Tax Collected & Not Remitted - 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, will dive into the cardinal sin of sales tax, also known as tax collected and not remitted. Answering common questions including: Do people really go to jail for tax collected and not remitted? How companies find themselves with these issues and potential remedies.
Here’s a glimpse of what you’ll learn:
We explain why tax collected and not remitted is the cardinal sin of sales tax.
Do people really go to jail for collecting tax and not remitting it?
How do knowledge and intent come into play?
How do people find themselves in this kind of situation and what are the remedies?
Connect with Michael
Episode Transcript - Audio Version
[0:00] Intro: Welcome to Sales Tax More, your go-to resource for all things state tax-related. Now, here is your host, Michael Fleming.
[0:27] Mike: Hi, Mike Fleming here, founder of Sales Tax More and today’s co-host of the Sales Tax and More podcast, where we talk about everyone's favorite topic, which is, of course, sales tax. Today, we're going to revisit what many believe is the cardinal sin of sales tax, and that's tax collected, not remitted. Now we've addressed this issue in the past, but we're currently seeing more and more companies have problems with this issue. And it appears at least in our experience to be accelerating.
We're seeing more and more of it, as I've said. So we've decided to devote an entire episode to it. But before we get started, let me introduce you to my co-host Ellie Moffat.
[1:11] Ellie: Hey everyone! It's great to be here with you, Mike, and to be on the podcast, and I just want to do a quick introduction for Sales Tax and More before we get started as well.
So Sales Tax and More is a full-service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax or related needs. So we do a lot of sales tax returns, sales tax registrations, consultations, research, and like our name states, more, which puts us again in this position to see these kinds of issues.
So Mike, can you explain why tax collected and not remitted is the cardinal sin of sales tax?
[1:52] Mike: Yeah, great question, Ellie. I'm not a lawyer, and I'm not giving legal advice, so I'm going to break this down. I'm going to use layman's terms and boil it down to the simplest form. So, in most states, the states are going to make you their de facto tax collector.
You're collecting the tax in trust for the state. Now, the tax collected, is generally not your money. It's either your customer's money or the state's money. So, when you keep the taxes by not turning them over to the state. The state views that as a huge no-no.
[2:31] Ellie: Okay, I see. So, states don't like it when you don't collect their taxes. They must like it even less when you collect the taxes and keep them.
[2:43] Mike: Very much so Ellie. In fact, in both states, it's a crime, and some states call it unjust enrichment. Others call it fraud, and others have various other terms. In short, they liken it to stealing from them. So they think you're actually stealing that money.
Again, in layman's terms, but they all have one thing in common. They generally come with criminal penalties when a state finds you. In addition to the normal civil penalties. And some people might get a little bit worried here. In the most egregious situations, tax collected not remitted can lead to jail time. And it's because of this criminal side of this issue that we refer to this as the cardinal sin of sales tax.
[3:37] Ellie: Ooh, that's harsh and I know it sounds pretty harsh to our listeners, too, Mike. So are you exaggerating? Do people really go to jail?
[3:47] Mike: Yeah, Ellie. Unfortunately, they do. I see stories about it all the time, especially in Florida and Minnesota. However, as I mentioned earlier, it is only in the most egregious situations. Generally, the company must have some type of knowledge and intent in order for the jail time to be imposed. We see this in cash businesses, like convenience stores and bars and restaurants, car lots, etc. If a company is underreporting its sales, then it's generally not going to be remitting the sales tax on those underreported sales, and that's when people usually end up going to jail.
[4:29] Ellie: Okay, so if you don't have knowledge or intent, you don't have to worry about this?
[4:35] Mike: No, unfortunately, that's what a lot of our clients hear but it's still a huge issue. While you don't have to worry about jail time, generally. The criminal penalties are going to be very harsh, and they can be fifty percent or more in some instances. And that's on top of the normal civil penalties and interest for late returns and nonpayment. And just the normal penalties and interest, especially if it's over a longer period of time, can quickly reach fifty percent or more.
You don't want another 50 percent on top of that. And there's also personal responsibility for tax collected, not remitted in just about every state. And this doesn't go away. You cannot be discharged through either a personal bankruptcy or a company bankruptcy and it just grows with time. There's no statute of limitations on this. So, it truly is a big issue.
