What Happens If You Don’t Collect Sales Tax?

Consequences of Failure to Collect

Sales tax is a consumption tax businesses collect from customers. This revenue is held in trust for the state and must be remitted to the tax authority. Failure to meet this obligation can lead to significant financial and legal repercussions.

States impose various penalties for non-compliance. Penalties for failing to file a sales tax return or failing to pay the tax are typically a percentage of the tax due per month, often capped at a total percentage of the liability. States may also assess additional charges for negligence or fraud, which can add significantly to the underpayment. These penalty assessments typically accrue from the original due date of the uncollected tax.

Interest charges are applied to uncollected or underpaid tax, and often to penalties. Interest rates vary by state and can compound, meaning the total amount owed can grow substantially. Non-compliance frequently triggers a sales tax audit by state tax authorities. During an audit, the state reviews a business’s financial records to verify compliance.

An audit can lead to an assessment for all uncollected sales tax, along with associated penalties and interest, for multiple tax periods. The business typically bears the burden of proof to demonstrate it met its sales tax obligations or that sales were properly exempt.

Business owners, officers, or other individuals can face personal liability for uncollected sales tax in many states. This means the state can pursue personal assets to satisfy the tax debt, even if the business operates as a corporation or limited liability company. This personal liability applies to the “trust fund” portion of taxes, which is sales tax collected from customers but not remitted to the state.

States use legal tools to enforce collection. These can include filing tax liens against business and personal property, which can impair credit and complicate asset sales. States may also issue levies to seize bank accounts or accounts receivable. In cases of willful tax evasion, criminal charges, including fines and imprisonment, are possible.

Understanding Your Sales Tax Obligation

A business’s obligation to collect sales tax is determined by its “nexus” in a state. Nexus signifies a sufficient connection or presence that creates a tax requirement. Physical nexus is established by having a physical presence, such as an office, warehouse, or employees in a state. Inventory in a third-party fulfillment center can also establish physical nexus.

Economic nexus is established when a business meets specific sales volume or transaction count thresholds in a state, even without a physical presence. Many states have adopted thresholds, commonly based on sales volume or transaction count, which vary across jurisdictions. Once either a physical or economic nexus threshold is met, the obligation to collect sales tax begins.

Understanding which goods and services are taxable is an important aspect of sales tax obligation. Tangible personal property is generally subject to sales tax. The taxability of services varies widely by state; many are exempt unless specifically enumerated as taxable. Common exemptions from sales tax include groceries, prescription medications, and sales for resale, provided the purchaser furnishes a valid exemption certificate.

Once a business establishes nexus and engages in taxable sales, it must register for a sales tax permit or license. This registration must occur before collecting sales tax from customers and making taxable sales. Operating without a valid permit is a violation of state tax law.

Steps to Address Uncollected Sales Tax

When a business discovers uncollected sales tax, it must first assess its liability. This requires identifying states where nexus was established, calculating taxable sales, and applying correct sales tax rates to determine the total uncollected amount.

A Voluntary Disclosure Agreement (VDA) is an option for addressing past uncollected sales tax. Many states offer VDAs, allowing businesses to report past tax liabilities, often anonymously. Benefits include reduced or waived penalties, and a limited “lookback period” for which taxes are owed, typically three to four years. To finalize a VDA, the business agrees to pay the uncollected tax and interest, often through a payment plan.

If a VDA is not pursued or available, the business must prepare and file delinquent sales tax returns for all periods where tax should have been collected. This involves reporting taxable sales. Filing these delinquent returns will typically trigger the state’s assessment of the uncollected tax, along with statutory penalties and interest.

After filing delinquent returns or completing a VDA, remit the full amount of back taxes, penalties, and interest owed. States may offer payment plans, but interest accrues on outstanding balances. Failure to make these payments or adhere to a payment plan can lead to further aggressive collection actions by the state.

Seeking professional assistance is advisable due to the complexities of multi-state sales tax laws. Sales tax professionals, tax attorneys, or Certified Public Accountants (CPAs) can assist with liability calculations, negotiate VDAs, represent the business during audits, and help minimize the financial impact of non-compliance.

Ensuring Future Sales Tax Compliance

To prevent future sales tax issues, a business must register in every state where it has established nexus. This involves obtaining a sales tax permit or license. This permit is required before collecting sales tax from customers and making taxable sales. Operating without a valid permit can lead to penalties.

Once registered, implement systems for sales tax collection at the point of sale. Businesses should configure POS systems, e-commerce platforms, or invoicing software to automatically calculate and apply correct sales tax rates. These rates are determined by factors such as customer location and product/service taxability. Ensuring all taxable goods and services are correctly taxed at the time of sale is important.

Timely remittance of collected sales tax is important. Businesses are assigned a filing frequency by the state, typically monthly, quarterly, or annually, based on their sales volume. Adhering to these deadlines for submitting returns and remitting the collected tax is important, as penalties and interest can apply if not paid on time. Establishing internal processes to track due dates and ensure timely payments is fundamental.

Maintaining accurate record-keeping is key for future sales tax compliance. Businesses should retain all sales invoices, purchase records, and valid exemption certificates for any tax-exempt sales. These records provide an audit trail and support figures reported on sales tax returns. Organized records streamline future audits and demonstrate due diligence.

Staying current with the evolving landscape of sales tax laws is important. States frequently update nexus rules, change the taxability of new products or services, and adjust tax rates. Businesses should proactively monitor state tax authority websites, subscribe to tax news services, or consult with professionals to stay informed of these changes. Sales tax automation software can also be a valuable tool, as it can help manage nexus thresholds, apply correct rates across multiple jurisdictions, handle exemption certificates, and streamline the filing process, reducing compliance burden.