What Happens If a Business Collects Sales Tax but Does Not Remit It?

Sales tax collected from customers is not business income. It is money held in trust for the state — collected on the state's behalf and required to be remitted on the filing schedule. When a business collects sales tax and does not remit it, the state treats this as a serious compliance failure.

The consequences are more significant than simply owing the tax. New York treats the failure to remit collected sales tax as a trust fund violation — the business collected money that belonged to the state and did not turn it over.

Penalties and Interest

New York imposes penalties for late filing and late payment of sales tax. The penalty for failure to file is 10% of the tax due. The penalty for failure to pay is also 10%. Interest accrues on unpaid balances from the due date.

For willful failure to collect or remit sales tax, New York can impose additional civil penalties and, in serious cases, pursue criminal charges. The state takes the trust fund nature of collected sales tax seriously.

Personal Liability for Business Owners

One of the most significant aspects of sales tax non-compliance is that the liability is not limited to the business entity. New York can assess sales tax liability personally against individuals who were responsible for collecting and remitting the tax — including business owners, officers, and in some cases managers.

This means that forming an LLC or corporation does not protect the responsible individuals from personal liability for collected but unremitted sales tax. The trust fund nature of the obligation pierces the corporate veil.

What to Do If You Are Behind on Sales Tax Remittances

If a business has collected sales tax and not remitted it, the situation should be addressed proactively rather than waiting for the state to identify the problem. Options include:

• Filing and paying the overdue returns: Filing late returns and paying the tax owed, along with applicable penalties and interest, stops the accrual of additional penalties and interest.
• New York Voluntary Disclosure Program: New York offers a voluntary disclosure program that can reduce or eliminate penalties for taxpayers who come forward before the state contacts them. Eligibility and terms depend on the specific situation.
• Installment agreements: If the full amount cannot be paid immediately, the state may agree to an installment payment arrangement.

These situations benefit from professional guidance. The approach taken — and the order in which steps are taken — can affect the outcome significantly.