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Tax Q&A: What happens if I don’t collect sales tax?


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Our Tax Q&A series tackles common tax questions facing FBA sellers and other small business owners.

Sales tax can be very confusing — and while the recent Supreme Court decision answered the question of whether states can require out-of-state online sellers to collect sales tax, complying with the resulting updates and changes to state laws can still pose headaches.

We created TrustFile to help businesses like yours ease that hassle. But say you don’t collect sales tax when a state says you should. What happens then?

Potentially, a lot — and none of it is good, even if your lack of compliance is due to misunderstanding the law instead of malicious intent.

1. A state might ask you to pay years’ worth of sales taxes. If you haven’t filed returns, the state could go back multiple years when they look for taxes owed. This can be tens of thousands of dollars — or more. And often, sellers had no idea they needed to collect the taxes in the first place.

2. Your business and personal assets could be seized. If a state determines you owe sales taxes and you don’t respond or can’t pay, tax authorities can take assets or put liens on them, potentially damaging your credit. So don’t ignore notices; even if you can’t pay in full, you might be able to set up a payment plan over time.

3. You might owe more than just the taxes. States can charge you interest and penalties for late payments (or payments that were never made in the first place). This can add 10 percent, 20 percent, or more to your total bill.

4. Other costs could add up, too. If you’re audited or a state takes legal action against you, you’ll probably need to pay a professional to represent you. If you’re trying to sell your business and it’s discovered that you owe these taxes, that will almost certainly affect the price. Remember, not all of the costs are financial — dealing with tax problems will take your time and attention away from your business, not to mention cause you a great deal of stress.

5. You could be accused of fraud. This is unlikely, unless you’re doing something like collecting sales tax and keeping the money for yourself instead of remitting it. But if you’re operating a business that isn’t registered with the state, you could be at risk as well. (For that situation, some states will reduce or even eliminate penalties if you come clean voluntarily.)

There are real risks involved when it comes to correctly handling sales tax, and it’s always best to get ahead of them. If you’re having tax issues, don’t bury your head in the sand and hope they go away. Talk to a professional and take steps to address them now.

Have a question about sales tax? Email us at smallbizstories@avalara.com.

 


Avalara Author
Mike Plaster
Avalara Author Mike Plaster
Mike Plaster is a former journalist who now owns and runs a small business. He began a partnership with Avalara in 2018, aiming to shed light on issues important to small business owners and Amazon sellers.
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