Unless you live in a state or a country that does not impose sales tax, you must be aware of the strict obligations regarding its fulfillment and payment.
Yet, many small businesses tend to take the sales tax for granted. It is also difficult for them in the know of all legislation and bills passed related to their industry, which is why sales tax often goes under the radar. A balancing act may be difficult to carry out.
But this is exactly what separates successful businesses from ones which are destined to fail. A small business which adapts to changes, and is aware of everything related to the industry is bound to last longer.
While adapting to changes may be a key requirement for all businesses in an industry it holds more significance in the case of small businesses. You see for a large and established firm adjusting to the changes may not be a tough act to follow. These firms have enough resources to hire experienced professionals to design a strategy and to pilot their ship to the coast.
Many entrepreneurs blame the lack of time and energy as a big reason for not giving extra attention to pending sales tax. However, if you as an owner of a small scale business does this, and ignore the significance of the sales tax, you will be left with no other option than scrambling to deal with the next letter your local tax authority sends you.
In this article today, we will discuss the hazards of ignoring sales tax.
Why Be Compliant?
We do understand that at the end of the day the decision to be compliant or not is a judgment call. However, there are reasons we urge compliance to sales tax regulation, especially for newly established businesses.
Neglecting to pay sales tax can have a cumulative effect at the point of sale for a business
Not being sales tax compliant can cost you money in the long run, especially if you plan on selling your business in the future. A business which collects sales tax from each transaction incurs the cost of collection and remittance which would not be more than a few thousand dollars.
At the point of sale of a business, due diligence is performed on the financial activities by the party purchasing it. This is done because the new owners are now held accountable for all business decisions made in the past. Therefore, during the transferring of all business assets, the buyer also asks for a sales tax clearance certificate.
A sales tax clearance certificate is handed over to a business by the state it functions in. This certificate is a legal indication of the business being clear of all sales tax charges i.e. the business has paid the sales tax on a regular basis and that the owners selling the business are not liable to pay any sales tax.
Potential buyers are concerned about sales tax because they don’t want to incur additional liabilities. This is the reason why they need a guarantee that they won’t have to pay taxes for any period prior to ownership.
If a business has not paid sales tax it won’t be eligible for the sales tax clearance certificate. In this case, the sales tax will be calculated on the basis of all the sales made during the history of the business, the final amount will then be deducted from the initial sale price agreed between the buyer and the seller.
This whole exercise can cost a business a fair chunk of the decided sale price. Therefore, rather than ignoring sales tax it is better to clear all dues in a timely manner.
It becomes impossible to sell through larger distribution channels
All small scale businesses need the support of bigger distribution channels to reach a larger audience if they are to grow. When a business is not sales tax compliant, then it is difficult for them to tap into larger distribution channels such as Walmart or other retailers to sell products.
What Can Possibly Happen If I Do Not Pay My Sales Tax
This is one question that owners of newly formed businesses often wonder about. One reason why small scale businesses carry on ignoring sales tax is that they are not aware of the consequences. The following are the repercussions of ignoring sales tax.
- The tax authorities may force you to pay the whole uncollected tax out of pocket
With state governments realizing the huge potential of revenue they can generate through sales tax, special emphasis has been leveled at imposing sales tax.
Therefore, if you have a sales tax obligation but you are not remitting it to the state, you run the risk of being forced to pay what you owe them with penalties later.
As long as you continue to neglect collection and remittance, you will run the risk of being audited and penalized. With the changing financial landscape and the immense potential that the eCommerce industry holds, the chances of these penalties being levied could soon be true.
- In case of late remission, you could be asked to pay interest fees
If you intend on accumulating sales tax and paying it back at some point down the road, then you need to be wary that for all late payments, interest will be charged on any of the tax due. On average, states charge a 6.4 percent interest penalty on late remission.
Additionally, some states also charge a flat rate of the original tax as a penalty on late sales tax remission. If you are late even by a day in paying your tax, you will be charged a penalty by the state. The average sales tax penalty states levy on sellers is 17.85%
How Not Paying Sales Tax Affects Your Business Operations
So far in this article, we have only discussed the costs of non-compliance, however not paying your sales tax also has an effect on the financial aspect of the business. Ignoring sales tax or accumulating sales tax for later payment can lead to problems in creating the financial structure of the business.
