Sales Tax Penalties: What Happens if I Fail to Pay Sales Tax?

Did you fail to file and pay your sales tax on time? Are you curious about sales tax penalties?

You must be curious about what happens when a business doesn’t pay sales tax. But as an ecommerce business, it is your duty to understand the consequences of not following sales tax rules. Otherwise, the repercussions might get unnecessarily too taxing for you (no pun intended).

All actions (and, for that matter, inactions) have consequences, so always ensure you are up-to-date in filing, collecting, and remitting sales tax. Read this article to learn more about how you can avoid being non-compliant.

 

What are the Common Ways Businesses Fail Sales Tax Rules?

Here are some ways ecommerce businesses stumble with the sales tax rules:

• Not registering for a seller’s permit once economic nexus has been met – You need to register for sales tax in every state where you have met nexus. If you don’t register, you will become non-compliant with the state laws and regulations and could be fined with sales tax penalties. 
• Failing to collect sales tax – you must ensure that you charge sales tax to all parties and on all taxable products or goods and services in states that you meet the nexus requirements.
• Charging the wrong tax rate – Sales tax varies from state to state, with other jurisdictions also collecting local sales tax. You have to make sure you know the different applicable rates and charge the correct amount.
• Not filing your sales tax returns on time – Every state has a specific due date for sales tax returns based on the frequency of the return. It is the business’s responsibility to file sales tax returns on time.
• Failing to pay sales tax – If you don’t remit the sales tax you collected to the respective state governments, you might face unfortunate consequences like paying fines or, in extreme cases, legal litigation for civil or criminal offenses.

 

What are the Possible Outcomes if a Business Fails to Collect, Report, and/or Remit Sales Tax? 

Here are some of the ways failure to report and/or remit sales tax may cost your ecommerce business:

 

Accumulate Tax Debt

Before anything else, you should know when your business meets economic nexus in a state, as this would be the baseline that the state governments will use to determine how much your tax obligations are.

Think about it this way: your ecommerce company had already met economic nexus in October 2018 in the state of Wisconsin. Then, you are already required to apply for a seller’s permit and begin collecting sales tax.

But if, for one reason or another, you only started to collect in June 2022. You will also have to pay the total sales tax amount, including penalties and interests that may apply, from your own pocket.

That’s why if you don’t start collecting sales tax from the time you meet economic nexus, you are, in fact, jeopardizing your business’ funds. And if you continue to neglect this, the debt can grow bigger and bigger until it becomes challenging to pay it off.

 

Penalties and Interests

As state governments are always quick to assume “willful neglect” of businesses that fail to submit and/or remit their sales tax dues, they may impose penalties for non-compliance with sales tax rules. The penalties may include fines, additional interests on top of the late charges, and even suspension of business permits in extreme cases, depending on the severity of the offense.

 

State Audit and Back Taxes

If you keep delaying compliance with your sales tax obligations, sooner or later, you may receive an audit from state governments or other tax authorities, which will examine your financial records and check the extent of your non-compliance. If more discrepancies are found, you may be charged with additional penalties, back taxes, and interests on top of the amount you originally owed, which might hurt, especially if you are a startup company.

 But here’s some good news for you: TaxHero offers Back-tax Strategy and Audit Support services to help you streamline your sales tax compliance. You may talk with our CEO to discuss your options and a way out of your sales tax debacle.

Legal Consequences

Harsher penalties await those who continue to avoid filing and paying their sales tax, even after numerous attempts by the state governments to reach and remind them of their obligations.

You may also be liable to civil and/or criminal penalties, including prison time and additional late payment charges.

 

Reputational Damage

Sales tax non-compliance may greatly hurt your ecommerce business’ reputation. Customers may lose their trust or brand loyalty to your company if they find that you are not following sales tax regulations.

 

How Will State Governments Try to Collect Your Sales Tax Obligations?

Here are some of the ways state governments will try to reach you to remind you of your sales tax dues:

 

Notice of Non-Compliance

If you miss your deadline for filing or remitting your sales tax, the state where you are liable will send you a notice of non-compliance, reminding you of your obligations and the possible repercussions if you fail to file the return or pay your dues.

The letter will state how much you owe in tax and what could happen next if the notice remains unheeded. It may also include a deadline for your payments, explain when your business will incur interest, and also include any penalty being charged.

