How to handle sales tax when closing a business temporarily or permanently

The number of coronavirus (COVID-19) cases in the United States is more than 5.4 million and counting. Also rising is the number of businesses closed permanently or temporarily as a result of the pandemic. Recognizing this, state tax authorities are starting to issue guidance on what businesses in these situations need to do to avoid sales tax fees and penalties.

Permanent closures now number more than 72,000 and account for 55% of all closed businesses since March 1, 2020, according to the Q2 2020 Yelp Economic Average report (the remaining closures are temporary). No city or state is immune. While Las Vegas, Nevada, is suffering from one of the highest rates of permanently closed businesses in the country, Los Angeles and New York City have the highest number of permanent closures overall, at roughly 5,600 and 5,100, respectively.

There’s evidence temporary closures in many states have plateaued, although Yelp reported a spike in temporary closures in Arizona, Florida, and Texas. As with permanent closures, Los Angeles and New York City are experiencing the highest rate of temporary closures, followed by San Francisco, Chicago, and Dallas.

Restaurants have the highest number of temporary and permanent business closures, followed closely by retailers. Other hard-hit industries include beauty and fitness. Professional service providers who can easily work remotely, such as accountants and attorneys, have suffered fewer closures — though they’re still vulnerable.

Sales tax filing obligations for temporarily closed businesses

Businesses temporarily shuttered as a result of the pandemic may still need to be filing sales tax returns as required prior to the hiatus. That’s because most states require businesses to file zero returns (returns when there is no tax due).

The Indiana Department of Revenue explains, “A return must be filed even when no tax is due unless the Indiana tax account has been closed using Form BC-100. If your business is closed temporarily and has no tax revenue for a filing period, you must file a return indicating $0 for that period ($0 return). If a business is permanently closed, an Indiana tax account is no longer needed. Please complete Form BC-100.”

Failure to file a zero return as required often results in a penalty, and failure to pay the penalty can result in additional penalties and interest. The minimum penalty in New York is $50. In Kentucky, it’s $100.

Sales tax obligations for permanently closing businesses

Sales tax licenses need to be canceled, taxes paid, and final returns filed if a business is closing permanently. According to the Arizona Department of Revenue (ADOR), “Should your business close, to avoid fee and penalties, you must cancel your TPT license.”

There are several ways to cancel a transaction privilege tax (TPT) license in Arizona:

Cancel your account online, through AZTaxes.gov (log in and click, “Account Update”)
File a final TPT return with ADOR (check the box marked “Final Return, Cancel License” on your last TPT return)
Return the license with the word “Cancel” written across the front (mail to the Customer Care and Outreach department at ADOR)
Submit a Business Account Update Form (check box marked “Cancel effective date”)
Visit an ADOR office in person (if open) or call and speak to a customer service representative

No matter the state, it’s important to remit all sales taxes due prior to closing out your account. If left unpaid after a business closes, sales tax liability will follow the business owner.

Making sure sales and use tax is properly handled is, of course, just one of many issues closing businesses need to address. Additional guidance is available from the U.S. Small Business Administration, Internal Revenue Service, and your state department of revenue.

Learn more about how the pandemic is affecting businesses at our COVID-19 tax info hub for business recovery.

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.