A Short-Term Gain is Not Worth the Pain

A Short-Term Gain is Not Worth the Pain.

And the pain can sometimes be so severe it can threaten the livelihood of the business and/or your job. One of the biggest problems we continuously see is companies choosing to not collect tax. Ultimately it doesn't matter what you believe as to whether your products or services are taxable, but what the state believes, especially when the courts would likely back the state.

We have seen many companies that take positions in order to avoid collecting tax. Some of these companies do it to avoid the cost or hassle of collecting tax. Others do it out of a lack of knowledge and still, others think it will help them win more sales. Whatever the reason, taking an aggressive or uniform position when tax planning can often have devastating results for a business. Sales tax when done correctly should come out of the purchaser's pocket at the point of sale. And nowadays most informed purchasers expect to pay the sales tax unless they have an exemption. So when taking an aggressive or uniform position and not charging sales tax, the scene is set for the greatest tragedy in sales tax. Taking a liability that a customer would be willing or at least begrudging pay at the point of sale and turning it into a liability that now comes out of your pocket with the added insult of penalty and potentially years of interest.

States in theory can go back and audit to the first date of nexus when a return is not filed. However, they generally limit themselves to 7, 8, or 10 years depending on the state. This means that a state will want not only all the back tax for that period but also the penalty and interest which can easily exceed 50%. If a company has been filing returns the look-back period will be limited to the statute of limitations which is generally 3-4 years, but the states routinely go back 7, 8, or 10 years when returns have not been filed.

I have never understood why companies or people take these risks. Since the customers will generally pay the sales tax, the only things I see to gain are the costs of compliance. And the costs of compliance usually pale in comparison to years of back tax, penalty, and interest. And what happens if more than one state pursues you? States do talk.

I have seen too many companies fail or executives lose jobs because poor choices were made. The time to be aggressive is when you are under audit. When deciding whether or not to charge tax it pays to be conservative. And remember it doesn't really matter what you think, but rather what the state thinks. If you need help please let us know.

By: Michael Fleming

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.