The aim is to help you to review the different options and to plan a path forward that best suits your company’s situation. And so with that in mind, let’s take a closer look at some of the ways you can help your team deal with past exposure.
1. Comply prospectively
The simplest option is to start complying prospectively. This means ignoring the sales tax due on past revenue and focusing on being tax compliant with new sales going forward.
There’s an obvious drawback to this approach, which is that it leaves all of your past exposure on the table. If you’re audited by the state, you could be asked to pay the full sales tax amount out of pocket, along with any penalties and interest that you’ve accrued.
You’ll also still be required to book this as a liability every month going forward. The next option that we’ll discuss is more common, but some finance leaders choose this first option if they’re worried about their immediate cash flow and they’re unsure about their ability to pay up past liability.
2. Include past sales tax liability
This second option is a more conservative approach, and it blends complying prospectively with including past exposure in your first return for each jurisdiction in which you have nexus.
Unless you want to bother your customers by asking them to pay up for the sales tax that you should have collected in the past, you’ll need to foot the bill. Most companies choose to pay out of pocket rather than to provide a poor customer experience. You should also remember that you’re not legally allowed to start collecting sales tax from your customers until you’re registered in the state and approved to do so.
There are a few benefits to this approach. Not only does this take your past sales tax liability off the books, filing a return starts the statute of limitations and stops the accrual of penalties and interest on the prior exposure amounts. It also starts the clock for how far back states can look at your sales tax filings.
In addition, states are generally more forgiving in future audits if they see that you proactively came forward with your sales tax due. Audits may be smoother as a result.
Last but not least, you’ll also have the benefit of collecting sales tax from customers going forward. This can save your company millions of dollars of tax paid out of pocket.
3. File a Voluntary Disclosure Agreement
The third option that many states provide as an option for sellers is to file a voluntary disclosure agreement (VDA). It’s important to note, though, that you can only qualify to file one if you’ve never previously registered with the state and if you’ve never received any audit notices from the state.
The key benefits of filing a VDA are that you can finalize the outcome around historical exposures and experience economic benefits through reductions in the amounts you’ll owe to the jurisdiction. You’ll still need to pay the sales tax amount due, but may find that the penalties are waived and interest due reduced. We’ve written a guide to help you to understand how VDAs work, and you can click here to access it.
To file a voluntary disclosure agreement, a seller typically engages a tax firm to act as a confidential third party between the seller and the state. This can cost several thousand dollars per jurisdiction and take many months to complete. Thus, it’s usually a path chosen by companies that have been in a jurisdiction for many years and which have substantial revenue in those states.
Now that you know just a few of the options that are available to you when it comes to getting your team sales tax compliant, it’s over to you to determine the best option for you and to take steps along your chosen path to success.
Of course, compliance isn’t easy and sales tax can be complicated at the best of times, and so it’s a good idea to get a helping hand along the way. That’s where we come in. Be sure to reach out to us to find out more about how other SaaS companies are getting sales tax compliant and learn what we can do to help.