Many businesses not providing taxable services or products assume that sales tax filings are irrelevant to them and unnecessary. Examples of such businesses include those that do not sell tangible property to end-users and those that do not provide taxable services such as hedge fund/asset management companies.
Non-filing of sales and use tax returns may create significant tax exposure to such companies due to potential noncompliance with the compensating use tax statutes of state and local jurisdictions. Most jurisdictions assess a use tax on tangible personal property or taxable services used by a business within such location if sales tax was not initially paid to the supplying vendor. Tangible personal property (such as office supplies, computer equipment, and certain software) and services (such as some information services and repair services) are examples of categories potentially subject to the use tax. Additionally, particular components of an office renovation may not qualify for capital improvement exemption status. The most common source of acquiring items subject to the compensating use tax occurs when such items are purchased out of state with no tax paid or where the provider for whatever reason fails to collect the appropriate sales tax for the product or service sold. Use tax is remitted on a regularly filed sales and use tax return for the period in question. Only the filing of the return will initiate the running of the statute of limitations for the assessment of tax.
States in general have targeted unregistered sales and use tax non-filers for examination and have committed substantial resources to auditing those non-compliant businesses. Businesses that have not filed use tax returns are potentially subject to unlimited look-back audits although many jurisdictions will limit the period to six years. Since EVERY business most likely will have some use tax exposure, the combined tax, interest, and penalties for a six year audit could prove costly.
It is therefore recommended that every business register for sales and use tax purposes in their subject jurisdictions with the intent of filing appropriate returns for prospective periods, thereby establishing a statute of limitation on current and future filings.
Where significant tax exposure exists for prior periods, use of a jurisdiction’s Voluntary Tax Disclosure Program may serve to limit the look-back period, with the potential for abatement of penalties and the possible partial mitigation of interest (though it is important to note that not all states have this type of program available). Use of this program, where available, may be advantageous.
The least desirable course of action is, in fact, “inaction”. Once a notice of examination is received, the Voluntary Tax Disclosure Program becomes unavailable. If the resulting tax assessed upon audit is so material that the business is unable to pay, the responsible persons running the business will become personally liable for such tax.
We are available to assist you in all phases of the above, including assistance in quantifying any past and present tax exposure, the registering of the business with applicable state and local jurisdictions, the filing of applicable sales and use tax returns, and the use of various Voluntary Tax Disclosure Programs for prior period relief.
Please contact your Untracht Early advisor to discuss the above issues as they relate to your business.