Your state’s Sales tax is one of the most difficult areas of a CPA’s practice. Why? Because CPAs tend to play a very limited role in a client’s collection, reporting, and remittance of sales tax to the State. Yet when it comes to your state sales tax problems, the CPA is the first in line to incur the client’s wrath. So how best to deal with the issue without damaging the relationship with the client? What are the early warning signs that a problem may exist? What constructive advice can you give your client?
Most of the state sales tax issues related to the client’s late filing or failing to file and in some instances, sales tax has been collected but not remitted. Of course, some of the issues are caused by the CPAs themselves as a result of late filings, overwork and just giving bad advice. In either case, you can bet your client is going to blame you, the tax professional. Most calls that we get end up resulting in damage control for the tax professional who either didn’t know the sales tax rules or gave the client incorrect advice.
Statute of Limitation
The first port of call for relief is to determine whether the Statute of Limitations applies. This is only useful if filings have actually been made but mistakes have been made and/or sales have been under-reported. If no filings have been made, then you are out of luck for this potential solution – the Statute of Limitations has not started running yet. If there is no protection from the Statute of Limitation, the state revenue agency can potentially look back to the day the company/business started trading or when the problem started.
If filings have been made then your state can only look back to the applicable SOL date unless it finds that there was criminal intent involved. If your state files criminal charges or tax collected not remitted is involved, it can look even further. Just bear in mind that to benefit from this limitation on the lookback period, filings must have already been made.
Shutting down a business or liquidating a company is not necessarily a sound strategy to avoid liability. Your state often has the ability to go after the business owner personally. For example, responsible party penalties can be made against those in charge, which includes owners, directors, and employees.
Voluntary Disclosure Program (“VDP”)
Where no filings have been made at all, there is still hope. In such cases, if the client had not been contacted by your state in respect of the filing deficiency and the client is not under a sales tax audit, then the client can avail themselves of the VDP program.
Under the VDP, your state will often waive penalties except in cases where sales tax was collected but not remitted. In such cases, the penalty is often limited. Your state will also limit the lookback period. This can be an effective tool if transactions were taxable but no returns have been filed as it can cut exposure. In addition, the VDP carries a presumption that no criminality was involved so precluding any possibility of prosecution in the future. If the conditions are met, clients should be made aware of the VDP and encouraged to pursue relief as soon as possible.
While Wayfair legislation is often geared to capture many online transactions, many companies still do not pay use tax on items bought online. In your state where the buyer makes an online purchase and the seller does not collect the sales tax, then the buyer has to account for and remit the tax. Essentially sales tax is payable on any item which if sold in an offline situation would incur sales tax, then the online transaction will also be subject to sales tax. Many business owners are still coming to terms with the online business model, particularly for cross-state line transactions and clients need to be guided accordingly.
Clients need to be encouraged to keep complete records of sales tax payments and in particular, they need to retain the actual tax receipts showing the amount of sales tax paid. Credit card bills are not proof of sales tax paid. Where such receipts are not kept, the client will be liable to the tax again.
Business owners should be trained that they either charge their customers tax or get a document that says no tax is due. Absent a state resale or exemption certificate, your client, who will blame you, is on the hook for not charging the appropriate amount of state sales tax. Make sure your client retains proper record-keeping for exempt sales as your state will often focus their audits on exempt sales issues.
Clients With Cash Flow Issues
Most businesses will just deposit all sales money collected, including sales tax into a single bank account. The owners will pay bills and expenses out of this same account. For a profitable cash positive business, this will not be a problem. But for a cash negative business, when the time comes for the sale tax remittance there may not be sufficient resources. Every week clients call our offices and while they had good intentions, cash flow fell short and they do not have the money to pay the sales tax. The same happens the next month, and then the next. And, before they know it they owe tens of thousands of dollars in collected but not remitted sales tax. Not only does it carry penalties when your state finds out but it can also result in harsh criminal penalties.
No matter what, almost every company in your state has sales tax problems they are not aware of. Hopefully, this article will give you some ideas of what to look for. Be proactive with your clients even if they don’t ask you to review sales tax. You’d rather be the hero that catches the problem rather than the person that gets blamed for it (even if you were not engaged to review sales tax).