What to do about sales tax if you close your business
by April 14, 2024
Please note: This blog was originally published in 2020. It’s since been updated for accuracy and comprehensiveness.
It’s a topic nobody really wants to talk about. But the fact is that businesses shut their doors every day. And this past pandemic year has been especially hard on some businesses that rely on foot traffic and in-person customers.
Or hey, maybe you are shutting down your business because it’s time to retire and spend time traveling the world.
Either way, here’s what you need to do when it’s time to shut down your business.
File a final sales tax filing
File a “final return” with any state in which you collect sales tax. Handily, many sales tax filing websites have a place where you can mark that this is your business’s final return.
Don’t forget this step! Say for example you are required by your state to file and pay sales tax every January, but you decide to close your business in April. You will still have a sales tax return due that next January. Further, your state’s online filing system may not allow you to file that far future return until closer to the due date. In this case, you can simply wait to file, or contact your state and see if they can provide an alternative way to file your final return.
Pay all sales tax collected to the state
This is arguably the most important step to closing your business when it comes to sales tax. You must pay every cent of sales tax you collected from customers to the state. Failing to do so can result in penalties, interest and even criminal charges. Yikes.
Again, don’t forget to remit this along with your final filing. And if your final due date is far in the future, contact your state’s taxing authority to determine if there’s a way for you to file and remit sales tax earlier.
Cancel your sales tax permit
In most states, marking your last return as “final return” is all you need to do in order to cancel your state sales tax registration. However, some states have a few more hoops to jump through. If you don’t see a “final return” checkbox or other indication on your final filing, we recommend contacting the state taxing authority to close your sales tax account.
Some states might allow you to mark a sales tax return as “final” but then send you a questionnaire or other notification. Be sure to comply with any instructions from your state’s taxing authority to ensure your account is closed.
What happens if you don’t cancel your sales tax permit? You may be on the hook for fines and penalties. About half the states require online sellers to file “zero returns” even if you did not collect any sales tax over a taxable period. Failing to file a zero return can result in a fine of up to $50 simply for failing to file.
Maintain your sales tax records
Your business might be closed, but that doesn’t mean you can say goodbye to your records. For one, your business could still be subject to audit. (Click here for a list of states and their statutes of limitations when it comes to auditing sales tax records.) Worse, if the state suspects fraud or other criminal malfeasance, there is no statute of limitations on how far they can peer back into your sales tax records. So don’t trash your sales tax documents just yet.
Temporarily closing your business
What if there’s a light at the end of the tunnel? Then you may not want to go to the drastic business-closing measures we listed above.
If you are only temporarily closing, it may be more trouble than it’s worth to cancel your sales tax permit. Some states require you to jump through hoops to close your sales tax account or pay to obtain a new permit. If you are just temporarily closing, just be sure to file “zero returns” whenever you have a sales tax payment due to avoid fines. And, of course, be sure you’ve remitted any collected sales tax to your state. Remember that it’s illegal to keep any sales tax you’ve collected in your pocket.
