What Happens If I Don’t Charge Sales Tax?

Sales tax is a consumption tax that governments impose on the sale of goods and services. Businesses collect this tax from customers at the point of purchase and then remit it to the state and local tax authorities. Businesses act as agents for the government, handling these funds. This article clarifies the significant consequences businesses face when they fail to properly charge, collect, and remit sales tax.

Uncollected Sales Tax and Financial Penalties

Businesses have an obligation to remit sales tax, regardless of whether they actually collected it from the customer. If sales tax was not collected, the business remains liable for the amount that should have been. This means the business must pay these taxes out of its own funds.

Interest charges accrue on any underpaid or uncollected sales tax from the due date until paid. Interest rates vary by state and may compound, increasing the total owed.

Late payment penalties are imposed for failure to remit sales tax on time. Penalties are calculated as a percentage of the unpaid tax, varying by state. Some states impose a maximum penalty or a flat fee.

Failure to file sales tax returns, even if no tax was due, incurs additional non-filing penalties. These penalties are separate from late payment penalties, often a percentage of the tax due, sometimes with a minimum fee.

More severe penalties, including fines, are imposed for intentional evasion or gross negligence. Fraud penalties apply with clear intent to defraud the state, such as knowingly preparing a false return or concealing facts. These penalties are substantial, reaching 50% to 100% or higher of the tax due.

Sales tax laws, rates, and penalties vary across states and local jurisdictions. Specific figures and rules depend on location and sales activities. What applies in one state may differ in another, requiring attention to local regulations.

Sales Tax Audits

Sales tax audits often uncover non-compliance, triggered by factors like discrepancies between reported income and sales tax filings, industry benchmarks suggesting underreporting, random selection, or tips from former employees or competitors. State agencies cross-reference sales tax data with other tax filings to identify inconsistencies.

Businesses receive notification of an impending audit through a letter from the state tax authority. This letter outlines the scope of the audit and requests financial records. Auditors request documentation, such as sales records, purchase invoices, exemption certificates, bank statements, and general ledger accounts.

During the examination phase, auditors review these records to identify any uncollected or under-remitted sales tax. They focus on distinguishing taxable from non-taxable sales, verifying nexus (the connection a business has to a state requiring sales tax collection), and ensuring proper application of sales tax exemptions. This review can uncover errors or omissions leading to an assessment.

Upon completion of the audit, the auditor presents findings to the business. This results in an assessment detailing uncollected tax, accrued interest, and penalties. Businesses have the right to appeal these findings if they dispute the assessment, allowing for further review or negotiation with the tax authority.

Audits impact operations. They demand staff time and resources, diverting attention from daily operations. The process is disruptive, requiring extensive documentation and engagement with auditors.

A statute of limitations defines the period within which a state can assess back taxes. This period is typically three to four years, but extends indefinitely for fraud or significant non-compliance. This timeframe dictates how far back an auditor can examine records for uncollected or under-remitted tax.

Personal Liability and Legal Consequences

Sales tax is considered a “trust fund tax” because businesses collect it from customers on behalf of the government. Certain individuals, called “responsible persons,” are held personally liable for uncollected and unremitted sales tax. This liability extends to owners, officers, or managing members, even if the business operates as a corporation or LLC, bypassing corporate shield protections.

In severe cases of intentional sales tax evasion or fraud, criminal charges are possible. This occurs with large sums, repeated offenses, or clear intent to defraud the state. Penalties include substantial fines and, in some instances, imprisonment.

Repeated or significant non-compliance can lead to suspension or revocation of a sales tax permit or general business license. Losing these permits prevents a business from legally operating, potentially leading to shutdown. This results from failing to fulfill the requirement of collecting and remitting sales tax.

States use mechanisms to collect unpaid sales tax, including liens and levies. A state can place liens on a business’s assets, and potentially personal assets if liability is established. Authorities may levy bank accounts or seize receivables to recover outstanding tax debt, impacting financial liquidity and stability.

Resolving Past Non-Compliance

Businesses discovering past sales tax non-compliance can take proactive steps to mitigate repercussions. A common approach is a Voluntary Disclosure Agreement (VDA) with the state tax authority. VDAs allow a business to voluntarily report and pay past due taxes, often resulting in benefits like a reduced look-back period for liability and abatement of penalties.

Accurately calculating uncollected sales tax for past periods is necessary to resolve non-compliance. This involves reviewing historical sales data to determine the amount that should have been collected. This calculation forms the basis for any payment plan or VDA.

If a business has been operating without a required sales tax permit, it must register and obtain one promptly. Registering ensures the business is recognized by the state for sales tax purposes and can begin proper collection and remittance. This step is foundational for future compliance.

Given the complexities of sales tax laws, especially with multiple states or significant liabilities, consulting a qualified sales tax accountant or tax attorney is advisable. These professionals provide guidance, assist with calculations, negotiate with tax authorities, and help navigate compliance and resolution.

Establishing systems for sales tax collection, reporting, and remittance is crucial for future compliance. This includes implementing accounting software, training staff, and regularly reviewing sales tax obligations. Proactive measures help prevent recurrence and ensure adherence to requirements.