Many online businesses wonder what happens if you don’t collect sales tax. But in fact, collecting sales tax is just one part of the whole compliance process.
There are other ways your business might slip up – which is understandable because sales tax, VAT, and GST can be complicated to manage. Different rules apply depending on your business location, sales volume, and income.
But never fear, we’re here to help you avoid sales tax penalties!
In this post, we’ll cover:
- 5 forms of non-compliance with sales tax
- 5 consequences of not complying with sales tax
- Tips for sales tax compliance
- How to automate your sales tax compliance
Ready? Let’s learn what happens if you don’t comply with sales tax.
5 forms of non-compliance with sales tax
Even if you try your best to understand how sales tax works in the US, there are several different ways you can end up being non-compliant. Knowing the pitfalls is the first step in making sure you avoid them!
Here are 5 common ways businesses break sales tax rules:
- Not registering on time once you become liable
- Penalty for not collecting sales tax
- Charging the wrong tax rate
- Not filing on time
- Penalty for not paying sales tax
1. Not registering on time once you become liable
You need to register for sales tax in every state you have a nexus, before your business opens. If your business starts operating without being registered you’ll be viewed as non-compliant.
2. Penalty for not collecting sales tax
You need to ensure you’re charging sales tax to all parties who are not exempt and on all products that are taxable.
3. Charging the wrong tax rate
Sales tax can vary from state to state so it’s important be aware of the different rates applicable. For example, an auto bill of sale Oregon may have different requirements compared to one from Kentucky.
4. Not filing on time
You need to make sure that you don’t miss the deadline or you’ll be classed as being non-compliant.
5. Penalty for not paying sales tax
If you don’t remit the tax you’ve collected, not only will you have to pay back taxes but you could face fines and, in extreme cases, jail time.
As you can see, there are several different ways you can be non-compliant with sales tax. In all cases it’s best to be as informed as possible and to err on the side of caution to ensure you remain compliant.
5 consequences of not complying with sales tax
The 5 consequences of not complying with sales tax are:
- Warning Letter
- Gained interest
- Civil penalties
- Criminal penalties
Failing to pay your sales tax or file it correctly can incur serious consequences. It’s important to understand what will happen should you miss a deadline or provide inappropriate paperwork, as this varies depending on the region your business is based in.
What’s more, the consequences become progressively worse the longer you avoid paying the sales tax or the more serious mistakes you make when filing it. However, if you stick to the deadlines, you shouldn't have to worry about these.
- Warning letter
Should you miss the deadline for filing your sales tax, the governing state that you haven’t paid tax to should send a warning letter to your business. This assesses the situation, stating how much the state believes you owe in tax and what will happen if you don’t pay it. They may also set out deadlines for your payments, explaining when your business will incur consequences.
The best response to a warning letter is to sort out your sales tax as soon as possible and resolve the issue. If this isn’t possible for any reason, you may want to organize a meeting with the sender of the warning letter or someone else from the department handling your sales tax. This allows you to explain your circumstances and potentially arrange deadlines that your business can meet instead, although this isn’t guaranteed.
- Gain interest
For most tax areas, if your business doesn’t respond to the warning letter by the specified deadline, you’ll start gaining interest on the tax you owe. This may be at a standard rate until another deadline or steadily increase as more time passes, meaning the longer you delay, the more you’ll owe. The rate of interest should be set out in your warning letter or you can find out by looking online or asking the state department who sent your warning letter.
You may be able to negotiate your interest rate with your state and set up a payment schedule. Alternatively, you could use a PandaDoc settlement agreement template to spread the cost of sales tax over a longer period. However, this requires you to meet with a representative, and it shouldn’t be assumed that this will be accepted. The longer you leave it, the less likely you’ll be able to minimize the tax you owe. Instead, aim to repay what you owe as soon as possible to limit the added interest.
- Civil penalties
The longer you leave it without paying sales tax, the more serious the consequences. Even if you intended to pay the tax but missed the deadline or weren’t sure about collecting sales tax for selling online, you may be liable to civil penalties. As mentioned above, this could incur interest on your owed sales tax or you could be faced with a standard rate penalty charge to pay to your state depending on regulations in your area.
