Help! My Business Hasn’t Been Collecting Sales Tax

My Business Hasn't Been Collecting Sales Tax From Customers: Now What?

Failure to collect sales tax as required can lead to penalties, personal liability for the unpaid tax, and even criminal exposure or loss of your business license. However, there is always a solution, and the sooner you reach out for help, the better. This article outlines the consequences of not collecting sales tax and how to get into compliance, so you know what to expect.

Key takeaways

Failure to collect sales tax can lead to interest, penalties, loss of business licenses, and possible legal exposure.
If you haven't collected sales tax, your business will most likely need to pay it – but depending on the state, you may only need to pay up to three years' worth of uncollected sales tax.
Most states can hold business owners personally liable for unpaid sales tax.
Voluntary disclosure programs can help you get back into compliance.
Use TaxCure to find a licensed tax professional who has experience with your state's department of revenue.

Consequences of uncollected state sales tax

If your business is supposed to collect state sales tax, but if it doesn't, you may face the following consequences:

Business liability for the sales tax – unfortunately, you generally cannot collect sales tax retroactively from customers. Instead, the business will need to pay the uncollected tax.
Penalties – penalties for unpaid sales taxes vary based on the state. Depending on the situation and how quickly you rectify it, you may face late filing penalties ranging from 1 to 15% of the uncollected tax, or potentially fraud penalties that are significantly higher.
Interest – all states assess interest on late tax payments. Rates vary, but all states backdate interest to the original due date for the tax payment.
Loss of business license – uncollected, unfiled, and unpaid sales tax can all put you at risk of losing state business licenses or having your business shutdown. Some states can even take away professional licenses. If you're not licensed in a certain state, they can't take away the license, but they can revoke your right to do business in that state.
Personal liability – almost all states with sales tax have laws allowing the state to hold owners personally liable for unpaid sales tax. States may potentially even assess sales tax against other parties related to the business, such as shareholders or employees who make financial decisions.
Criminal charges – if the state believes that the failure to collect or pay sales tax was based on willful intent, they may bring criminal charges against you. If you're worried about criminal exposure, contact a tax attorney as soon as possible.

When are businesses required to collect sales tax?

Sales tax requirements vary from state to state. Review the rules carefully in every state where you make sales so that you understand your legal obligations. You need to consider two points:

Do you have nexus in the state?
Are you making taxable sales?

Sales tax nexus rules

Generally, you only need to collect sales tax if you have nexus in the state. Nexus laws vary, but typically include the following:

Physical nexus – you have a physical store in the state, or you meet other physical nexus requirements, such as having warehouses or employees in the state.
Economic nexus – you don't meet the physical nexus test, but you have a certain number or volume of sales in the state.

All states with sales tax passed economic nexus rules after the South Dakota V. Wayfair ruling determined that states could require companies located outside of their state to collect and remit sales tax. But economic nexus thresholds vary drastically from state to state.

Some states require you to reach a certain number of sales, others use a dollar amount, and in others, you must pass both a volume and dollar threshold to trigger sales tax requirements. The timing also varies – states may require you to check sales every month, quarter, or just annually.

Taxable sales and services

In addition to figuring out if you have nexus, you also need to determine if your sales are taxable. Again, the rules vary from state to state.

Most states with sales tax require you to collect sales tax on the personal property, but they may have a list of exempted items, such as groceries, medicine, or even clothing under a certain value. Some states require you to collect sales tax on services, but it varies. The rules also vary on whether you need to collect sales tax on shipping fees or other items.

How to get into compliance

If you haven't been collecting sales tax, you need to get back into compliance as quickly as possible. The sooner you start following the rules, the easier it will be to resolve this issue. That said, the stakes are high – you're facing significant risk of penalties and possibly even legal consequences. To protect yourself, you may want to work with a tax professional during this process.

However, here are some guidelines on getting back into compliance.

Check the registration requirements – first, figure out if you're required to register for a sales tax account in a certain state. If so, it's time to make a plan. If not, make sure that you understand the registration requirements and that you track sales made in that state so you can register once it's required.
Consider making a voluntary disclosure – if you're not registered for a sales tax account, most states let you make a voluntary disclosure. If you qualify, you'll be able to get into compliance without facing penalties or legal consequences. However, you'll generally need to pay any tax due fairly quickly after the state accepts your application.
Look into a streamlined disclosure – if you're out of compliance in multiple states, you may be able to make a multi-state disclosure through the Streamlined Sales Tax Governing Board, Inc – at the time of writing, 22 states are full members of this program. If you're dealing with a state that doesn't participate, you'll need to contact them directly to make a disclosure or explore other ways to get back into compliance.
File the unfiled returns – whether you make a voluntary disclosure or not, you'll need to file the unfiled returns. On each sales tax return, you'll report the taxable sales from the period and calculate how much you owe in sales tax. Then, if applicable, you'll also need to calculate tax and penalties.
Make payment arrangements – if you can't pay all of the uncollected sales tax at once, contact the state's department of revenue and request a payment plan. Most states accept payment plans for unpaid sales tax on a case-by-case basis, and again, the rules vary. If you're making a VDP, make sure you understand the rules before you apply – some states allow payments on VDPs while others require full payment within a certain date of being accepted.
Stay compliant moving forward – to avoid future problems, start collecting sales tax from customers. Make sure you have software that can calculate sales tax correctly, track sales tax collected from each state, and file sales tax returns.

