Sales Tax Liability and Voluntary Disclosures

It is a common misconception that online sales are not subject to state sales taxes.  However, states may impose sales taxes on any sale, online or traditional, if the seller has nexus with the state.  Nexus can be a difficult legal doctrine to apply, so sellers should obtain a legal opinion to determine if they are subject to a state’s sales taxes.  Nexus usually entails a physical presence in the state, which can be as insignificant as sending independent sales representatives to the state.   

If a seller discovers that it has nexus with a state, under no circumstances should the seller approach the state directly and report its failure to charge sales tax.  Approaching the state directly will likely trigger an automatic audit and cause the seller to owe the entire delinquent amount of taxes, plus fines and interest.  The seller’s liability for taxes could be unlimited.  If possible, the seller should participate in the state’s voluntary disclosure program.  The voluntary disclosure program is the mechanism by which states grant leniency to sellers that voluntarily report failure to charge sales tax.  The prescribed procedures for the voluntary disclosure must be followed carefully.  If not, the law will prohibit the state from granting a voluntary disclosure.  An essential element of this procedure is maintaining the anonymity of the seller.  Organizations do this by hiring an attorney or another third party to approach the state anonymously to negotiate a settlement of the unpaid taxes.  The settlement may be less than the entire delinquent amount, and the state will often agree to reduce or waive penalties.  The voluntary disclosure program is often the best means for a seller to pay its prior sales tax liability without exposing it to unlimited liability.   

The foregoing article was provided for general information and must not be relied upon as legal advice for any specific situation.  The attorneys of David L. Bea & Associates are experienced in representing organizations in voluntary disclosures.  If you have any questions, please do not hesitate to contact us.

© 2011 David L. Bea & Associates