When it comes to shutting down sales tax accounts, it’s important to ensure you know that each account needs to be dealt with separately. A common misconception is that dissolving an LLC will automatically close down any open sales tax accounts, but this is not the case. In this blog, we explore the best practices and important steps to make sure your sales tax accounts are closed correctly.
Filing all Outstanding Returns
Before you deregister any sales tax account, it is important to make sure all outstanding filing periods leading up to the closure date have been filed. E.g., if you close your business from Dec 2024 but the last period filed for was Jun 2024, you would need to file July, Aug, Sep, Oct, and Nov 2024 if the filing requirement is monthly, or Sep 2024 if the filing requirement is Quarterly, etc.
Failure to do this can result in:
- Specific periods accruing fines and penalties for not being filed.
- States chasing you with continual letters.
- Debt collectors coming after you for periods that have accrued fines owed to the state.
Paying all Outstanding Sales Tax and Penalties
Each state has its own sales tax account closing procedure. Some states will allow you to close an account with an outstanding balance, but others will not. You must pay off any remaining sales tax and penalties to ensure the account is properly shut down. Failure to do so will result in:
- Account closure not approved, you may need to resubmit it, which is going to take more of your time.
- Tax liens may be placed on your business, and your bank assets may be frozen.
- Significant penalties and interest may be added to your account.
Ensuring All Records Are Kept and Up to Date in Case of an Audit
It is good practice to keep records of all steps taken in looking after your business to make sure you’re prepared for any kind of business audit. Some examples of this would be:
- Keeping track of any sales made and sales tax collected, and declaring this information during filing.
- Having a spreadsheet with all state logins and passwords, and also recording any confirmation codes from the states in regards to filing and closing accounts.
- Dating each transaction and making notes is also a great way of staying on top of things.
Submitting Closures for the Correct Date, Filing Final Returns
Sometimes, when closing accounts, people make mistakes that can lead to problems and sales tax accounts not being closed properly. One of the most frequent errors people make is entering the wrong date for their closure date. E.g., it may be May 4th and they close the account from May 31st, not realizing that the whole of May then needs to be filed for. Or they accidentally put Dec 2025 as the closure date for an account that closed Dec 2024. The state would still be expecting an entire year of filing for this account.
- Some states have an option for a final filing, which also should lead to the shutdown of a sales tax account.
- Double-check everything and don’t assume an account is closed until you have solid confirmation.
- Check for emails from the state and get confirmation codes if you are still not sure, you can even call the state up.
- Always pop back into the accounts the following month, as most sites will show open or closed on the main account pages.
Double-checking if You Need an Account Open
Some people don’t think they need sales tax accounts open with certain states, so they just close them down. It is important to do your due diligence and know what is required of your business.
If you have Nexus in a state OR require a resale certificate, think twice before shutting your sales tax account down. What constitutes NEXUS is:
- Physical Presence: If you have an office, warehouse, employees, inventory, or any property in the state, it counts as physical presence, which can cause nexus in the state.
- Economic Presence: This means exceeding a certain dollar amount of sales (often $100,000 or $500,000) or number of transactions (e.g., 200 transactions) to customers in the state, common in sales tax nexus.
- Affiliate or Click Through: Affiliate nexus is having people or businesses in the state that help establish or maintain your business. Click Through nexus is when you have agreements with in-state residents who refer customers via website links or other digital methods, especially if a commission is paid.
There are also a few other, less commonly known triggers for Nexus that you should look out for when closing your sales tax account. These include:
- Attending or hosting trade shows
- Conducting in-person training or services
- Delivering goods in company-owned vehicles
- Local advertising or marketing presence
- Licensing software, patents, or trademarks used in-state
The last tricky situation that can cause a snag when shutting down a sales tax account is something called Trailing Economic Nexus. The way this works is in some cases, even if you may no longer have economic nexus with a state, you may have trailing economic nexus. An example of this would be:
- In 2024, your business sells $150,000 of goods to California customers, triggering economic nexus in California. But in 2025, sales drop to $80,000 below the $500,000 threshold for California. However, California requires businesses to keep collecting and filing for all of 2025 because of trailing nexus rules.
When Should You Close an Account?
Although you need to be careful not to close sales tax accounts that are required to be open, it is recommended to close those that are not needed, which can lead to unneeded extra work and time wasted. You should close an account if:
- The business has been closed
- The business has been sold
- The business no longer has any type of Nexus
Final Thoughts
Although there is a lot to learn and be aware of when running a business. It’s just good practice to research all states’ rules when it comes to filing and closing sales tax accounts to avoid being caught out. Don’t be afraid to ask questions or seek the advice of a specialist like RJM Tax Exemption, who handles these issues on a day-to-day basis. Reach out to the experts at RJM Tax Exemption today.
