by Andrew Johnson, CPA
Tax Amnesty Usually Means No Penalty — Big Deal! You Still Owe the Tax!
What if I told you: You Can Get Out of the Whole Tax?
It seems like there’s constantly a tax amnesty being offered by some state somewhere. Amnesties can be a sweet deal, that is if you have the money to pay. That’s right, you’ll probably still have to pay the tax. Almost always when a state offers “amnesty” what they’re really offering is to waive the penalties (but not usually all or even some of the interest). Most companies are a little surprised to find this out until they realize what leverage the states really have. They have ways of finding you and in our experience it’s not usually IF they find you but WHEN. When they do find you and determine that you had nexus in their state but weren’t registered and filing tax returns with them, they will bring the hammer down.
And a hammer is a good metaphor because not only do they assess the tax against you but they add the penalties and interest which can really add up. Figure up to 50 to 60% in addition to the tax. But WAIT, there’s more! In addition to the taxes and interest and penalties, they can also go back to day one.
But what about the statute of limitations? There is a statute of limitations in each of the states, but a little known fact is that if you had a filing requirement in a state but weren’t filing there, then the statute of limitations doesn’t protect you. They can go back to day one on you. That’s a fact that may be hard to swallow, but we’ve seen it too many times with our clients to sugarcoat it.
They Could Go Back to Day One, But…
States have their own policies on how far back they’ll go regardless of when you started business, so in all likelihood, if you’ve had nexus since 1984, they’re not going back that far, but many states will go back 7 or even 10 years. Many companies tell us if a state or states found them and went that far back, the business would be bankrupted.
Now, lest you think this article is all bad news, we do have some excellent news to report. And I don’t mean that you might be able to get some penalty waived in some state (which in the shape most states are in these days, a waiver of penalties is actually not that bad a deal). What I do mean is there are 4 states where you can get out of the tax altogether, right now. And those states are…
- Georgia, Tennessee, Utah and Ohio.
If you have some potential liabilities in these four states, then you need to read this article. You might save millions like a client of ours just recently did. BUT, you also need to know there’s a huge caveat. That’s right, there’s a big catch on this one.
It’s All About the SSTP
The Streamlined Sales Tax Project (the “SSTP) is an effort by a coalition of states designed to “simplify” the tax compliance burden in the participating states. If you go to www.StreamlinedSalesTax.org, you’ll see that they try to cast themselves in the most favorable light possible as if they are totally on the side of business. The reality is that this whole project has one goal and one goal only in my mind, and that is to convince the US Congress to pass a federal law forcing all businesses to collect tax in every state of the union. The states have been stymied in their efforts to impose tax collection duties on any and all companies who dare to sell to their citizens by a series of US Supreme Court (“SC”) cases. The SC has repeatedly ruled that companies must have a more than the “slightest physical presence” in a state before the DOR can work their magic.
Faced with that check on their taxing power, the states decided to take action. So, back in 1999 they formed a group. In Quill, the SC signaled that Congress, if they so choose, has the exclusive power to force sellers to collect sales tax everywhere they sold. The SC found that no constitutional barrier existed to prohibit congress from taking such action. The other protection that companies were leaning on was the Equal Protection clause, but the SC pretty much dismissed that argument in Quill. The SSTP group was formed on the basis that Congress had the power to pass the law and the SC would not overturn it. So, someone needed to lobby Congress. But the lobbying had to be based on an argument that the states had implemented changes in how difficult it is for companies to comply with so many different taxes.
Therefore, the SSTP is attempting, desperately, to get uniform legislation in enough states to where these states have enough leverage to go to Congress and ask them to act. Whether this will ever actually come to fruition, is anyone’s guess. They’ve been working on it since 1999 and we’re not there yet.
We’re not necessarily against the SSTP. Actually, we take a neutral position on this whole thing because it hurts some sellers and helps other sellers. The one thing we don’t think it will ever do, in spite of the promises, is “simplify” the compliance with sales/use tax laws. That’s the promise of almost all tax code revisions and history shows that with tax code change comes increased complexity not less. When you hear state government authorities trumpet “tax code simplification”, grab your wallet!
One thing is for sure, we keep a close eye on developments and we look for opportunities in which our clients can benefit from changes that are implemented.
There is a huge benefit available to some taxpayers who might owe taxes in one of the above-named states and have no corresponding liability in the other SSTP states. These four states are offering not only waiver of penalty and not only waiver of interest but a waiver to sellers of the ACTUAL TAXES that should have been collected by that seller in all prior periods. Our clients have saved literally millions of dollars as a result of the amnesty offered in these states.
There are significant drawbacks. Let me say here and now, that this article is not meant to give a comprehensive list of all of the drawbacks — I’ll just highlight a few. There’s significant risk to registering with the SSTP and you must exercise extreme caution. I’ll mention the few we’re most concerned about for purposes of this article below.
Registering with the SSTP states mean you register with all of them and you have to collect and remit tax in all of them for at least 36 months following registration even if you don’t have a physical presence in any of them. There are currently 20 “full member” states and 4 “associate member” states.
The current list of full-member states is: Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Oklahoma, Rhode Island, South Dakota, Vermont, Washington, West Virginia, Wisconsin and Wyoming.
The amnesty is only open for the 4 associate member states. Ohio, Utah, Tennessee and Georgia. There is currently NO AMNESTY in the other 20 states. If you have big potential liabilities in GA and elsewhere then you could get whipsawed pretty bad; and
This amnesty applies only to sellers who have neglected to collect sales/use tax on sales of taxable items in the referenced states. There is NO AMNESTY for tax that you collected but haven’t remitted. There is NO AMNESTY for tax you did not pay on taxable purchases either.
Having Said All That
We don’t just pound on the negatives here. We don’t get paid to just sound the alarm. We get paid to figure out solutions. We do have an approach that could save your bacon if you face a situation where you had nexus in many SSTP states and sold taxable items without collecting tax. True, the amnesty is only offered in those 4 states, but in the right circumstances, we may be able to really help you.
Every company is different. If you do business in any of the SSTP states and you have nexus but are not registered, then we need to talk, ASAP.