November 15, 2023

The Hidden Costs of Non-Compliance: The Importance of Sales & Use Tax

By Anthony Kwan, Senior Manager, Tax & Business Services & Mark Thomas, Senior Manager, Tax & Business Services

The Hidden Costs of Non-Compliance: The Importance of Sales & Use Tax Year-End Tax Guide

In today’s landscape of ever-evolving state and local tax laws, ensuring tax compliance is increasingly complex. The growth of companies and their offerings can lead to overlooked sales and use tax liabilities. The 2018 South Dakota v. Wayfair Supreme Court decision has further complicated matters, allowing states to tax e-commerce and remote sales regardless of a company’s physical presence. Many businesses that previously had no obligation to file sales and use tax returns in states where they had no physical presence are now caught off guard and have started filing returns.

Sales & use tax compliance is critical for several reasons:

  • Businesses are legally obligated to collect and remit sales tax on taxable goods and services, with non-compliance leading to penalties.
  • Complying helps businesses maintain a positive image and credibility among customers, suppliers, and other stakeholders.
  • Non-compliance can lead to costly financial consequences that significantly strain a company’s resources and profitability.
  • When all businesses collect and remit sales tax, it prevents others from gaining an unfair advantage by not charging tax, resulting in a level playing field.
  • Sales tax is a vital revenue source for government services like education and infrastructure.
  • Accurate sales tax compliance reduces the risk of being audited and costs associated with tax audits.
  • Efficient tax processes ensure businesses have accurate records, proper documentation, and streamlined reporting systems. This simplifies and improves overall business operations.
“Sales tax is a vital revenue source for government services
like education and infrastructure.”

Sales tax compliance is essential for businesses as it ensures legal adherence, protects reputation, avoids financial consequences, supports fair competition, contributes to government revenue, minimizes audit risks, and simplifies operations.

The Importance of Automation and Software in Compliance

As businesses comply with various state and local filing obligations related to sales and use tax, the need to utilize software to automate the different tax calculation and filing processes becomes necessary. Whether a small or large business is rationalizing to invest in tax calculation software, the reasons for budgeting resources for this can procure various long-term benefits, such as:

  • Accurate sales tax calculations across different jurisdictions.
  • Time savings by automating tax processes for various products and locations.
  • Reduced risk of errors compared to manual calculations.
  • Scalability to manage growing business complexities.
  • Simplified tax return filing and documentation, which is helpful during audit.
  • Cost savings by potentially reducing the need for specialized tax professionals.

Overall, sales & use tax software streamlines the sales tax management process, reduces errors, saves time, ensures compliance, and provides greater convenience and accuracy for businesses. Considering a reputable partner in sales and using tax compliance software is instrumental in streamlining the tax compliance process.

Pursuing Voluntary Disclosure Agreements

A Voluntary Disclosure Agreement (VDA) is a program offered by tax authorities to encourage taxpayers to voluntarily disclose unreported income, assets, or other tax-related information. It allows taxpayers to rectify mistakes or omissions without facing severe penalties or criminal charges and enables tax authorities to collect owed funds without lengthy investigations.

A sales tax VDA allows businesses to voluntarily disclose and pay any outstanding sales or use tax liabilities, with penalties generally waived or reduced depending on whether sales tax was collected but not remitted. Under a VDA, businesses enter into an agreement with the state tax authority to disclose their unpaid tax liabilities for a specified period and agree to pay the outstanding tax liabilities, including interest and penalties.

Most states offer taxpayers the option to enter the VDA program anonymously, which enables our clients to withdraw from the VDA if they decide not to proceed.

Companies must determine tax liability through due diligence when selling their business. VDAs are generally part of the due diligence process to minimize tax liability, which can reduce the business’s sale amount or require the seller to ensure a high dollar amount of escrow to cover this exposure.

Marcum LLP’s State and Local Tax professionals have vast experience guiding our clients through the entire VDA process and will address any questions or concerns at any time.

2023 Marcum Year-End Tax Guide