What to expect if you make a voluntary disclosure

Again, VDP programs vary from state to state, but there are many similarities in the process. In almost all cases, you can only qualify if you reach out to the state before they contact you. If the state has sent an audit letter or a bill, you don't qualify. In some states, you can apply if you've registered for a sales tax account but haven't filed returns, but in other states, you can't use the VDP program if you have already registered for a sales tax account.

If the state accepts your application, you'll get the following benefits:

Limited look-back period – typically, it's three or four years. That means you only have to file and pay the last three or four years of sales tax returns. However, that only applies if you haven't been collecting sales tax. If you've been collecting but not paying sales tax, the look-back period will cover the full time you've been collecting sales tax.
No penalties or reduced penalties – Most states don't assess any penalties if you qualify for their voluntary disclosure program. However, some states may just reduce the total penalties.
No legal consequences – unless there are significant criminal tax fraud indicators in your application, the state will not pursue legal action against you. If the state wants to pursue criminal charges, it will not accept your application. Instead, it will start a criminal investigation. To protect you from this threat, many states let you start the application process anonymously.

How states monitor sales tax compliance

You know you haven't been collecting sales tax, and you're probably wondering if the state will find out. Even if the state hasn't contacted you about the uncollected sales tax, they will likely find out. Here are some of the ways state revenue agencies monitor sales tax compliance:

Data sharing: information received from other state tax agencies or the IRS.
Third-party reporting: for example, reports from logistics companies, such as warehouses that may make inventory reports showing a business's physical nexus in the state.
Marketplace monitoring: details from marketplaces such as Amazon or Etsy can help states find marketplace sellers who aren't reporting sales from other channels.
Whistleblower reports: sometimes, employees or others make reports when a business isn't compliant with tax laws.
Advanced analytics: states can determine all kinds of information by analyzing returns that have been filed.

Learn more about state sales tax.

To learn more about sales tax registration requirements, nexus rules, filing deadlines, and payment options, check out these TaxCure guides to state sales tax:

FAQs about uncollected sales tax

Sales tax is administered on the state level, meaning the laws vary. The answers below reflect the usual practices for most states, but keep in mind that the actual rules, programs, and consequences of unpaid sales tax vary based on the state and your unique situation.

Am I liable for sales tax I didn't collect?

Possibly. In most states, you are liable for uncollected sales tax if you were legally obligated to collect it. You're not liable if you weren't required to collect it, but in these cases, state law typically requires you to notify the buyer of their obligation to pay use tax. For example, this may happen if you're a remote seller who makes a sale in a state but is below the sales tax registration threshold.

Can I retroactively charge customers sales tax?

It depends on the laws in your state. Generally, once a buyer has paid for a purchase, the transaction is complete, and the seller cannot retroactively change the terms of the agreement. You can ask customers to voluntarily pay sales tax if you forgot to charge it on a purchase, but to be on the safe side, you may want to consult with a licensed tax professional or tax attorney before doing anything. Never charge a client's payment method after a completed transaction without their authorization.

What is a sales tax Voluntary Disclosure Program?

Voluntary Disclosure Programs (VDP) allow taxpayers to receive certain types of relief in exchange for coming forward voluntarily to meet their tax obligations. Most states with sales tax have VDP programs for unfiled sales tax returns as well as other types of state returns, but the terms vary. Typically, to qualify, you must come forward before the state contacts you, and then, you face a limited look-back period and reduced or eliminated penalties.

How far back can states audit sales tax?

It depends on the state. All states have their own laws on tax-related statutes of limitations. However, in most cases, states only have three years to audit a sales tax return after it's filed, but they may have longer to audit fraudulent returns and an unlimited amount of time to assess tax if a return wasn't filed.

How do I become sales tax compliant going forward?

Make sure you understand the laws in every state where you make sales. Use software to track your sales in each state and enable alerts so that you know when you meet the threshold to trigger sales tax registration requirements in each state. If you're required to collect sales tax in a state, make sure you file sales tax reports and make payments on time. The right software can be critical for navigating these processes – look for tools that facilitate multi-state sales, track sales tax collected, and automate sales tax filing.

Get Help With Sales Tax Problems

TaxCure makes it easy to find high-quality help for your tax problem. Start your search now. Then, use the filters to narrow down the results so you only see licensed tax professionals who have experience with sales tax problems in the state where you need help.