Sales Tax Cost: Will Voluntary Disclosure Cost You?
If you have been selling for several months and are behind on collecting and remitting sales tax, you may realize that you not only owe a lot but have also acquired penalties and interest. Consequently, your sales tax cost could get out of control.
First, determine how much you owe in penalties to determine if you should consider Voluntary Disclosure or move forward and apply for a sales tax permit and pay the penalties.
If you decide your sales tax cost is not too high, you may choose to move forward to applying for sales tax permits. It is important to keep in mind that using the date when you first had stock/inventory will trigger past sales tax returns due (plus payment of your past sales tax + penalties + interest.) Do you have the cash flow to pay that amount upfront? This is typically due within 30-60 days.
Voluntary Disclosure allows you to disclose to a state the fact you have not paid sales tax and would like to come forward (before receiving a notice or applying for a permit), hoping the state will waive your penalties. In most cases, they will when the process is handled correctly. You would then owe the past due to sales tax plus interest, which will be about 8% plus 6% or 14% on average.
How Much Do You Owe in Past Sales Taxes + Penalties + Interest?
This is important to know for your overall cash flow to move forward. Sales tax rates may range from 5.4% up to 8.5%, penalties from 10% to 30%, and interest from 2% to 18%. Let’s take an average of each for your formulas.
Sales Tax: 7%
Your Sales subject to sales tax (per state) $_____ =
(the sales subject to sales tax) x .07 (sales tax owed) $_____ = $_____
(sales tax owed) x .10% (Interest on sales taxed owed) $_____ = $_____
(sales tax owed) x .20% (penalties on sales taxed owed) $_____ = $_____
Amount owed in sales tax + interest + penalties, in that one state $_____
$5000 in sales subject to sales tax
$350 = $5,000 x .07 (sales tax owed)
$35 = $350 x .10% (interest on sales taxed owed)
$70 = $350 x .20% (penalties on sales taxed owed)
$455 = $350 + $35 + $70
$455 may be what you owe in one state. As an Amazon FBA seller, you may have stock in 20 different states (update- now with marketplace nexus Amazon is collecting in 43 out of 45 states), and if behind, that number could be 20 x $455 = $9,100, of which 20 x $70 = $1400 of potential penalties could be waived through filing a voluntary disclosure agreement with the state. Update: A Shopify seller now with economic nexus may have over 200 transactions in 20 states which would be a better example.
If you file a Voluntary Disclosure Agreement (VDA), you would be able to waive the $70 in penalties in this one state. That may not be worth the effort to file a Voluntary Disclosure Agreement in that one state. SALT (sales and local tax experts) charge up to $2,000 + Per State to File a VDA.
Each state also has its own formula for late fees and penalties for being delinquent on sales tax returns that are past due. The sooner you move forward to apply for sales tax permits and stop paying sales tax out of your own pocket, the better. Let us help you apply for your permits!