Sales tax compliance is the preparation and filing of sales and use tax returns. Companies have to provide exacting and detailed analysis of transaction-by-transaction dealings. It’s a complex and challenging process for even the most powerful companies. When errors occur, there are risks and legal repercussions.
Common hazards of sales and use tax compliance
With the reporting process, companies should consider some common risks. Those include:
- Interest and penalties
- Missed deadlines
- Inaccurate calculation of liability
- Overpayment
- Filing errors
There are over 9,000 local and state tax jurisdictions. If your business crosses state lines, that means adhering to each locale. You have to track nexus laws and requirements. That increases compliance risk and can end with constraints on resources.
Consequences of missing the mark
Not filing use tax on time in Massachusetts can result in as little as 1% or as much as a 25% liability for the amount of the balance due. In addition, not paying use tax or paying late can equate to from 1-25% liability for the unpaid tax.
What’s more, unpaid or late taxes also get charged the federal short-term interest rate plus 4%, which is compounded daily. These fees and penalties can be a burden for a large national company, let alone a small business like a local restaurant.
If the IRS finds that your unpaid taxes were intentional, you could be charged with federal tax evasion, which is a felony and carries fines upwards of $100,000 and time in prison if convicted. The amount of fines and severity of incarceration time depends on the individual case.
Complexity of reconciliation
As a monthly chore, reconciling sales tax collecting between general ledgers and sales tax systems only creates greater possible complications. Tax teams have to track data from all jurisdictions where you have a nexus. It then has to be properly reconciled in both systems. If reconciliation is done incorrectly, the result may be a collection of missed deadlines and filing issues.
Because of this, it’s possible that tax errors and late or missing payments are the result of human error and not intentional acts. Regardless of if the errors are intentional or unintentional, business owners are still obligated to pay sales or use tax, and if they don’t, face penalties and possible jail time.