Motor Fuels Tax Minute, Episode 19

Sales and use tax compliance is the topic for this week’s Motor Fuels Tax Minute as our hosts interview Steven Scarborough in a deep dive on how to navigate these tax requirements.

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Detailed Description of Weaver’s Motor Fuels Tax Minute, Episode 19

00:00:00

Emilda: Welcome to Weaver’s Motor Fuel Tax Minute, where we talk all things motor fuel. Joining us today is our guest, Steven Scarborough, director of state and local tax services with a heavy focus in the sales and use tax arena.

Steven, today we have a few questions for you and welcome.

00:00:17

Steven: Thank you. Glad to be with you guys on this very famous podcast.

00:00:22

Leanne: We’re glad to have you, Steven.

Our first question to kick it off is when it comes to sales and use tax compliance, what are some things that companies need to be thinking about?

00:00:31

Steven: When it comes to sales tax compliance, the first thing to say is “no news is not necessarily good news.” Taking a proactive approach is what’s definitely needed in the case of compliance.

Usually, things get more expensive as time goes on and when things aren’t handled. The first thing to do is really just have a full awareness of your compliance footprint. That means knowing what your business is doing, the nature of the operations, the type of sales that you’re having, the type of services that you’re offering, and then where are you offering those – into what states and jurisdictions are you doing it. How complex your compliance would be is dependent upon how large your operations are, such as how many states that you’re operating in.

A few years back, we had a large landmark case with the Supreme Court, Wayfair versus South Dakota, where the sales tax footprint, or Nexus, of your business within a particular state is now changed from physical presence to economic nexus, which means you only have to meet a minimum sales threshold within that state in order to be considered to have nexus within that state, which means that you need to register and start reporting and filing for taxes.

This was especially troubling for a lot of our manufacturing clients, for example, not having to worry about filing tax returns in various states where they operated for years. But even though they don’t have to pay any sales taxes and they have exemption certificates from their clients, they still, in some cases, are required to register and file in those states. It’s something that you want to take a proactive approach to, something where you can dig into it and find out what’s going on. And the old adage does hold true with compliance: an ounce of prevention is worth a pound of cure.

00:02:16

Kelly: That all seems like a lot of work, the registrations, the filing of the returns. What are the risk of noncompliance with sales and use tax?

00:02:26

Steven: True, yes. There is a cost to staying in compliance and being compliant, but it is small relative to the potential cost of being out. Some things you might experience are penalty and interest. Any past due returns or tax amounts due, you’re going to incur penalty and interest on.

One of the biggest things is missing an opportunity to collect sales tax from your clients in the present day when you’re issuing the invoices. Going back to your clients a year or two later is a lot more difficult to collect those funds. In some cases, you may be at risk of losing your business license or not being in good standing with the state.

Another thing that’s important is that when you file a tax return, you’re actually tolling the statute of limitations for that jurisdiction. And what that means is that the state will say, “after three or four years, we’re not going to audit you,” depending on the state. And if you don’t file that return, that clock doesn’t start. So, you need to go ahead and get those things filed so that the states know that the clock has started.

There’s also fees and costs to getting back into compliance. You have to spend the time to do the analysis, to communicate with the states, to register and do those things – all of that can be expensive. And another thing, in our current world, there’s a lot of mergers and acquisitions going on. A lot of our clients are going through this, and usually there’s a due diligence process that would encompass reviewing and looking at sales and use tax compliance within that. And if it’s not being handled, it could be a big exposure note in the sale or the agreement as well.

Those are some reasons why you want to take care of it ahead of time so that as your business moves and changes, you’re ready to go.

00:04:05

Emilda: Steven, is it true that certain individuals working with businesses can be held personally liable for their employers and paid sales taxes?

00:04:15

Steven: You know what Emilda, that is actually true. It is a scary truth. But if you consider what is a sales tax, which is considered a trust tax, it means that you’re holding those funds in trust for the state you’re collecting from.

There’s no other use for that fund. You should not be using it in your business. Typically, the people that could be held personally liable would be the officer group, such as the CEO, CFO, VP of accounting, controller, even tax manager or tax preparer in some cases. But the real test is do you have control over the funds and do you have control over the ability to follow the return?

If those answers are yes and you did not handle the obligation, there is a good chance that the liability will be on you as well. There are countless cases amongst all the states that have a sales tax where individuals were assessed and then held liable and confirmed in a court to say, yes, you do actually owe this bill. And one of the unfortunate things about trust taxes is that if you have an assessment against you for that, you cannot get it removed via bankruptcy, whether that be the business going bankrupt or yourself personally, they are going to stick and you’re going to owe them. It’s a big deal. And yes, even in some states there is criminal liability or criminal charges that can be brought to you depending on how much fraud may be involved.

00:05:39

Leanne: What are parallels there with what we find in the motor fuel tax world with our excise taxes? So, let’s say a business is out of compliance, Steven, what steps should they take to get back into compliance?

00:05:50

Steven: Some of the things you can do is understand first, where are you buying and where are you buying it? What are you selling and where are you selling it? You want to analyze your products and services for their taxability in the jurisdictions where you’re operating and understand, should I be charging a tax? Is what I’m doing taxable?

The second thing you can do is the Nexus study. Find out what states that we’re operating in have an obligation to file a tax return, where have we met the economic threshold, nexus threshold, in order to be obligated to report and file.

Once you establish where you’re supposed to file and the taxability of your products, then you can determine how much exposure you have. For our clients, we typically do a taxability exposure analysis. Going back as far as when you have reached Nexus in those locations to provide an assessment and estimate of how much penalty and interest might be due.

If you have a large amount due in one particular state, most states offer a voluntary disclosure program where you can actually go into an agreement with the state. You bring all your numbers to them and tell them what you owe, and in return, they will close those periods for you and then they will, in most cases, also waive interest in a few states. This can be beneficial if you’re in that situation where you do owe a lot of tax.

In the states where you maybe owe less, you just want to go ahead and register. Get the sales tax registration done, start filing, catch up any prior period returns, and then that’ll kind of get you back to current. On a proactive basis, you want to look at your ERP and your tax system. Maybe you need a little bit more of a robust tax engine to do an interest rate call out so that when you have transactions invoicing out, it can call out and get the rate. If you’re in a lot of states, it’s hard to keep up with rates being plugged into your ERP and fix, you want something that’s a little more dynamic. That might be something that you want to look into. The overall idea is that you want to handle the past and then get yourself set up so you can have a smooth future with compliance.

00:07:54

Kelly: Excellent. Thank you so much again, Steven, for joining us today.

And to all of our listeners, please feel free to reach out to Steven with any questions you might have about sales and use tax.

Thank you again for joining us on our Motor Fuel Tax Minute. We look forward to seeing everyone again next week. Thanks.

00:08:11

Steven: Thank you.