In March, we released our Guide to Sales Tax Penalties and Audit Risks for eCommerce Sellers. This blog is the first in a series that will highlight subjects from the guide and break them down for easy digestion.
With regulators at both the federal and state levels constantly looking to increase their efforts and drive further revenue via collecting sales tax, eCommerce businesses are continually on high alert. The impending South Dakota v. Wayfair decision could create a federal standard for nexus and sales tax obligations, but there is no guarantee the Supreme Court will rule in favor of South Dakota. In its current state, the sales tax landscape is murky and complicated for eCommerce businesses and other remote sellers.
You can read more about these developments in our blog, and be sure to stay tuned as the Supreme Court is set to rule on the case in June. In the meantime, let’s dive into our guide. First up: Back taxes, penalties, and interest.
What are back taxes?
Put simply, back taxes are any outstanding amounts of tax you owe to a state, local jurisdiction, or the federal government. But how might you accrue these back taxes, and what can you do to avoid them?
Unfortunately, states will not send you a friendly letter letting you know when you have a sales tax obligation. Instead, you will receive a not-so-pleasant letter when the state finds out you haven’t been collecting and remitting sales tax correctly. Your business is on the hook for keeping track of each jurisdiction in which you have nexus and are thus obligated to collect and remit sales tax. You may not even know you have nexus in a certain area, but that does not absolve you of your obligation.
In most cases, this is how back taxes are generated: Businesses don’t realize they are culpable for sales tax in a certain area, and then the amount of unpaid taxes continues to grow over a period of years until the appropriate taxation authorities catch on and crack down after a period of monitoring, called “delinquency.” Failure to pay off these outstanding amounts can result in audits, penalties, interest, and even lowering the company’s valuation.
As far as avoiding back taxes goes: If you’re reading this and thinking to yourself, “uh-oh,” it may be too late to prevent them. But that’s ok, as long as you negotiate a repayment plan with the appropriate authorities. If you are a newer business, or you have recently gained nexus in a region, now is the time to get on top of your obligations and make sure you regularly submit accurate sales tax payments.
When do penalties and interest come into play?
So, you’re behind on your sales tax obligations because you weren’t aware that you had nexus in a state (or two, or three, or…). Unfortunately, this probably means you’ve incurred some penalties. The best option, if possible, is to make sure you pay off those penalties immediately to avoid accruing interest on them. According to our data, the average penalties accrued are 20 percent of the amount of unremitted taxes, while the average interest accrued on unremitted tax is 10 percent. In some states, these penalties can go as high as 25 percent, with interest rising to 18 percent in certain places.
The longer it takes your business to get caught up with your sales tax collection and remittance obligations, the more you’ll wind up paying in penalties interest overall. This could also potentially have a negative effect on business valuation and could make your company appear less favorable to potential investors.
If you aren’t sure where you may or may not have a sales tax obligation, sign up for a free trial of Taxify by Sovos today. Our team of regulatory experts constantly updates our portal with accurate rates and forms, so you’ll always be on top of your obligations.
To learn more about the pitfalls of audits, penalties, interest, and back taxes, download the complete guide today.