Failure to comply with the applicable sales tax rules can have a devastating effect on a business, but they’re often overlooked because they’re considered “pass-through” as the business is responsible for collecting the applicable taxes which pass through the business and are subsequently turned over or paid to the states. While these pass-through taxes are not meant to create a financial burden on a business, failure to comply can create significant risk.Where to start
Mitigating sales tax liability starts with the same two factors that you use in determining your obligations in the first place: Your nexus and the taxability of your revenue streams. To evaluate your economic nexus footprint, follow these steps.
Nexus can be a physical presence in the form of an office, employees, inventory, or even traveling into a state to conduct business. Separately, you can also establish sales tax nexus via an economic presence when you have enough sales into a specific state or jurisdiction.
- Map where you have sales. Anywhere you have a customer or client could potentially result in economic nexus. All 45 states with a sales tax (plus the District of Columbia) have applicable economic nexus laws.
- Evaluate economic nexus thresholds for the states where you have sales. Sales revenue value and the number of transactions are the two aspects that dictate whether your company has economic nexus in a state. Most states (but not all) use 200 transactions or $100,000 in revenue into a state.
- Understand revenue categories and periods utilized for the states where you make sales. Also consider that individual states might use three revenue figures and periods for determining whether you have reached their economic nexus thresholds or not. Most states rely on gross sales, but not all. The period for calculations can also differ by state.
- Understand the taxability of your products and services. Before you are obligated to collect and remit sales tax, ensure that your products and/or services are taxable in a state.
What’s at stake
When your company determines that your product or service is subject to sales and use tax, and you have sales tax nexus, you should estimate your exposure from the prior periods when you should have been collecting sales tax. Analysis of exposure should encompass all periods where your company had nexus and taxable sales but wasn’t in compliance. However, in most states, the look-back is only seven years in determining prior period liability for an unregistered business.
Suppose you were collecting sales tax, but just not filing or remitting to the state? This is a bigger issue. This can be considered criminal. Responsible parties in an offending company, including corporate officers, face fines of more than 50% of the tax amount – or even prison.
What can you do now?
Contact past customers. If you collected sales tax in error, you could choose to refund the tax directly to your customers. If you haven’t yet collected sales tax when you were obligated, you generally do have the option to go back to your customers and request it.
Go ahead and register. With this option, you register for sales tax purposes with a prior period effective/start date that aligns to when you first had nexus and taxable sales. You will need to file the applicable returns and remit the tax due. This option is usually best when there is very little exposure or exposure doesn’t date more than a couple of years back.
Enter a voluntary disclosure agreement (VDA). A VDA is a legal means for taxpayers to self-report back taxes owed for income, sales, property and other tax types. In exchange for a company voluntarily reporting the tax due, states generally grant a waiver of penalty and a limited look-back period (generally three to four years). If you owe taxes beyond this period, the tax from these older periods is generally waived provided you never collected it.
Ask about tax amnesty. These programs, which states offer occasionally, resemble a VDA except that there usually isn’t a look-back period and registered taxpayers can participate. The purpose is to generate revenue for the state while also accelerating collections of outstanding liabilities already assessed against taxpayers.
Keep up and keep compliant
Mitigation efforts largely backfire down the road if you don’t establish a process to stay compliant.
If you try to handle compliance in-house, your accounting platform may have some functionality to calculate sales tax via tax rate subscriptions and plug-ins. That still leaves you with the burden of filing and remittance even as filing frequencies, your nexus footprint and other key details change over time. You also need a system to handle the many time-sensitive notices that tax jurisdictions love to send.
Sales tax is confusing. By working with a sales expert, you can take the heavy lifting off your plate and eliminate risk and liability. Contact TaxConnex to learn more about how when you work with us, sales tax is all on us.
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