 

Gain Interest

If you fail to respond to the warning letter sent out by the state government and still do nothing to settle your sales tax dues, you will begin incurring interest on the tax you owe.

 

Demand for Payment

If the initial notice of non-compliance goes unnoticed and you still do not make an effort to settle your obligations, the state government may issue a demand for payment. This is more formal than the first notice sent to you, which is why it is wise for you not to ignore this any longer.

The demand will include the specific deadline by which the payment must be made.

 

Collection Efforts

If you still did not respond to the payment demand, the state may employ collection efforts through bank levies, wage garnishments, seizure of assets, and others to settle your tax debt.

Some states may also place tax lien on your properties, which could affect your ability to sell or transfer any of your assets until the tax debt is paid.

 

Revocation of Permits and Licenses to Operate

Some states may suspend or unilaterally revoke your business permits or licenses if you fail to comply with your sales tax obligations. This could affect your ability to legally operate as a business.

 

Legal Action

Harsher penalties await those who continue to avoid filing and paying their sales tax, even after numerous attempts by the state governments to reach and remind them of their obligations.

You may also be liable to civil and/or criminal penalties, including prison time and additional late payment charges.

 

How Does Each State Fine Those That Failed to File and Pay Sales Tax?

Civil penalties may be slapped if you are, in good faith, tried to comply with sales tax regulations but encountered a curveball in meeting the deadline or remitting the payment on time.

Meanwhile, criminal penalties may apply if you’re found to:

• Willfully delayed payment of any sales tax due or intended to evade payment
• Willfully falsified a return or submitted a fraudulent one
• Falsely executed or signed a public document intended to cover up a material fact relating to tax
• Knowingly filed a return with an intent to deceive the state government of your tax liability

Below are the civil and criminal penalties for each state government:

 

