Sales tax issues can sneak up on even the most responsible business owners. One missed return can turn into two, and before you know it, you’re receiving state notices you’re worried to open. These problems can escalate quickly unless they’re addressed.
When sales tax returns go unfiled or unpaid, sales tax liens are one of the strongest tools a state can use. The good news is that sales tax liens don’t come out of nowhere. In this blog, we are going to look at what sales tax liens are, how they happen, what they mean for your business, and how to resolve them before they turn into a full-blown crisis.
What is a Sales Tax Lien?
You may be asking, “What is a sales tax lien?’ A sales tax lien is a legal claim a state places against your business, and sometimes the owner personally, when a company fails to file or pay sales tax that it was required to collect.
Sales tax is considered a ‘trust tax’, which means it is money collected and held from customers on behalf of the state. Therefore, states take missed filings and unpaid taxes very seriously. A sales tax lien is a public record that shows a state tax agency has a legal right to collect from your business assets because unpaid sales tax is owed.
Sales Tax Liens Affect Your Business
As a sales tax lien is a public record, it can have a detrimental effect on your business. It can:
- Impact on your credit scores and financing
- Lead to banks tightening their lending or shutting down your accounts
- Be viewable by sellers, landlords, and customers, leading to a loss of confidence in your business
- Lead to suspension or revocation of business licenses
- Mean personal liability for the business owner or responsible parties
A sales tax lien not only shows that your business owes money, but it also indicates that your business might be a financial risk.
Missed Sales Tax Returns Lead to Liens
Fortunately, a missed sales tax return doesn’t automatically trigger a lien, but it can set off a chain of events that leads to one. States rely heavily on sales tax revenue, and when a return is missed, they may assume something is wrong and pursue it, often aggressively.
When a sales tax return is missed, a state will typically send a reminder notice, a demand letter, or a penalty for the late filing. They may also apply an estimated assessment with penalty fines on your account, either based on previous return amounts or an ‘industry standard’ estimate. These estimates are often much higher than the actual amount. This inflated balance will sit on your account until you file the real return to correct it.
If the sales tax returns remain outstanding, additional penalties and interest may accrue, creating a snowball effect. If no action is taken, the estimated assessment can become ‘final’ after a period of time, and legal collection can then commence. With a finalised debt and no response from the business, the state can file a sales tax lien.
Common Reasons Businesses Miss Sales Tax Returns
There are several reasons why a business might miss a sales tax return, these include:
- Misunderstanding sales tax nexus requirements
- Not keeping on top of sales tax filing frequency changes
- Cash flow issues
- Poor bookkeeping and no systems in place
- Marketplace or online sales confusion
- Staff turnover
Warning Signs You’re Approaching a Problem
Several warning signs can mean you’re close to receiving a sales tax lien. These include:
- Multiple reminder notices from states
- Being flagged on delinquent taxpayer lists
- Threats of permit revocation and audits
- Letters from collection agencies
All of the above are clear signs that the state is escalating your case, and you will need to take action immediately to avoid enforced collection.
How to Fix Missed Sales Tax Returns Before It Gets Worse
It is highly recommended that you act quickly if your business misses any sales tax returns. Here’s where to start:
- Gather your records – sales reports, exemption certificates, bank statements
- File missing returns immediately
- Update or correct estimated assessments on your sales tax returns
- Contact the state to prevent future escalations and collections
- Put a plan in place for future compliance and filings
Prompt action can help prevent penalties from accumulating, prevent liens, and show the state you’re actively working to resolve the issue.
What Happens Once a Sales Tax Lien Is Filed
Once a lien is filed, the situation becomes urgent. As detailed above, a sales tax lien can have a very detrimental effect on your business. It won’t go away on its own; it must be actively resolved, even if your business is closed or no longer operating.
A sales tax lien becomes public record, which can hurt your business credit and financing, leading to a lack of customer trust and to collection agencies becoming involved. Sales tax liens will continue to grow until they are resolved.
What to Do If You Owe More Than You Can Pay
Not being able to pay immediately won’t be a valid excuse. Most states have options available, including but not limited to:
- Payment plans
- Penalty abatement
- Short-term hold status
- Partial payment options
These options vary by state, and some won’t accept a partial payment but may offer a payment plan.
A voluntary disclosure agreement (VDA) may also be an option when the missed filings go back years. A VDA is a legal agreement between a taxpayer and a state tax authority, which allows a business to voluntarily report and pay previously uncollected or underreported taxes in exchange for a reduction or penalty waiver and a limit on the ‘look-back’ period for which back taxes are owed.
How to Remove a Sales Tax Lien
To remove a sales tax lien, a state typically requires:
- Filing all outstanding sales tax returns
- Paying the full balance owed or having a payment plan set up
- Confirming that the state has processed and issued the lien release
- Ensuring the release is recorded with the county or agency where the lien was filed
It may take several weeks for credit companies and public databases to update. In some cases, you may need to send them the lien release yourself to expedite removal.
Preventing Future Sales Tax Problems
To reduce the risk of a sales tax lien, there are several proactive steps your business can take, including:
- Setting up automated sales tax filing software
- Maintaining and updating exemption certificates
- Monitoring the economic nexus regularly
- Establish an internal calendar with reminders when returns are due
For more complex cases, where multiple states are involved, estimated assessments appear incorrect, or when you can’t figure out your actual liability, it may be best to bring in a professional.
At RJM Tax Exemption, we have experience helping clients file missing sales tax returns, clear estimated sales tax delinquencies, apply for VDAs, and clear sales tax liens. We handle these issues daily and can deliver better outcomes than business owners working alone. Contact us at [email protected] if you need any assistance with what’s been detailed in this blog.
Conclusion
Sales tax problems rarely fix themselves, and the longer they’re ignored, the more expensive and stressful they can become. While sales tax liens can be overwhelming, it’s ultimately the result of missed filing requirements and unpaid taxes. These problems can be rectified with the correct steps.
By acting quickly to file outstanding sales tax returns, pay owed sales tax, and get the help you need, your business can resolve liens, regain control of your finances, and prevent future issues. By acting now, you can save your company a lot of headaches in the future.
