Understanding Uncollected, Unpaid Sales Taxes And the Registration Process

Have you been operating your business for years and realized that you hit nexus a year ago and now have uncollected and unpaid sales taxes? You are worried and confused and unsure of what to do next and want to take action before you trigger an audit and have the IRS on your doorstep.

This page is for those who find themselves in this very scenario. So, without further ado, let's dive in!

What Is Uncollected And Unpaid Sales Tax?

Uncollected and unpaid sales tax refers to sales tax that a business should have collected from customers but failed to or tax that was collected but not remitted to the appropriate tax authority. This issue arises when businesses neglect their sales tax responsibilities or misunderstand their tax obligations.

This happens for several reasons. Some are unaware that they have reached the nexus and should start collecting taxes; others assume that the marketplace facilitator is taking care of the taxes for them, and in many cases, retailers are overwhelmed with the whole process and do not know where to start.

Some register and collect taxes but fail to remit them to the tax authority. Remittance is part of the whole process and should not be overlooked.

Practical Example

Mindy owns Snug&Comfy Crafter, an online store that sells handmade home décor, personalized gift items and more. She started the business in 2019 as a small Etsy shop, shipping orders only within her home state of Illinois. Initially, her sales were modest—averaging around $5,000 per month—so she only registered for an Illinois sales tax permit and collected taxes from customers in that state.

By 2023, Snug&Comfy Crafter expanded significantly. Mindy launched her own Shopify store, joined Amazon's seller program, and participated in online craft fairs. She started shipping to customers across the U.S. and even ran Facebook ads targeting buyers in Texas, California, Georgia, and Florida.

At the end of 2023, Mindy's sales had grown beyond $250,000 annually, with a large customer base in Texas ($120,000 in sales), California ($90,000), Georgia ($105,000) and Florida ($150,000). However, surpassing the sales thresholds in some of those states triggered economic nexus, meaning she was legally required to register for a sales tax permit and collect sales tax from buyers in those states. While safe in Texas and California, Mindy triggered nexus in Florida and Georgia where the sales threshold is $100,000.

Fast forward to early 2024, Mindy receives a compliance notice from the Florida Department of Revenue. The letter states that:

1. She failed to register for sales tax collection after exceeding Florida's $100,000 economic nexus threshold.
2. She owes back taxes on Florida sales—approximately $9,000 in unpaid sales tax (6% of $150,000 in sales).
3. Late fees and interest have been added, increasing the total amount due to $10,800.
4. If she does not comply, the state may conduct a formal audit and impose further penalties.

Mindy panics. She had never set aside money for sales tax in Florida because she didn't collect it from customers in the first place. Now, she must pay the tax out of pocket, eating into her profits.

In this scenario, Mindy just received a compliance notice from Florida. What if Georgia will do the same after a week or month? Imagine the distress Mindy will face. Instead of enjoying the growth of her business, she is troubled due to tax liabilities.

Why Many Fail To Collect Sales Tax?

Mindy's case is not unique—many small business owners unintentionally fail to collect sales tax because of the following reasons:

• Don't monitor economic nexus thresholds and assume they only need to pay sales tax in their home states.
• Struggle with multi-state tax compliance due to confusing and inconsistent state laws.
• Think that marketplaces handle all sales tax collection when selling through multiple channels.
• Delay registering for sales tax permits because the process feels overwhelming.

Consequences of Not Collecting and Remitting Sales Taxes

Failing to collect and remit sales tax can lead to serious financial and legal consequences for businesses. Tax authorities aggressively pursue unpaid sales taxes since sales tax is considered trust fund money—collected from customers on behalf of the state. Below are the key consequences of non-compliance.

1. Financial Consequences

✔ Back Taxes Owed

• If a business fails to collect sales tax, it is still responsible for paying it out of pocket when tax authorities discover the issue.
• This can result in large, unexpected tax bills that cut into profits.

✔ Penalties and Interest

• States impose steep penalties for failing to register, collect, or remit sales tax.
• Interest accumulates daily on unpaid taxes, increasing the total liability.

✔ Audit Risks and Associated Costs

• Businesses that fail to comply may be flagged for a sales tax audit, requiring them to provide detailed transaction records for multiple years.
• Audits can be expensive, time-consuming, and lead to additional penalties.

✔ Loss of Tax Discounts and Benefits

• Some states offer early payment discounts or compliance incentives.
• If a business is non-compliant, it forfeits these benefits.

