What are the business risks of not collecting sales tax?
Managing your daily operations as a small business owner is a big task, especially if you oversee multiple aspects of your business. From the conversations Taxify has had with prospects and clients, we have found that most small business owners don’t have a lot of extra time or energy to manage sales tax. We regularly receive questions similar to “What happens if I don’t collect sales tax?” While we are unable to offer legal advice, this post can give you an idea of what is at stake by not remitting sales tax.
Why should you consider becoming compliant sooner rather than later?
In the end, Taxify understands that the decision to become compliant is a choice that you need to make for your business. Our intent is to provide the facts for you to evaluate when making a decision.
Here’s what we know to be true about the current state of sales tax:
- Laws regarding sales tax compliance are quickly changing. We’re seeing an increasing number of states that are interested in collecting revenue from online sales.
- Neglecting to maintain sales tax compliance can cost you money if you ever plan on selling your business. Read how failing to collect sales tax cost this business $70,000.
- Selling your products through larger distribution channels — like Walmart — can be impossible unless you can prove historical sales tax compliance.
What could happen if you choose not to collect sales tax?
You could be forced to pay all uncollected tax out of pocket. If you have a sales tax obligation but aren’t remitting tax to the state, it’s only a matter of time before you’ll be required to pay what you owe.
While sales tax and income tax are reported differently, the penalties warranted by failing to pay income tax can serve as a model for businesses that avoid reporting sales tax. Eventually, the IRS will catch up to you, and you will risk being audited as a result.
Based on the amount of attention state governments are paying to sales tax, this could soon be true for any sales taxes you have not collected. As long as you continue to neglect collection and remittance, you will run the risk of being audited. As the regulatory landscape changes, ecommerce sellers owe an increasing amount of sales taxes to remote states.
Using Taxify can ensure that you’re collecting the right amount of tax so that you won’t be paying for it out of pocket in the future. It could very well be much more cost-effective to automate sales tax today than to try to handle it later. Still deciding whether or not you’re ready to start collecting sales tax?
You could be forced to pay interest fees for late remission. If you are are planning on paying any uncollected sales tax at some point down the road, you’ll be liable for interest on any of the tax due. If you owe sales tax in another state because your inventory is being stored in an Amazon FBA warehouse there and you have not collected sales tax there for the past few years, you will eventually need to pay the tax plus penalties and interest. On average, states charge a 6.4 percent interest penalty on late remission.
You could be forced to pay late fees for late remission. In addition to interest, most states also charge a flat rate of the original tax due as a penalty to sellers for being late on sales tax remission — even if it’s only by a day. The average sales tax penalty states levy on sellers is 17.85 percent.
Making the right decision for your business
Ultimately, you alone can best make the right decision for your business. If you’re not sure where to start, we recommend first finding out the states in which you may have a sales tax obligation. Signing up for a 30-day trial of Taxify’s automated sales tax solution can help you determine the states in which you should consider becoming compliant.
Once you have this information, Taxify recommends you speak to an attorney or a sales tax professional who can help answer specific questions you may have that are related to your business.
Questions to ask yourself
Here’s what you should consider when making a decision around sales tax.
- Do you have a sales tax obligation to the states in which you are selling items?
- If you do have an obligation in a state, are you either selectively or unintentionally ignoring collecting sales tax?
- How much do you think you will have to pay in penalties and interest when you do become compliant in a given state?
- Are you selling enough products in a specific state to justify the cost of becoming compliant in that state? In other words, will the cost of registering for a sales tax permit in a state and the cost of reporting and filing be greater than the amount of tax you actually owe? This is a business decision that you’ll be able to make once you understand the associated costs of becoming compliant.
If you’ve made your decision and are considering automating sales tax, contact Taxify to learn more about our automated solution.