Stop Making These Common Sales Tax Management Mistakes!
- Jul 27, 2015 | Avalara
What do sun burns and sales tax audits have in common? They’re both easy to avoid if you take the right steps. 45 states require your business to collect and remit sales tax if you have nexus in them and are selling taxable goods and services. But, with so many rules and jurisdictions, it’s easy to make mistakes. Avoid these five if you don’t want to get burned.
1. Registering to pay sales taxes when you don’t need to
This mistake can cause all kinds of problems. In fact, says Dr. Shireda Howard a tax attorney and CPA in Atlanta, “Businesses shouldn’t register to collect sales tax in states where they don’t need to register, or register too early in one. Both of those mistakes could result in unnecessary costs and time spent on sales tax compliance.”
And, adds Dallas, Texas CPA and Partner at Peisner Johnson & Company, L.L.P, Jerry Piesner: “In addition to having to prepare and file sales and use tax returns in these additional states, the seller also would more likely face future tax audits by them.” Make sure you must register in a state to avoid the unnecessary headaches of complying with regulations in those where you’re not required to register.
2. Failing to collect and pay sales tax in the states where you have nexus
This is a very common misstep. Many online sellers try to get around this requirement in various ways, usually by refusing to accept they have a nexus in that state. But, being crafty can be costly. Peisner warns, “Companies that have nexus in states create a liability for themselves if they fail to register and collect sales or use tax from their customers on sales. The longer a company transacts business in this manner, the greater its tax liability becomes.”
Worse, you’re risking your business and will be personally liable if you’re found out, which is increasingly likely says Howard, the Managing Director of Diversified Financial Management Group, Inc. Peisner continues, “By ignoring the problem, the company risks going out of business and many states have laws allow the taxing authorities to go after personally officers and directors of companies that fail to satisfy their tax liabilities.”
3. Collecting and failing to pay sales tax in a timely manner
You are required to remit the right amount of sales tax on the right dates. No worries, though. The states where you’re required to pay won’t let you wallow in ignorance. “Once you’ve registered for your sales tax permit, states will assign you a sales tax filing date--usually monthly, quarterly or annually. Be sure you always file a sales tax return on that date,” explains Howard.
Failure to collect and pay can be costly, too, especially if payment is delayed long enough. “In addition to what is already owed, a company could face penalties of 50 percent to 100 percent of the tax amount,” Peisner cautions. Both CPAs say these amounts are based on states assessing “failure to file” and “failure to pay” penalties.
4. Under- or overestimating sales tax due
If you collect too much tax (something for which Howard has seen an increase in lawsuits against companies for doing), you’ll need to refund the difference to the buyer. “It is against state law for a seller to keep any excess tax collected, “explains Peisner adding states consider that “unjust enrichment.” When you’ve already remitted the overpayment to the state, you could get a refund. But, says Howard, “You’ll have to prove you refunded the over-payment to the customer, first.”
Companies that underestimate then underpay state sales tax, “Create a sales tax liability for themselves,” that they’ll have to pay, including added penalties, Peisner states. And, he says you won’t be able to apply excess tax collected to sales taxes owed.
5. Failing to respond to tax authorities
Failing to respond to these requests can lead to significant tax liability depending on the request. Moreover, Peisner warns, “Failure to respond to taxing authority requests can eventually lead to suspension of a taxpayer’s sales/use tax permit. After that, they can face civil and/or criminal penalties by continuing to transact in that state.”
So, adds Howard, “It is in your best interest to respond immediately when you receive a notice from the tax authority.” Because these state authorities share data, not responding to one could cause other state and federal agencies to investigate your business in their state. You could end up paying penalties to multiple states for failure to respond.
Preventable sales tax compliance mistakes come with high business and, in some cases, personal financial liability. And, with so many tools and professional help available to avoid these mistakes, you won’t be able to play dumb. So, your best bet is to avoid being burned by making them.