Running a business can create serious cash-flow problems. Payroll is due. Vendors need to be paid. Rent is approaching. A business owner may see money sitting in the company’s bank account—including sales tax collected from customers—and use those funds to keep the business operating.
That can create a serious New York tax problem.
When a business collects New York sales tax from its customers, the money is not simply additional business revenue. Under New York law, the business holds collected sales tax in trust for New York State.
The New York State Department of Taxation and Finance expressly advises businesses that they should never use collected sales tax to make purchases or pay business or personal expenses.
If your business collected New York sales tax but did not remit it to the State, the consequences can include unpaid tax, penalties, interest, personal liability for owners and other responsible persons, collection enforcement, and—in more serious cases involving willful conduct—potential criminal exposure.
If your business has unremitted New York sales tax, addressing the problem early can be extremely important.
Collected Sales Tax Is Not the Business’s Money
The starting point is understanding how New York treats sales tax.
When a registered business makes a taxable sale, it generally collects sales tax from the customer and later pays that tax to the New York State Department of Taxation and Finance.
New York Tax Law § 1133 provides that a person required to collect sales tax holds the tax as trustee for and on account of the State.
In practical terms, when your customer pays:
$1,000 purchase price + applicable sales tax
the sales tax portion is not simply another part of your company’s revenue that can freely be used to operate the business.
The business has collected money that ultimately must be paid over to New York State.
The Tax Department therefore recommends maintaining a separate bank account for sales tax receipts and specifically cautions businesses against using collected sales tax to pay business or personal expenses.
What If the Business Needed the Money to Survive?
This is a common factual situation.
A business may encounter a financial crisis and use collected sales tax to pay:
- employee wages;
- rent;
- suppliers;
- utilities;
- loan payments;
- insurance;
- operating expenses; or
- other creditors.
From the owner’s perspective, the decision may have been an attempt to keep the company alive rather than an attempt to steal money from the government.
But using the money to keep the business operating does not eliminate the sales tax obligation.
New York still expects the collected tax to be remitted when due.
That means an owner who uses $50,000 of collected sales tax to meet payroll does not ordinarily eliminate the $50,000 sales tax obligation simply because the money was used for a legitimate business expense.
The company can remain liable for the tax, together with applicable penalties and interest.
What Civil Penalties Can New York Impose?
If a business files its sales tax return but fails to pay the tax due, New York generally imposes a penalty under Tax Law § 1145.
The basic failure-to-pay penalty begins at 10% of the tax due for the first month, plus an additional 1% for each additional month or part of a month, up to a maximum of 30%.
Interest also accrues on unpaid tax.
Interest continues to increase the liability until the tax is paid and is compounded daily.
This means a sales tax debt can grow substantially when it remains unresolved.
For example, a business that originally failed to remit $100,000 may ultimately owe significantly more after penalties and interest are added.
And if the Department determines that the failure to pay or pay over tax was due to fraud, the consequences are substantially more severe.
Tax Law § 1145(a)(2) provides for a fraud penalty equal to two times the amount of tax due, in addition to interest.
Can the Owner Be Personally Liable?
Yes.
This is one of the most significant features of New York sales tax law.
The fact that the business operates through a corporation or limited liability company does not necessarily protect the people behind the business.
Tax Law § 1133 provides that every person required to collect sales tax is personally liable for tax imposed, collected, or required to be collected.
Depending on the type of business entity and the person’s role, New York may seek personal liability against individuals such as:
- business owners;
- corporate officers;
- directors;
- managers;
- certain employees;
- partners; and
- members of limited liability companies.
For corporate officers and employees, responsible-person status generally involves a factual analysis of the individual’s authority and responsibilities within the business.
The Department and courts may examine whether the individual could sign checks, control bank accounts, decide which creditors were paid, hire or fire employees, oversee financial affairs, prepare or supervise tax filings, and otherwise exercise authority over the business.
This means a sales tax problem that initially appears to belong to the company can become a personal financial problem for the owner or other responsible individuals.
What If an Accountant Was Responsible for Filing the Returns?
Hiring an accountant does not necessarily eliminate an owner’s personal exposure.
A business owner may say:
“My accountant was supposed to take care of the sales taxes.”
That fact can certainly be relevant to understanding what happened.
But New York responsible-person liability does not disappear automatically because tax compliance was delegated to an accountant, bookkeeper, controller, or employee.
