Ever since Wayfair v. South Dakota, both states and businesses across the nation have been scrambling to keep up with the ever-changing sales tax laws. It’s high pressure times, with retailers struggling to adjust to new requirements and states pursuing fresh avenues of enforcement.
Even before the defining Supreme Court case that ruled businesses don’t have to have a physical presence in a state to pay sales tax, it’s always been the taxpayer’s responsibility to both understand their sales tax duties and collect the correct amount.
So, if you’ve been putting off learning your new sales tax obligations as a retailer, or think you can get away with skimping on your dues, think again, because states are cracking down.
Perhaps the most effective and inventive method of detecting tax cheats, the recent use of data mining software looks at existing tax records on a business, along with past and current behaviors, to score and classify potential non-compliant companies. In some cases, even third party data centers like credit unions are being sought out for the information they may hold on the state of a business’ sales.
Among the states currently “using analytics to find out-of-state sellers that either aren’t aware they owe tax or are shirking collection and remittance”, are New York, Ohio, Illinois, Oklahoma, Connecticut, and Pennsylvania. Meanwhile, Nevada, South Carolina, Alabama, Utah, and Wyoming have expressed that they’re working “to make analytics a bigger part of their plans.”
Data mining is a great tool for searching out tax cheats from the masses, but it doesn’t accomplish everything. Often, there’s nothing better than good old fashioned boots on the ground, and lately, states have been sending out plenty of boots.
Long before economic nexus was considered grounds to collect sales tax, auditors have been coordinating with outside state officials to locate and enforce both out-of-state sellers, and those within state lines who are suspected of owing taxes. With audit targets varying from high-transaction companies and those with mismatched data, to picking out businesses at random, states will often send over auditors across borders to track down offenders, or alternatively – thanks to Regional Information-Sharing acts – communicate information surrounding any business with a high amount of sales in a certain state, to that said state.
Covering more ground by working as a unit, once a company is suspected of skimping on their sales taxes, for auditors, it’s simply a matter of testing whether that’s true by placing an order and watching to see if the correct amount of sales tax is charged.
Bottom line: if you’re unsure what you’re supposed to be collecting for sales tax, or simply haven’t set up the necessary collection systems… Don’t wait.
As challenging as it may be and while some states do offer “safe harbor” thresholds for small businesses, the risk of a potential audit and accompanying penalties can be costly. Choose to protect your business and promote a healthy state, by learning all your new sales tax requirements and applying the necessary steps to fulfill them.