Sales tax compliance is one of the most underestimated risk areas for growing businesses. The rules are complex, vary by state, and change over time. What many business leaders do not realize is how quickly small oversights, such as a missing document or an overlooked nexus obligation, can lead to large assessments, interest, penalties, and even personal liability for their own corporate officers.
Your First Line of Defense - Documentation
Keeping complete and accurate sales tax records is one of the most effective ways to make an audit go smoothly. Well-organized documentation gives auditors the information they need to confirm the accuracy of your transactions and tax decisions.
Without it, many companies are left scrambling during an audit, unable to provide proof that certain sales were exempt. In those situations, auditors may default to treating sales as taxable or use estimates and historical data to determine liability, which often results in higher assessments.
Common files requested by auditors include:
- Sales and use tax returns
- Consumer use tax accruals
- Miscellaneous adjustments and reconciliations
Not Realizing You Have an Obligation To Collect is Not a Defense
It is easy to overlook situations that create a sales tax obligation, but unfortunately, “I didn’t know” offers little protection during an audit. Understanding how your company’s activities, employees, products or services, and even business processes can establish a tax obligation is essential to reducing risk.
Common situations that create risk a business may miss include:
- Adding employees in a new state
- Acquiring a business or product with different taxability than your main business
- Traveling for conferences or sales meetings
- Utilizing warehouses or hiring out of state contractors
If you discover sales tax was not collected on a taxable transaction, first determine whether you had nexus in that state. If you did, and your customer has not paid the corresponding use tax, you may be liable under audit.
But at what cost?
The Real Cost of Missing Sales Tax
When sales tax returns go uncollected and unfiled, there is no statute of limitations. Unpaid liabilities can build indefinitely, creating the risk of owing years of back taxes if compliance is missed, forgotten, or avoided. Interest rates, often averaging 12 percent per year, combined with penalties of up to 25 percent of the tax due, can quickly escalate the total owed and put your business in real trouble.
Understanding what your options are for mitigation of uncollected sales tax is important if you’re looking to get ahead of the risk and liability of getting caught out of compliance.
One common option for mitigation is a voluntary disclosure agreement (VDA). For businesses that choose to come into compliance voluntarily, a VDA can reduce the look-back period and eliminate penalties, making it one of the most cost-effective ways to address past liabilities. However, it is not always the right solution for every company, so it is important to understand the potential implications before moving forward.
Risk to Not Just Your Business - Personal Liability for Corporate Officers
In many states, sales tax liability extends beyond the business.
Corporate officers and other “responsible parties” can be held personally liable for uncollected or unremitted sales tax.
When registering for sales tax in a state, one of the requirements can include the SS number of the business owner or corporate officer. In serious cases, failure to remit collected tax can lead to criminal charges to this individual. This means compliance issues can put both your company’s finances and your personal assets at risk.
Worth the Risk?
As your business expands into new states, so does your compliance footprint. If nexus exists, that state can enforce tax laws through assessments, liens, lawsuits, and collection actions. Failing to respond to notices or missing deadlines only increases the risk and the cost.
No matter what your industry, sales tax compliance should be treated as a strategic business priority. Proactively managing documentation, monitoring nexus, and maintaining exemption certificates can protect your company and potentially you personally from the financial and legal consequences of noncompliance.
If you’re looking for help mitigating your risk or understanding and managing your full sales and use tax obligations, TaxConnex can help. We take a diagnostic approach to understanding your sales tax obligations and help you take the best steps forward for your specific business. Get in touch to learn more!
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Disclaimer: This story is auto-aggregated by a computer program and has not been created or edited by finopulse.
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