How Can the US State Tax Offices Know I Am Evading Sales Tax?

September 25, 2022
sales-tax

US states have the legal right to impose sales tax on businesses that aren’t based in their state. Based on the Nexus rules, if you meet certain criteria, your business will be obligated to register for sales tax and start charging the tax on your sales to that state.

But how will the local state ever know that you

a) should be registered

b) have elected to ignore your obligations and evade the tax?

The simple answer is that they can find you although many people will lead you to believe it’s unlikely. Hiding from the US government has never been a successful survival strategy, especially when they have the following options if they do decide to hunt you:

Bots to scrape the Internet

In 2019, the German tax office developed bots that scraped the internet to identify the websites, marketplace merchants and tech companies that were making the most sales to their citizens. This project uncovered tens of thousands of non-compliant businesses, that were served with tax assessments and penalised.

Many US states have already developed similar technology, and it is not unreasonable to think they will continue to invest in such endeavours, since the proceeds they can recover from back taxes and penalties will make it worth their while.

Financial data shared by credit card and payment companies

Many banks and financial institutions share data with governments and fiscal authorities. In fact, some of the bigger players even provide this data in real–time via API. It would not be difficult for tax offices to identify merchants who are established outside their state and who are receiving material proceeds from citizens within their states.

Data shared by platforms and marketplaces

Marketplace facilitator rules in the USA have made companies like Amazon and Walmart responsible for registering and reporting all eligible sales to the local states. These laws also compel these companies to share relevant transactional data upon request. This forced cooperation will likely be extended from marketplaces to eCommerce platforms like Shopify and WooCommerce.

Data shared by warehouses and fulfilment centres

If you store goods in a warehouse or fulfilment centre in a state, it is very likely the local company has already provided your company’s name to the local tax office. During audit and regular compliance reporting, these companies will be obliged to provide the list of their clients who store inventory on their premises.

Import data

The US government obviously has access to all import data – so they are certainly aware of any company that is importing goods into the USA. Similarly, many logistics companies will share information with tax authorities relating to the movement of goods between states in the USA. If you have a significant volume of inventory being delivered to a single state, the tax office probably has your name already.

In fact, states often share data with each other to catch tax evasion, especially if your business operates across multiple states. This coordination helps them track whether businesses are collecting the proper taxes.

Enforcement squads using their own initiative

Tax offices have set up enforcement squads specifically to investigate and identify businesses that are not complying with the tax legislation. These teams will use their own experience, intelligence and technology that is available to them to come up with lists of possible offenders to scrutinise. They will follow trends, manually search the internet and check places like social media to identify the products not produced in their state that are popular and generating a lot of sales.

Audits

State tax offices regularly conduct audits on businesses to ensure that sales tax is being collected and remitted correctly. If they suspect discrepancies or if your business operates in industries with higher tax evasion risks, you could be selected for an audit. They’ll go through your records and compare them to your tax filings, looking for any inconsistencies.

Third-party reporting

Suppliers, wholesalers, and even customers may report their transactions to state tax offices. This creates a paper trail that can be cross-referenced with the information you provide. For example, if a supplier reports a sale to your business but you haven’t collected sales tax on the resale, it raises a red flag.

Nexus tracking

States have become more vigilant in monitoring nexus—your connection to the state that requires you to collect sales tax. With the rise of ecommerce, states use economic nexus thresholds (like transaction volume or sales amount) to track businesses operating within their borders. If your business surpasses a state’s threshold and you’re not collecting sales tax, you may be targeted for investigation.

Conclusion

No one wants to pay taxes, but it’s a cost of doing business. The current economic climate makes tax revenue more important to governments than ever, so they will use every tactic at their disposal to identify tax evaders. It is crucial that you understand if you have any tax exposure in the USA – if you do, you can either stop selling to the states where you have liabilities, or it is very simple to regularise your tax position. (Including various amnesty options available to you to minimise penalties).

Contact Yonda today for a complimentary nexus assessment.

FAQs about US Sales Tax

Is Sales Tax the Same as a Value-Added Tax (VAT)?

Which States Have the Highest and Lowest Sales Tax at a State Level?

Can a Non-US Business Owe US Sales Tax?

What’s the Difference Between Use Tax & Sales Tax?