COVID-19 and Tax Extensions - Not All Extensions Are Created Equal
The measures suggested by the federal government, or in some cases mandated by state and local governments, have been unprecedented. The reason for these steps has been to lessen the severity and duration of the COVID-19 pandemic in the United States. We hope and pray that these measures are successful, but only time will tell. What is immediately clear is that these steps have basically shut down large portions of our economy and forced even more to work from home. The financial ramifications have been swift and severe. While the federal government is working feverishly to contain both the virus and bolster the economy, many state and local governments have announced extensions of tax due dates. However, not all of extensions are created equal.
On the income side, the federal government, at first, required returns to still be filed by 4/15/2020 but allowed payments to be delayed for 90 days. They later changed this and said the due date for returns and payments had been extended to 7/15/2020. Most of the states are following suit. We will soon have a chart posted on our website detailing state responses for income tax.
On the sales tax side, the announcements from the states, as usual, vary widely. Here are some of the ways the states are responding:
Some states are not doing anything. They are requiring filings and payments to be made on time. They say that while they realize taxpayers are hurting, the state requires the revenue to help those with the greatest needs.
Some states are offering extensions of 30, 60, or 90 days.
Of the states offering extensions, some states say returns still need to be filed by the due date, but payment can be delayed. Other states say both filings and payment can be delayed.
Of the states that say payments can be delayed, many are only waiving penalties with interest continuing to accrue. Some states are waiving both.
In many states, the extensions and waivers are automatic, while in other states the extensions and waivers must be applied for.
The states never make anything easy and their varied responses to this crisis can be confusing. We have created a chart to help companies better understand and compare what the states are offering. However, we believe that sales tax, whenever possible, should be paid on the original due dates and almost universally should never be used to fund business operations. Here is why.
Unlike income tax, which almost always comes from a company’s or owner’s funds, sales tax is generally either the customer’s money or the state’s money. A company generally only collects it in trust, like a payroll tax. Since sales tax is not a company’s money, it should be set aside and not be used to fund a business. Sales tax collected and not remitted is a cardinal sin in the tax world. States generally impose criminal penalties on top of civil penalties. Boiled down to simplest turns, states view this as a type of theft. A company can not use someone else’s money to pay its bills. As bad as things get, they can always get worse. In instances like this, there is generally personal responsibility which not only can extend to owners and officers but even employees who were involved in the tax collection and payment process. Bankruptcy is often not an option as collected and unremitted sales tax can survive both business and personal bankruptcies.
We believe that income tax extensions should be taken advantage of. If the money that would have gone to income taxes needs to be used to help get the company through lean times then by all means use it. There may be penalties that need to be paid down the road, but we believe they will pale in comparison to sales tax which was collected and can not be paid back.
For those reasons, we do not believe the sales tax extensions should be used. There may be too great a temptation to utilize these funds over the coming months if they are not remitted to the state.
The one scenario where we believe the extensions should be used is when the data can not be compiled or the returns can not be processed timely due to dislocations in the workforce. With so many people working from home, having access to all the different systems needed may not be possible. This is an entirely different scenario than the tax money being used to fund business operations.
In summary, I would like to say that we do not know of any states waiving taxes or allowing companies to keep any tax they have collected. At best, the states are offering an extension with the penalty, and in some instances, interest is waived. We understand times are tough and will probably get tougher before we all get through this crisis. Many of us will need to make tough decisions. We want you to be fully informed when you make those decisions. If you do decide to utilize sales tax funds to help make ends meet, we hope your business rebounds quickly so you can get the tax to the state when ultimately due.
If anyone needs additional information or needs help during these difficult times you can contact us here or by emailing Ellie Moffat at emoffat@salestaxandmore.com. Stay safe and healthy.
By: Michael J. Fleming, CMI
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.