If an individual otherwise had sufficient responsibility and authority over the company’s financial affairs, delegating the preparation of sales tax returns may not eliminate personal liability.
That is why the roles of each person involved in the business should be examined carefully when substantial unpaid sales tax exists.
Is Failure to Remit Sales Tax a Crime in New York?
It can be.
There is an important difference between owing sales tax and committing a tax crime.
Not every business that fails to remit sales tax has committed a crime.
Businesses make mistakes. Accounting systems fail. Owners misunderstand tax obligations. Companies experience financial distress. Taxability determinations can be complicated.
But New York Tax Law specifically identifies the willful failure to remit state and local sales taxes collected as conduct that can result in criminal prosecution.
New York’s tax-fraud statutes classify criminal tax fraud according to the circumstances and amount involved, and criminal penalties can include fines and imprisonment.
Therefore, the key issue in a potentially criminal case may not simply be:
“Was the tax unpaid?”
The investigation may focus on questions such as:
Was sales tax actually collected?
Did the owner know it was required to be remitted?
What happened to the money?
Were accurate sales tax returns filed?
Were sales intentionally omitted?
Were business records altered or concealed?
Was the conduct repeated over multiple filing periods?
Were false returns filed?
Those facts can affect whether the matter remains a civil collection problem or develops into something more serious.
Collected but Unpaid Tax Is Different From a Taxability Dispute
This distinction is important.
Consider two businesses.
Business A sells a service that it believes is not subject to New York sales tax. During an audit, the Department disagrees and determines that the service was taxable.
Business B charged its customers sales tax, collected the money, reported or knew of the obligation, but used the money to pay other expenses instead of remitting it.
Both businesses may ultimately owe sales tax.
But the factual circumstances are very different.
Business A may have a legitimate legal dispute concerning whether its transactions were taxable.
Business B presents the more serious question of what happened to tax money that was actually collected from customers and held for the State.
That distinction can become important when evaluating penalties, responsible-person liability, and possible criminal exposure.
What If You Filed the Sales Tax Returns but Couldn’t Pay?
Filing accurate returns is generally better than failing to file or filing inaccurate returns, but filing does not eliminate the obligation to pay.
If the business accurately reported $75,000 of sales tax due but could not remit the money, the Department already has documentation identifying the liability.
Penalties and interest can accrue, and the Department may pursue collection.
However, the facts may differ materially from a case in which the business concealed sales, understated the amount of tax collected, or filed false returns.
If your business cannot pay its sales tax liability in full, you should consider addressing the problem rather than allowing additional filing periods to accumulate.
What If the Business Has Not Filed Sales Tax Returns?
That can create additional problems.
A business with unpaid sales tax should distinguish between:
filed but unpaid returns
and
unfiled returns with potentially unpaid tax.
Failure to file required sales tax returns can result in separate penalties and potentially complicate the Department’s ability to determine the amount due.
More importantly, continuing to collect sales tax while failing to file returns and remit the money can create an increasingly serious pattern.
A business in that situation should consider obtaining professional advice before simply filing multiple delinquent returns without first understanding the potential civil and criminal consequences.
Can New York Audit the Business?
Yes.
The Tax Department may audit the company’s sales tax returns and records to determine whether the correct amount of sales tax was collected and remitted.
During the audit, the Department may review items such as:
- sales records;
- bank statements;
- credit-card processing statements;
- point-of-sale records;
- sales tax returns;
- income tax returns;
- purchase records;
- exemption certificates; and
- other business records.
If records are inadequate, the Department may potentially use an estimated or indirect audit methodology to reconstruct taxable sales.
That can create an additional problem: the Department may conclude not merely that reported sales tax was unpaid, but that additional taxable sales were never reported at all.
What If New York Is Already Trying to Collect?
Ignoring the liability usually makes the problem worse.
The Department can pursue collection after a tax liability becomes fixed and unpaid.
Depending on the circumstances, collection activity may include tax warrants and other enforcement measures against the business and responsible individuals.
The appropriate strategy depends on whether the taxpayer disputes:
the amount of tax,
the responsible-person determination,
penalties,
or simply the ability to pay an otherwise valid liability.
Those are different problems and may require different solutions.
A business should therefore determine whether it is dealing with an audit dispute, an appeal, a collection matter, or some combination of the three.
Can Penalties Be Reduced?
Potentially.
New York law permits relief from certain penalties where the taxpayer establishes reasonable cause and the absence of willful neglect.