STATE PENALTY FAILURE TO FILE SALES TAX RETURNS FAILURE TO FILE COLLECTED SALES TAX Alabama Civil Greater of 10% of the total sales tax due or $50 10% of the total sales tax due Criminal Misdemeanor Felony Alaska not applicable Arizona  Civil 4.5% of the total sales tax due per month or fraction 0.5% of the total sales tax due per month or fraction (maximum of 10%)  Criminal Class 5 Felony Class 5 Felony Arkansas  Civil 5% of sales tax due per month or fraction (maximum of 35%) 5% of sales tax due per month or fraction (maximum of 35%) Criminal Class D Felony Class C felony Class D Felony  Class C Felony California Civil 10% of the total sales tax due 10% of the total sales tax due  Criminal Misdemeanor Felony Misdemeanor Felony Colorado Civil Greater of 10% of the total sales tax due, in addition to 0.5% of the tax due per month (maximum of 18%) or $15 Greater of 10% of the total sales tax due, in addition to 0.5% of the tax due per month (maximum of 18%), or $15 Criminal Misdemeanor Class 5 Felony Connecticut  Civil Greater of 15% of the total sales tax due, or $50 Greater of 15% of the total sales tax due, or $50  Criminal Up to $1,000 fine and/or up to one (1) year of imprisonment Up to $1,000 fine and/or up to one (1) year of imprisonment Delaware not applicable District of Columbia  Civil 5% of the total sales tax due per month or fraction (maximum of 25%) 5% of the total sales tax due per month or fraction (maximum of 25%)  Criminal Misdemeanor Felony Misdemeanor Felony Florida  Civil 10% of the total sales tax due (minimum of $50) 10% of the total sales tax due (minimum of $50)  Criminal Third-Degree Felony Misdemeanor First, Second, or Third Degree Felony, depending on the total sales tax due Georgia  Civil Greater of 5% of the total sales tax due or $5 per 30 days (maximum of 25% or $25) Greater of 5% of the total sales tax due or $5 per 30 days (maximum of 25% or $25) Criminal High and Aggravated Misdemeanor Felony High and Aggravated Misdemeanor Felony Hawaii  Civil 5% of the total sales tax due per month or fraction (maximum of 25%) Up to 25% of the sales tax due  Criminal Misdemeanor Class C Felony Embezzlement Idaho  Civil Greater of 5% of the total sales tax due per month (maximum of 25%) or $10 0.5% of the total sales tax due per month (maximum of 25%) Criminal Misdemeanor Felony Illinois  Civil 2% of the total sales tax due (maximum of $250) 2% of the total sales tax due within 30 days, or 10% of the total sales tax due if more than 30 days but within 90 days or 15% of the total sales tax due if more than 90 days but within 180 days or 20% of the total sales tax due if more than 180 days Criminal Class 4 Felony for failure to file sales tax Class 3 Felony if total sales tax due is $300 or more Class 4 Felony for failure to file sales tax Class 3 Felony if total sales tax due is $300 or more Indiana  Civil 10% of the total sales tax due 10% of the total sales tax due  Criminal Class A Misdemeanor Class D Felony Iowa  Civil 5% of the total sales tax due 5% of the total sales tax due  Criminal Fraudulent Practice – For willful failure to file sales tax Class D Felony – Attempt to evade Fraudulent Practice – For willful failure to file sales tax Class D Felony – Attempt to evade Kansas   Civil 1% of the total sales tax due per month or fraction (maximum of 24%) 1% of the total sales tax due per month or fraction (maximum of 24%)  Criminal $500 to $10,000 fine and/or one (1) to six (6) months imprisonment $500 to $10,000 fine and/or one (1) to six (6) months imprisonment Kentucky   Civil Greater of 2% of the total sales tax due per 30 days, or fraction (maximum of 20%) or $10 Greater of 2% of the total sales tax due per 30 days, or fraction (maximum of 20%) or $10  Criminal Class D Felony Class D Felony Louisiana   Civil 5% of the total sales tax due per 30 days, or fraction (maximum of 25%) 5% of the total sales tax due per month or fraction (maximum of 25%)  Criminal Up to $1,000 fine and/or up to one (1) year imprisonment  If total sales tax due exceeds $1,000, up to $2,000 fine and/or up to two (2) years imprisonment Up to $1,000 fine and/or up to five (5) years imprisonment Maine  Civil Greater of 10% of the total sales tax due or $25 1% of the total sales tax due per month or fraction (maximum of 25%)  Criminal Class D Crime; Succeeding offenses are Class C Crime Class D for intent to evade, Class C if the total sales tax due is $2,000 or more, or for succeeding offenses  Class B for the subsequent offense and total sales tax due is $2,000 or more Class D Crime; Succeeding offenses are Class C crime Class D for intent to evade, Class C if the total sales tax due is $2,000 or more, or for succeeding offenses  Class B for the subsequent offense and total sales tax due is $2,000 or more Maryland  Civil not applicable Up to 10% of the total sales tax due  Criminal Misdemeanor Misdemeanor Massachusetts  Civil 1% of the total sales tax due per month or fraction (maximum of 25%) 1% of the total sales tax due per month or fraction (maximum of 25%)  Criminal Misdemeanor Felony Michigan  Civil 5% of the total sales tax due if filed within two months and An additional 5% of the total sales tax due per month or fraction (maximum of 25%) 5% of the total sales tax due if filed within two months and An additional 5% of the total sales tax due per month or a fraction of it after two months (maximum of 25%)  Criminal Felony Misdemeanor Felony Misdemeanor Minnesota  Civil 5% of the total sales tax due 5% of the total sales tax due per month or fraction (maximum of 15%)  Criminal Felony if there is a willful attempt to evade Misdemeanor if there is none Gross Misdemeanor – Knowing failure Felony – willful attempt to evade Mississippi  Civil 10% of the total sales tax due 10% of the total sales tax due for first offense, 15% of the total sales tax due for second, 25% of the total sales tax due for the third and 50% of the total sales tax due for succeeding offenses  Criminal Misdemeanor Misdemeanor Missouri  Civil 5% of the total sales tax due per month or fraction (maximum of 25%) 5% of the total sales tax due  Criminal Up to $10,000 fine and/or up to five (5) years imprisonment Up to $10,000 fine and/or up to five (5) years imprisonment Montana   not applicable Nebraska  Civil Greater of 10% of the total sales tax due or $25 Greater than 10% of the total sales tax due or $25  Criminal Class IV Misdemeanor Class IV Felony for attempt to evade Class IV Misdemeanor Class IV Felony for willful failure to pay Nevada  Civil 10% of the total sales tax due Up to 10% of the total sales tax due Criminal