Tuesday, October 23, 2007

My Customer Won't Pay the Tax

I've had this question come up a couple of times in the last few days so I thought I'd discuss it here. The problem is customers who, after having been billed sales or use tax, refuse to pay the tax.

Generally, states require the vendor to remit the tax to the state. Whether the customer pays the tax to the vendor isn't important to the state. So, if the customer refuses to pay the tax, the vendor winds up holding the bag.

So what are your options?

1. Ask the customer for documentary evidence for why they don't owe the tax, like a certificate or a citation to a statute or regulation. Remember, you've got to be convinced, otherwise you're not accepting the certificate in good faith. And the customer may not even make the effort to provide you with documentation.

2. Is the sale taxable? Double check your facts, talk to your adviser to make certain of your position that the sale is taxable. I know it's hard to believe, but maybe, just maybe, the customer is right on this one. Don't take any draconian action until you know for sure.

3. Consider firing the customer. If they won't obey the law and they're costing you money, then don't sell to them anymore. Of course, your sales department won't appreciate this.

4. Eat it. If you've got enough margin, and the customer is worth it, just cover the tax with your margin. Perhaps, slowly raise the price you're charging your customer to cover your additional cost. Of course, the sales department should take the hit for this additional cost, since they're the ones insisting that you keep selling to this customer.

5. Document that you've billed the customer and they've refused to pay. Always bill the tax to the customer and let them refuse to pay. This way, when you get audited, you can build auditor credibility by demonstrating that you're doing the right thing in this situation. Plus, there's the revenge angle. The auditor would love to know about this customer. Remember, if they're refusing to pay you the legal tax, they're not paying tax elsewhere. They'll get a visit from the auditor and they'll pay...lots...eventually.

6. Rat 'em out. I don't recommend it but in the interests of full disclosure, I should mention this. I've tripped across a couple of states with laws where, if you report the customer to the state, they'll waive your liability for the taxes. Talk about revenge....

Sales Tax Guy


Alvis Jenkins said...

-Customer refuses to pay sales tax. If the customer understands the law, then it is plain to him/her that the tax is not owed. In Florida Statutes Chapter 212 section .05, it is hereby declared to be the legislative intent that every person is exercising the privilege to do business at retail in this state. These two words, "legislative intent", governs all sections of the chapter for sales taxes. It may sound like "every person" is required to pay the sales tax but if it is by "privilege" then it can only be owed by the "seller" who has the taxable liability. Consumers in Florida have a right to buy from sellers but since they don't buy by "privilege" under any section of chapter 212, they simply do not have to pay the sales tax for the seller.

Jim Frazier said...

Usually, if the tax is imposed on the seller for the privilege, the law also gives him the right to impose the tax on the buyer and make it part of what the buyer owes. Not terribly interested in researching this for Florida, but I've seen that language in other states.