Without a proper understanding of sales tax rules, you may be making decisions which are good for marketing or sales, but bad for business down the road. In such cases, it is important to also be aware of problems that ignoring sales tax can cause your business.
Below we list down segments or activities of your business which can get affected in case of a neglecting attitude towards sales tax.
Keeping a record of the sales tax helps us in the long run. Rather than making adjustments after making an accumulated payment which includes the penalty and the interest levied for late remission it is better to record timely the proceeds paid for sales tax.
Record keeping and ensuring that all accounting details are under check are hugely important for newly formed businesses. We have seen a lot of businesses fail because of their inability to make adjustments in their books according to the transactions carried out.
The phrase a stitch in time saves nine holds true for all walks of life. Owners of newly formed businesses will agree that managing a whole business and ensuring that everything goes to plan is a momentous task. Owners of new business are often not able to take time out for other things
Owners of newly formed businesses prioritize sales, revenue generation, and marketing and in their effort to improve the identity of the business they tend to completely ignore the sales tax. For a business to be sales tax compliant it has to register itself in the state where it carries out its operations.
This can be a pretty boring task especially if you already have something highly important and challenging to deal with. However once done the process of remitting sales tax can be automated making your life simpler.
However, you are in for a long haul if you have not offered to make your business sales tax compliant even after your business has been operating for quite some time now. In this case, lots of agreements and contracts will be signed between you and the state which can be draining and time-consuming.
Therefore making your business sales tax compliant at the earliest opportunity is the way to go forward especially if you plan on avoiding needless hassles and saving time for later.
Yes, you heard it right, a business can lose its assets in case of inability to pay sales taxes. Once the state finds out that you have not paid taxes for years, it demands you to pay at the earliest. However, there have been cases when a business does not have the ability to pay back.
The state, although designed to protect and safeguard us can be pretty ruthless at times like these. If the business is deemed unfit to pay back the required sales tax, alternate methods are implemented to retrieve the accumulated amount from the business. This usually means taking control of the assets of the business.
Imagine working hard to setup a business and accumulate assets only for them to be taken over by the state. Losing control of assets is a heartbreaking ordeal for any business that too if it happens over taxes and non- payment of nominal remissions which could have easily been avoided.
Apart from the costs already discussed in this essay, there are other costs too. If the state decides to take legal action against you, things will get extremely tough as you will require an attorney to represent you. Any good attorney will cost a lot; this will obviously have an adverse effect on your business.
Not only does ignoring sales tax affect the financial costs of the business it also has an adverse effect on the owners, remember, it is not easy dealing with tax-related problems. Issues like these can be taxing and stressful not to forget that during the whole ordeal your attention is away from the day to day operations of the business.
One issue that is often overlooked, even when a business is under a state’s radar for ignoring sales tax is the loss to the credibility of the business. Negative attention has an adverse effect on the business leading to loss of potential clients and loss of sales.
Once a business loses credibility it is very difficult to regain trust. This case gets worse given the kind of attention. If for instance, the state decides to take you to court for this honest mistake, it will lead to lots of negative murmur about your business with people speculating different things about you.
Yes, we agree that reality and perception are two different things, but it is always perception that shapes an opinion.
Stop Ignoring Sales Tax
As business owners it is your right to make decisions in the best interest of the business. As advisors of many new startups and local online businesses, we are here to guide you on what could affect your business in both favorable and adverse manner. Ignoring sales tax will definitely have adverse effects on your business as explained in this article.
Reading this article we hope that you realize the importance of sales tax and the effect ignoring them has on your business. We also provide solutions to many other problems that newly formed businesses face.
At Fully Accountable we guide our readers on possible finance-related queries because we believe that a well-managed bookkeeping portfolio is a key indicator of the potential of a business and is a true reflection of the success that a business is bound to achieve over the years.