Whether reasonable cause exists depends on the particular facts.
A taxpayer generally should not assume that financial hardship by itself will automatically eliminate penalties. Instead, the circumstances leading to the failure should be carefully documented and evaluated under the applicable standards.
Fraud penalties present a substantially different problem because they involve allegations of intentional misconduct.
What Should You Do If Your Business Has Unremitted Sales Tax?
First, determine the scope of the problem.
Identify:
- which sales tax returns were filed;
- which returns remain unfiled;
- how much tax was reported;
- how much tax was actually collected;
- how much was paid;
- which periods remain outstanding;
- whether sales were accurately reported;
- who controlled the company’s finances; and
- whether the Department has already contacted the business.
Second, stop the problem from growing.
Continuing to collect sales tax without properly addressing current filing and payment obligations can increase both the financial liability and the seriousness of the situation.
Third, preserve the company’s records.
Do not alter, destroy, backdate, or create documents in an attempt to correct historical problems.
Finally, consider obtaining legal advice before making substantive representations to the Tax Department if the facts could potentially suggest intentional conduct.
When Should You Contact a New York Tax Attorney?
Legal representation should be seriously considered when:
- substantial sales tax was collected but not remitted;
- multiple filing periods are involved;
- sales tax returns were not filed;
- returns may understate actual sales;
- the business has substantial cash transactions;
- the Department is conducting an audit;
- owners or officers face personal liability;
- fraud penalties may be asserted;
- the Department has requested interviews or explanations concerning missing tax;
- there is concern about a criminal investigation; or
- the business cannot pay the outstanding liability.
The strategy in a case involving simple inability to pay can be very different from the strategy in a case involving potentially willful failure to remit collected tax.
Understanding that distinction before communicating with the Department can be important.
Speak With a New York Sales Tax Attorney
If your business collected New York sales tax but did not pay the money to the State, waiting usually does not make the problem easier.
At Thorgood Law Firm, we represent businesses and individuals in New York State sales tax audits, unpaid sales tax matters, responsible-person assessments, tax appeals and collection matters, as well as cases involving potential civil fraud or criminal tax exposure.
If your business has collected but unremitted New York sales tax, contact Thorgood Law Firm to discuss your situation before the liability grows or the matter becomes more serious.
Frequently Asked Questions
What happens if my business collected New York sales tax but did not pay it?
The business can remain liable for the unpaid sales tax together with applicable penalties and interest. New York may also seek personal liability against responsible individuals, and willful failure to remit collected sales tax can potentially result in criminal consequences.
Is collected New York sales tax considered the business’s money?
No. New York law provides that a person required to collect sales tax holds the tax as trustee for and on account of the State. The Tax Department advises businesses not to use collected sales tax for business or personal expenses.
Can I be personally liable if my corporation did not pay its sales tax?
Yes. New York can impose personal liability on individuals who qualify as persons required to collect sales tax. Depending on the entity and circumstances, this may include owners, corporate officers, directors, employees, managers, partners, and LLC members.
Does an LLC protect me from unpaid New York sales tax?
Not necessarily. New York’s sales tax statutes expressly include LLC members within the definition of persons required to collect tax. An LLC therefore does not automatically shield its members from sales tax liability.
What is the penalty for failing to pay New York sales tax?
For an ordinary failure to pay or pay over tax, the basic penalty generally begins at 10% of the tax due for the first month, plus 1% for each additional month or part of a month, up to 30%. Interest also accrues. Different and substantially greater penalties can apply in fraud cases.
Can failing to remit collected sales tax result in criminal charges?
Yes. New York law provides criminal penalties for willfully failing to remit state and local sales taxes collected. Not every unpaid sales tax case is criminal; the particular facts, including evidence concerning willfulness and intent, are important.
What if I used the sales tax money to pay employees or keep the business open?
Using collected sales tax to pay legitimate business expenses does not eliminate the obligation to remit the tax. The circumstances may be relevant to evaluating the case, but the underlying sales tax liability generally remains.
What if I filed the sales tax returns but could not afford to pay?
The unpaid tax remains due, and penalties and interest can accrue. Filing accurate returns may present materially different facts from concealing sales or filing false returns, but the payment problem should still be addressed promptly.
Should I contact an attorney before speaking with New York State?
Consider doing so when substantial collected tax was not remitted, multiple periods are involved, returns are missing or inaccurate, responsible-person liability is possible, or there is concern about fraud or criminal exposure.