[5:40] Ellie: Mike. Are you fear-mongering? Because I do have this memory of a client once accusing you of fear to market, accusing us really, of fear to market.
[5:50] Mike: Yeah, unfortunately, people don't like to hear the facts, and they don't want to face reality. I believe it is that serious. And we very recently had a new client that accused me of using fear to get them to purchase unneeded services. And as I said, I don't consider telling someone the straight facts to be fear-mongering. You’ve got a problem.
If you have collected tax and you're keeping it, you haven't turned it over to the states, If you don't think that the states want that money and can be punitive in trying to get that money, I believe that's just silly. So this particular individual, they'd been collecting tax and not remitting it for over four years in multiple states and they were acting like it's no big deal.
[6:45] To me, it is a big deal. That client is no longer a client. We can't be a part of something if you're going to stick your head in the sand. We would obviously like your business, but we put out these podcasts and webinars for educational purposes. And if you find yourself in this situation, you need to take action.
The problem only gets worse with time. The amounts of penalty and interest stack up. And it gets more and more egregious. Remember we mentioned intent. If you knew that you had this issue and did nothing about it. Now we start getting back into that intent. So once you discover this, you need to take action. Whether it be with us, whether it be with anybody, you just need to take action.
[7:39] Ellie: So it is that serious. I think maybe a lot of people are agreeing. What do you want to discuss next? How companies find themselves in with TCNR (Tax Collected Not Remitted) or what some of the remedies are, perhaps?
[7:54] Mike: Yeah, and for those of you out there, we use a lot of abbreviations in the sales and use tax game. State taxes in general, TCNR stands for tax collected, not remitted. And Ellie, I think we should start with how people find themselves in this position. Then, we can go on and talk about remedies.
[8:15] Ellie: All right. Great.
[8:17] Mike: All right. So, if you've listened to me before, you probably know that I have a love-hate relationship with tax software. I often think of it as a necessary evil, but in some ways, it actually makes our lives a lot easier.
If we're…we need automation to collect the right amount of tax. It's just too tough to do it on a manual basis, especially if you have thousands and thousands of transactions, but it's this easiness. That's the problem or one of the problems because it's very easy to start collecting tax. Sometimes, you can have tax turned on inadvertently by mistake. You didn't realize you were doing it, or maybe because of a lack of knowledge.
[9:10] The other day, we ran into a situation and most software out there, and even some of the platforms, alert you when you may have nexus in a state. We had this one company, and the person who was in charge of Shopify saw that they may have a responsibility to collect tax in a number of states.
They just went in and turned the tax on. They didn't understand that Shopify didn't file the tax for them. Nor did they understand that you have to register in order to be able to collect the tax. This one went on for about two years. No one else in the company was paying attention to it because this person was in charge of Shopify, but they weren't a tax person.
[10:00] So very easy to make mistakes. Maybe it's a lack of communication. Maybe someone said, Hey, we need to start collecting tax here. And someone thought someone else was getting registered. Someone thought someone else was doing the filing. It just could be a lot of different issues, but the ease of just flipping a switch and turning the tax on is one of the reasons why we're seeing more and more of this.
Also, we have a lot of companies that are just starting. Here we are five years into Wayfair. We have a lot of companies still just starting to try to get compliant, and they don't understand taxes. They don't understand how the software works. So we're seeing a lot of mistakes.
[10:55] Another issue is getting registered for the wrong type of tax. I'm going to pick on Avalara at this point and someone used Avalara to do their registrations, and Avalara went in and got them registered in Virginia for the out-of-state use tax. And that's something that sellers are required to collect. Avalara generally doesn't set up your tax settings.
That's something you have to do on your own. So this person, maybe it was a lack of communication. Maybe they didn't understand it, but when they went in to set up their tax settings inside Avalara, they set themselves up for consumer use tax. So Avalara. Is collecting the tax. Avalara is also doing their returns.
[11:48] Two years into this, they come to us, and they say, Hey, we think things are getting done incorrectly here. We take a look at it. They had set themselves up to collect the consumer use tax. So Avalara was filing a 0 consumer use tax return for two years, yet was not filing any of the out-of-state use tax.
