The Cardinal Sin of Sales Tax
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
Mike Fleming and Ellie Moffat discuss one of the cardinal sins of sales tax.
Here’s a glimpse of what you’ll learn:
Why do we call sales tax collection without remittance the cardinal sin of sales tax?
Are people doing this on purpose? How do people find themselves in this situation?
What should someone do if they find themselves in this situation?
Connect with Michael
Episode Transcript - Audio Version
[00:00:00] Welcome to Sales Tax and more your go-to resource for all things state tax related. Now here is your host, Michael Fleming.
Micheal Fleming: Hi, Mike Fleming here, founder of Sales Tax and More, and today's co host of the Sales Tax and More Podcast, where we talk about everybody's favorite topic, which is of course, sales tax. And today we're going to talk about the cardinal sin of sales tax. But before we get to that let's introduce you to my co host Ellie Moffat.
Ellie Moffat: Hey, everyone. Really great to be here. And as always, please like and subscribe to the podcast. We really appreciate it. It really helps us out, especially if you're getting some useful information out of [00:01:00] it. We, Sales Tax and More, we are a full service consulting and solutions firm, and we have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax and related needs. So we do a lot of sales tax returns, sales tax registrations, consultations, research, audit defense, exemption, certificate management, and like our name states more. So if you have questions about our services or you'd like to work with us. Please reach out, let us know.
We'd love to hear from you and we'd love to work with you. And Mike last week in our webinar, someone asked us a question about sales tax collection without remittance. And since then it's come up in a meeting and it made me realize that maybe it was time to revisit this. So today, let's talk about sales tax collection without remittance.
And can you tell us a little bit more about why we call it the cardinal sin of sales tax?
Micheal Fleming: Yeah, absolutely. Besides getting a scarlet letter, it's a [00:02:00] major problem. It's the one part of sales tax where people can actually go to jail. Sales tax collection without giving it to the state is a problem because in most instances, it's never your money.
It's either your customer's money or the state's money, and you're just the tax collector. You're collecting it in trust for the state. So in that scenario it's like a payroll tax. So it's your customer's money or the state's money, not your money. You're just tasked with collecting it and making sure it gets to the state.
So when you keep that money states on very often called this unjust enrichment. Which is really a nice way of saying you've committed fraud. And they don't take very kindly to that at all. So if you do this by accident and it, it can happen very easily by accident, you're not going to jail, but a lot of people, especially people with [00:03:00] cash businesses, like convenience stores and any type of cash store cash business.
When they under report their sales, they're also under reporting their sales tax. And that means that it's going into their pocket. And those are the types of people who are going to jail, especially in the states of Florida and Minnesota. Two states that are extremely aggressive, although all states can be aggressive.
Ellie Moffat: Mike, I want to, I want to talk about, do people do this on purpose? Because I bet we have listeners, I bet we have people listening right now who think this could never be me. This doesn't apply. So are people doing this on purpose? How do people find themselves in this situation?
Micheal Fleming: Yeah, it's, let's start with the ones who don't do it on purpose. In the today's world of automation, it's really easy to hit a switch accidentally and all of a sudden you're collecting tax in a state you're not even registered in, or maybe don't even have [00:04:00] nexus in and it takes months, sometimes years to realize you're doing it if you don't have good accounting practices in place. We had one company there was a woman and she went on vacation and while she was on vacation they found out that she had been collecting tax in the state of California. She didn't know what to do with it. So she was just journaling it back to the general ledger.
And this was going on for over 10 years. And, only the bookkeeper knew about it. So that's how it came to light. And they fired her and they went to the state of California before the state of California found them. We did a voluntary disclosure agreement with them with a payment program because they just didn't have the money to pay that back.
So that's it's very easy to have it happen by accident. One of the things we do here is when we're doing sales tax returns for our clients we look at the other [00:05:00] states, are they collecting sales tax where they should not be? And if they're not, we let them know and say, "Hey, we don't know if this was a mistake or don't know how it happened, but you realize you're collecting tax and you're not registered in these states".
And then we either go out and get them registered or help them get the tax turned off and get that remitted however we can. So real easy to do it by accident. Also real easy to do it on purpose. Cash businesses if they're short paying, they underreport their sales.
It just happens when you're underreporting the sales. Maybe you don't realize you're also underreporting your sales tax. You're collecting the sales tax, but you're not turning it in. So there's a double whammy. Just underreporting your sales is a problem, but keeping the taxes is a whole nother issue and an additional problem.
