Will Sales Tax Audits Increase Soon?
Sales tax audits will not only derail your business but your life. They are something you want to avoid or minize at best.
It is important to first revisit the major changes with sales tax legislation so you can avoid sinking your business and having a plan to move forward with compliance.
Prior to the 2018 June Wayfair vs South Dakota U.S Supreme Court Decision, the states collectively lost over $28 Billion + in sales tax revenue. Post-Wayfair, the states have started to see massive differences in the amount of sales tax revenue flowing to the states that have passed new economic nexus guidelines (44) and especially from the states with marketplace nexus where the marketplace facilitator (Amazon, for example) is now collecting and remitting (in 24 out of 37 states that have approved this so far).
The states should be happy and content just to move forward and not worry about anyone with past physical nexus or those sellers who are still not coming forward after passing the economic nexus levels.
The labor involved to audit past sellers just to squeeze a few more dollars into the state’s coffers, may not even make financial sense.
Unfortunately, that is not the way things are working, at least in several states. And, in the end, let’s be honest, if the states don’t enforce the rules and go after the little guy (which represents 80% of the sellers), most would not comply. This is the same reason why the IRS continues to audit taxpayers making under $100K, because they make up 80% or so of all tax revenue generated.
In the end, it is your responsibility, as a seller, to understand your sales tax obligations under the post-Wayfair state changes.
States have enacted remote seller nexus legislation, which has created nexus and registration requirements for more sellers. Don’t assume your CPA is up on all the changes, and if not, will lead to bad results for your business when you are hit with more sales tax audits. They have heard of it, they are familiar with parts of it, but typically they are confused about it.
The odds are, even if you are selling on Amazon, you will need to register in multiple states, as you cross these economic nexus thresholds.
Unfortunately, the state’s registration process is slightly different in most states. Some states have updated their websites, making it easier to register online (assuming the responsible party has an SSN); others have not. Some states mail you the sales tax registration number or special code to finish the process of creating your tax account. In the end, even with streamline sales tax that simplifies registration in 24 states, you must provide accurate information.
In general, if you make a change in your business structure or even taxation type (especially with the non-streamline states), you are creating a nightmare of updates with each state you have registered.
What is Economic Nexus?
It is a threshold enacted by the state, typically $100K in sales OR 200 sales transactions in a year (some states only have a sales threshold). If you cross a threshold, you are responsible for registering to collect and remit sales tax, or at least report if the marketplace facilitator is collecting and remitting on your behalf. There are exceptions to every rule, which makes it more difficult when dealing with sales tax in 45 states and DC. In the end, selling in the U.S. is like selling in 46 different countries at the same time.
States and Their Audit Tools for Compliance
Believe it or not, the state audit departments go to seminars to learn how to invest in and use the latest technology to make their job more efficient with respect to non-filers. They consider buying lists and use software to search web pages with online stores…to maximize every dollar and generate revenue to meet their state budgets. New York City budgets the collection of $75,000,000 per year just in penalties. In the end, the states want all the money due, and interest keeps accruing, so there is no rush to go after non-filers.
States Already have the Lists of Amazon Sellers
The states that already have a list of Amazon sellers include California, New York, and Washington. California’s deadline was September 25th for all those to come forward who already received a letter, with a last chance to only pay sales tax and penalties over the past three years. These states will follow up on past sales tax due. Just because a notice does not get to you (perhaps due to a change in address) does not mean your liability will go away).
How the States Make More Money by Waiting
You are not protected by bad information or advice. Telling a state auditor your Facebook group gave you the advice not to pay and said, “Sales tax is not required,” or “Amazon should pay all the past sales tax,” or “We are not even the retailer,”… will not protect you at all. Your liability increases with penalties and interest if you get audited or notified for not being registered when it was required. Interest and penalties on unpaid past sales tax add up quickly.
But Won’t the States All Change to Only a Sales Threshold and Drop the Transactions Thresholds?
This is true in a few states, like California, Idaho, Iowa, Mississippi, New Mexico, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas and Washington. This list will grow by a few states, but a majority still have a threshold of 200 transactions. The name of the game is compliance with the current state guidelines; they don’t go away if the transaction threshold does drop off in the future. Since most states have had economic nexus levels in place for more than a year, that means the longer you wait, the more your liability grows.
What Registration Date to Use When You Come Forward?
The date when you first had nexus is the proper answer. Assuming the states will simply be satisfied with collecting moving forward is a bad assumption. Fraud penalties, which are common if you are caught using the wrong date, are typically 50% additional penalties and will kill your profits.
Looking to Buy an Amazon Business That is Not Compliant with Sales Tax?
This is a bad idea. When you registered for sales tax, most states have a question on the application that asks if you acquired the business from another company and to name that company. Guess what that does for the seller? If likely triggers an audit to see if that company was in compliance with sales tax. If you are the seller, that means you, so it only makes sense to get into compliance now.
What about Non-Marketplace Facilitator Sites?
Shopify sellers are usually shocked to discover that they have passed the sales or transaction thresholds in many states and have the responsibility of collecting and remitting sales tax. The total due with past sales tax, penalties, and interest adds up to about 10% of your gross sales in that state once you pass the economic threshold. This applies to your own website too.
In the End, Will You be Personally Liable?
Operating as a separate legal entity is an important step to separate your business liability from your personal assets. This only happens when you protect the entity veil and start with a complete formation. Most sellers do not operate with any product liability insurance, so a proper entity formation is key.
A separate legal entity will not protect you from the sales tax liability passing to you, personally. States will go after the owners of an entity for past due sales tax. They understand the leverage is with the owner, because having sales tax liens against you in multiple states will financially paralyze you, and no banks will want to lend you any money.
In the end, exposure from sales tax liability is similar to personally guaranteeing a business credit card, if you default, you are personally liable.