CA PA Sales Tax 101

Will States Come After You if You Do Not Collect Sales Tax?

by Mark Faggiano

We’ve spent a lot of time talking about an eCommerce sellers’ real and potential tax liability. But what are the consequences if you – knowingly or unknowingly – owe sales tax to a state and don’t pay?

This could happen to you for three common reasons:

State Sales Tax EnforcementScenario 1 – You didn’t realize you have sales tax nexus in a state – You may have started selling online as a hobby, not realizing that you met your home state’s requirements to collect sales tax. Or, you may be an Amazon FBA seller who doesn’t realize that many states consider that housing inventory in an Amazon fulfillment center gives you sales tax nexus. This is the most common issue TaxJar users face, and we’ll talk about it at length later in this article.

Scenario 2 – You did not file for a sales tax permit, but collected sales tax – If you collect sales tax without a permit, many states will view this as fraud, i.e. you are representing yourself as an agent of the state for sales tax purposes but not actually registered.

Scenario 3 – You filed for a sales tax permit, but did not remit sales tax to a state – A worst-case scenario is the story of this Florida man was recently jailed for allegedly collecting sales tax without remitting it to the state. Of course, that type of activity is fraud. A more common scenario is that an online seller does not make any sales in a state, but forgets that most, if not all, states require a sales tax filing whether they collected any sales tax or not. Failing to file for sale tax can subject you to hefty penalties.

If you are like most TaxJar users, you may have had a problem with Scenario 1 at some point.

Most states try, in some form or another, to find online sellers (and other businesses) who haven’t complied. Usually they provide several ways for citizens to turn in non-compliant businesses.

They also generally hire people who’s job it is to seek out businesses who are not in compliance. Remember, sales tax is a big source of revenue for the states who levy it, and they don’t want to miss out.

Below we’ll detail two approaches we’ve found to collecting past due sales tax:

The Aggressive Sales Tax Compliance Approach: Pennsylvania

Pennsylvania is one of the most notorious states when it comes to going after non-compliant sellers. As early as 2011, they released a sales tax bulletin announcing that remote sellers who warehouse goods in Pennsylvania have sales tax nexus in the state.

Pennsylvania Sales Tax Nexus

Click to enlarge. This link takes you to the entire bulletin, which opens as a .pdf.)

The good news is that collecting sales tax in Pennsylvania is fairly simple.

The bad news is that Pennsylvania is very aggressive about identifying sellers how may have sales tax nexus in Pennsylvania.

We talked to one seller who received a demand letter from the state of Pennsylvania in mid-2012.

Pennsylvania Sales Tax Demand Letter

As you can see from the letter, the state threatened consequences such as “assessment, audit, lien or referral to a collection agency or the Office of the Attorney General” for failure to collect sales tax. The seller chose not to respond to the demand, and as of this writing reported that no further action had been taken.

The state of Pennsylvania has the means and the wherewithal to go after out-of-state sellers. Whether they are able to fine or prosecute what they term delinquent sellers remains to be seen.

The Friendly Sales Tax Compliance Approach: California

Perhaps fortunately for sellers who don’t understand the law or have become confused about it, many states seem to be taking a softer approach to sales tax compliance.

California is a prime example. The California Board of Equalization recently announced a plan to contact online sellers who may have sales tax nexus in California. The stated goal of this outreach is “awareness” and “education.”

I spoke with one online seller who has been dealing with the California BOE since 2008. She reports that her conversations with the BOE lead her to believe that the state is forgiving of people who were ignorant of the law – as long as they try to make the delinquency right.

On the other hand, this isn’t to say that California is all forgive and forget. No state is going to go easy on a seller – or any business – who has knowingly dodged paying sales tax. (Refer back to the Florida example above!)

Have you been contacted about sales tax compliance by any other states? We would love to hear your experiences.

  • FedTax

    The seller who chose not to respond to the letter from PA by simply filling out the questionnaire and returning it in the prepaid envelope is reckless, and is not being well advised by their accountant or tax counsel. If they didn’t consult with either after receiving that letter, they deserve what comes next.