2. Legal Consequences

✔ State Tax Authorities Can Pursue Legal Action

• If a business repeatedly fails to pay sales tax, the state may take legal action, including tax liens or even criminal charges.
• Some states consider willful non-payment as tax fraud, leading to harsher penalties.

✔ Sales Tax Liens and Business Asset Seizure

• States can place a tax lien on a business's assets, making it difficult to secure loans or sell the business.
• In extreme cases, tax authorities may seize assets or freeze bank accounts.

✔ Business License Suspension or Revocation

• Some states suspend or revoke business licenses for non-payment of sales tax.
• This can force businesses to cease operations until compliance is restored.

✔ Personal Liability for Business Owners

• In many states, business owners, officers, or responsible parties can be held personally liable for unpaid sales taxes.
• This means even if a business shuts down, the owner may still owe sales tax debt.

3. Operational & Reputational Consequences

✔ Negative Impact on Business Credit and Financing

• Unpaid sales tax can negatively affect a business's credit score, making it harder to get loans or financing.
• Lenders may see outstanding tax liabilities as a high-risk factor.

✔ Reputational Damage

• State tax agencies publish lists of tax delinquents, which can damage a business's reputation.
• Customers and partners may lose trust in a company flagged for non-compliance.

✔ Customer Disputes and Refund Issues

• If customers later discover they were charged incorrectly (or not at all), they may demand refunds or file complaints.
• Businesses may face disputes or chargebacks related to improper tax handling.

Understanding Sales Tax Registration

Sales tax registration is the process of obtaining a permit or license from state tax authorities that allows a business to collect and remit sales tax legally. This is a crucial step for businesses selling taxable goods or services because it ensures compliance with state laws and prevents costly penalties.

A business must register for sales tax in any state where it has nexus, which can be established in several ways, including having a physical presence (like a store, warehouse, or office) or an economic presence (such as exceeding a certain sales threshold in that state). Since the 2018 South Dakota v. Wayfair, Inc. ruling, many states have enforced economic nexus laws, meaning businesses must register once they reach a specified amount of sales in that state—even if they don't have a physical location there. In May 2022, 83% of respondents (small and big enterprises) admitted that Wayfair affected how their company operates their business.

Failing to register when required can result in back taxes, penalties, interest charges, and even legal consequences. It can also disrupt business operations if tax authorities audit or take enforcement action. Proper sales tax registration builds customer trust by ensuring transparent pricing and tax compliance, reducing the risk of financial surprises down the line.

Key Points

Here are the important things to remember about registration.

✔ Sales tax registration is required when a business has nexus in a state

• Nexus can be triggered by physical presence, economic activity, or employee location.
• Most states require registration when sales exceed $100,000 or 200 transactions.

✔ Businesses must collect sales tax on taxable goods and services

• Some states tax only physical goods, while others tax digital products and SaaS.
• Taxability rules vary by state, making proper classification important.

✔ Failure to register can lead to financial and legal consequences

• Unregistered businesses that fail to collect tax may be liable for back taxes plus penalties.
• State tax agencies conduct audits and can impose fines for non-compliance.

✔ Registration is necessary before collecting sales tax from customers

• It is illegal to collect sales tax without a valid sales tax permit.
• States may issue fines for improper tax collection.

✔ Businesses selling in multiple states may need multiple registrations

• Each state has different registration processes and deadlines.
• Automated tax solutions help businesses track nexus and file correctly.

✔ Online sellers using Shopify, Amazon, or other platforms must verify sales tax obligations

• Some marketplaces handle tax collection, but not all sales are automatically covered.
• Businesses selling through multiple channels must ensure proper tax setup.

✔ Exempt sales (e.g., resale, nonprofit) require proper documentation

• Sellers must collect exemption certificates to prove why tax wasn't charged.
• Missing documents during an audit can result in back taxes owed.

✔ Registration is the first step in ongoing sales tax compliance

• Businesses must file periodic tax returns (monthly, quarterly, or annually).
• Tax rates change frequently, requiring businesses to stay updated.

The Sales Tax Registration Process: A General Guide

Sales tax registration is crucial for businesses that sell taxable goods or services. While the exact process varies by state, most states follow a similar registration procedure. Below is a step-by-step guide explaining how businesses can register for a sales tax permit and what is needed at each step.

