DoorDash is under siege for allegedly charging sales tax in states where there is no sales tax. The class action lawsuit claims customers in Delaware, New Hampshire, and Montana were overcharged and DoorDash pocketed the sales tax difference.
DoorDash allows customers to order food for delivery from local restaurants. The price charged to customers includes the cost of the meal, service and delivery fees, an optional tip for the driver, and sales tax. The suit alleges that DoorDash illegally charges a sales tax on prepared delivered food and meals of up to 8.75% even when meals are delivered to addresses in three tax-free states. (The suit notes that DoorDash correctly refrains from collecting sales tax in the tax-free states of Oregon and Alaska.) The case claims that DoorDash pockets the extra money instead of remitting it to local taxing authorities or returning it to consumers.
DoorDash isn’t alone in being accused of overcharging for sales tax. Both intentional and inadvertent overcharging is taking place across the country. Charging sales tax in a state that does not have it is in violation of state and federal law, making fees disguised as sales tax and retained as revenue a big problem for businesses, consumers, and taxing authorities.
Sales tax post-Wayfair
Businesses must charge sales tax everywhere they have nexus as a result of the Supreme Court decision in South Dakota v. Wayfair, Inc. States have the authority to force businesses to collect tax if their sales exceed economic thresholds being set across the country.
The problem is that the parameters for collections in each taxing jurisdiction are typically different. With over 9,000 state and local taxing jurisdictions, calculating the right tax rate can be challenging. For businesses that want to get it right, the many variables—taxability, rates, special taxing district requirements and regulations, small business safe harbors, other--make it easy to understand how ethical businesses can take advantage of the complexity to pocket unwarranted sales taxes.
Even businesses using automated sales tax systems can occasionally see wrong outcomes when tax rates are based on zip codes and not taxing jurisdictions. Adding further complexity, states like Colorado have overlapping jurisdictions where rates and taxability are layered and can be particularly difficult to capture. No matter how sophisticated the sales tax automation software, if the inputs in point of sales system do not reflect the right rates, products or services being sold, what’s ultimately charged at checkout may be off.
Fraudulent vendors are banking on this difficulty to intentionally overcharge sales tax and pocket the difference between what they charge buyers and what they remit to taxing authorities.
Intentional or not, the consequences for overcharging sales tax can be serious. Civil penalties vary among states and can be severe, beginning at 100% of the overcharge and compounded when fraud is involved. Refunding overcharges to consumers can also be part of the mix, which can be a time-consuming administrative headache.
Where collections start
Sales tax is a local tax that state, county and municipal governments charge on consumer purchases. Merchants collect the tax from the consumer at the point of sale and pay it to the taxing authorities. Five states--Alaska, Delaware, Montana, New Hampshire, and Oregon--do not impose sales tax, but merchants in some cities might still be on the hook to collect local sales tax.
All other states and the District of Columbia do require sales tax collections. Local sales taxes are collected in 38 states. In some cases, they can rival or even exceed state rates. Many foreign businesses are surprised to learn that each U.S. state has its own set of laws and determines whether to impose a sales tax and what products and services are taxable.
More businesses are collecting taxes than ever before, and more may be overcharging and risking severe sales tax ramifications. It’s important to get the right person to help you to get it right, understand the issues and minimize risk. Very few CPAs really understand sales taxes, as they have traditionally been focused on audits and income tax compliance. So, vet your experts and make sure they are in it to win it for you!
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