In the world of business, we find comfort in deadlines. We operate with the understanding that the past eventually stays in the past. We keep our records for seven years because we believe that is the magic number. We assume that if we made a mistake in 2010, the government has missed its window to punish us for it.
For federal income tax, this is generally true. But in the chaotic, aggressive world of State Sales and Use Tax, this assumption is a fatal error.
There is a legal concept that acts as a trapdoor for growing businesses, particularly those selling across state lines or employing remote workers. It is the concept of the “Infinite Statute of Limitations.”
To understand why this exists, you have to understand how the “clock” works.
The Clock That Never Starts
The Statute of Limitations (SOL) is the period of time during which a taxing authority can audit you and assess additional tax. In most states, this period is three or four years.
However, the statute of limitations has a trigger mechanism. The clock only starts ticking when a return is filed.
If your business has nexus in a state—meaning you have enough presence or sales activity to be obligated to collect tax—but you fail to register and file a return, the clock never starts. The statute remains open. Forever.
This means a state auditor can legally go back to the very first day you started doing business in their state, whether that was five years ago or twenty years ago. They can assess tax on every single transaction from day one, add interest compounded daily, and stack penalties on top of it.
The “Wayfair” Wake-Up Call
For years, many businesses flew under the radar because they lacked “physical presence” in other states. They didn’t have an office or a warehouse, so they didn’t file.
But the 2018 Supreme Court ruling in South Dakota v. Wayfair, Inc. changed the rules of the game. It established “Economic Nexus,” meaning you can owe tax simply by selling a certain amount of goods or services into a state.
Here is the nightmare scenario: A mid-sized software company has been selling its product nationwide since 2015. They believed they only owed tax in their home state of Texas. In 2024, the state of California connects the dots using data sharing or credit card processing records.
California asserts that the company has had economic nexus since 2019. Because the company never filed a return in California, the state is not limited to looking back three years. They look back five years. They assess the 7.25% tax on five years of sales. Then they add a 10% penalty for failure to file. Then they add a 10% penalty for failure to pay. Then they add interest.
Suddenly, a tax bill that would have been manageable annually becomes a company-killing lump sum liability.
The Danger of “Flying Under the Radar”
Many business owners adopt the “Ostrich Strategy.” They know they might have exposure, but they decide to wait it out. They rationalize that they are too small for the state to notice.
This is a gamble, and the odds are getting worse. States are no longer relying on manual audits. They are using sophisticated data mining. They cross-reference 1099-K forms from payment processors. They buy data from lead-generation lists. They monitor huge corporate acquisitions to find smaller targets in the supply chain.
When a state finds you—rather than you finding them—they are rarely in a forgiving mood. The penalties are mandatory. The lookback period is maximized. The leverage is entirely in their hands.
The Exit Blocker
The “Forever Audit” risk doesn’t just hurt your cash flow; it ruins your exit strategy.
If you try to sell your company, the buyer will conduct due diligence. Sophisticated buyers specifically look for state tax exposure. If they find that you haven’t been filing in key states, they know about the infinite statute of limitations.
They will view your company as a ticking time bomb. They will either walk away from the deal, or they will demand a massive escrow “holdback”—often 10% to 20% of the purchase price—to cover potential future audits. Your past negligence effectively devalues your life’s work at the finish line.
The Strategic “Reset”
So, how do you stop a clock that never started?
You have to confess. But you don’t just walk into the tax office and hand over your wallet. You negotiate.
This is where the concept of a “Lookback Period” becomes the most valuable asset in tax planning. If a business comes forward proactively, states are often willing to make a deal. They want the revenue, and they want the business to be compliant moving forward.
In exchange for voluntary compliance, states will often agree to limit the “lookback period” to just three or four years, effectively forgiving any tax liability prior to that date. They will also typically waive the punitive penalties.
This process is formalized through voluntary disclosure agreements, which allow a company to approach the state anonymously (usually through a representative), negotiate the terms, and pay only the limited back taxes. It turns an infinite liability into a finite, manageable number.
Conclusion
The belief that you can outrun your tax history is a myth. In the digital age, visibility is inevitable. The “Forever Audit” is a mechanism designed to punish those who hide.
For business owners, the choice is binary. You can live with the anxiety of an unlimited lookback period, hoping the letter never comes. Or, you can control the narrative, cap your liability, and close the books on the past. In tax law, the only way to stop the clock is to start it yourself.