    Everyone should understand, PA did not send that letter out at random (no state does). PA sent that letter because some activity by another seller or purchaser in that state has revealed to the state that there is some level of business activity for the seller in PA – possibly a drop-shipper.

    My point is this: PA has actionable evidence that they can take into a court of law – if they didn’t, they would not have sent the letter. But before doing that, PA has provided reasonable opportunity for the seller to explain the situation (by simply filling-out a questionnaire) – without even the burden of a stamp!

    Why would ANYONE resist completing a simple questionnaire when faced with the alternative likely legal action?

    If you receive a letter like the one PA sent to the seller above, do not seek advice from the internet – seek advice from your accountant or tax counsel immediately.

  • justsomeone

    Just subscribed to the blog and looking at the product thank you. Question is, in CA what if you have purchased products in CA and paid the sales tax when you purchased them. When you resale them if you are charging the customer the complete price of the sale including the sales tax you paid when you purchased the item, then are you still required to do anything? Wasn’t the tax paid when you purchased the item? Isn’t that double taxing an item to charge tax again? What if you say purchased a dvd for $25 at wal mart and then the next few months later resold it on ebay for only $9.00. Haven’t you all ready paid the sales tax for that item at purchase? In the resale of the item are you not just collecting back what you all ready paid?

    • The only way you can avoid the tax is if you bought it originally at resale. In that case you’d need an exemption certificate.

      Here’s some more info from the state of CA:
      http://www.taxes.ca.gov/Sales_and_Use_Tax/doingbus2.shtml#Resale

      One other thought about this: if you’re the seller, you shouldn’t have to “pay” sales tax for the items you sell. The way it should work is that you collect sales tax from the buyer and then pass that sales tax collected to the state – thus eliminating the need for you to go out of pocket.

  • NexusInTexas

    Mark, great article/blog. I have a slightly different scenario that wasnt exactly covered in the article and i was hoping for your thoughts. We recently identified that our services (we are a SaaS provider HQ in FL) are taxable (and have been for the last 3 years) for services provided to our clients located in Texas by way of employee residence nexus. We historically have not billed or collected sales tax from these clients. What is the best way to deal with this for the past years? How would the state of TX address this upon an audit? I imagine we would be on the hook for the taxes due to the oversight, but would we be able to bill our clients for the sales taxes owed for the past 3 years? Conversely, would TX ever go after our clients in this scenario?

  • zaflow

    Hello,

    I’m a canadian seller and I’m thinking about selling FBA in the USA, I’m not a resident of the US and I rarely cross the border.

    Will the States go after me in Canada?

  • Hi there,

    We can’t speak for individual states, but suggest you contact a good sales tax professional when deciding when and how to comply with sales tax laws.

  • Pingback: Drop Shipping and Sales Tax, Demystified()

  • ginger

    Can an on-line auction house come back 2 years after an auction and claim that I owe sales tax that they apparently neglected to collect at the time of sale. What recourse do I have-as I don’t know what I paid at the time. I am in Pennsylvania.

    • Hi Ginger,
      I highly recommend contacting a sales tax expert for this one. Here’s a vetted list: http://www.taxjar.com/sales-tax-accountant-directory/

      Good luck! That is a frustrating situation.

      • ginger

        Hi, Thanks. I went to the PA Dept of Revenue site and asked the question and they replied that I do NOT have to pay the tax. It was the auction houses’ responsibility to collect it at time of sale. So I am not sending them any money. I have had another issue with them in the past, otherwise I would be more inclined to part with more money. It pays to be nice to your customers!

        • Glad to hear you got it worked out!

  • Leslie Mertz

    Having a nightmare situation. My husband filed for a business license for a project that he was working on, but never got off the ground. He did not file his business with the State of WV because he made no money from said business. Now we live on the west coast and just got a letter from the state tax stating we owe an estimated $19,000.00 in back taxes. What should we do? Again, my husband never made money off of the business.

    • Hi there,

      I’m so sorry about your situation! While I can’t give you specific advice, I highly recommend who contacting the West Virginia governing authority who sent you the letter and explain the situation.

      It isn’t clear from your comment if this is back sales tax or back income tax, so you may need to a different sort of professional. But if the state of West Virginia pursues the case, I’d contact either a CPA or a tax attorney in your area right away. I hope you get this situation resolved!

