Businesses that sell into various states now have to contend with the sales & use tax regulations and requirements of thousands of jurisdictions nationwide. One big question for these businesses is how much time, effort and money do they need to devote to compliance – and do they need to pay attention to it at all?
Businesses need to evaluate when they’ve reached nexus thresholds to ensure compliance, and they must remember that they need to evaluate sales/use tax responsibilities for both economic nexus thresholds and physical presence standards. At the point that a business reaches a nexus threshold or establishes nexus within a specific state or jurisdiction they are responsible for collecting and remitting sales tax, but many would rather not deal with the hassle and just roll the dice on whether or not they will be caught. What are the risks associated with non-compliance and how can a state or jurisdiction find out if your business has nexus?
Jurisdictions can discover your company’s nexus through audit – and not just an audit of you. Audits tend to beget audits. A customer undergoing their own sales tax audit might produce one of your invoices, resulting in the auditor possibly contacting you for a certificate of exemption or other documents. A state may also find that you didn’t charge the client sales tax on transactions. An audit of one of your suppliers could also turn up one of your exemption certificates for something the auditor may think is taxable – resulting in a flag for an audit of your company.
Auditors know that competitors tend to have similar business models and that some industries are more susceptible than others to tax deficiencies based on the complexity of the taxation scheme. Audits of similar companies in your industry may also lead state tax authorities to run comparison data on you and your competitors, such as your percentage of taxable sales; even being off just a little bit could lead to you being audited.
Here’s another question: What happens if you do get caught?
What can you expect? Slaps on the wrist? No – punishments can range from assessments, penalties and liens to use of collection agencies or referrals for criminal action.
Let’s say you are selling a product and/or service in a jurisdiction that you have nexus in, but are not taxing your customers. In the first year your company’s sales total $10M and grows 20% annually over the next three years (totaling $36.4M in sales).
With an average sales tax rate of 8%, that’s more than $2.9M of tax you should have collected. Add to that, an additional penalty and interest assessment and your total exposure is over $3.8M. That’s a big number for any business to cough up.
States and jurisdictions have seemed slow to ramp up penalties for non-compliance but are becoming more serious about enforcement. The California Department of Tax and Fee Administration has sent letters to Amazon sellers saying that they may owe years of uncollected sales taxes and may be facing audits. New York has increased its threshold but made it retroactive to mid-2018, possible ensnaring many more sellers.
Many other states are well along in considering enforcement methods, and legal liability is yours if you miss complying.
There’s no statute of limitations for unfiled returns; unpaid tax liabilities can compound indefinitely, leaving you to pay for all the liability. And depending on the timeframe, it’s probable that it will be too late to go back and collect from past customers. Penalties associated can start at 25% of tax liabilities. And even non-filing of zero taxable sales can result in penalties.
Then there’s the business cost. Non-compliance can compromise your company’s financial statement, a tough problem for small and new enterprises. Due-diligence in future mergers, acquisitions and capital venture arrangements can also turn up past non-compliance (either intentional or not) and can kill otherwise promising deals.
Any online business runs a huge risk with non-compliance. Let TaxConnex help you comply and stay on top of this ever-changing tax environment for you. Contact us to learn about the latest developments in sales-tax nexus and what they mean to you and your company.
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