Often there is a distinction between whether your non-compliance is in not filing your sales tax or not paying it. There are different deadlines to be aware of both for filing and paying your sales tax too. Therefore, you must double-check your paperwork when submitting it, ensuring it accurately shows how you’ve collected, stored, and paid your sales tax. This helps to show that it was an honest mistake rather than an intentional breach of sales tax legislation.
- Criminal penalties
Harsher than the civil penalties, criminal penalties apply to those businesses that were aware they owed sales tax and may have even collected it, but intentionally didn’t pay it. Likewise, intentionally creating misleading or fraudulent paperwork for your sales tax can lead to criminal penalties. These penalties are significantly harsher, due to the misconduct surrounding the payment of sales tax as compared to failure to comply with deadlines.
Although there is variation in the penalties depending on your state, these tend to be hefty fines or potential imprisonment. In many states, intentionally not paying sales tax is classified as a felony so the risk of imprisonment is real. Even if you do avoid imprisonment, the fines can be up to $100,000 in some states for corporations willfully failing to comply. With this in mind, paying the sales tax to begin with would be a lot cheaper and less risky for your business.
The consequences of non-compliance could also land your business in a lawsuit, being litigated by the state. This means your company is taken to court to be sued, meaning you’ll end up paying far more than the initial sales tax as well as having to pay for your legal representation. Lawsuits generally are only applied when your business intentionally avoids paying sales tax or creates misleading paperwork to benefit your company unfairly.
Lawsuits can also cause reputational damage to your business, causing customers to lose trust in your company and potentially impacting your revenue. Particularly for larger corporations, lawsuits can create a lot of negative press coverage which can also translate into negative online and in-person comments from the public. This can have long-lasting effects on your target market, as it drives them to other more reliable and honest businesses.
Tips for sales tax compliance
Managing a business can be hard work as there’s so much to oversee. Within this, sales tax compliance can get put off or overlooked. Delegating a specific employee or team to organize your business finances and prepare your sales tax returns can take these jobs off your hands. This also means you have the resources in place to complete the paperwork properly, stick to the various deadlines, know what your state rules are and comply with them.
Of course, we’re big fans of automating the sales tax compliance process. You can do this with tax automation software that connects to your online store, payment processors, and other platforms you use to run your business. Automating with the right tool means that all your tax calculations are accurate, your tax records are up to date, and your business can access all of this information in an instant. It saves time and relieves stress, knowing a secure database is monitoring and running this process for you.
Sometimes finances and sales tax require an expert and, in these situations, your business should outsource. Finding someone who already understands sales tax laws and regulations can make it easier to grasp what’s required from your business and how to submit this to the state. For those of you who'd rather leave tax returns to professionals, Quaderno can connect you with a verified tax filing service!
How to automate your sales tax compliance now
Sales tax doesn’t have to be scary or stressful for your business. If managing sales tax by yourself is overwhelming, then you should consider tax compliance software that will monitor your sales tax liabilities automatically.
Quaderno is a “set it and forget it” solution to your sales tax woes. We don’t register your business for you, but once you set up your tax settings in Quaderno, the app will:
- Calculate the correct tax amount on every sale and collect it automatically.
- Keep your tax registrations in order, with the information easily at hand.
- Automatically alert you to any changes in tax rate.
- Monitor your sales around the world so you know where you’re growing.
- Alert you when you might be liable for taxes in a new place, so you can register in time.
- Generate instant reports so you can see how much sales tax, VAT, or GST you’ve collected in each jurisdiction.
- Store all of this data securely for as long as you need.
If you’re curious how the software can help automate your tax processes and transform your growing business, try a risk-free trial of Quaderno.
Yauhen Zaremba - Director of Demand Generation
Yauhen is the Director of Demand Generation at PandaDoc, all-in-one document management tool for almost all document types including this PandaDoc sponsorship proposal template. He’s been a marketer for 10+ years, and for the last five years, he’s been entirely focused on the electronic signature, proposal, and document management markets. Yauhen has experience speaking at niche conferences where he enjoys sharing his expertise with other curious marketers. And in his spare time, he is an avid fisherman and takes nearly 20 fishing trips every year.
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.