What Happens If You've Never Paid 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…
When it comes to taxes, states have more power than most people realize. They can track down non-taxpayers and enforce assessments, even if the company or business owner is in a different state. Because of this, failing to pay your sales tax can result in major consequences for your business.
According to Michael J. Fleming of Sales Tax and More, there are a number of ways states can find a person or company that has not been paying the required taxes. These include auditing their customers, using discovery units, and gathering information from third parties like broken partnerships, unhappy spouses, and disgruntled employees.
In this episode of Sales Tax and More, Michael J. Fleming is interviewed by his co-host Ellie Moffat about the consequences associated with people or businesses not paying sales tax. Michael explains what causes states to seek out non-taxpayers, how they find the information they need, and the actions they can take in response to non-compliance. Stay tuned.
Here’s a glimpse of what you’ll learn:
Michael J. Fleming explains what could happen if a company hasn't been paying sales tax
How states can trace and find companies who have never paid their taxes
Michael shares a case story of a Missouri client who failed to pay taxes for his virtual business
How discovery units follow up on audit leads
What states can do after finding a non-taxpayer—and how you can avoid major consequences
Do states have the power to enforce assessments across state lines?
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax and More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now here is your host, Michael Fleming.
[0:26] Mike: Hi, Mike Fleming, 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. What else could it be? Today, my co-host, Ellie Moffat and I are going to be discussing what happens if you've never paid sales tax? I mean, that's a question we get quite often in our salespeople. So we forget, it's one we want to talk about today. But before we get started, let's introduce you to Ellie.
[0:58] Ellie: Everyone, Mike, it's really great to be here. And I am excited for this episode, I think it's gonna be incredibly helpful for everyone listening out there. But first, I'm going to do a quick introduction for Sales Tax and More. 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 registration, sales tax audits, consulting, we do research and like our name states more. So if you have questions about our services, please do not hesitate to reach out to ask. We are more than happy to answer those questions for you. So Mike, what happens if you've never paid sales tax? And do not tell me it depends.
[1:47] Mike: But why? I mean, it really does depend? I mean, I know you don't like what I use that answer, but, you know, in some companies, nothing ever happens. I mean, you know, there's only an issue if a state finds you. And some companies go their entire existence and never get found. So it really depends. So it depends, number one on if a state finds you or not. Now, you know, just because they say that not all companies get caught, I don't think you should be playing Russian roulette. Because if you have exposure, I don't think you want to leave this up to chance because the stakes are so high, you know, you're more likely to be audited for sales tax than you are for income tax. And, you know, nowadays, the IRS is you know, a nice little house cat compared to the states who are Tigers when it comes to finding and enforcing, you know, their sales tax compliance. So, you know, if you let this go on long enough, sometimes it can even be business threatening. And there's personal responsibility in a lot of instances also. So we don't want to leave it up to chance.
[3:05] Ellie: Well, that certainly sounds ominous. Mike. So do you care to provide a little more detail here?
[3:12] Mike: Why surely Ellie, let you know. You know, we say that it all depends on whether the state's gonna find you or not. So let's start there. There are a number of ways that states can find you. But if you're selling to other businesses, one of the biggest ways that states find us by auditing your customers, because when a state comes out, or an auditor comes out, they're not, you know, just looking at your sales, make sure you charge the right amount of tax, and that you're remitting all the tax you collected. They're also looking at your purchases. And the reason is just because you know, someone doesn't charge you tax doesn't mean it's a tax-free transaction. Maybe your vendor didn't have nexus or maybe they didn't know they were supposed to collect the tax. So what the auditor is looking for is to see how you handle those transactions, did you self-assess it and remit it as a consumer use tax? So that's the primary reason why the auditor is looking at your purchases, as well as your sales. But the secondary reason is that a great lead list. That's a lot of lead potentials. I mean, anyone who's not charging you a prospecting list is what I meant to say, anyone who's not charging you tax, you know, they can go on a list and in some states, it's a very formal process, Texas, a lead card has to be filled out for each vendor that is not charging tax. Now, just because you get on a list. It's not the end of the world. But each state has what we call discovery units. Some states have very big discovery units, you know, states like California, or Texas. Texas even gives there's a special name, it's discovery units not good enough, it's the business activity research team or Bart. And their sole purpose is to go out and look for taxpayers who they believe should be registered or not. So they're found following up on these lists on these leads. So auditing your customers is a big issue. Also sharing information. So one of the ways that the states do this is by sharing information with the IRS. And the reason they do that is because one of the things that create nexus out there are third parties, independent contractors, subcontractors, you know, people who are not even employed by you can actually create this link or connection called nexus two Supreme Court cases that say that so. So the states go out to the Supreme Court, excuse me, not Supreme Court, I don't mean that. They go out to the IRS, not the Supreme Court, they go out to the IRS, they say who's got a 1099 in my state, and then they look at who's issued that 1099. And then they say, okay, who's you know, signed up for tax in our state. So that's how a lot of companies are found.