Misdemeanor Misdemeanor New Hampshire  not applicable New Jersey  Civil $100 with an additional 5% of the sales tax due per month or fraction (maximum of 25%) 5% of the total sales tax due  Criminal Failure to file: disorderly person offense Failure to file with intent: Third-degree crime Disorderly Person Offense – Reckless or negligent failure to pay Third-Degree Crime – Failure to pay with intent Second-Degree Crime – Failure to pay $75,000 and total sales tax due New Mexico  Civil Greater of 2% of the total sales tax due per month or fraction (maximum of 20%) or $5 Greater of 2% of the total sales tax due per month or fraction (maximum of 20%) or $5  Criminal Felony Felony New York  Civil 10% of the total sales tax due for the first month plus 1% for every month or fraction (maximum of 30% and minimum of $50) if late by a month or less 10% of the total sales tax due for the first month plus 1% for every month or fraction (maximum of 30%)  Criminal Misdemeanor Misdemeanor Class E Felony for attempt to defraud the state or a political subdivision of at least $10,000 North Carolina  Civil 5% of the total sales tax due if not more than one month and an additional 5% for each month or fraction (maximum of 25% in aggregate) or $5 or which is greater 10% of the total sales tax due, $5 minimum Criminal Failure to file: Class 1 Misdemeanor Attempt to evade: Class H Felony Failure to pay: Class 1 Misdemeanor Attempt to evade: Class H Felony North Dakota  Civil Greater of 5% of the total sales tax due per month or fraction (maximum of 25%) or $5 Greater of 5% of the total sales tax due or $5  Criminal Class A Misdemeanor Class A Misdemeanor Ohio  Civil Greater of 10% of the total sales tax due or $50 Greater of 10% of the total sales tax due or $50  Criminal $100 to $1,000 fine and/or up to one (2) months imprisonment Class 4 Felony Oklahoma  Civil 25% of the total sales tax due if not filed within ten days after receipt of written demand 10% of the sales tax due after 15 days from the deadline  Criminal Misdemeanor – Intentional disregard Felony – Intent to defraud/evade Misdemeanor – Up to $500 fine for 1st offense Up to $1,000 fine and/or up to one (1) month imprisonment for the succeeding offenses Oregon  not applicable Pennsylvania  Civil Greater of 5% of the total sales tax due per month or fraction (maximum of 25%) or $2 3% of the total sales tax due per month (maximum of 18%)  Criminal Misdemeanor Misdemeanor Charges of Embezzlement, misapplication of entrusted property, and/or theft for failure to remit collected tax Rhode Island  Civil 10% of the total sales tax due 10% of the total sales tax due  Criminal Felony Up to $10,000 fine and/or up to one (1) year imprisonment South Carolina  Civil 5% of the total sales tax due if not more than a month, with an additional 5% for each month or  fraction (maximum of 25%) 0.5% of the total sales tax due for the month, with an additional 0.5% for each month or fraction (maximum of 25%)  Criminal Up to $10,000 fine and/or up to one (1) year imprisonment Up to $10,000 fine and/or up to one (1) year imprisonment South Dakota  Civil Greater of 10% of the total sales tax due or $10 not applicable  Criminal Class 1 Misdemeanor Class 6 Felony for failure to file two (2) or more within a year Class 1 Misdemeanor Class 6 Felony – Failure to pay two (2) or more within a year Tennessee  Civil Greater of 5% of the total sales tax per month or fraction (maximum of 25%) or $15 Greater of 5% of the total sales tax due per month or fraction (maximum of 25%) or $15 Criminal Class E Felony Class A Misdemeanor if total sales tax due is less than $500 Class E Felony Class A Misdemeanor if total sales tax due is less than $500 Texas  Civil Greater of 5% (additional 5% if more than a month late) or $1 Greater of 5% (additional 5% if more than a month late) or $1 Criminal Class C Misdemeanor Class B Misdemeanor and/or up to $2,000 fine for second offense Class A Misdemeanor and/or up to $4,000 fine for the succeeding offenses Class C Misdemeanor if total sales tax due is less than $10,000 State jail felony if total sales tax due is between $10,000 to $20,000 3rd Degree Felony if total sales tax due is between $20,000 to $100,000 2nd Degree Felony if total sales tax due is $100,000 or more Utah  Civil Greater of 10% of the total sales tax due or $20 Greater of 2%, 5%, or 10% of the total sales tax due or $20 Criminal Third Degree Felony – $1,000 to $5,000 fine Second Degree Felony – $1,000 to $25,000 fine Vermont  Civil 5% of the total sales tax due per month or fraction (maximum of 25%) 5% of the total sales tax due per month or fraction (maximum of 25%) Criminal Up to $1,000 fine and/or up to one (1) year imprisonment  Up to $10,000 fine and/or up to three (3) years imprisonment if total sales tax due exceeds $500 Up to $1,000 fine and/or up to one (1) year imprisonment  Up to $10,000 fine and/or up to three (3) years imprisonment if total sales tax due exceeds $500 Virginia  Civil 6% of the total sales tax due per month or fraction (maximum of 30%) or $10 6% of the total sales tax due per month or fraction (maximum of 30%) or $10 Criminal Class 1 Misdemeanor Class 1 Misdemeanor Washington  Civil 5% of the tax the Department of Revenue has determined to be due To increase to 15% if still not paid on the date in the notice To increase to 25% if not paid within 30 days (minimum of $5) 9% of the tax the Department of Revenue has determined to be due To increase to 19% if still not paid on the date in the notice To increase to 29% if not paid within the next month following the due date (minimum of $5) Criminal not applicable not applicable West Virginia  Civil 5% of the total sales tax due per month or fraction (maximum of 25%) 0.5% of the total sales tax due per month or fraction (maximum of 25%) Criminal Misdemeanor – $100 to $2,500 fine Misdemeanor – $100 to $2,500 fine and/or up to six (6) months imprisonment Misdemeanor – Failure to pay tax collected Felony – Failure to pay tax collected Wisconsin  Civil 5% of the total sales tax due per month or fraction (maximum of 25%) 25% of the estimate if the sales tax return is not filed 5% of the total sales tax due per month or fraction (maximum of 25%) Criminal Misdemeanor Felony or Misdemeanor Theft – depending on the amount of total sales tax involved Wyoming  Civil $10 $25 if not filed within a month after the receipt of the notice to file 10% of the total sales tax due Criminal Misdemeanor Misdemeanor – Failure to collect and pay Misdemeanor – Failure to remit taxes collected Felony – Failure to remit taxes collected

