By now, most people have heard that last week the U.S. Senate passed the Marketplace Fairness Act ("Act"). If passed by the House of Representatives and signed by the President (who is on record saying he would sign), the Act will enable states to force internet retailers to collect sales taxes on sales made to in-state residents. In the week or so since the Senate passed the Act, there have been hundreds (possibly thousands) of articles written about why one particular group of businesses or lawmakers are in favor of the Act while an equal number are against it.
Many of the articles focus on how business owners do not have the time or money to comply with 45 different state sales tax laws. Interestingly, many of the points made in these articles are the same points brought up back in 2010 when Congress passed the Affordable Care Act (commonly referred to as "Obamacare"). In general, Obamacare requires most businesses to provide health insurance to their employees. For those businesses that do not comply, an annual penalty of $2,000 per uncovered employee penalty is imposed.
Because of the significant cost of providing health insurance coverage and the comparatively low penalty, many businesses have considered paying the penalty instead of incurring the cost of providing health insurance coverage to employees. Given this response, I was not surprised when business owners began asking about "the downside" of not complying with the Act.
When it comes to cutting corners on sales tax matters, my advice has always been "don't go there." Each state has its own laws and regulations dealing with penalties for sales tax noncompliance (the Act does not have a universal penalty provision that would apply in every state). Since sales tax is commonly considered a "trust fund tax" (meaning, companies are responsible for collecting sales tax on behalf of a state and/or local taxing jurisdiction), the penalties for noncompliance tend to be the most onerous of all tax penalties.
In most states, a company that fails to collect sales tax when required can be held jointly liable with the consumer for the unpaid sales tax. For example, a company that is required but fails to collect $300,000 in sales tax on Internet purchases can be assessed and held liable for the $300,000 plus penalties and interest. Assuming the company's failure to collect the sales tax goes back three years, the total liability could easily be in excess of $2,000,000 including interest and penalties.
To make matters worse, states can hold a company's "Responsible Person(s)" personally liable for any unpaid sales tax liabilities of the company. In other words, a state can "pierce the corporate veil" and go after the personal assets of a Responsible Person in order to collect unpaid sales tax owed by a company. A "Responsible Person" can be a single person or any combination of an owner, officers, or employee of a company that has direct or indirect oversight of collection and remittance of sales tax.
As an example, last year the New York State Tax Appeal Tribunal held the CEO (who was also a founder and major shareholder) of an online retailer personally liable for the company's outstanding sales tax liabilities. Despite the CEO's argument that the size of the company and number of transactions made it impossible for him to personally oversee all aspects of the company's operations, the Tribunal ruled that as a corporate officer he had a fiduciary responsibility to ensure that sales tax was being properly charged and remitted to the state. The Tribunal went on to say that an officer's fiduciary responsibility could not be absolved simply by relying on others to perform the officer's required fiduciary duties.
In my opinion, the Act, as currently drafted, will not get the requisite number of House votes (or be voted on at all) to become law. However, with certain modifications, a bill could potentially get through Congress that would shift the current use tax collection responsibility (on Internet sales) away from states and instead require Internet retailers to collect the applicable sales tax. This shift in collection responsibility could result in a company going from filing a single state sales tax return to being required to file in more than 40 states. The increase in sales tax compliance will dramatically increase the possibility of a company making "mistakes" in reporting and remitting the proper amount of sales tax collected. As previously discussed, these "mistakes" can result in an owner losing his or her business, and more.
David Seiden is a leading authority in state taxes. He is a partner in Citrin Cooperman's White Plains office, where he leads the firm's State and Local Tax (SALT) Practice. He can be reached at (914) 517-4447 or firstname.lastname@example.org.
Citrin Cooperman is a full-service accounting and business consulting firm with offices in New York City; White Plains, NY; Norwalk, CT; Livingston, NJ; and Philadelphia.
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