Earth-shattering tax liability means doomsday for vendors: Don’t put your personal net worth at-risk

Vendors selling out of state but not collecting sales tax are on a path to suffering severe financial loss. The tax liability could be astronomical – enough to devastate a business – as high as 10% or more of total sales for a business with annual sales as low as $100,000 or as few as 200 transactions in a given state. Add interest and penalties, and a vendor’s tax related liability could easily double. In pursuit of this easy money (estimated tax at between $8 billion and $13 billion annually), states have commenced their crackdown on non-compliant out-of-state or remote vendors.

Unfortunately, the liability does not end there. Remote vendors may also be subject to each state’s business activity taxes, including corporate-level income taxes, taxes imposed on owners of pass-through entities, franchise/capital stock taxes, net worth taxes, and gross receipts taxes. The liability, with penalties and interest, quickly escalates.

Yes, take it personally!

Sales and other state taxes can be staggering, while providing a very substantial revenue windfall for the taxing states. Even more frightening, a vendor’s uncollected sales tax may typically be imposed directly on the vendor’s owners, officers and employees with fiscal responsibilities. That’s right, owners, officers and certain employees may have personal liability for the vendor’s failure to collect tax, which would be nondischargeable in the event of their personal bankruptcy. Compounding the disaster, when a vendor does not collect tax and file sales tax returns, there is typically no statute of limitations on a state’s ability to pursue the non-compliant vendor and its owners, officers, and employees, meaning the state could pursue taxes for an unlimited time period from unregistered vendors.

Tick tock: anticipated state action

Of the 45 states with a sales tax, more than two-thirds now have economic nexus laws in place forcing remote vendors to collect sales tax if they’ve exceeded very modest sales thresholds – most commonly $100,000 of sales or more than 200 deliveries into a state during the previous or current year. And more economic nexus laws are being enacted, with California, New York, Texas and Pennsylvania each requiring sales tax collection by remote vendors at different times this year! Eventually, every state will take audit action, as doing so will prove very lucrative. Vendors may not have been contacted yet simply due to the particular state’s lack of resources or current audit backlog, but eventually the states will catch up to claim their growing pot of gold. The states do not even need to be in a hurry knowing there is no statute of limitations barring sizable assessments for unregistered vendors.

In the meantime, to promote compliance, states will be sending notices to known vendors advising of their responsibility to collect sales tax and address other business activity taxes. Unfortunately, notice from a state precludes a vendor’s ability to participate in the state’s voluntary disclosure program, an approach normally utilized by unregistered vendors to minimize the tax liability and avoid penalties for late payment/returns and failure to collect tax. States will surely be less forgiving once vendors are on notice of their obligation to collect sales tax.

States can easily identify audit targets through simple Google searches of products available to be purchased via the Internet. States can then estimate sales volume — at least with enough confidence the modest sales thresholds are exceeded — through information from an IRS database shared with taxing states. With the immense amount of data available, and more and more states implementing analytics to identify audit targets, it is only a matter of time until non-compliant vendors are caught in the cross-hairs.

A simple solution – Become compliant today!

This sales tax exposure can be totally eliminated by simply collecting and remitting tax. Further, because sales tax is passed along to customers, there is not even an economic burden on the remote vendor. Finally, as many competitors are already collecting sales tax, there is no competitive advantage to skirting the legal collection obligation, because any immediate, short-term benefit is more than offset by the staggering liability upon future audit.

Proactively collecting sales tax and paying the state’s business activity taxes provides advantages to the vendor, essentially eliminating the likelihood that the taxing state would take an aggressive position and seek penalties for failure to register and pay tax. It also eliminates the state’s right to audit for returns that are more than three or four years old, depending on the particular state’s statute of limitations on assessment.

Remote vendors should immediately take the proper steps to protect themselves before they lose control over the situation and unnecessarily subject themselves to the large financial risks associated with a state sales tax audit. Avoid this catastrophe by contacting your tax professional immediately.

Attorney Steven A. Dimengo is Managing Partner of Buckingham, Doolittle & Burroughs, LLC and member of the taxation practice group. He helps clients with complicated tax challenges including Ohio sales/use, income, commercial activity and federal taxes and has represented clients before the Ohio Supreme Court. Steve can be reach at [email protected] or 330.258.6460.

Richard B. Fry III is partner at Buckingham and chair of the taxation practice group with a focus on state and local tax compliance and controversies, including Ohio and multistate sales/use tax, commercial activity tax, and personal income tax issues. He also represents clients in federal income tax controversies with the Internal Revenue Service (IRS). Rich can be reached at [email protected] or 330.258.6423

About Buckingham, Doolittle & Burroughs:

Buckingham is a corporate law firm that counsels Middle Market executives and business leaders all over Ohio and beyond. With offices in Akron, Canton, and Cleveland, Buckingham offers clients Business Law Reimagined through sophisticated and practical legal services. Serving the region for over 100 years with nearly 70 attorneys, Buckingham’s mission is to deliver meaningful experiences through the practice of law, exceed expectations in terms of service, counsel and business sense, and to offer continuous value to the industries, communities and clients they serve. See all of our news and updates by visiting our website.