In a perfect world, every business would understand their sales tax obligations and maintain compliance with each state’s laws at all times. In reality, however, many businesses struggle to understand their specific sales tax obligations, which can expose them to potential tax liability and a variety of complications, including penalties, revocation of business licenses, and audits. 

In this blog post, we’ll address a number of situations in which you may find yourself with potential sales tax liability and the consequences of each situation. Although your situation might seem overwhelming, remember that there are possible solutions, as well.  

Problem: Back Taxes 

A common problem that business owners face is discovering past tax liability that has not been addressed. In some situations, you may have been unaware of your collection and reporting requirements, so you did not collect sales tax from your customers to remit to the state. This can be detrimental to some businesses, because failure to collect sales tax from customers at the time of the sale means that you must now pay any sales tax owed to the Department of Revenue out of pocket. 

On top of the sales tax due are the added costs of compliance, including time and money spent to review data, understand sales tax laws, file returns, and resolve issues with the Department. For someone unfamiliar with sales tax, this can take significant time and attention. 

Potential Solution: The best solution to unpaid back taxes is, of course, to stay ahead of your sales tax obligations. Understanding the importance of sales tax early on can prevent unpaid tax liability. Additionally, if you are contacted by a state Department of Revenue or receive a notice of unpaid tax liability, it is crucial to address the issue immediately. Some states will also allow you to request a payment plan if you have unpaid sales tax liability that you cannot pay.

Problem: Penalties and Interest  

Once you have addressed unfiled returns and unpaid tax liability for prior periods,  it is likely that the state will impose penalties and interest for filing and remitting sales tax past the deadline. The amount of penalties imposed can vary significantly by state, but a typical penalty rate is between 5 to 10% of the tax due. Some states will cap the penalties at a certain dollar amount, while others impose a minimum penalty that must be paid. Some states impose a penalty for failure to file on time and an additional penalty for failure to pay on time. Interest is imposed by state statute and interest rates can change from year to year. 

Potential Solution: Penalties and interest can be particularly overwhelming for business owners. Many business owners are not aware that they have options for addressing penalties. 

Although interest typically cannot be waived, many states have penalty waiver or penalty abatement programs that can reduce the penalties owed. Penalty waivers can be requested in a variety of ways, including by a form made available by the state, a written request, or sometimes through your online account with the Department of Revenue. 

If you can demonstrate that your delay in filing a return or paying the tax due was reasonable and not intentional, the state may waive or reduce the penalties. Examples of reasonable cause to file a late return can include difficulty in obtaining records or a loss or replacement of the employee responsible for filing returns. Because penalty waiver requests are typically reviewed on a case-by-case basis, there are a number of other reasonable cause arguments that a state may accept. Additionally, some states apply first-time penalty waivers if this is the first time your business has missed a return or payment. 

Another potential option for addressing tax liability is a Voluntary Disclosure Agreement. Many states have programs to incentivize businesses to voluntarily come forward with unpaid tax liability. The benefits of these programs are typically an automatic penalty waiver for certain periods. There are several requirements to be accepted into the program. One of these requirements is that your business is not and has not been previously registered with the state, so it is crucial to consider a Voluntary Disclosure Agreement before completing a state registration, if you think your business may be eligible. 

Problem: Additional Late Filing Penalties

If you need to file past due returns in multiple states, it is crucial to develop a strategy for filing. As previously mentioned, state penalty and interest rates can vary drastically by state. 

Potential Solution: From a strategic standpoint, you should consider several factors when addressing past due returns and payments. Which states have the highest penalty and interest rates? Perhaps those states take priority over states with lower rates. Which states offer penalty waiver programs, and how do you qualify? Do any of these states offer Voluntary Disclosure Programs that you could apply for? The order in which you take these steps can impact the amount of penalties and interest you ultimately pay, so it is important to be strategic. 

Conclusion

The best approach to navigating sales tax obligation is a proactive one. However, it is not uncommon for business owners to find themselves with unfiled returns, past due taxes, and penalties incurred. 

Working with an experienced tax professional from our team at State Tax Advisors can help protect your business from costly mistakes. Let us help you implement a carefully planned strategy to address your sales tax liability, reduce penalties, and ensure compliance with any state.