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How Sales Tax Nonpayment Can Hurt Your Business and Personal Credit

  • Jan 13, 2016 | Avalara

Outright fraud aside, failure to satisfy sales tax obligations is far more common than most sellers think. Usually, it’s due to lack of understanding of tax requirements. But even if the crime isn't malicious, the consequences are high: The state can seize seller assets when sellers don’t remit the required sales taxes.

More often than not, neglecting to pay sales tax results from an oversight that can be fixed easily. Frequently the problem can be solved by registering in the state where the mistake transpired, paying the past due obligation (and related fees and penalties), and committing to pay sales tax in that state in the future.

Know When To Pay

But, there are times when it may not be possible to satisfy a tax obligation, and that can have dire consequences for your business and personal finances, including your credit.

“We see regular examples of sellers who end up owing thousands of dollars states when they had no idea they were required to collect sales taxes,” says Jerry Peisner, Principal at Peisner Johnson & Company, L.L.P. in Plano, Texas. Sellers learn of the problem only when an audit of their books is triggered by an audit done on a buyer from whom the seller didn’t collect sales tax. Failure to collect often occurs when a seller doesn't know that they have nexus in a particular state.

“Sometimes sellers owe years of back sales taxes amounting to tens of thousands of dollars,” Peisner explains. “In states where the seller never filed a sales tax return, there’s no statute of limitations on audits or no limit on the lookback period.” That means a state can look back as many years as a seller has been selling in that state without paying taxes.

What Sellers Can Do

Luckily, there are steps between an audit notice and the point when your find your credit has been ruined by unpaid taxes.

First, you’ll receive an audit notice from the state. “Don’t ignore those,” warns Peisner. “Respond as quickly as possible because you might learn yours is an easy fix." Often, if your sales were business-to-business, you can ask the buyer to pay those taxes owed. Peisner suggests trying that because buyers are obligated to pay sales tax when they know or learn it’s due.

Next, if your situation does not have an easy fix, you’ll face an audit -- perhaps an extensive one, depending on the circumstances. “If the state says you owe significant back sales taxes, you should seek advice from a competent professional,” says Peisner.

After determining how much you owe, most states will set up a payout agreement or a payment plan to help you pay back what you owe.

However, if you don’t respond or can’t pay, states “turn up the heat,” warns Piesner. They seize and place liens on business and personal assets, including bank accounts. Then, your business and personal credit can be damaged because you can’t pay your bills.

Worst Case Scenario

The worst-case scenario is having a tax lien appear on your business and personal credit report. Both types of credit would be ruined, especially if the lien is on you credit for years.

“A tax lien is considered very negative," explains business and personal credit, Gerri Detweiler, Head of Market Education for Nav. "Not only can it affect your ability to get future credit, but periodic reviews of your credit by current lenders (who may receive alerts from the credit reporting agencies) may trigger review of your existing accounts.”

She emphasizes that lenders might decrease your personal credit line, close your accounts to future charges, or raise your interest rates on future purchases.

While laws provide certain consumer protections on personal credit, these rules don’t apply to business credit. “With business loans or accounts, a lender or vendor could raise your interest rate or change the terms of your account, including payment terms, as long as permitted by your contract,” Detweiler explains.

So it behooves sellers to learn when they must collect sales taxes, as well as to use tax software to automate sales tax management. Avoid common mistakes by doing your research and keep up with state laws. Otherwise, you can find yourself with ruined credit when hit with a large sales tax bill you don’t expect and can’t pay.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara helps businesses of all sizes get tax compliance right. In partnership with leading ERP, accounting, ecommerce, and other financial management system providers, Avalara delivers cloud-based compliance solutions for various transaction taxes, including sales and use, VAT, GST, excise, communications, lodging, and other indirect tax types. Headquartered in Seattle, Avalara has offices across the U.S. and around the world in Brazil, Europe, and India.