The Penalty Box: Sales Tax Style
In hockey, the penalty box is a location where players sit to serve time for a given penalty. Penalties are commonly given to a player who violates a rule of the game. Sometimes this violation is intentional, and sometimes it’s just human error, plain and simple. This is no different than in sales tax.
Mistakes in the sales tax world can lead to a slew of penalties and interest charges. These can potentially add up to or exceed 50% of the tax that is owed. We touch on a few frequently asked questions revolving around penalties in sales tax below.
What are actions that will result in sales tax penalties?
There are multiple actions that can result in sales tax penalties. One we like to call the cardinal sin of sales tax is sales tax collected but not remitted. In some situations when setting up sales tax, it can be simple to turn tax “on” in automatic processes, however, this does not complete your returns process, and tax is generally not automatically remitted to the state. This can put businesses in a situation that is viewed as unjust enrichment because they are keeping money that is meant for sales and use tax, but it is not being remitted to the state.
Another action that can result in sales tax penalties is failing to collect or remit sales tax at all. This mistake is typically discovered in one of two ways, during an audit, or the business realizing it themselves.
During an audit, the state can go back and request the back taxes, penalty, and interest for the period in question. If you, as a business, discover this mistake there are a few options to help mitigate the past exposure. Contact us if you have questions about that here.
How do I avoid sales tax penalties?
One of the sure-fire ways to avoid sales tax penalties and interest charges is to be compliant! A few questions to ask yourself when questioning if you are compliant are:
Do I have nexus in one or more states?
Have I registered for sales and use tax in the states I have nexus in?
Is what I sell taxable?
Am I collecting and remitting sales and/or use tax in those states?
Having a trustworthy sales tax partner can help to ensure you are on the right track from the beginning of your sales tax journey. To read more about finding a reliable sales tax partner, click here.
Though being compliant sounds “easy” there are many instances where a business either made a mistake and is being audited or simply discovers the mistake themselves. There are a few ways you can go about handling the mistake.
One way is a tax amnesty program, a tax amnesty program is offered by the states. The state may waive some or all interest and penalties in regards to previous tax periods without criminal or civil penalties.
Another way you might handle this is a Voluntary Disclosure Agreement (VDA). A Voluntary Disclosure Agreement (VDA) is where taxpayers can disclose tax liabilities from previous periods, and there are certain benefits for doing so. These include elimination of penalties or lower interest amounts. Benefits of a VDA can include limited look-back periods, penalties, and interest being reduced or eliminated. However, it is important to note that in most states a VDA may not be available if you are already registered or have been contacted by the state. In these instances, a managed audit may be an alternative.
A managed audit is generally performed by a third party, under the supervision of the state. Since the state does not have to complete the full audit themselves, there is generally a reward, this could be a waiver of penalty and some or all of the interest being waived.
We have an entire blog dedicated to the differences between a VDA and an amnesty program. Read more about it here.
Sales tax penalties and interest are big topics. We have a podcast episode you can listen to here. If you need help or have a question about our services please reach out at contact@salestaxandmore.com
By: Jayci Trujillo
This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.