What to Do If Your Small Business Has Unpaid Sales Tax

Small businesses may fall behind on sales taxes for several reasons. They often operate on tight margins and may use the collected sales tax for operating expenses.

Unpaid sales tax can also arise if a small business:

• Is unclear about its sales tax obligations or recent changes to their state’s sales tax laws
• Lacks dedicated accounting staff or sophisticated software

Some businesses may even underreport sales intentionally to bring down their tax liability.

Regardless of the cause, businesses should address the unpaid sales tax swiftly. This doesn’t necessarily mean paying the full amount due immediately. But it does mean it’s critical to develop a resolution strategy and plan in relatively short order to avoid worsening the situation.

If your small business is dealing with unpaid sales tax, a tax attorney who’s well-versed in the laws of your state can be invaluable. They can help secure the best possible outcome for your current predicament and your business’s future.

Though sales tax obligations vary significantly by state, we’ll explore some common principles in this article and provide you with recommendations. But first, let’s review what exactly sales tax is.

Sales Tax

Sales tax is a type of business tax added to the price of goods and services that customers pay when they buy something. It’s usually in the form of a percentage of the purchase price.

You may be most familiar with sales tax in the context of retail sales. That is, sales of tangible personal property to end consumers. But it can also apply to other categories. This may include:

• Short-term real estate rentals
• Services
• Business-to-business transactions
• Event tickets
• Hotel stays

Though it can be fee-based under certain circumstances, sales tax is typically calculated as a percentage of the purchase price.

Sales Tax Laws

There are no federal sales taxes or federal sales tax laws in the United States. As such, sales tax generally doesn’t involve the Internal Revenue Service (IRS), the federal agency primarily responsible for collecting income taxes.

Instead, state and local laws primarily govern sales tax matters. Each state has its own sales tax laws and regulations. These typically cover several topics, including:

• Taxable items and services
• Sales tax rates
• Entities required to collect sales tax
• Filing periods for sales tax returns
• Sales tax-exempt transactions
• Sales tax payment due dates
• Consequences for non-compliance

Many state sales tax laws also allow cities and counties to add their own local sales taxes on top of the state rate. So, business sales tax responsibilities very much depend on what you sell and where you sell it.

Business Sales Tax Obligations

When businesses collect sales tax, they’re primarily acting as tax collectors on behalf of the government, not as taxpayers. But collecting sales tax is only one part of a business’ sales tax obligations.

In most locations, businesses need to report total sales, taxable sales, and the amount of tax collected. Generally, businesses that charge sales tax must also remit tax payments to the appropriate tax authority. This is usually the state or local Department of Revenue.

We refer to the total amount of sales tax the business is responsible for collecting from customers and remitting to the tax authorities as its sales tax liability.

Use Tax

Although distinct from sales tax, use tax is related to a business' sales tax obligations. It refers to the tax on goods purchased without paying sales tax.

Use tax applies to individuals, as well as businesses, and often stems from online or out-of-state purchases. So, if a business buys something for its own use (not resale) and doesn’t pay sales tax, it may owe use tax.

Many states combine sales and use tax reporting on a single tax form even though businesses are considered taxpayers for use tax purposes.

Unpaid Sales Tax Consequences

Managing sales tax can be complex, especially if you sell in multiple states or online. Still, you may face serious consequences for late or unpaid sales tax.

Penalties and Interest

The tax authorities may charge penalties and interest on the tax due. Over time, this can increase your tax debt.

Tax Liens

The government may also place a tax lien on the business' property, which may affect bank accounts and other assets. Liens can be particularly problematic for some small business owners because, under certain circumstances, the government may also be able to place a lien on the owner's personal property.

In sole proprietorships and some partnerships, there's no legal separation between the business and the owner’s personal liability, making personal assets vulnerable. Corporations and limited liability companies (LLCs) usually enjoy more protection from personal liability, but it's not absolute.

Tax Levies

In severe cases, the government can seize business assets to satisfy the tax debt. This is called a tax levy. Whether a business owner’s personal property can be seized in a tax levy similarly depends on several factors.

As a general matter, however, more property is exempt from a levy than from a lien. Levies on personal assets often require more justification than liens.

Along with a range of additional consequences for unpaid sales tax, the tax authority may also take legal action against a business and/or its owners.

What Should You Do?

While you might be tempted to simply pay the unpaid sales tax when you discover it, this won’t necessarily make the problem go away. And it’s likely not even an option for many.

Most tax authorities impose penalties and interest for late payments, which may apply even if you pay the overdue amount in full. Others may not stop the statute of limitations from running even after you pay, which can leave your small business exposed to future audits.

Ultimately, your best course of action for handling the unpaid sales tax will largely depend on state law.

For example, some jurisdictions offer voluntary disclosure programs that may provide penalty relief under certain circumstances. Many states also have specific reporting procedures for late payments.

As a result, it’s highly advisable that you consult with a tax attorney in your jurisdiction who can help you understand your options.

Future Compliance

An experienced tax attorney can also advise you on ways to avoid future unpaid sales tax. This may be critical if your state’s tax authority tends to scrutinize future filings more closely after late payments.

Depending on the causes of your unpaid sales tax, enhancing future compliance with sales tax obligations can take various forms. This might include:

• A comprehensive sales tax compliance plan tailored to your business
• Recommendation/implementation of sales tax software
• Employee training
• Periodic monitoring to ensure compliance
• Policy/procedure development
• Cash flow management
• Record-keeping guidance
• Legislative tracking of dynamic state tax laws

These and other potential measures can help you proactively address sales tax obligations and reduce the risks associated with future unpaid sales tax.

Getting Legal Help

While your predicament may not be ideal, it doesn’t have to ruin your business. You’ll have several options for resolving the unpaid sales tax. An attorney experienced in negotiations with your state’s tax authority and its enforcement actions can help you determine your best course of action.

You can generally speak with them confidentially under the protection of attorney-client privilege. This is key to ensuring you’re making informed decisions at this crucial time.

Findlaw’s directory of dedicated tax attorneys can get you started. Just click on your state to view contact information for local experts who can navigate the relevant legal landscape for you. You can also narrow your search results by city if you prefer.

Time is of the essence. Engage the help of a trusted advocate who can help you right the course for your small business’ sales tax compliance.