They're the ones who did the registration. They're the ones collecting the tax, yet they never notified this customer of theirs that they had a bunch of tax collected, not remitted. So lots of ways to do this. Number one is the ease of how this can be done. But the number two issue is relying on software companies. This is where I have my biggest issue for services.
[12:43] All right. There are a necessary evil. You need them for the automation, but I don't believe that any of the software companies perform services for you well. I've got horror story after horror story after horror story like the one I just mentioned.
A big one and we see this all the time, but we've talked about this one in our actual horror stories is that you got salespeople for the software companies coming out and saying, hey, just sign up with us, and you don't have to worry about anything ever again. And they're pushing the streamlined sales tax program. This one client here, they're ours now. They've moved about five companies over to us since they realized this issue. Streamlined sales tax program doesn't or wasn't, I'm not sure if they do it now. I don't think they do, but they don't do the local jurisdictions. So this company thought Avalara was, remitting all the tax they collected.
[13:48] No one ever told them that we're not doing these local jurisdictions and after three years they had $900,000 plus in tax collected not remitted in the local jurisdictions of Louisiana and Colorado. You would think Avalara is collecting the tax, Avalara is remitting returns. You would think that they would notify this customer. “Hey, by the way, you got a bunch of tax collected here, not remitted.”
Unfortunately, they don't. When you're utilizing these software companies, they chop this work up and give it out to a whole bunch of people, one hand doesn't know what the other hand is doing. So it's not that they're doing this intentionally. But if the one hand doesn't know what the other hand is doing, it's hard to catch errors like this.
[14:44] And that's just one example. I can give you example after example. So you know when you're talking to salespeople, you got to question them. When you're doing the tax, Configuration when you're setting up your taxes, if you're unsure, then you got to ask questions, and you can't really ask those questions of the software companies they usually don't answer those questions out of liability issues.
They don't want to take on that liability. As a matter of fact, they tell their salespeople not to answer these types of questions. However, salespeople want to provide good customer service, and a lot of them do what they're not supposed to be doing. So you can find yourself in a lot of issues. There are lots of ways that this can happen. The biggest reason is because it's just easy to turn on that tax miscommunications could be a combination of reasons could be a lack of knowledge and communication. Or it could be, you're just relying on someone else to do it.
[15:58] And because you've been told that. Unfortunately, it doesn't turn out that it's a set-it-and-forget-it type of thing. This is something that, a lot of times, companies still have a responsibility.
[16:14] Ellie: So Mike, how can this be resolved?
[16:17] Mike: All right. There are a number of ways that this can be resolved before you can figure out the best way to resolve it. You need to review the facts. Number one, was there an actual need to collect the tax? Did you actually have a link or connection with the state? We call nexus. That would require you to become the state's tax collector. If not, then one of the easiest ways is just to return the money to the customers.
Sometimes that's not possible. That will solve the issue in most scenarios, though, where you weren't required to collect it. But sometimes you get so many transactions. It's such a nightmare. It's going to be more work to do that than to try to figure out some other type of remedy. And in that instance. Maybe a historical registration. You go back and tell them the first date that you started collecting tax, and you just get registered.
[17:26] And usually, we've got to look at materiality. So if it's only two or three months, then this is a great solution. The historical registration, tell them exactly when you started collecting the tax, go ahead and get the tax remitted. And as soon as you get it remitted, then go back and de-register because you don't have a responsibility to be collecting the tax.
Now, if you did have a responsibility to collect the tax, I don't think you want to return that money to your customers. The reason being, what happens if the state finds out that you had a responsibility to collect tax and they're pursuing you for that actual tax? You're going to be kicking yourself because you had that tax in your hand and now you can't go back to the customer. You've already given it back to the customer. What are you going to do? Hey sorry. I gave this back to you. And especially if this is, an individual rather than a company.
[18:30] So now you're going to have to dig into your own pocket in most circumstances to turn this money into the state. So I don't think you just want to automatically return the money to your customers. You only want to do that when you weren't responsible for collecting the tax, either you didn't have this link or connection we call nexus with the state, or a lot of times, people inadvertently collect tax on items that are not taxable.
