Sales tax compliance can be a minefield for business owners, fraught with complex regulations and potential pitfalls. While it’s easy to get caught up in the day-to-day operations of running your company, neglecting your sales tax obligations can lead to serious consequences. 

However, circumstances may arise that cause you to fall behind on these payments. Understanding the potential consequences of such a situation is crucial for protecting your business and planning your next steps. Let’s explore the landscape.

Late filing and payment penalties

The immediate impact of falling behind on sales tax is the imposition of penalties and interest. Most states have strict guidelines for these penalties, which can quickly add up to significant amounts. For instance, many states impose a penalty of 5-10% of the tax due for late filing, with additional penalties accruing for each month the tax remains unpaid. Some states also charge interest on top of these penalties, compounding the financial burden.

Take California as an example. The Golden State imposes a penalty of 10% of the tax due for late filing, plus an additional 10% if the payment is also late. This means that if you owe $10,000 in sales tax, you could be looking at $2,000 in penalties alone, not including interest.

Audits and increased scrutiny

Falling behind on sales tax payments often raises red flags with state tax authorities. This increased attention can lead to a higher likelihood of being audited. During an audit, tax officials will meticulously examine your business’s financial records, potentially reviewing not just the delinquent periods but also past tax periods.

In 2021, a staggering 72% of businesses surveyed by Avalara and Potentiate had been audited in the previous five years. This statistic underscores the frequency of such audits and the importance of maintaining accurate records and timely payments.

Legal consequences

In more severe cases, failing to remit sales tax can lead to serious legal repercussions. State tax authorities have the power to place liens on your business assets, effectively claiming them as collateral for your tax debt. In extreme situations, your business license could be suspended or revoked, forcing you to cease operations until the tax issues are resolved.

It’s also worth noting that in some jurisdictions, business owners can be held personally liable for unpaid sales tax. This means that your personal assets could be at risk, even if your business is structured as a corporation or LLC.

Damaged business reputation

The impact of falling behind on sales tax extends beyond immediate financial and legal consequences. Your business’s reputation can suffer significant damage. Suppliers may become hesitant to extend credit, viewing your business as a higher risk. Potential partners or investors might be deterred from engaging with your company, fearing the implications of your tax issues.

Plus, if your tax problems become public knowledge, it could erode customer trust. In today’s interconnected world, news travels fast, and consumers are increasingly conscious of supporting businesses that operate ethically and responsibly.

Steps to take if you’re behind

If you find yourself falling behind on sales tax, it’s crucial to take action promptly. Ignoring the problem will only exacerbate the situation. 

• Your first step should be to contact the relevant tax authority immediately. Many tax agencies are willing to work with businesses that proactively address their tax issues.
  
• Consider setting up a payment plan to catch up on your obligations. While you’ll still likely face some penalties and interest, a structured payment plan can help you avoid more severe consequences and demonstrate your commitment to resolving the issue.
  
• It’s also advisable to consult with a professional that specializes in sales tax like DAVO. We can provide valuable guidance on navigating your specific situation and may be able to negotiate with tax authorities on your behalf.

Prevention is key

While understanding the consequences of falling behind on sales tax is important, the best strategy is prevention. Implement robust systems for tracking and remitting sales tax, and consider automating these processes to reduce the risk of human error. Regularly review your sales tax obligations and ensure you’re staying current with changing regulations in all jurisdictions where you operate.

Staying on top of your sales tax obligations is far easier and less costly than dealing with the consequences of falling behind. If you’re struggling to manage your sales tax, don’t hesitate to seek professional help from the experts at DAVO today.