Sales tax management isn’t the easiest task in the world — and that’s just why so many people make a living managing sales tax. Good sales tax managers and controllers have a lot of mobility in their careers because almost every business needs expert help in sales tax. However, not taking care of your sales tax can have drastic effects on your business and even yourself, especially if you’re doing what tax jurisdictions think of as bad sales tax management. There are three potential outcomes when sales tax goes wrong. Tax jurisdictions think of the sales tax you collect as their money–which it is. Sales tax is money businesses collect on behalf of the tax jurisdiction but to which they have no rights.
When you collect sales tax, don’t think of it as your money because it’s not. Taking steps to treat the sales tax you collect as someone else’s money is a smart move when it comes to sales tax management. This might mean creating separate general ledger accounts to keep money “separate” from other accounts where it might be spent accidentally. When sales tax goes wrong, the first negative outcome is penalties and interest that the tax jurisdiction puts in place after discovering a fault. Since it’s their money, they see businesses as the custodian of the money and that it’s part of the privilege of doing business. When your business doesn’t execute the privilege correctly and take care of sales tax money, the tax jurisdictions want to make the money, plus interest they would have made on the funds, as well as penalize the business for foul play.
Since our society believes in honest and fair practices, this makes sense as a response to bad business practices. Another outcome of bad sales tax can be a class action suit. We’ve all heard the story of when charged the wrong rate in some stores before a rate change went into effect. If Target hadn’t corrected the rate and kept charging an incorrect rate and hadn’t provided sales tax refunds for customers, the retailer might have been the target of a class action suit on behalf of the shoppers at Target. Laws say that businesses need to collect the correct rate in good faith and provide a way for customers to obtain refunds if there is a mistake.
Jail time isn’t something we like to talk about on our blog because if you’re here, you care about doing sales tax correctly. However, another obvious outcome is prosecution for pocketing sales tax illegally. If you’re not filing sales tax, this could happen. Any way you slice it, bad sales tax management creates risk. Instead of guessing, use trusted resources to help you stay on top of your sales tax management.