  • AT

    I have a question! I am a physical therapist working as an independent contractor in NC providing ergonomic services. As part of this, I recently started selling seat cushions to the company I am contracting with. I purchase them locally (where I pay full sales tax!) and then turn around and re-sell them to the company for a 15% profit. To recoup the sales tax I had to pay, I upcharge them by the 6.75% rate that I paid in sales tax. Now my question is…what should I be paying NC? I don’t want to commit fraud. Since I paid sales tax on the cushions in the first place, should I even be charging sales tax again? Should I just build in the cost of my tax into the base cost I’m charging for the cushion and not worry about it????

    Thanks,
    AT

    • Hey there,

      It sounds like you should definitely be charging sales tax. Also, you could actually get a resellers permit so you don’t have to pay sales tax on the initial payment. And keep in mind that sale tax is charged on the sale, not the actual item, so you’d need to charge sales tax when reselling.

      I recommend you check out our Sales Tax 101 guide here: http://www.taxjar.com/guides/intro-to-sales-tax/

      It will help you wrap your mind around this complex issue and get started with sales tax. I really hope this has helped demystify some of this stuff!

  • Dezmey Tafoya

    My Boyfriend, is doing some yard work for a property management company in New Mexico. He is charging tax, but I was just informed we are suppose to pay taxes at the end of the month every month, for the taxes that we charge. Is this true? I need help before the amount gets outrageous!

  • kevin wasup

    hey i am 19 years old and i just created an online store with shopify im not sure should i have sales tax i have no exprience in what i am doing.. i do not want to get in trouble later on for not having taxes on my shirts… please can u help..

  • Matt

    We are a UK company selling internet services (no physical goods) from servers located in Texas to some US customers. We’ve never charged our customers sales tax. Seems a grey area as to weather our servers mean we have a “nexus”. Should we be charging sales tax to our US customers despite being a UK company? If we should have been, what are the penalties for not having done so (unknowingly) ?

    Thank you!

    • Hi Matt,

      I can’t answer specific questions but can point you to Sylvia Dion, a sales tax specialist who works with international clients regarding US tax laws: http://www.sylviadioncpa.com. I hope this points you in the right direction!

  • Berns

    What about Scenario 2 in California? I am an artist and collected sales tax on two direct sales with the intent on paying the state, but did not obtain a seller’s permit at the time. I usually do not sell directly to clients, my gallery does that. These are my only two incidences where I sold directly to the clients. Do I still need to obtain a seller’s permit although I do not intend on selling in the future? I do, however, want to pay these taxes to the state since I collected them, but not sure if I can without the seller’s permit.

  • myownjoy

    Thanks so much for creating TaxJar and providing such valuable information! One fundamental concept I’m still trying to understand is what does “collecting” sales tax entail and how does that impact a seller’s responsibility to “pay” sales tax? For example:

    (1) If I did not “collect” sales tax on the products I sold does that mean that my customers did not pay any sales tax on the products I sold? And, if this is true, then am I expected to pay sales tax to States on these products even though I never “collected” any sales tax from the customers for these products?

    (2) If Amazon “collects” the sales tax for me, what exactly does that mean? Are they holding the sales tax that they collected somewhere? What do they do with the sales tax that they collect for my products? Do I have to ask them to give me the sales tax that they collected so I can pay the taxes due to each state? Or, does Amazon “collecting” the sales tax for me mean that they will also pay the sales tax due to the states on my behalf? Thanks so much for any clarification you can provide on this!

    • Good questions!

      1.) If a states says that an item is taxable and that you are a merchant required to collect sales tax then you need to remit it back to the state whether you actually collect it from the customer or not. I’ve heard of states saying that it’s unlawful to include the sales tax in the price of the item (i.e. pricing something at “$10 including sales tax” but then paying the sales tax back to the state out of your own pocket) but I don’t have a definitive list of which states frown on this practice. From the states point of view, they just want the sales tax that was – or should have been – collected on each taxable sale, and they don’t care if it comes from your actual customer or from your own pocket if you didn’t collect sales tax.

