If you’re not on top of your sales tax obligations, you could find yourself facing serious financial penalties and operational setbacks. Each state has its own rules and enforcement tactics, and ignoring these can lead to hefty fines and other severe repercussions.
So can you be penalised for not paying your sales tax? Yes.
In this article, we’ll break down what can happen if you fall short on your sales tax duties and guide you through the essential steps to stay compliant and avoid those costly pitfalls.
The Penalties for Non-Compliance
In case you’re a busy bee and don’t have the time to read our article in full here are the penalties for not paying your sales tax (ever or on time) include the following:
- You will have to pay the tax you owe in full as well as fees and penalties over and above this
- Your website could be shut down by the state
- You will fail a due diligence analysis if you ever sell or list your business
- It will create irreparable reputational damage
- Your product could be banned in the USA
Financial Consequences
States have the right to legally demand all historic taxes you should have paid to them, and they can add ruinous penalties on top of that.
Each US state has the right to impose its own penalties. In most cases, this will be levied as a percentage of the tax you owe, with interest applied as well.
For example, New York will penalise you 10% of the tax due for the first month plus 1% for each additional month or part of a month. California will also whack you with 10% of the tax payable, but they also reserve the right to charge a “Collection Cost Recovery Fee”, which is at their discretion.
Operational Consequences
Non-compliance with sales tax regulations can have significant operational impacts on your business. For instance, if a state discovers that you owe back taxes, they might take actions that can disrupt your daily operations. One major consequence is that your business could face a state-ordered shutdown of your website or eCommerce platform until the issues are resolved. This can lead to lost sales and a halt in operations, which can be particularly damaging if you rely heavily on online sales.
Additionally, non-compliance can affect the sale or listing of your business. If you decide to sell your business, prospective buyers will likely conduct a due diligence analysis. Failure to demonstrate compliance with tax laws could lead to the deal falling through or a lower valuation of your business.
If you consistently fail to comply with state sales tax requirements, the state tax authorities might take drastic actions such as prohibiting the sale of your products. This can occur if you are found to have repeatedly evaded taxes or if your business is deemed non-compliant after multiple warnings and penalties.
Reputational Consequences
The repercussions of non-compliance extend beyond financial penalties and operational disruptions—they can also tarnish your business’s reputation. Negative publicity spreads quickly. If your business faces issues with sales tax compliance, it could become a topic of discussion in the media or on social platforms, damaging your brand’s image.
Customers are increasingly aware of and concerned about how businesses handle their tax obligations. If it becomes known that your business is involved in tax disputes or is failing to comply with sales tax laws, it could decrease customer trust and lead to a loss of business. The damage to your reputation can have long-lasting effects, as customers may choose to take their business elsewhere to companies they perceive as more reliable and trustworthy.
Moreover, a negative reputation could lead to reduced opportunities for partnerships and collaborations. Other businesses might hesitate to engage with you if they view you as a compliance risk. In the competitive landscape, maintaining a good reputation is crucial for sustaining and growing your business.
3 steps to sales tax compliance
1. Register for a sales tax permit
If consumers in different US states buy your products online – whether it’s a physical good or something digital – you’ll probably have sales tax exposure in some of those states, depending on your business model and how much you sell.
Once you have analysed your Nexus obligations, you will identify the states where you have physical nexus or have crossed the economic nexus thresholds. You will then need to apply with the relevant state for a sales tax permit. Each state has their own registration process, but it will generally involve completing a detailed registration form and providing supporting documentation about your business, supply chain, and products.
2. Set up sales tax collection on your shopping cart and start collecting
Once you are registered for sales tax in a state, you will have to start charging sales tax on eligible sales made to that state. Depending on your website setup and which eCommerce platform or payment solution you use, you will need to configure your site to charge an accurate tax rate at checkout.
For all sales delivered to a customer in a state where you are registered, you will need to add the relevant sales tax (which will be reported and paid over to the tax office when you file your returns)
3. Report and file sales taxes collected
States will require you to file a monthly or quarterly return, where you report all the sales you made to their state. The tax returns are filed electronically using the relevant state tax office’s filing portal. They will calculate how much tax you owe, and this will need to be remitted before the specified deadline.
Finishing Off
Sales tax compliance is crucial to avoid severe penalties and operational disruptions. From hefty fines and potential asset seizures to reputational damage and even product bans, the risks of non-compliance can be significant and far-reaching. By understanding the potential consequences and taking proactive steps to ensure you meet your sales tax obligations, you can protect your business from these pitfalls and maintain a smooth, successful operation. Remember, keeping up-to-date with state tax laws and consulting with tax professionals can help safeguard your business and keep you on the right track.