Thursday, June 16, 2005

When do you obey the sales and use tax laws?

Justice of the PeasWhen do you obey the sales and use tax laws?  All the time, of course.

But realistically, the fundamental question is simply whether or not the issue you're dealing with is worth the effort to fix. There are going to be some things that you may be doing wrong, but are just not that big of a deal. As I often tell people in my seminars, "if that is the only problem you've got when you walk out of here, then you're in good shape."

So, here is a test to determine if something is worth addressing.  And I didn't come up with it.  I went to a payroll seminar a long time ago.  The speaker, who was the payroll manager for a very famous restaurant chain, made this statement:

"If the cost to comply with a law is greater than the potential cost of violating it, then you may wish to consider not complying."

The cost of compliance includes the taxes you'll have to start paying that you haven't been paying before, along with interest, fines and back taxes.  And it also means you'll have to develop systems, policies, procedures and training to support the new efforts to comply.

For example, you may be looking at a problem that would require so much reprogramming of your accounting system, along with the training of your people, that you'd rather take your chance on an audit.  You may wind up paying $100,000 in fines and back taxes.  But if it would have cost you $2,000,000 to fix it, well, there's your answer.

There is also the possible loss of any competitive advantage you have in not charging your customers tax. Suppose you realize that you have nexus in Maine and you haven't been collecting and remitting their tax. If you register, you might lose customers because you're now charging tax. They may decide to buy from someone who doesn't charge tax.  Your cost is the lost sales.  Your risk is Maine auditing you.  

You might decide, after weighing all of the factors, including the odds of Maine catching you, that you'd rather take your chances with Maine. You're choosing NOT to obey the law. Not that I'm recommending this, you realize. I expect all of you to obey the law all the time. OK?

There is the moral and ethical issue of not complying. You should always comply with the law regardless of whether or not you're going to get caught or how much it costs. But we ALL make this decision every day. Do you report ALL of your taxable income to the IRS? Do you always drive within the speed limit and obey all the traffic laws? Do you follow ALL of the OSHA rules, all of the time? "Hey, where are your safety glasses?" 

We are constantly making decisions about whether or not to obey laws and weighing the costs and risks. I've just analyzed it for you. But remember, I do expect absolute compliance from all of you!  No funny business!

The Sales Tax Guy

See the disclaimer - this is for education only.  Research these issues thoroughly before making decisions.  Remember: there are details that haven't been discussed, and every state is different.  Here's more information

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