Step 1: Determine If You Need to Register

Why It's Important: Businesses must first determine whether they have a sales tax obligation (nexus) in a state before registering.

What's Needed:

✅ Identify if you have a physical presence (store, office, warehouse, employees) in the state.

✅ Check economic nexus thresholds (most states require registration if sales exceed $100,000 or 200 transactions).

✅ Verify if your products or services are taxable in that state.

Step 2: Gather the Required Business Information

Why It's Important: States require key details about your business before issuing a sales tax permit.

What's Needed:

✅ Legal Business Name & DBA (Doing Business As) – The official name of your business and any trade names.

✅ Employer Identification Number (EIN) – Issued by the IRS for tax purposes. Sole proprietors may use a Social Security Number (SSN).

✅ Business Structure – Indicate if your business is a sole proprietorship, LLC, partnership, or corporation.

✅ Business Address & Contact Information – Include physical address, phone number, and email.

✅ Estimated Monthly Sales Tax Collection – Some states ask for an estimate of taxable sales to determine filing frequency (monthly, quarterly, or annually).

Step 3: Apply for a Sales Tax Permit

Why It's Important: A sales tax permit (also called a seller's permit) legally allows businesses to collect sales tax from customers.

How to Apply:

✅ Online: Most states allow online registration through their Department of Revenue website.

✅ By Mail or In Person: Some states still offer paper applications.

✅ Third-Party Registration Services: Businesses selling in multiple states may use sales tax automation tools to streamline registration.

What's Needed:

✅ All information from Step 2 (business name, EIN, address, etc.).

✅ Taxpayer Identification Number (TIN) – Required in some states for verification.

✅ Industry Type or Business Activity Code (NAICS Code) – States may require classification based on the type of products or services sold.

✅ Filing Frequency Preference – Some states allow businesses to choose whether they file sales tax monthly, quarterly, or annually based on sales volume.

Step 4: Receive Your Sales Tax Permit

Why It's Important: Once approved, your permit number must be included on tax filings, invoices, and in-state sales records.

What Happens Next:

✅ Some states issue immediate approval for online applications.

✅ Others may take 1-4 weeks to process, depending on verification requirements.

✅ You will receive a Sales Tax ID Number that must be used when collecting and remitting tax.

✅ Some states require businesses to display the permit in their physical store if applicable.

Step 5: Start Collecting Sales Tax

Why It's Important: Once registered, businesses are legally required to collect sales tax from customers and remit it to the state.

What's Needed:

✅ Set up sales tax collection in your e-commerce platform (Shopify, WooCommerce, etc.).

✅ If selling on marketplaces like Amazon or Etsy, check whether the platform collects tax on your behalf.

✅ Understand state-specific tax rates and exemptions for your products/services.

Step 6: File and Remit Sales Tax

Why It's Important: States require periodic tax filings, and failure to remit collected tax can lead to penalties.

How to File Sales Tax Returns:

✅ Log into your state's tax portal to submit tax returns.

✅ Report total sales, taxable sales, and the amount of tax collected.

✅ Pay the sales tax owed via bank transfer, check, or online payment.

✅ File on time to avoid penalties and interest charges.

Filing Frequency:

✅ Most states assign businesses a monthly, quarterly, or annual filing schedule based on sales volume.

✅ Some states offer discounts or early payment incentives for timely filing.

Step 7: Maintain Compliance & Renew When Necessary

Why It's Important: Sales tax laws change frequently, and states may require businesses to renew permits periodically.

What's Needed:

✅ Monitor nexus thresholds to register in new states if required.

✅ Keep records of tax filings and exemption certificates for audits.

✅ Stay updated on sales tax rate changes and reporting requirements.

✅ Renew permits if required by the state (some states require renewal every few years).

How Do Sales Tax Automation Tools Help?

Sales tax automation tools streamline tax compliance for businesses, helping them avoid uncollected and unpaid sales tax issues while simplifying the registration process. These tools ensure businesses accurately track, collect, and remit sales tax, reducing the risk of penalties, audits, and financial setbacks.

Uncollected And Unpaid Sales Tax

✅Automated Nexus Tracking & Alerts

• Sales tax automation tools track where a business has economic or physical nexus across states.
• They monitor sales thresholds (e.g., $100,000 in sales or 200 transactions) and notify businesses when they need to register.

✅ Correct Tax Rate Calculation at Checkout

• Sales tax rates vary by state, county, and city, making manual calculations error-prone.
• Automation ensures the right tax rate is applied to every transaction, including special tax rules (e.g., food, digital goods, SaaS).

