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:
Scenario 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.
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.
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.