I have never seen anybody be put out of business by the IRS over nonpayment of income taxes. There are two other types of taxes that can put you out of business. The first is payroll tax. Employers have a fiduciary responsibility to pay over employment taxes to the government. For some reason, this still trips up some business owners. They don't seem to understand that when they withhold taxes from their employees' wages, that money MUST be paid over to the government. If not, the IRS will come knocking and it can get nasty.
Of course, most employers understand that they have to pay over payroll taxes. And payroll taxes really are not difficult to compute. The only time employers really get in trouble with payroll taxes is when they are struggling financially and look at the payroll taxes as an opportunity for a short-term loan from the government. Not a good idea.
The other tax that can put you out of business is sales tax. This one is not so simple. Yes, if you collect the tax, you have a fiduciary responsibility to pay it over to the government. From this standpoint, it is similar to payroll taxes. The similarity stops there.
Sales tax can be complex. Most businesses really do not have a handle on when they have to collect sales tax. That's a challenge, since if you collect sales tax from your customers, your customers pay the tax. If you don't collect the tax from your customers and the State comes knocking on your door, you could owe the tax and never get to collect it from your customers. Really, now, how many of you think you can go back to a customer three years after a sale and collect sales tax from them?
Remember that it's not just the public that has been hit hard by the Recession. The states have also been hit hard. They built up all of their social programs during the boom times and now they want to continue funding these programs even though the taxes have plummeted. So what do they do? They look for more opportunities to collect tax.
The best tax for States to go after is sales tax. Why? Because the rules are complex enough and the law vague enough that the States can be aggressive in their collection activities. Recently, the Wall Street Journal ran an article on the front page of its Marketplace section entitled, “States Plot New Paths to Tax Online Retailers.” One of my friends who puts on seminars told me that he was recently audited by the State and ended up paying a boatload of back taxes on sales that his presenters had made at his events.
While I may not agree with the States' position on what they can and cannot tax, the reality is that they are going after retailers, especially those who sell over the Internet. And isn't that just about everybody?
I have spent 14 years teaching multi-state sales and income tax at Arizona State University. I can tell you that the laws are vague. Yes, the U.S. Supreme Court has held that a retailer must have a physical presence in a state in order for the state to require the retailer to pay sales tax. The question is – what constitutes physical presence? How much presence is enough? What if one of your employees visits the state for a couple of days of training? What if you have an affiliate in the state? Does the affiliate's presence count as physical presence for you?
My recommendation? All Internet and Seminar retailers should have a thorough sales tax review performed by a qualified sales tax professional. The challenge is finding such a professional, since most CPAs don't know any more about sales tax than you do.
Don't let sales tax put you out of business!!! Learn the rules and avoid this tax burden altogether. Remember, that if you know when to charge sales tax, you often can pass this burden on to your customers.