Giving it back to the customers makes sense in some scenarios. If you were required, let's talk about to collect it. Number one, we started talking about historical registries. And a historical registration is a good option. If the amount of exposure, the liability is relatively low.
[19:29] You can always ask for a penalty waiver, but the longer this has been going on, I've been involved in some situations, one out in California, what was going on for over 10 years. In this scenario, the person didn't understand sales tax. They had nexus in California because they had consigned inventory there.
Someone was actually selling it for them. They were responsible for collecting the tax, but any of the sales outside of that relationship, they were still responsible for the sales tax. And this bookkeeper, not knowing what she was doing every year, was journaling that back into the general ledger, and the company was going out and spending the money. After 10 years, this woman gets fired and after she got fired. It was then that they realized what she was doing. California worked with them. They put together a payment plan, but they still had to pay all of that back tax plus the penalty, and on the tax, excuse me, they waived the penalty.
[20:35] They had to pay the interest on the tax that was prior to the look-back period, as well as in the look-back period. So, they did a VDA. I’m getting a little bit ahead of myself here. So, in that scenario, you would not want to do a historical registration. That was the point I was trying to get to. There's just too much exposure. And you want to get as much of that waived as possible. So, a Voluntary Disclosure Agreement is a really good option for tax collected, not remitted. And in a Voluntary Disclosure Agreement, the state rewards you for stepping forward voluntarily. And they usually do this by limiting the look-back period and by waiving some or all of the penalty.
Most of the time, it's all of the penalty, but in tax collected, not remitted situations, there are a handful of states out there that only waive some of the penalty. If you've been collecting tax for 10 years, even if the look-back period of a normal VDA is four years, they're going to want all their money.
[21:47] You cannot keep this money. That's a big no-no. You have to get that money back to the state. It's like a modified VDA. But still, if you have a lot of exposure, that's one of the best ways to handle this. Especially since the penalty is waived in most instances, and we're not only talking about the civil penalty; we're talking about any potential criminal penalties.
Those are usually waived, also. VDA is a great tool, but it's not a one size fits all tool. You have to make sure it fits—your facts and circumstances. The VDA is a pretty formal process. VDAs generally are…No matter who you go to, they're generally going to be more expensive than doing a historical registration.
[22:42] So you have to do a cost-benefit analysis to see if the VDA is actually your best solution. It may be that historical registration. So, if you don't have a responsibility to collect the tax. One of the first things you want to look at is just returning the tax to your customers. Sometimes that's not possible. Then you can always either do the historical registration or you can do even a VDA, and you can get de-registered once that tax is taken care of.
So the moral of the story, Ellie, if you find yourself with tax collected, not remitted, take action. Some of these options are only available if you're proactive. If you wait for the state to come and find you VDAs are often off the table, penalty waiver is often off the table. So, you want to be proactive. As I said earlier, we welcome your business, but whether or not you work with us, we implore you to contact someone you trust to work through these issues with. You gotta be proactive.
[24:02] You do not want to wait for the state to come and find you, and you want to take care of this sooner rather than later because once you know about it, remember knowledge and intent, you've got to figure out a way to get it back to the state. Thank you everyone. This is a podcast. We only have a limited amount of time here.
We appreciate you listening to us. We hope we didn't scare you too much. There are solutions to this. Bottom line is that you have to pay that back tax and sometimes it may be two or three months, sometimes two or three years, sometimes 10 years or more, but you got to take care of it.
[24:44] Ellie: Thank you so much for all the great information today, Mike. And if you have sales tax needs, we do offer many solutions and services. If you want to discuss tax collected, not remitted, and your facts, I suggest a consultation with Mike. You can reach out to me directly at emoffat@salestaxandmore.com.
That's emoffat@salestaxandmore.com.
That will be listed in today's notes as well for our podcast. You can also visit our website, salestaxandmore.com. In addition to our services, we have an entire series of free webinars that provide CPE. We offer a whole host of free resources for you out there and paid ones as well. So thank you so much, everyone, for your time, and have a wonderful day.
[25:34] Mike: Thank you everyone and we look forward to seeing you on the next podcast. Bye bye.
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