Introduction
For a small business owner – especially when you are just starting up and have made no sales yet, sales tax can and will be the last thing on your mind. You will focus on registering the business, setting up shop, and promoting your business.
Unfortunately, the misconception that only sales tax is a concern once sales are made has cost individuals a significant amount of money and stress. Registering your business can sometimes trigger sales tax obligations in some states. If you are not well-informed, you could face sales tax estimates and other tax delinquencies within just a few missed returns.
In this blog, we will be looking at a real-life example from an anonymous small business owner in Texas who recounted their experience through an online forum about having their dream turn into a sales tax nightmare. This case is one of many, and we hope this blog can inform you and help avoid a similar situation when starting up.
The Real Nightmare: $0 in Sales = $10k in Debt
“Didn’t file TX sales and use tax as DBA for the last 4 years… I decided to pull out old mail I never opened. I see I owe nearly 10K from “estimates” given by the general attorney’s office here in Texas. I don’t recall filing for a sales use tax number” – Anonymous, via public forum 2025
In 2019, this entrepreneur began with a dream of starting up their own small business, where they would sell their art online. Like many others with this dream, they registered a DBA (doing business as) in their state – in this case, Texas – and thought nothing of it. Life then happened, and they forgot about this registration for four years, which was easily done since the small business never even made a sale; why would they assume action was needed?
To clarify, registering a DBA in Texas means that you are telling the public you are going to be doing business under a chosen name, other than your own. This does not mean a sales tax registration is formed right away. However, the lines can be blurred, and a sales tax account can be registered if an online application is submitted mistakenly, which is a very doable scenario when following the Texas.gov – “Starting a business in Texas”.
Individuals starting up can have the impression that, to get everything set up and legal, you need to have all paperwork done right away – DBA registration, EIN registration, Seller permit, etc., and since Texas offers all of this start-up registration in a tidy, easy-to-follow, 7 step process, who are we to question, right?
While reviewing old mail, the artist discovers that Texas had calculated estimates into their sales tax accounts over the past four years, following the DBA registration, and decides to contact them to clarify the matter.
Does This Only Happen in Texas?
Unfortunately, no. In many states, the lines between registering your business and triggering sales tax responsibilities are very blurred. A sales tax registration can be applied by mistake during the setup of your business, as it was done in this case with Texas; or there are cases where states will issue a sales tax permit automatically when an LLC, sole proprietorship, or DBA is registered. Although the process can vary between states, as each has its approach, it is something to be aware of when starting up and registering your business for the first time.
For example:
- North Carolina: A sales tax registration is often included by default within the registration of a business with the department of revenue.
- Colorado: When a general business license is registered within CO, some localities automatically issue a local sales tax license, which will then trigger sales tax responsibilities.
- Arizona: Users are prompted to open a ‘transaction privilege tax’ (TPT) whenever using aztaxes.gov to register their businesses. This is Arizona’s version of a sales tax permit and will trigger sales tax responsibilities.
Other states, such as California, Georgia, or New York, can follow Texas’s example, where registrations are neatly compiled or prompted by their website. This makes it challenging to determine what is required and what isn’t when registering a business in that state, potentially leading to the accidental registration of a sales tax permit.
The Phonecall with Texas
“They said there’s really nothing I can do now.… I owe the state what they “estimated” my business income to be based on its category. I owe $9,700.00 as of today in state tax liability, AND there’s a daily interest fee of $1.29 if there’s any amount unpaid” – Anonymous, via public forum 2025
During the phone call with the Texas Department of Taxation, the artist was informed that, due to account inactivity, their business account had been closed. However, this did not clear all of the past sales tax estimations and liabilities added to the account during those active years.
If a sales tax account is active, sales tax filing is required to keep the account up to date. If no filing is submitted, the state will add an estimate to the account. This estimate is either based on past filing history (if any available) or on ‘industry average’, depending on what type of industry their business is registered under. Once an estimate is added to the account, many states allow a grace period of 30-90 days for this overestimation to be corrected by submitting the sales tax returns with the accurate amount of sales (a $0-sales return is needed if no sales were made).
Once this grace period is over, the estimated tax becomes locked in and is now seen as a real and collectible debt. You can read more about this here. As we can see here in their case, once enough time has passed, daily interest begins to accumulate in the account. In worst-case scenarios, bank accounts can be frozen and vehicles or properties seized due to debt resulting from $0 sales.
What Can We Take Away from This Real-Life Example?
- Take it easy – register one thing at a time; applying for every permit right away to get your start-up ‘legal’ can cause headaches, especially when applying for permits that are not yet needed. Take it easy and get informed about what you need and when you need it.
- Be aware of sneaky states – in some states, registering your business can trigger a sales tax account. Be vigilant with all documents/permits received at your mailing address. Also, call the states to double-check your business and tax obligations.
- Read those letters – if a sales tax account has been automatically or accidentally created for your start-up business, there will be signs. Read every letter, and be aware of every permit you receive.
- Act promptly – if a sales tax registration is activated for your business, you must be on top of those sales tax filing requirements, even if no sales are being made. If you don’t need a seller’s permit just yet, asking the state to close the sales tax account is an option and results in one less thing for you to worry about.
- Remember the grace period – if you still miss a sales tax return or returns after taking the above steps, you will not receive estimates on your accounts without notice; instead, you will receive letters about it. Some states, like Texas, can be very aggressive when it comes to collecting – remember the 30-60 day grace period and act accordingly to correct that estimation!
- The emotional burden is real. This artist’s real-life example represents many other start-ups that get put on pause by life, but unfortunately, the systems don’t account for “life happens.” Compliance can be unforgivable, so stay on top of it for your mental well-being.
- Do not suffer in silence – Seek help as soon as things start to pile up!
It’s easy to get overwhelmed and miss things with a start-up. You want to focus on your new brand and the excitement of being your boss, not the paperwork and hoops you have to jump through. We get it.
That is why businesses like RJM Tax Exemption offer a free consultation and follow-up services, so that you are informed about all your sales tax responsibilities every step of the way! If you ever need any help, remember you can always contact us.
