Tax authorities use crowdsourcing to find non-collecting sellers
Crowdsourcing has been used to solve problems and answer questions for centuries, at least since Britain’s Longitude Act of 1714. More recently, it’s become an effective fundraising tool for emerging businesses. And with the Supreme Court of the United States ruling in South Dakota v. Wayfair, Inc. — that physical presence is no longer requisite for sales tax collection — state tax authorities are discovering a new use for it: identifying non-collecting sellers.
At least three states are actively seeking assistance with this matter from the population at large: Connecticut, South Dakota, and Wisconsin have developed a process for taxpayers to identify businesses that don’t collect tax on their sales into the states. The Wisconsin Department of Revenue genteelly seeks “Remote Seller Referrals,” while the Connecticut Department of Revenue Services and the South Dakota Department of Revenue take a harsher tone, asking people to “Report Tax Fraud.”
People wishing to identify a non-collecting business in Connecticut have to print a paper form and either fax or mail it to the department. Informants are asked to provide a great deal of information about the business they’re reporting, including the social security number, Connecticut tax registration number, and employer identification number, if possible.
The Connecticut Department of Revenue Services (DRS) accepts information on a wide variety of suspected tax fraud, including but not limited to failure to withhold/collect tax, failure to remit tax, false exemptions, cash wages off the books, and smuggling. In addition to sales tax, it will accept tips on alcoholic beverage tax, income tax, motor fuels tax, and more.
Tax fraud has been linked to some dangerous characters: Remember that Al Capone was imprisoned for income tax evasion, not bribery, murder, narcotics trafficking, or his many other crimes. Perhaps that’s why the DRS asks, “Do you consider the taxpayer dangerous?” The DRS also wants to know if the informant has “books/records available” to corroborate the allegation.
Conversely, the name of the alleged non-collecting business is the only information South Dakota requires on its form. It requests the business type and address, and the name and contact information of the informant, but that information doesn’t have to be shared. More than one form must be filled out when reporting more than one business.
The Wisconsin form has space for 10 non-collecting businesses, and while the informant is asked to identify itself, anonymity is allowed: “Do you want to remain anonymous?” and “If we have additional questions, may we contact you?” both appear at the top of the form.
The Wisconsin Department of Revenue asks for “proof that each business [being referred] is not collecting Wisconsin sales/use tax on sales made in Wisconsin (e.g., receipts, invoices, image of a web page, etc.).” It also wants informants to shoulder a bit of burden: “Do you know this business makes more than $100,000 or sales or 200 or more sales transactions into Wisconsin [the amount of business in the state that triggers an obligation to collect Wisconsin sales tax]? Please explain how you know.”
Since the Supreme Court ruling in Wayfair, more than 30 states have adopted remote sales tax laws or rules. The more states actively seek sales tax revenue from remote sellers, the more they’re likely to seek tips about non-collecting sellers. If states other than Connecticut, South Dakota, and Wisconsin haven’t already developed a similar strategy, it likely won’t take them long to follow suit.
If you think you have or are at risk of developing an obligation to collect sales tax in one or more states, it’s best to be proactive. Avalara’s state-by-state guide to sales tax nexus rules is a good place to start. Additionally, Avalara can help you connect with a sales tax expert.
The 2021 sales tax changes report: midyear update
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