What Happens If I Don’t Charge Sales Tax?

Sales tax is a consumption tax levied on the sale of goods and certain services. It is a significant revenue source for state and local governments, funding various public programs and services. Unlike federal taxes, sales tax is governed at the state level, meaning rules and rates vary considerably across jurisdictions. Businesses generally have the responsibility to collect this tax from customers at the point of sale and then remit it to the appropriate tax authorities.

Determining Sales Tax Obligation

A business’s responsibility to collect sales tax hinges on establishing “nexus” with a particular state or jurisdiction. Nexus signifies a sufficient connection or presence that triggers a sales tax collection obligation. Historically, this primarily involved a physical presence within a state, such such as an office, store, warehouse, or employees.

Sales tax obligations expanded significantly with “economic nexus.” This concept, solidified by the South Dakota v. Wayfair Supreme Court ruling, requires out-of-state retailers to collect and remit sales tax if their economic activity within a state exceeds certain thresholds, regardless of physical presence. Economic nexus laws are typically triggered by a dollar volume of sales or a certain number of transactions within a 12-month period. Common thresholds are $100,000 in annual sales or 200 separate transactions, though these figures vary by state.

Once nexus is established, a business must collect sales tax on taxable goods and services sold into that state. Generally, sales tax applies to tangible personal property. However, the taxability of services varies widely; some states tax specific services like telecommunications or data processing, while others exempt most services unless specifically listed as taxable.

Many common exemptions exist. These include sales for resale, where the purchaser provides a valid resale certificate. Sales to governmental agencies and certain charitable organizations are often exempt. Some states also exempt specific items like certain food products for home consumption, prescription medicines, or specific types of machinery and equipment. Businesses must maintain proper documentation, such as exemption certificates, to substantiate any sales made without collecting tax.

Repercussions for Uncollected Sales Tax

Failing to collect and remit sales tax can lead to significant consequences for a business and its owners. The business owner, not the customer, is ultimately liable for any uncollected sales tax. If sales tax was not collected when it should have been, the business will likely have to pay these amounts directly, impacting its financial health.

States impose various penalties for non-compliance. Common penalties include those for failure to file returns and failure to pay the sales tax due. These penalties are often calculated as a percentage of the unpaid taxes, accruing monthly until resolved. Interest on unpaid amounts is also typically assessed. Interest rates vary by state.

Businesses that do not comply also face an increased risk of a sales tax audit. State tax authorities conduct these audits to verify proper collection, reporting, and remittance of sales tax. An audit may be triggered if a state suspects underreported sales or if a sales tax return does not align with other reported financial data. The audit process typically begins with a notification letter outlining the scope and requesting specific records.

During an audit, auditors review sales transactions, exemption certificates, and applied tax rates across different jurisdictions. They may examine sales records, financial statements, and general ledgers, comparing reported sales with bank deposits. Auditors may also use sampling methods to examine representative periods or transaction types.

The typical “look-back” period for an audit is generally three to four years, but can extend further if fraud is suspected. If discrepancies are found, the business will be assessed for the uncollected tax, along with applicable penalties and interest. In severe cases of intentional non-compliance or fraud, business owners could face substantial fines and even criminal charges, including imprisonment.

Steps to Remediate Unpaid Sales Tax

Businesses discovering past sales tax non-compliance should take proactive steps to become compliant. The initial action involves registering for a sales tax permit in each state where nexus has been established and sales tax should have been collected. This registration is typically done through the state’s department of revenue website and requires basic business information such as the Federal Employer Identification Number (EIN), business structure, and estimated sales volume. A business cannot legally collect sales tax without a valid permit.

A significant mechanism for businesses to address prior uncollected sales tax is through a Voluntary Disclosure Agreement (VDA). A VDA is a formal agreement allowing a business to voluntarily report and pay past-due tax liabilities to a state tax authority. The primary benefit of entering a VDA is the potential reduction or waiver of penalties and a limitation on the “look-back” period for which the state will assess taxes. While states can typically look back indefinitely if non-compliance is discovered through an audit, a VDA often limits this period to three to four years.

To qualify for a VDA, a business generally must not have been previously contacted by the state regarding its sales tax obligations, and it must not currently be under audit. The process usually involves submitting an application, often anonymously at first through a representative, to the relevant state tax authority. The application typically requires disclosing the nature of the business, its operational history, and an estimate of the sales tax liability.

Following the application, the business negotiates terms with the state, including the specific look-back period and any reduced penalties or interest. Once terms are agreed upon, the business remits the agreed-upon back taxes, along with any negotiated penalties and interest. Entering into a VDA can prevent the more severe financial repercussions and legal actions that might arise if the non-compliance were discovered through an audit.

Managing Ongoing Sales Tax Compliance

Once a business has registered and addressed any past liabilities, maintaining ongoing sales tax compliance requires consistent attention. This involves accurately collecting sales tax at the point of sale, which mandates applying the correct tax rate based on the customer’s location. Sales tax rates can vary significantly not only by state but also by city, county, and special taxing districts. Businesses must ensure their point-of-sale systems or e-commerce platforms are configured to calculate these varying rates correctly.

Collected sales tax must then be remitted to the appropriate state tax authorities according to a predetermined filing frequency. Filing frequencies are typically assigned by the state based on a business’s sales volume or the amount of sales tax collected, and can be monthly, quarterly, semi-annually, or annually. Most states initially assign new businesses a monthly filing frequency, with potential adjustments later based on reported sales. Due dates for remittance also vary by state, often falling on the 20th or the last day of the month following the taxable period. Payments are commonly made electronically.

Accurate record-keeping is a fundamental aspect of ongoing sales tax compliance and is important for audit preparedness. Businesses are generally required to keep detailed records of all sales, collected tax, and remittance filings for a period, often between three to six years, though some states may require longer retention. These records should include sales slips, invoices, receipts, cash register tapes, and documentation for any exempt sales, such as resale or exemption certificates.

Records must distinguish between taxable and non-taxable sales and clearly show separately stated sales tax amounts. Maintaining an organized system for these documents, whether physical or electronic, allows for easy retrieval during an audit and helps demonstrate adherence to sales tax laws. Failure to maintain adequate records can lead to tax authorities estimating liabilities or even suspending a sales tax permit.