[6:20] So I'll give you a quick example. This one's from a couple of years ago, but you know, here's an example of the guy trying to do right, he was a very early adopter saying that you know, inventory in an Amazon warehouse does create nexus. At that time, there were only six or so states that actually had inventory, that actually had Amazon warehouses. So he got registered in all those states, he was in Missouri at the time, at that point, there was no Amazon warehouse. But Missouri is a state that, you know, goes to the IRS and see, to see who has 1099. And they say, oh, Amazon seller, are they registered to collect tax here in Missouri, they live here in Missouri. And unfortunately, he had registered everywhere but didn't think of getting registered in his home state. So he came to us at that point. And we helped him out a little bit, but there's only so much you can do, he wanted us to make the argument that, hey, his business is in the cloud. So he doesn't really have a physical location anywhere. And the states don't believe that you know, even in it, you know, when we do have a lot of virtual businesses, you know, where you're located, or where you operate your business from, that creates a link or connection with the state. And that's the definition of nexus, some sort of link or connection. So sharing information, now, there are certain parts of the country, once the state finds you, they're not going to share information with every state out there, but in the southeast and is in the Midwest, especially once one state finds you six months down the road, you know, after that one state gets their money, they'll start giving out your information to these other states, and all of a sudden, you're having three or four states call you. Again, I don't want to say the sky is falling, because you know, not every state all of a sudden is going to be calling you that's not the way the information sharing works. But states do share information. Another thing, you know, we talked about how these discovery units follow up on leads. So there's a number of different ways leads are generated. But you know, if you look at employees, you know, former employees, disgruntled employees, or if you look at partnerships, and you know, the partnerships breaking up, one partner feels that they didn't get fairly treated, or even relationships. I mean, I've seen spouses do this. And on every website out there, you know, there's either a telephone number, where you can report noncompliance, or, you know, you can submit it through the website in some states anonymously. And some of these states actually pay a bounty. So this former employee, this former disgruntled employee, disgruntled partner, you know, the spouse who's unhappy with the way that the divorce is going, they can turn you in and get their pound of flesh and get paid for doing it.
[9:22] So that's more prevalent than you actually think. Your competitors, you know, I talked on one of our last podcasts about competitors turning in everyone in the industry. When they got audited, they said, Hey, if I'm getting audited, everyone else should be audited. But this is actually becoming a much bigger deal because as companies realize that they have exposure for this economic nexus and they want to get registered, but they're worried that none of their competitors are and they think it's going to impact their sales. I'm getting asked this question, you know, a couple of times a month. Is there anything I can do to force my customers to start collecting taxes? Can I tell the states on them? So you're having this become a front and center issue again, with more and more people thinking about it, so you competitors, and sometimes you can come very innocently from a customer, you know, you don't charge your customer tax. Now they're gonna start worrying about consumer use tax, and they call the state and say, hey, the vendor didn’t charge me the tax here. What do I need to do? Do I need to do anything about this? Next thing you know, the state saying, who's your vendor, and you're on a list. And that's subject to the discovery unit now. Web surfing, you know, states like Washington, sometimes they use live people to go out there and look at different websites. A lot of states do this. But Washington's really a big web surfer. And some states actually use software, they call it a web crawler, it's looking for certain terms out there on the websites. And when it comes across them, then they, you know, have a live person look at it. But you know, our salespeople, I say this all the time, in the last two months or so, they brought me two different scenarios. And right on the website, you know, you do a Google search, give me a list of the hundred best coffee shops, not coffee shops, but coffee providers. There was a top 10 provider and they sold all sorts of equipment, in addition to the coffee beans. And right there, you didn't even have to click on the website, you just looked at the Google page. And it said, only pay sales tax in this state. Now, that's a giant neon sign. You're telling every state out there who's looking at the web who's doing this web surfing, who's got a web crawler, come and find me because I get a problem in every state. I mean, giant neon flashing and of course, these people always know more than we do. So Oh, no, I don't have to worry about economic nexus, it doesn't apply to me. Okay. At the very least, this is what I told her salespeople at the very least, even if you don't believe in sales tax, even if you don't believe in nexus, take this down. Why tempt fate, because sooner or later, they're going to come up to you. And they were very similar situations. So you gotta watch what you put out on your website. Because they do this web surfing. And those are the biggest ways, there are more ways that states can find you. But those are some of the more. Oh, there's one I forget, it's for fairly new. Going out and buying a list. Utah went out and bought a list of people that they thought were over their economic nexus thresholds, which are $100,000 or 200 transactions. It was effective on January 1, 2019. And in January of this year, they started calling everyone on that list. Now when the pandemic happened, we started getting the closures, they backed off, but I expect them to start right back up. And I expect more states to follow. So nowadays, they don't even have to, you know, do all of this other stuff to create their own list. I just go out and buy a list.
