Sales tax problems: nexus, audits, unremitted tax and more

Nexus is the connection that lets a state require you to collect its sales tax. Since the Supreme Court's 2018 South Dakota v. Wayfair decision, states can base nexus on sales into the state alone. A business that crossed a state's threshold without registering may owe that state's tax for past sales — even though it never charged customers.

A voluntary disclosure agreement lets a business that should have been collecting a state's sales tax come forward before the state contacts it. In return for registering, filing and paying tax plus interest for a limited lookback period, states generally waive penalties for that period and tax for earlier periods. Eligibility usually ends once the state reaches out first.

Sales tax collected from customers belongs to the state from the moment you collect it. Keeping it — even to cover payroll or rent — is treated far more seriously than failing to collect. States typically assess penalties and interest, can revoke your permit, and in most states can hold responsible owners or officers personally liable. The way out starts with filing and paying current periods.

A sales tax audit is the state's review of whether a business collected and paid the right tax on its sales and paid use tax on its purchases. Auditors compare returns with sales records, exemption certificates and purchase invoices. Findings usually come from undocumented exempt sales, untaxed purchases and gaps between records and returns.

Use tax is owed when a business buys taxable goods without paying sales tax and uses them in a state with a sales tax. Because sellers outside the state often don't charge tax, businesses build up unpaid use tax on equipment, supplies and software without realizing it — and auditors look for it.

Marketplace facilitator laws make large online platforms collect and remit sales tax on sales they process for third-party sellers. That removes much of the burden for marketplace-only sellers, but it doesn't cover your own website, wholesale or in-person sales — and some states still count marketplace sales toward your nexus threshold.

Forming an LLC or corporation usually protects owners from business debts, but many states make an exception for sales tax. A responsible person — someone with authority over which bills get paid — can be held personally liable for tax the business collected or owed and didn't pay, typically after the business closes and only if the failure was willful.

In many states, a buyer who purchases a business or its inventory can inherit the seller's unpaid sales tax unless the buyer withholds enough of the purchase price or gets a clearance from the state. It's one of the few situations where you can owe tax you never collected, so it matters for both buyers and sellers.

A seller's permit is what makes it legal to sell taxable goods in a state. States can refuse, suspend or revoke it — often for unfiled returns or unpaid tax — and selling without one can bring added penalties. Reinstatement usually means filing missing returns and paying or arranging to pay the balance, sometimes plus a security deposit.