The Hidden World of Sales Tax Crimes

Income tax often seems to grab most of the headlines, but sales tax can make for a hefty crime – and punishment – too. A famous case recently examined in the TaxConnex podcast It Depends episode, “Sales Tax Crimes - Pt. 2: The Eccentric TYCO CEO’s Sales Tax Scheme,” clearly shows how you shouldn’t do the sales tax crime if you can’t do the time.

Big numbers, common crime

Unscrupulous vendors often collect and not remit sales tax (as in one recent case with a juice store owner in the District of Columbia), but sales tax on tangible personal property and high price tags are a recipe for other shenanigans.

Because sales tax is transactions-based and because there are so many transactions every day, it becomes easy for people and companies to try to take advantage of the opportunity to avoid the sales tax. In what remains one of the biggest such cases, in 2005 CEO Dennis Kozlowski of Tyco International was convicted of, among other crimes, avoiding millions of dollars in sales tax on high-end art.

Investigators found his pattern was a typical one involving high-priced goods and complicity with sellers, especially in art and jewelry. A customer walks into a store, identifies an expensive piece of jewelry – let’s say it costs $100,000 – with an 8% sales tax. That’s $8,000 on top of the price of that piece. The customer will ask the retailer to ship the piece to them in another state, maybe a state like New Hampshire that doesn’t have a sales or a use tax.

If the retailer agrees and the product is in fact boxed and shipped to New Hampshire, there’s a good chance that will be a transaction exempt from sales tax.

What can happen instead is that the buyer takes possession of that $100,000 piece of jewelry in the store and asks the retailer to mail an empty package to the customer’s out-of-state address. Both parties thus avoid dealing with the $8,000 add-on at the end of the transaction.

Investigators and others say the above happens regularly, especially in a state like New York, where there’s extraordinary wealth and wide distribution of expensive products and services.

States are watching

For Kozlowski, the sales tax matter was a $3.2 million item (in addition to other crimes that netted him six and a half years in prison). Authorities found Kozlowski an excellent opportunity to publicize that this sales tax scheme won’t be tolerated.

Sales tax is unusual in that states get together and form watchdog coalitions like the Southeastern Association of Tax Administrators (SEATA) to collaborate and identify sales tax crimes, flagging shipments of jewelry to other states, for instance, and giving tax administrators the chance to investigate whether sales tax has been paid on an item.

Auditors might not knock on your door today but could be knocking on the door of one of your vendors.

Just another story in how devastating the financial impact and criminal sentence can be for those who try to avoid sales and use tax.

(It Depends explains many issues concerning the complexity surrounding sales and use tax. Other topics have included exemption certificates, finding a compliance provider and what can go wrong in sales tax filing.)

If you’re looking to add a full end-to-end sales tax solution to your compliance processes, get in touch. With TaxConnex you get the best of technology and innovation combined with human expertise, oversight and dedicated support.