      2.) Amazon will collect the sales tax and then send it back to you as one of your payments so you can remit it to the state. They don’t do anything having to do with your responsibility toward sales tax (like reporting, filing or remitting. That’s actually one big reason we created TaxJar.com – because Amazon and other platforms don’t have any responsibility to help you with sales tax, and they mostly actually try to avoid it because it’s so complicated.) Here’s more about that and how to set up sales tax collection on Amazon: http://www.fbasalestax.com

      I hope this helps!

      • myownjoy

        Wow- your responses really helped to put this in perspective for me! Thanks so much for taking the time to answer my questions so promptly!! I truly appreciate it!

  • Heather P

    This is so helpful – thanks! Question: If a pay sales tax on a product and resell it to a customer in SC and charge the full amount I paid (including the sales tax), do I need to charge them sales tax again? Soo confusing! Thanks.

    • Hi Heather,

      Great question and the answer is yes, you do. It’s easiest if you think of sales tax as on the transaction rather than on the item.

      That said, if you plan on buying a lot of items for resale you can apply for a resale certificate from your state. With that, many distributors will allow you to buy items for resale tax free. I hope this helps!

  • The AM Effect, LLC

    I am a entrpreneur. I offer design and printing services (all web-based). I am located in Pennsylvania but again am only a web-based company. No physical location. Should I be charging sales tax??

    • Hi there,

      Unfortunately, it doesn’t matter if you’re web-based or have a physical location, you have nexus in your home state and should charge sales tax there IF you sell tangible personal property. In most states services aren’t taxable, but tangible items are. (So your printing may be taxable.) I suggest contacting the Pennsylvania DOR (you can do this anonymously) and asking about your obligation for your specific business. You can find the best way to reach them here: http://taxjar.wpengine.com/state-sales-tax-phone-numbers/ I know sales tax can be daunting, so I hope this helps!

  • cwc720

    A brick & mortar business in Connecticut failed to collect sales tax from me at time of sale. Can either the business or state come after me for tax? This happened on many occasions over a 5 – 6 year period and amounts to over $1000.00 in uncollected sales tax.

    • This isn’t a question we’ve come across before, but I’m guessing – and this is definitely just a guess – that the store can try to do that and that the state can, also, because of use tax. (If you don’t pay sales tax on an item you plan to use in the state you’re supposed to pay use tax to the state. This is a little known and hard to enforce law.) You may want to contact a sales tax pro for a more informed answer. Here’s a vetted list: http://www.taxjar.com/sales-tax-accountant-directory/

      • cwc720

        Thanks for your response. I figured this was a difficult question. I’m talking about well over $1,000.00 in uncollected sales tax. Guess I’ll see what happens. Thanks.

      • cwc720

        Thanks for your response. I figured this was a difficult question. I’m talking about well over $1,000.00 in uncollected sales tax. Guess I’ll see what happens. Thanks.

    • This isn’t a question we’ve come across before, but I’m guessing – and this is definitely just a guess – that the store can try to do that and that the state can, also, because of use tax. (If you don’t pay sales tax on an item you plan to use in the state you’re supposed to pay use tax to the state. This is a little known and hard to enforce law.) You may want to contact a sales tax pro for a more informed answer. Here’s a vetted list: http://www.taxjar.com/sales-tax-accountant-directory/

  • cwc720

    A brick & mortar business in Connecticut failed to collect sales tax from me at time of sale. Can either the business or state come after me for tax? This happened on many occasions over a 5 – 6 year period and amounts to over $1000.00 in uncollected sales tax.

  • Ran

    Hey there, I had an air conditioning company in NYC NY that was closed two years ago, I never collected sales tax from my customers on any job, I got a letter for audit from the state. 1. Is it matter that business is close for that matter 2. Is the state will go after owners?

    • Hi Ran,

      I hate to hear this and I recommend contacting a sales tax professional right now to represent you. Here’s a vetted list, though you may want someone in NYC: http://www.taxjar.com/sales-tax-accountant-directory/

      1.) States can go back and audit you for several years, even though the business was closed. 2.) I recommend a sales tax expert or tax attorney to answer these questions

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