[13:20] Ellie: Wow. Okay, Mike. So what happens when they find you? What happens when they use this information? And they find you What's next?
[13:30] Mike: Well, if I say it depends, again, I think that you're gonna give me a really hard time.
[13:34] Ellie: I will, I will. But if you got to say it, you got to say it.
[13:38] Mike: All right. Well, again, it depends on the state. But in general, the state is going to request certain information once they find you. And they are either going to do this by phone or by email, or by sending out some sort of questionnaire. And what they're looking for is when your nexus first began, because, in theory, they can go back to the beginning of time, or whenever your nexus began, and ask you for all of the back tax plus penalty and interest. Now, in reality, and I'm saying this tongue in cheek here, they only go back seven, eight or ten years. And that's generally because even Texas who says they go back seven years, we have an instance where they were trying to go back twelve years, so they can go back in most instances to instances to the beginning of the time, but they limit themselves to seven, eight or ten years. I don't know of any states that go back nine years. So once that date is determined, as I said, the state's gonna want all of that tax plus all of the penalty and interest that would have been due. And if you work with them, there's no negotiating with them. You know, most states have you know, mitigation programs available like a voluntary disclosure agreement. But in general, once the state finds you, that's not available. Some exceptions state like Michigan and there are a couple of others will still let you enter into a voluntary disclosure agreement. And I'll sidetrack here for a minute. A voluntary disclosure agreement is a reward for stepping forward voluntarily, you haven't made the state use their assets, their time, their energy, their money, their people to track you down. So instead of going back seven, eight or ten years, they're generally going to go back either three or four years, wave everything older than that look back period, and then waive the penalty for the period that they are looking back.
[15:45] And then some states like Texas, they're going to waive the interest also. So Texas, four-year look back period, waive 100% of the penalty, and 100% of the interest. So these VDAs are tools, just like any other tool, and offer all scenarios, but they can be great tools, but they're off the table. So California, their VDA is 36 months. So if California finds you, they're going to go back up to eight years. That's their look-back period. And at that point, they will not allow you to use a VDA. So if you think that, you know, you hear California coming and you want to get out there in front of them, because 36 months is a lot better than eight years, you're not going knocking years worth of back tax penalty or interest off there. And a lot of people say, Well, I'll just negotiate with the state, in general, the state's not going to negotiate with anyone, once they find you, they don't have any need to negotiate with you. So, you know, really important, I think it's still better to cooperate with the state, because a lot of people I talk to say, well, Mike, I just won't respond, I just won't, you know, cooperate, well, you know what, in the past, you could get away with that, but that state never really goes away, just takes him a little bit longer to get to you. And now your exposure is continuing to build. They're becoming a lot quicker to do what we call estimated assessments nowadays. So if you won't work with them, if you won't provide the numbers, they'll look at another company in your industry and say, okay, here's what they know, revenue looks like, and we're gonna base it off of this. And if you're gonna estimate something, that's like making up a number. So if you're going to make up a number, you might as well make it up really high. So sometimes these estimates are four or five times the amount of the actual numbers. And, you know, once they estimate it, they'll give you 30 days, 60 days, depending on the state, there goes that depending le but they'll give you 30 to 60 days, and if you don't pay that, then they're going to turn it over to their collections unit.
[18:03] Ellie: So, okay, Mike, we have a lot of interaction with sellers, we talked to people a lot. And I've heard people say, states don't have the power to enforce assessments across state lines. How true is this?
