The Cost of Sales Tax Compliance

There is no way to sugarcoat it. The cost of sales tax collection and remittance falls directly on retailers – not government. In essence retailers are unpaid sales tax collection agents for the states and municipalities. The retailers gain no competitive advantage, marketing value or assets from calculating, billing, collecting and remitting sales tax. The best a retailer can hope for is to minimize those costs.

These costs include software, hardware, employees and consultants, not too mention penalty and interest for mistakes. A recent survey found that the average small or mid-sized business incurs $327,000 annually to manage sales tax compliance. This is a staggering statistic!

The states and localities do not do enough to minimize these costs. There are hundreds of different tax rates, tax forms and requirements – all of which change frequently. As example, most of these tax forms are due monthly. Some of the forms are multiple pages – greater than 50 pages in some states. Some of the preprinted forms provided by the jurisdictions cannot be duplicated because they are machine-read for processing. Some of the forms must be completed electronically with additional specialized software or through manual entry on the internet. Failure to comply with these requirements leads to potential penalty and interest assessments by the jurisdictions, which greatly increases the costs.

The states are attempting to create some standardization through a multi-state initiative to simplify sales tax compliance. Unfortunately, their motivation to simplify sales tax compliance is to expand the collection of sales tax to more retailers, not to simplify the burden of the retailers. As a result I have little faith that this effort will actually reduce the cost of sales tax compliance to retailers.

Personal Tax Liability-It's Not Just for Officers Anymore!

Are you a “responsible party” party who could be held personally liable for your company's unpaid sales tax?  Your first response may be, “I’m not an officer of the company, so how can I be personally liable?”  Guess again.  Under most state statues, the Department of Revenue of a state has the option to pursue collection of unpaid sales tax against any party who has any part in the accounting, collection, and remittance of the sales tax.  In the illustration below, the mere act of signing the sales tax return could make you personally liable.

The “corporate officer liability” statutes have been around for many years.  Don’t let the name confuse you, the liability is not limited to only officers.   In most states the risk of personal liability extends to anyone – regardless of title – who has responsibility for collecting and paying sales tax.   Most states have re-labeled these statutes as “responsible party” statues to express their desire to not limit this liability only to those parties who are officers.   For the most part, the names put on the company’s initial business registration application will be the ones used for collection efforts.   

Here is a real situation from Missouri where the Department of Revenue pursued personal liability against an unlikely party—and won!! 

Pam Martin was the manager of a bar (The Countyline) located in Fair Play, Missouri.  The bar owner was a family friend who lived in Kansas.  The owner asked Pam to manage the bar for him and authorized her to purchase merchandise and sign certain checks.  Pam routinely filed the Missouri sales tax return and signed these returns herself.  On each return that Pam signed, was the statement “I have direct control, supervision, or responsibility for filing this return and payment of the tax due.” 

For the 1st and 2nd quarters of 2003, The Countyline failed to file its sales tax return and the Department issued assessments against The Countyline for $1,261.75 in tax and $315.43 of penalties, plus interest.  The Countyline failed to appeal the assessment and a collection judgment was issued by the Department.  Because Pam lived in Missouri, it was much easier for the Department of Revenue to pursue her than to pursue the owner who lived in Kansas. As such, the Department sent a collection notice directly to Pam and demanded that she pay the state the past due tax and penalty.  Pam argued that she was not a “responsible party” since she was not an officer.  The Department did allow Pam to get a notarized statement from the owner indicating that she was not a “responsible party” with regard to the sales tax. 

Unfortunately for Pam, the owner and family friend would not sign the statement indicating that Pam was not a responsible party – some friend!  As such, the Missouri Administrative Hearing Commission found Pam to be personally liable for the taxes due and imposed a 100% willful failure to file penalty.  At the end of the day, Pam was personally liable for $1,846.86 of tax (which reflects some tax payments applied by the department to the account) plus $460 of regular penalties, plus interest. 

How could this be?  Pam was deemed to be a responsible party because she signed returns and checks for tax payments, she attested that she was a responsible party when she signed the return, and she was aware of the responsiblty to file return sand pay the tax and failed to do so.  Do you do any of these things for your company?

This example shows how someone who is not an owner or an officer of a company can be made to pay the taxes due for a company out of their own pocket.  Most states do not impose any proportional ownership test to the taxes due.  That is, a 1% owner is liable for 100% of the taxes if no one else is available.  Most states issue assessments for 100% of the tax against all the owners and officers and other responsible parties let them fight it out among themselves as to who is going to pay.

States pursue responsible party liability as a last resort.  The most frequent cases involve bankruptcy or other business solvency issues.  Regardless, this threat is real and is aggressively enforced.  If you routinely prepare sales tax returns, you may want to double check whether this is a problem you need to deal with.  If you are an officer who has any supervisory responsibility for the filing and payment of these taxes, you should be doubly sure they are being filed and filed properly.  With the states all experiencing revenue shortfalls, the availability of some deep pockets at the “C level” of the business may make for some easy collections. 

A word or caution, if your name is listed as a corporate officer with a Department of Revenue and you are no longer an officer of the company, be sure the state has removed your name from its records to minimize any potential that you may be personally liable for taxes due for periods after you left the company.