Then we have people this doesn't happen anymore, but I can remember back on ebay it was a huge problem and a lot of these [00:06:00] sellers were paying tax when they were buying the things that they were selling on ebay. So they just said i'm gonna pay myself back. And they started collecting the tax and putting it in their pocket . As a matter of fact ebay got in trouble for that.
Because they were allowing this to happen. So that's another way to do it. But if you take that a step further, people can be collecting tax on their website or in their store and just putting the money in their pocket and keeping it. Sometimes people use that money for short term business needs and the business doesn't get better.
And now they've spent that money and they don't have it to turn back into the state. So there's a lot of ways that this can happen. Sometimes it's very accidental. Sometimes it's on purpose. Sometimes it's not maliciously done on purpose. It was just meant to be temporary. But the state doesn't say you're only a little bit pregnant, either are you or not.
Ellie Moffat: Okay, so let's say that someone out [00:07:00] there listening is in this situation. We don't know if they're on purpose, they did it on purpose or not. Regardless of that what should someone do if they find themselves in this situation?
Micheal Fleming: It depends. Usually that's an answer we like to use often. It depends. The first thing it depends on is did you have a responsibility to collect the tax? So sometimes when it's accidentally turned on, there was no nexus, no, no responsibility to collect the tax. And if that's the case if it's easy to give it back to your customers, sometimes that's the best way to do it.
If there's a couple of transactions they're bigger transactions, you give it back. The question last time is I don't want to be embarrassed in front of my customer. Yeah, it may be a little bit embarrassing, but nobody ever is going to look found money in the mouth.
I think I mangled that saying.
Ellie Moffat: It was close enough.
Micheal Fleming: Everyone got [00:08:00] the gist there, but if you're coming back to a customer and say, "Hey, I shouldn't have collected this tax. Here it is". Some of them are going to say, "I just need to pay it as a consumer use tax then. So you're not doing me any favors, but others are going to say, thanks. I appreciate it. Being honest, you didn't stick it in your pocket". So that's that's one way to do it. Give it back to your customers. If you can't give it back to your customers, you may have small dollar transactions and there may be thousands or tens of thousands of customers you would need to give it back to.
Then unfortunately you get registered. In some states, they'll let you remit it. Not usually the case. Most states are going to say you need to get registered and remitted through the through the registration. If you're going to go that route depending on the amount of money, I think that a voluntary disclosure agreement is the way to get registered.
A voluntary disclosure agreement, the state rewards you for stepping forward. They're going to limit the look back period in a [00:09:00] general VDA, but if you have tax collected that's going to go back further than the limitations of the VDA like in California. It's 10 years their VDA is 36 months. We still had to remit all of that money for that 10 year period.
We can't keep it. It's unjust enrichment. It was never our money our client's money, so we had to help them get it to the state. But they may or may not waive penalty and in some states they waive interest. They're going to work with you, though, if you're stepping forward. If they find you, not so much.
They look to make examples of people. So if you're stepping forward, voluntary disclosure is one way to do it. If the exposure is not very much, and it's only a couple of months, a historical registration, you do the back returns, you ask for a penalty waiver, but you want to get that money into the state's hands.
Ellie Moffat: All right. Thank you so much, Mike. Is there anything else you want to add in for our listeners? [00:10:00]
Micheal Fleming: Yeah, and I'm not encouraging this, but I have run across this situation and if it's small amounts of money, what this these sellers have done is turn it into their home state. Now, that doesn't let them off the hook.
If the state where that money was supposed to go to ever reaches out to them, they're going to owe that state that money. And if they try to go back to their state where they turned it in, maybe the statute of limitations is kicked in. Maybe it's older than three years and they can't get it back.
So that's a problem, but at least you don't have unjust enrichment. At least you didn't stick it in your pocket to make matters worse. So while I'm not advocating for that solution. It does happen and it solves part of the problem, not all of the problem. And if the, one of these states for which you [00:11:00] collected the tax shows up on your doorstep, you're going to have to figure out a way to get them paid.
But if it's not in your pocket, they can't say that it's unjust enrichment.
Ellie Moffat: All right. Thank you so much, Mike. And for, thank you guys so much for listening. If you have any sales tax needs, again we offer many solutions and services. You can reach out to me directly. If you have questions, my email is E Moffat.
That's E M O F F A T at sales tax and more. com. You can also visit our website, sales tax and more. com. And we hope that you continue listening.
Micheal Fleming: Thanks, everyone. Glad you joined us today and hope to see you on the next installment of the Sales Tax and More Podcast. Bye. Bye