State Sales Tax Debt: 6 Reasons to Assess It Before Promising Other Creditors

When a business falls behind on its bills, the owner may try to minimize the damage by keeping up with payments to its most important creditors. But among those creditors that are deemed “less important” may be the state and local governments where the company operates. At first glance, that might seem like a reasonable approach. Keeping creditors happy to ensure that basic operations continue is certainly an understandable strategy. Unfortunately, though, the government has powerful tools at its disposal to collect unpaid debts like income, property and sales taxes - and the longer the business waits to address such debts, the worse the problems can get. Don’t go down that road. Before making promises to your suppliers, your lenders and your landlord, find out exactly what you owe in sales tax. Then you can make informed commitments. Here are six reasons why.

As a retailer or other business that collects sales tax from your customers and sends that revenue to the state, you are not simply a business owner. You are also what is called a trustee. Although the funds seem like your own when they are in your account, they are actually the state’s money. While it might make sense to postpone payment on a less significant bill, this money is the government’s by law. Texas lays it out in its statutes. Collected taxes are held in trust for the state. In fact, simply turning in a return that shows tax due is treated as a presumption that you took the money. If you want to say you didn’t collect it, you have to back that up with the paper to prove it.

Business owners of sole proprietorships, as well as officers of other entity types, often find that the government can come after them personally for unpaid sales taxes. Some statutes specifically say the “responsible person” can be held accountable. Texas applies personal liability to any officer, director, manager or employee, or partner, who exercises control or supervision over deciding whether or not to pay sales tax and willfully fails to pay it. California has it spelled out. Even years after a company is out of business, if people in charge knew they were supposed to pay the money and chose not to, they can be held accountable. The government has to be able to show the responsible individual intended to fail to pay the taxes. The state allows up to eight years for the government to go after business officials personally for sales tax debts that were clearly left unpaid by the corporation or LLC.

The state can even tell you that you can’t sell at all. “Seller’s permits,” as they are sometimes known, are the state’s ticket to ensuring that the money gets collected on all those retail sales. Not complying with sales tax law can lead to trouble with your seller’s permit. In California, the state can suspend or revoke the permit, for breaking any sales tax law, although the business gets at least 10 days’ notice of a hearing to make things right. New York is a case in point. Every seller is going to have to re-register for its Certificate of Authority, sometime between mid-2027 and the end of 2030. If you have an unpaid liability the state says is fixed and final, you could be refused. It’s important to be aware that if you agree on an installment plan for sales tax, that doesn’t pay the debt. The balance is still owed in full. New York makes it clear that paying on an installment plan, even if you’re not late, is not a reason to get a certificate of authority.

Even as your unpaid tax bills sit, they are not sitting still. While you may focus on the taxes themselves, penalties and interest pile up fast. The Golden State is clear. A business pays a 10 percent penalty on late sales tax, and interest runs from the original due date till it gets paid. Worst of all, the amount you owe becomes a tax lien the minute it’s late. New York lays out a very high annual rate of 14.5% on outstanding tax, and it can keep adding interest for years.

Bankruptcy is a tough one. Maybe you have been thinking that if the situation goes completely south, the business can file bankruptcy and liquidate, and the taxes will go away. Not necessarily. The law contains provisions designed to keep the government from losing out in business bankruptcies. Look at the Bankruptcy Code’s priorities. Sales taxes have the eighth spot, and these are “unsecured” claims. Once you hear “unsecured,” you start thinking you might get out from under them. You can’t. The law says if this is tax the debtor had to collect but didn’t hand in to the government, it does not get wiped out in a personal discharge. Whether the claim was filed or not doesn’t matter.

The last thing you need when you are trying to keep your business afloat is to promise payments to others and then find out they have to go toward a larger obligation. Remember those suppliers, the landlord and the bank? If you owe New York, its PAID program is a way to make things right with the state for a history of late tax payments. Once the assessments are fixed and final, on or by Sep. 1, 2026, a business can pay off the tax, as well as half the interest, and all the qualifying penalties are waived. That can be a big deal. You have to have the full discounted amount paid by December 31, 2026. Partial payments don’t qualify and e-payments can take up to 14 days to hit the agency’s account. If you have worked out an installment plan with the state, you can still use the program if you get the full discounted amount paid up by the deadline. If you make the payment under your business’s ID, that can also close any responsible person assessments you may have had under your own ID. New York lays this out clearly in its PAID information. If you overpay, the state does not give you a refund or credit. The money you’ve sent is gone. Take that into account when doing your math. Don’t let your obligations to others drain your cash so badly that this program slips through your fingers. It’s also a good idea to get things rolling sooner than later. Yes, the interest doesn’t cut off till the 31st, but lining up funds or financing takes time.

Be careful with all this. Check the details. First of all, make sure any assessments you plan to pay off are “fixed and final” and qualify for the program. And in many of these situations, look carefully at what payments you have already made on the tax that’s owed. This program does not generally cover other outstanding debts like withholding tax that is fixed and final. You’ll need to get all this straight with the state before you lay out promises to other people.