It’s every online retailer’s nightmare: a dreaded audit or costly penalties and fines for erroneous sales tax reporting. And yet, the ever-changing landscape of sales tax regulations that affects ecommerce retailers means that errors in reporting are a real possibility for even the most conscientious of vendors. Is there a way retailers can protect themselves from exorbitant fees and charges due to erroneous reporting?
Voluntary disclosure may be able to help in cases where retailers realized that an error has been made. What is voluntary disclosure? For tax reporting, voluntary disclosure is a program that can waive penalties and fees on unpaid taxes or unfulfilled filing requirements when a company takes steps to report and rectify unreported or under-reported taxes, in this case, specifically sales taxes. Most states do employ a voluntary disclosure system.
Additionally, some states will run amnesty programs to correct erroneous reporting. While not every state participates in this kind of program, it is becoming more popular for states that need revenue quickly and want to work towards a faster payment resolution.
However, there are a number of things ecommerce retailers will need to know before participating in either an amnesty program or a voluntary disclosure program. Here are some guidelines to keep in mind:
- Amnesty programs run for a limited period of time. For example, Arizona just closed a program that ran from September 1 to October 1, 2015. As of this writing, 7 states have active (or just completed) amnesty programs and 2 states have future ones pending.
- Amnesty programs may – or may not – be recurring. Each state individually opens or closes these programs, some year by year. Pennsylvania, for example, ran an amnesty program in 2010 and has not resurrected it since then.
- Amnesty programs have conditions and time limits, therefore, retailers may not be eligible for them. In addition, taxes need to be paid in by the program’s deadline to avoid a possible audit. For a current listing of active, future and inactive amnesty programs by state, visit the Sales Tax Amnesty page at the Sales Tax Institute web site.
- Amnesty programs don’t necessarily save retailers money. According to Sylvia Dion at AllBusiness, “a taxpayer coming forward during an amnesty period may be required to file and pay delinquent taxes for as far back as the taxpayer’s liability extends.” That means, if a retailer has never filed in that state, no statute of limitations on taxes due has been established – and back taxes can be costly. Additionally, Dion writes, some states require paying the assessment before agreeing to it so retailers need to consider the cost of voluntary disclosure.
- Voluntary disclosure programs are ongoing. That means it will be a retailer’s only course of action if they have missed an amnesty period to avoid penalties.
- Voluntary disclosure programs are administered by each state’s own department of revenue or taxation. There will usually be a dedicated department within the state’s tax collection agency to deal with voluntary disclosure, so retailers should be familiar with their requirements, terms and procedures.
- Voluntary disclosure programs require participants to enter legally binding agreements. Ecommerce retailers should consult with their lawyers before accepting the agreement’s terms.
- Voluntary disclosure agreements have eligibility requirements. That means, for each state where retailers believe they have under-reported or underpaid sales taxes, they will need to research these requirements to see if they can apply.
- Each state will provide a different benefit to voluntary disclosure participants. According to The State and Local Tax Buzz, most states will offer “a full abatement of penalties,” however, interest is usually not abated – although it is in some states. (The linked article is no longer available online.)
- Voluntary disclosure allows for anonymous participation. This is enabled through a CPA, attorney or tax advisor filing on behalf of the applicant.
- Voluntary disclosure can also limit “look back” periods. A state may have the benefit of not looking at prior filing periods for back taxes due, however, retailers should keep in mind that the state now has them on file for all future taxes. In addition, the states themselves determine the length of look back periods for the initial disclosure. Retailers will then need to keep a watchful eye on regulations and changes to that states’ tax code.
- Retailers may need to disclose all applicable taxes in states where they are delinquent. That means, before participating in voluntary disclosure, vendors need to understand their liability for all state and local sales tax, taking into consideration the changing complexities of accurately reporting where they have a nexus in that state.
State amnesty programs and voluntary disclosure programs can help ecommerce retailers navigate the shifting sales tax and nexus reporting landscape without being overwhelmed by fines and penalties. Online retailers should speak to their accountant about these procedures if they think they have made a tax reporting error, and should continue to work closely with their sales tax software provider to ensure accurate state and local sales taxes are collected and reported. Here are additional tips on how to fix sales tax reporting errors.