If you ever missed one (or more) sales tax return deadline(s), you may have seen a tax estimate appear on your sales tax account(s); here’s the good news – you’re not alone. Although an unexpected tax estimate on your account(s) can be something concerning, it may only be a temporary display of a due fee if you know how to handle your accounts right away.
In this blog, we will touch on what sales tax estimates are, why they may be added to your sales tax accounts/when these estimates become locked in, and most importantly, how to avoid them.
Why am I Getting a Sales Tax Estimate?
Let’s rewind and talk about where the estimate would appear in the first place – your sales tax accounts. When getting your business sales tax compliant, you will likely have applied for a sales tax permit in one or more states within the USA, depending on your business needs. Acquiring a permit within any state of America will automatically activate a sales tax account for your business, and each state has a specific filing requirement (monthly, quarterly, or annually) in order to keep your sales tax account up to date.
For as long as these accounts are active, you are responsible for meeting the deadlines of these specific filing requirements – this is needed even if your business is making no sales; if that is the case, a $0-sales return will let the state know you have no taxes due for that period. The issue starts to pop up when these sales tax return deadlines are missed, and returns go unfiled for multiple periods (monthly, quarterly, or annually). When this happens, the state will begin adding sales tax estimates to your accounts due to the missed returns.
How are These Sales Tax Estimates Calculated?
These estimates will start to pop-up in your accounts based either on an average of your sales from past filing history (if any available) or based on a set sales figure estimated by the state (commonly from $100, for example – the state of Mississippi often estimates $331.50), this is so that the state will have something in the system to begin scheduling a collection or calculating penalties, which will happen if these estimates are not acted upon promptly, as the state will assume you are indeed liable for them.
Either way, these estimates tend to be deliberately higher, with a very slim chance of accuracy to your actual sales for those missed periods – note here that the state has no obligation to be accurate with your estimates, as it is your responsibility to let them know of your sales activities by submitting your sales tax returns in time. The higher estimates are a method used to apply pressure on you to either file your missed returns promptly, or to penalize you for a high number of missed returns – the good news is that you may still be able to correct these estimates if caught in time – so don’t make any payments just yet!
How can I correct my Sales Tax Estimates?
Here’s a good time to mention that sales tax estimates are not the first ‘go-to’ method states have to reminding you of your sales tax responsibilities – before an estimate is issued, you will receive email reminders that a return is approaching its due date; notices of ’overdue’ returns will appear in your accounts or be sent to your mailing address and you might even receive phonecalls from the state(s) reminding you of an overdue tax return.
With that said, there are some fast-tracking states, such as Florida or Mississippi, that will issue a tax estimate to your account shortly after a return is missed and a notice is sent to you. As with any reminders of tax due, a tax estimate should be acted upon promptly to make sure you are still able to correct it.
There tends to be a grace period of 30-90 days from issuing a sales tax estimate where states will be expecting a correction from you in the format of a sales tax return – by submitting the return(s) with the accurate sales activities for the missed period(s) ($0-sales return(s) is needed if no sales were made during that period), your estimates will often be cleared with no additional interest applied to the account – note here that a late fling fee may be issued by some estates to encourage on-time filing in the future, however, these late filing fees will be significantly lower than your tax estimates. Examples are: FL & NY charge $50, and TN charges $15 per late filed period.
The real issue begins when these estimates are ignored and become ‘locked-in’, meaning they are no longer reversible by simply filing your missed sales tax returns.
When Does a Sales Tax Estimate Become ‘Locked-in’?
A tax estimate becomes ‘locked-in’ once the grace period of 30-90 days (can differ according to state) expires and no correction is submitted. Once this happens, the estimate becomes final and is seen as a real legal tax debt owed to the state, which cannot be reversed by simply filing your missed sales tax returns. A formal appeal or an abatement request can be submitted, but correcting a locked-in estimate at this point becomes trickier, as you will be forced to prove the sales tax estimate is incorrect and to explain why your returns were missed.
Once an estimate is locked in, the following can happen-
- Collections for the amount owed in the format of liens and/or levies will begin.
- Interest will be added to the amount daily until payment is made.
- Other penalties for unpaid tax debt of 10% – 25% will begin to stack up over time.
- Your licenses will be suspended, and renewals will be denied.
- Your business’s credit score will be damaged.
- In worst-case scenarios, states can sue you, and the payment becomes enforceable.
Some states have more strict locked-in policies than others; some well-known ones are:
- Alabama is known to lock in its estimates and not allow adjustments if enough time has passed, even if proof of ‘no tax due’ is later provided during an appeal.
- California is known to provide a shorter grace period (30 days only) for collection once a sales tax estimate is issued, and they will refuse adjustments if not done via a formal appeal once their grace period has passed.
- New York is known for sending out their estimates with very limited reminders of returns overdue, and a tax tribunal hearing is often needed for appealing a correction.
- Texas is known to be more flexible with larger businesses but can be stricter with smaller businesses, enforcing their estimates shortly after being issued, and requiring a formal hearing to appeal for correction.
How to Avoid a Sales Tax Estimate
With all of the above information in mind, it is safe to say that avoiding any type of sales tax estimate is key to a stress-free business. The easiest way to do this is to:
- File all your sales tax returns by their due date.
- File all your returns accurately based on your sales.
- If a return is missed, act upon it quickly.
- Keep an eye out for those reminders sent by the state!
- If a tax estimate is issued, DO NOT PAY IT JUST YET.
- Correct your tax estimates BEFORE THE GRACE PERIOD EXPIRES.
It can be overwhelming as a business owner to keep on top of all your tax obligations; this is why companies like RJM Tax Exemption offer monthly sales tax filing services to take that stress off your shoulders, so you can spend your time focusing on growing your business. If you need any assistance with keeping on top of your sales tax requirements, you can get in touch with us via email or book a free consultation with us to discuss your sales tax needs!