✅ Multi-State Tax Collection Across Sales Channels

• Many businesses sell through Shopify, WooCommerce, Amazon, eBay, and physical stores.
• Automation tools ensure tax collection across all platforms, preventing gaps in compliance.

✅ Accurate Tax Exemptions & Certificate Management

• Some sales (e.g., B2B resale or nonprofit purchases) are tax-exempt.
• Tax automation tools track exemption certificates to ensure compliance and avoid unpaid tax liabilities in audits.

✅ Real-Time Reporting to Prevent Unpaid Taxes

• Many businesses forget to set aside collected tax and struggle with payments.
• Automation tools track collected sales tax in real-time, so businesses know exactly how much to remit.

✅ Integration with Accounting & Payment Systems

• Sales tax automation tools sync with QuickBooks, Stripe, PayPal, and e-commerce platforms, ensuring accurate records and preventing unreported tax liabilities.

Registration

✅ State-Specific Guidance on Registration Requirements

• Each state has different registration thresholds and tax rules.
• Tax automation tools provide state-specific guidance so businesses know when and where to register.

✅ Pre-Filled Registration Forms

• Some tools assist with completing state sales tax permit applications, reducing errors and processing time.

✅ Automated Registration Services for Multi-State Compliance

• For businesses needing to register in multiple states, automation tools simplify the process by handling applications across multiple tax agencies.

✅ Reminders & Compliance Monitoring

• Many states require periodic renewals for sales tax permits.
• Tax automation tools send reminders and track compliance status to prevent registration lapses.

Kintsugi - The Best Automation Tool

Kintsugi is the ultimate sales tax automation tool. It offers everything mentioned above with an easy-to-use interface, seamless integration with Shopify, Stripe, and WooCommerce, and real-time compliance tracking across multiple states. It automatically calculates the correct sales tax rates, monitors nexus thresholds, and streamlines the registration and filing process, eliminating manual work and reducing compliance risks.

Kintsugi also offers the following:

Voluntary Disclosure Agreement (VDA)

A Voluntary Disclosure Agreement (VDA) allows businesses to come forward and settle past uncollected sales tax liabilities while minimizing penalties and avoiding legal consequences. Many states offer VDAs with reduced back tax obligations, waived penalties, and limited lookback periods, helping businesses become compliant without excessive financial burden. Using a sales tax automation tool like Kintsugi ensures that businesses can quickly identify unpaid taxes and navigate the VDA process efficiently to minimize risk.

Filing Autopilot

Filing Autopilot ensures that sales tax returns are filed on time, every time, preventing businesses from facing late fees, penalties, and interest charges. Kintsugi automates the entire filing process, from accurate tax calculation to timely remittance, so businesses never miss a deadline. With autopilot mode, compliance is handled seamlessly, giving businesses peace of mind while eliminating manual paperwork.

Deregistration

If a business no longer meets nexus thresholds or stops operating in a particular state, it must deregister its sales tax permit to avoid unnecessary filings and compliance obligations. Kintsugi simplifies the deregistration process by ensuring all final tax returns are submitted, outstanding liabilities are cleared, and permits are properly closed. This prevents businesses from accidentally remaining on state tax rolls, avoiding unnecessary audits and compliance risks.

Error Insurance

With Error Insurance, businesses are fully protected in case of any tax miscalculations or compliance mistakes, ensuring that errors won't result in unexpected costs. Kintsugi's guarantee covers mistakes up to the total amount paid for the service, meaning that if a misstep occurs, the business doesn't bear the financial burden. This added security ensures absolute confidence in tax compliance, making Kintsugi a truly risk-free solution.

Refunds and Amendments

If businesses overpay, underpay, or make errors in past tax filings, they need a way to correct and adjust their returns. Kintsugi simplifies refunds and amendments, ensuring that businesses can recover overpaid taxes or fix past mistakes without hassle. With quick processing and seamless adjustments, businesses can stay compliant while ensuring they only pay what they owe—nothing more, nothing less.

Unlike other solutions, Kintsugi provides end-to-end sales tax management, ensuring businesses never miss a required registration, filing, or tax exemption. With Kintsugi, businesses can focus on growth while staying effortlessly compliant with ever-changing sales tax laws. Book a demo or sign up with Kintsugi to solve your sales tax burden.