Introduction
It is often thought that, in dissolving your LLC, it no longer has any ties to Sales Tax Obligations. Unfortunately, this misconception has been the cause of countless sales tax delinquencies, leading to overestimations of owed taxes, interest on owed taxes, late filing fees/penalties, and, if enough time has passed, even a criminal charge of tax evasion can be brought against the LLC owner.
You might find yourself in a similar position, wondering why there are so many Sales Tax letters and emails still chasing after you, even after your LLC has been dissolved. In this blog, we’ll explore why the above is the case and how to close your accounts properly, ensuring you are free from all those obligations.
What are these Sales Tax Obligations?
During the lifespan of your LLC, you will likely have registered with a Sales Tax account in one or more states around the USA. This could’ve been for the following reasons.
– Sales Tax Exemption: Grants you exemption from paying taxes on all items purchased for resale.
– Nexus Compliance: There are a total of 5 types of Nexus that can be triggered by a business’s connection to a state. The two most common are:
* Physical Nexus, which is reached when a business has a physical presence within a state.
* Economic Nexus, which can be reached when a business reaches the sales threshold of a state (these vary from state to state).
Regardless of the reason, the point is that you needed an active Sales Tax account to ensure your LLC remained compliant with state regulations. These Sales Tax accounts are individually activated for each state and have their diverse tax requirements. Some states require regular monthly Sales Tax Returns to keep the accounts active and up to date, whereas others may only require quarterly or annual returns.
Because these are individual accounts set up with each state, the dissolution of your LLC does not automatically close that Sales Tax account/s – in other words, the state in which you have a Sales Tax account registered with does not know your LLC has been discontinued, unless you tell them.
Worst case scenario?
As mentioned above, these Sales Tax accounts have diverse tax requirements that must be met as long as the account (s) remain active. Many LLC owners overlook the filing requirements for these Sales Tax Accounts, leaving the accounts as they are and ignoring them, assuming they are no longer an obligation.
Neglected Sales Tax accounts will start to build up on outstanding Sales Tax Returns, and if left for too long, will lead to:
* Huge sales tax delinquencies and estimates
* Late filing penalties
* Additional interest is applied to any sales tax owed
* States may freeze assets or place liens on your bank account/s
* In extreme cases, it can lead to a criminal charge for tax evasion
If left unresolved for a long time, you may struggle to get loans or credit for new businesses, as state liens will bring your business credit down.
How to properly cease your Sales Tax Obligations?
Upon dissolving your LLC, it is recommended that you officially and individually close out all of your sales tax accounts. The account closure often follows a Sales Tax Final Return, and it can be an uncomplicated process if the accounts are all up to date.
This task can be completed in different ways; for example, all Sales Tax Final Returns can be submitted via the state’s online portal as well as by paper submissions. Account Closures can also be completed via the state’s online portal; however, some states require a physical Account Closure request form to be submitted by email or fax. If you are unsure about specific state Account Closure requirements, companies like RJM Tax Exemption can help guide you in the right direction. Taxpayer Service Representatives within the State’s Departments of Revenue are also available to assist over the phone.
IMPORTANT TIP – The LLC owner should follow up and obtain confirmations from all sales tax account closures, especially with states that require physical account closure forms to be submitted by email, fax, or mail, as these requests can be easily misplaced, resulting in accounts remaining active.
What happens if my accounts are not up to date?
The process of submitting a Sales Tax Final Return and Account Closure request can become more complicated if the accounts have been neglected for several months and have now accrued late Sales Tax Returns and/or Sales Tax Delinquencies.
Some states will allow a Sales Tax Account to be closed from a date in the past, meaning that any accrued late Sales Tax Returns and/or Sales Tax Delinquencies from that closure date forward will be cleared up. However, this has unfortunately become less common as states update their requirements every year.
Having trouble with your account closures?
If the state is denying your sales tax account closure request, do not panic. There will be a reasonable explanation for this. States have strict requirements when it comes to properly closing down tax accounts, and if not done correctly, the closure request can be denied, and the account remains open. Here are some of the common reasons why accounts may remain open, and what you can do to rectify the issue:
– Outstanding Sales Tax Returns: Some states will deny an account closure request if backlogged sales tax returns are still due.
Tip: Make sure all sales tax returns are up to date before submitting an account closure request
– Missing a Final Sales Tax Return: Some states may require a proper final return to be submitted before approving an account closure request.
Tip: As well as checking that all outstanding sales tax returns are up to date, make sure that the last return submitted is clearly stated as a ‘final return’, if the state provides an option to disclose this information within the return form.
– Outstanding Balance: Most states will deny account closure requests if any outstanding balance remains unpaid. These balances can comprise tax and/or interest due, as well as any late filing fees and/or other penalties.
Tip: Before submitting an account closure request, make sure to: 1) Pay in full all outstanding balances OR 2) If submitting penalty waiver requests, wait for those to be either approved or denied. If approved, wait for the outstanding total to be cleared from the account. If denied, make the payment in full.
– Other active tax accounts in the same state: In some states, when a sales tax account is registered, different types of tax accounts within the same system will automatically be registered alongside it. These can be Use Tax, Franchise Tax, or Withholding Tax accounts. If these remain active when requesting a Sales Tax Account closure, the request can be denied.
Tip: If other tax type/s are also active within the same system (online portal) as your Sales Tax Account, make sure to request account closures for all account types simultaneously.
– Business Sold but eCommerce Website Still Active: If you have sold your business but your e-commerce store remains active, the state may assume you are still in operation and deny your account closure request.
Tip: To make sure a closure request is approved, follow these steps: 1) Let the state know that the business has been sold and transferred; 2) Provide any requested documentation to prove the new ownership; 3) Make sure the new business owner registers for new sales tax accounts under their name; 4) Make sure to submit a final return properly.
Conclusion
It is essential to individually and properly close out all sales tax accounts registered with any state in the USA if your LLC has been dissolved. This will ensure that no sales tax obligations arise.
If you are unsure of your Sales Tax Obligations when dissolving your LLC and closing out any Sales Tax accounts, RJM Tax Exemption offers a variety of services that can help you. You can reach out to us or visit our website www.rjmtaxexemption.com.