 

Can I Ask for the Penalties and Interests to be Waived?

However, don’t fret just yet. Although state governments are quick to impose interests and penalties on sales tax non-compliance, they are also lenient, especially if it’s an honest mistake or if it’s your first time filing and collecting sales tax returns. You need to show that a “reasonable cause” exists in your case, and they may consider waiving the penalties or, on rare occasions, including the interest.

Applications to waive differ from one state to another, so it is important that you consult with the local Department of Revenue where you owe sales tax. If you find this still too complicated and difficult, TaxHero can help you with this.

 

How Do I Avoid Sales Tax Penalties in the Future?

Understandably, filing and remitting sales tax might be overwhelming, especially to ecommerce businesses with a presence in multiple states and have economic nexus.  However, as responsible business owners, you should be on the lookout if ever you have sales tax obligations so that you will avoid getting tagged as non-compliant and avoid the consequences.

If you need help with your sales tax concerns, TaxHero can help you so that you and your business don’t suffer the harsh consequences.

 

Frequently Asked Questions

Can I request an extension if I can’t file my sales tax return on the due date?

The simple answer is no. Although most state’s Department of Revenue typically gives due consideration for good causes, for example, natural disasters, extensions are generally not allowed. In this case, failure to file the sales tax return on time may incur late charges.

 

Do I have to file a sales tax return even on periods where I made no sales?

Yes. A sales tax return must always be filed, even on periods where no tax is due. If you made no sales on a particular period, put zero on the total tax due line and then submit it to the state government.

 

Can I file my sales tax return online? 

Yes, as all states, excluding those that don’t collect, have online submissions for sales tax returns, whether through their websites or email.

 

Want a way out of your sales tax debacle? TaxHero got you!

If you want to avoid facing the consequences of failing to comply with the sales tax rules, TaxHero’s team of sales tax experts and certified public accountants are here to help you. You may book a time with our CEO to help you with your concerns so you will have nothing to worry about more than your business’ success.