When small business owners run into trouble with state tax officials, most often the problem stems from being unaware of their financial responsibilities, rather than willful noncompliance.
During a panel discussion at NJBIA’s “Taxing Your Bottom Line” seminar on Thursday, Michael Kovacs, a taxpayer service representative at the state Division of Taxation, said what he hears most often from small business owners who end up hot water is: “I didn’t know I had to do that.”
“They filed a piece of paperwork, they registered as an entity … and they’re uniformed that they have sales tax eligibility and they’re not informed that now has to be filed quarterly ever year,” Kovacs said. “I think it’s a lack of communication about what the responsibilities of a small business are.”
Obligations also vary based on the type of business entity involved, Kovacs said.
“Most of them don’t realize that unless they’re a C corporation, they’re going to be reporting their income basically on a personal tax return,” Kovacs said. “There may be other requirements, such as a partnership may have to submit filing fees with the NJ-1065, but they’re still going to be reporting and taxed on their income on their personal tax return.”
The Division of Taxation has educational resources for small business owners and will answer questions by phone or online chat on its business navigator website. But many taxpayers do not reach out for help after registering a business entity because they mistakenly believe doing so will “get them on our radar or something like that,” Kovacs said.
Mary Baker, CEO of Baker Tax & Accounting Services, in Linden, said the problem she most often sees with small business owners is not understanding their financial responsibilities regarding the sales tax.
“The sales tax is not your money,” Baker told the audience at NJBIA event at the Pines Manor in Edison. “I encounter a lot of small business owners and one of their issues is that they will collect the sales tax and use that to pay expenses for their businesses.
“Sales tax belongs to the state and when you collect sales tax you should be depositing that money into a separate account and be paying it on a monthly or quarterly basis, depending on your business income,” Baker said. “I cannot stress how important that is.
“If you ever do have a problem paying your sales tax, please reach out to the state … they have agents that will work with you, but if you ignore them then you will have bigger problems,” she said.
Another problem business owners have, especially small restaurants, is that they fail to collect sales tax from their customers in the first place, Baker said. Be aware that a business owner is still responsible for paying the sales tax to the state, even if it was never collected from the customer, she said.
Attorney Richard Botwright, co-chair of the State and Local Tax Group at Stevens & Lee, pointed out that entrepreneurs thinking about buying an existing business need to talk to a lawyer to make sure they are not buying the previous owner’s tax liabilities.
“If you go in and buy a company, and there’s some existing liabilities there, guess what? You’re on the hook for it,” Botwright said.
Keeping precise records is also important, whether you are buying a business or starting one of your own, Botwright said. “You have a requirement, as Mary said, to not only collect and pay taxes, but to keep records. You need to get a system in place and keep records so that you can validate what you owe and what you have paid.
“One thing that not a lot of people do not realize is that there are over 10,000 local jurisdictions in this country,” Botwright said. “If you are selling products throughout the country, you might have a (sales tax) liability in another state or locality. It is not something that’s on a small business’s radar until they start getting bigger … and they are in that growth stage and then realize they have a problem.”
Experienced accountants and tax attorneys can help the business owner rectify their delinquent tax problem with the state and calculate the correct taxes owed.
“You don’t want to overpay the tax, but calculate the correct tax,” Botwright said.