Tax & Accounting Blog

The Sales Tax Conundrum

Indirect Tax, Sales Tax Calculation May 28, 2009

I received a comment to this blog posting asking "As a consumer, what else can I do besides file a class-action lawsuit against a company who is overcharging sales tax?"  

Having been charged the incorrect sales tax rate multiple times (both over and under), I will let you know what I have done.  The first thing I do upon noticing an error is go to the Department of Revenue website and make sure that I am right.  Tax authority boundaries can change with little fanfare so I always do a quick check before I accuse them of being wrong.  If there is a legitimate error, then I ask to speak with the manager/owner of the business.  The benefit of the recent research is that I usually try to bring a DOR publication if I am meeting them in person or I can point them to the website if I am speaking to them over the phone.  If they seem unresponsive or continue with the error on my next visit, then I reach out one more time to the next highest authority level at the business.  If it doesn’t work, then I reach out to my local Department of Revenue office/representative notifying them of the error.  My situation is unique in that I can just tell my husband (a Washington Tax Auditor), but after that, I am like everyone else and have to assume that the DOR is handling it appropriately and properly "educating" the taxpayer.  If the error continued, I would probably stop frequenting the establishment rather than pursuing legal means, but that is just my nature.         

Original Post
If you don’t know the correct sales tax rate, is it better to over-charge sales tax or under-charge sales tax?  I get this question on a regular basis.

If you under-charge sales tax, the tax authorities will come after the taxpayer for the difference.  It is certainly possible for the taxpayer to go back to the consumer for the tax difference, but it is unlikely, and the taxpayer will need to pay the difference.  The excess tax due comes out of the profits of the business. 

If you over-charge sales tax the tax authorities get more than the amount due, the taxpayer doesn’t owe an additional amount, but the consumer loses.  Most folks think this sounds like the better option initially, since the business doesn’t take the risk of owing additional taxes.  The problem though is that consumers do not like being over-charged sales tax and it can lead to class-action lawsuits for over-charged tax.  There have been many class-action lawsuits around sales tax.  Dr. Will Yancy, CPA provides reviews of selected class-action lawsuits on his website which can be found here.

So you don’t want to over-charge sales tax and you don’t want to under-charge sales tax.  You need to address your tax calculation and automation needs to make sure that you stay good with tax authorities and your customers.