Note to Small Businesses: State Auditors are Looking for You

Since the first of the year, our firm has encountered many significant sales tax deficiency and non-compliance situations involving small multistate businesses.  These have been technology companies, retailers, and service providers.  The scenarios are somewhat similar.  Each business has been operating for a number of years (7 to 10 years), has taxable sales of property or services and clearly has nexus in multiple states (10 to 30 states), and is registered for sales in just a couple of states.  From our discussions each of these businesses agree that there is significant risk of tax liability to the company and to themselves as corporate officers, that the problem will only grow unless they do something about it, and each is concerned about what would happen if they were ever caught.

The other troubling similarity between these businesses is that none of them intend to do anything about the problem.  We have worked up some rough tax liability numbers, made some suggestions to mitigate liabilities by verifying non-taxable customers, and trying to work through some of the state amnesty programs.  None had an interest in these alternatives.  It seemed that our efforts to help them deal with the problem only solidified their resolve to pretend that they would never be caught or that they would somehow attempt to negotiate with a state if they were ever caught.

As a small business owner myself, I can clearly understand the resistance of paying sales tax out of my pocket to satisfy liabilities that may rightly belong with my customers or may have already been paid by my customers through use tax accruals.  However, as a fundamental risk management technique I would also recognize that taking some steps to slowly resolve the issues would be better than doing nothing. 

The forcast for state tax revenue is bleak for the next several years.  As such, the pressure for state auditors and state nexus units to identify unregistered taxpayers will increase.  In the situations above it would not be unexpected for the state to audit a company for the past 5, 7, or even 10 years given the nature of their business activities.  Add on penalty and interest and you have a significant situation for a small company.  Then multiply this by 15 or 20 states. 

Sales tax is as much and art as it is a science.  There are risks worth taking and risks to avoid.  The scenarios outlined above are not unique to "small businesses".  We see the same things at mid-sized and large companies also. 

If you are a small or mid-sized business and you operate in more than one state, you need to take very seriously your responsibility for whatever multistate sales tax issues you may have.  This might be as simple as just collecting valid resale exemption certificates from customers.  Without an independent assessment of your company's sales tax responsibility, you may never know what options there are for you to proactively manage your risk. 

Don't let the states be the first ones to tell you that your business has a multistate salse tax responsibility.