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How to avoid Massachusetts restaurant sales tax issues

The Suffolk County District Attorney’s Office recently accused the owner of an East Boston diner of failing to report sales. In a lengthy complaint, the state argues the diner failed to properly report $850,000 in sales between 2012 and 2015. Failure to report the income, allegedly resulted in unpaid taxes of roughly $60,000. The owner framed the issue as a misunderstanding.

In Massachusetts, restaurants are required to collect a sales tax of 6.25 percent on meals. Accusations of pocketing money collected for the meals tax, but not paying it to the state are serious. Failure to collect the tax at all is equally serious.

Reporting errors

When mistakes happen, MassTaxConnect provides business taxpayers with an “amend” feature. The system also allows taxpayers to challenge audit findings and assessed penalties.

Having the proper internal reporting in place is vital for every restaurant, food truck and caterer in the state. Our past post provides some good guidance. If your business only learns of sales tax reporting or payment issues with an audit notice, it’s critical to seek guidance from an experienced tax attorney.

Penalty and interest abatement

Interest adds onto a tax debt (it is calculated at the federal short-term rate plus four percent), when combined with monthly penalties delays become costly. The two possible penalties are:

  • Late payment penalties – starting at one percent of the unpaid tax bill per month, this penalty goes up to a maximum of 25 percent.
  • Failure to file penalties – this one is also one percent per month up to a maximum of 25 percent.

Acting quickly is the best way to limit the interest and penalties. In some extreme cases, if you have a good reason for failing to file or pay over taxes, you may also be able to request that agency waive certain interest and penalties.

Neglect or willful disregard

Even if facing structural deficits or cash flow issues, it is problematic to hold meals tax payments with hope to catch up later. For those who are accused of disregarding or neglecting tax laws, a penalty of 20 percent of the underpayment is possible.

Punishment for willful tax evasion includes fines of $100,000 (individual) or $500,000 (corporate) and up to five years behind bars. Willful failure to collect and/or pay over taxes carries a fine of $10,000 and similar time in prison.

What you might view as a misunderstanding, may not be viewed the same Massachusetts Department of Revenue or the local district attorney’s office. These cases can quickly become adversarial. With what is at stake you need someone to protect your interests and reputation.

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