[18:20] Mike: Not very, you know, maybe if we went back 50 years ago, this was true. And at that point, you know, the banks, even though we said, you know, we had a national banking system, we didn't, really did. And it was really a state banking system, a bunch of state banks, even if they all had the same name. And if you wanted to, you know, put a lien on, or levy on someone's assets, you had to go into that state to do so. Not so much anymore. Nowadays, you know, if you got a Bank of America account, and you're located here in Texas, and you know, you owe money to the state of California, California just goes down to their local Bank of America branch and says, hey, go ahead and put a lien on this, this account here. So pretty easy. Now, some people say, well, I'm just gonna go put my money in, you know, community bank, and you know, those are not national, okay, that's not going to stop the state from coming after you. It may slow them down a little bit. But it's not going to stop them. You know, some states, California, particularly, very, very aggressive. They'll go after accounts receivable, if they know who your customers are, they will go and, you know, try to put a lien on their money and get it to come directly to them and bypassing you. So accounts receivable, I'll give you a story about China. You know, this is Mainland China. This is a company there. So a lot of people ask me, Well, you know, what about foreign companies? Well, a lot of foreign companies do have some assets in the United States. So they found this company. They had called them and they contacted me and they said, Hey, we want you to defend us in this. I said, Okay. I said, What do we want to say? Well tell them we're in mainland China, and good luck coming to get us. So we're not cooperating. I said I don't think that that's going to work. They said, well, we want you to say it anyway. I said, okay, so I contacted the state of Washington, and I told them, Hey, you know, because they didn't reach this company in China, they reached it through one of their satellite offices, I think it was in Canada. And so I contacted the state, I said, Hey, this is not a Canadian company. This is a company, they're not even in Hong Kong, they're in mainland China. And basically, what they're telling me is, you know, let them collect the tax going forward, that's the compromise that they'll do with you. Because otherwise, there's no way you're going to get their money, they're in mainland China, good luck getting that money. So the state of Washington comes back, and they say, well, if that's the position that they want to take, great, here's what we're going to do, we're going to do an estimated assessment, and then you'll have 30 days to pay that estimated assessment, then we're going to turn it over to our collections unit, and here's what our collections unit is going to do, the first thing they're going to do, and by the way, this was an Amazon seller, we're going to Amazon, and we're going to get Amazon to send us all the money rather than your client. So we're gonna, you know, put a lien on their accounts receivable bolt, from Amazon. That's number one. Number two, we're gonna put a lien on all the inventory. So they've got inventory all across the country here. And we'll work with Amazon to make sure that we get a lien placed on every bit of inventory. Number three, if they have any other merchant accounts, or any other assets that we can get a hold of here, United States, we're going to go after that. And number four, we're going to pressure Amazon, to make sure that they don't do business with this company or any of the principles of this company again. So that last one, believe it or not, this company was making a killing here in the United States, and they didn't want to lose access to the markets. That last one one is what really got them. And they ended up settling with the state of Washington for north of $500,000. So, you know, even if you're a foreign company, the states have a lot more power than people think that they do. And that they did 50 years ago, and 50 years ago, this was a lot harder. So Ellie, on top of all that, you know, on top of all these things the states already do, we just read the other day, and I think it was the state of Massachusetts, but don't hold me to that. That is starting a new out-of-state lien program. And they've partnered with this firm, and the firm is going to put liens on all types of real estate and everything else, all across the country. If they need to get a judgment in the home state, then that's what this process is all about. The state thinks that this is going to catch on very quickly. And it's going to be a resource for all states to use. So as bad as it can be now, I think that this is going to get worse on a going-forward basis.
[23:34] Ellie: Yeah, Mike we will track down the information and get it in the show notes for everyone so that they can see for themselves. And, Mike, thank you so much. I do want to put out there that if you have sales tax needs, at Sales Tax, and More we do offer a lot of solutions and services. You can reach out to me directly at emoffat@salestaxandmore.com or jump on our website salestaxandmore.com. That's all Sales Tax and More all spelled out. In addition to the services we offer, we have a lot of resources out there as well. So we offer a series of free webinars that provide CPE credit. We have a paid research portion of our website as well. So Mike, is there anything else you want to say here?
[24:20] Mike: I just want to thank everyone for joining us on today's episode of the Sales Tax and More podcast, and we hope to see you in the next episode. Thanks, everyone.
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