The uncertain business environment brought on by COVID-19 has businesses struggling to hold onto as much cash as possible. Many business owners are asking whether they should stop remitting sales tax and instead use it as working capital.
Question: Do the potential consequences of not remitting sales tax outweigh the benefit of having extra cash on hand?
Answer: Under normal circumstances, the answer is unequivocally NO!
Using sales tax as working capital is a horrible idea. Sales tax should never be viewed as an interest-free short term loan from the government to be used to run your business. Sales tax revenue belongs to the state and business owners have a fiduciary responsibility to hold it harmless and secure.
It is actually illegal to use sales tax revenues as working capital. Additionally, the risk of using sales tax as working capital is that it won’t be available when it’s time to remit it to the State. Missed sales tax payments result in severe penalties – usually, around 20% on the taxes owed – and in egregious cases of nonpayment, states can and will close businesses and prosecute owners. It’s simply not worth the risk, so don’t do it.
But these are not normal times.
Businesses, and restaurants, in particular, are reconfiguring operations and fighting for their survival. With a precipitous drop in sales, businesses are facing a huge cash crunch. This makes sales tax revenue a tempting and easy source of short term working capital.
Question: Okay, so normally it’s a bad idea to use sales tax revenue as working capital. But is it okay to use this money during the COVID-19 crisis?
Answer: No, it’s still not a good idea, even during the COVID-19 crisis.
The first thing to realize is that using sales tax revenue as working capital is essentially a loan and not paying it to the state when due has consequences.
Like normal loans, this money will have to be repaid in a lump sum or via a payment plan. Unless states make changes, the interest on this loan will be incredibly high, anywhere from 10 to 20 percent. On top of that, the repayment window will be very short. This combination is not going to be beneficial to a cash strapped business.
Some states are offering extensions on payments though you should still file a return on time. You can also check your state’s website to see the latest updates on any extensions being offered.
Question: Okay, but I need working capital now. What can I do?
Answer: You have options from the federal government, your local state government, your merchant processor, your bank, or even a cash advance on a credit card.
The best alternative is to collect and remit your sales tax on time and in full and to seek alternative funding sources.
A good place to start is with a disaster relief program either from a federal government agency such as the SBA or your local state government. Many of these programs have very low rates of interest and very long windows for repayment. To get you started, our friends at Gusto put together a great spreadsheet of disaster relief funding options by state.
Other potential sources of capital include a merchant cash advance from your merchant processor, a line of credit from your bank or a cash advance on a credit card.
Make a plan for what you can control.
Make multiple plans for what is out of your control.
In uncertain times, the best way forward is to have a plan for the things you can control and multiple plans for the things you can’t. Knowing that you will have to remit sales tax to the state at some point, here are a few tips that are worth considering to help plan for managing sales tax moving forward.
- File your sales tax returns on-time: In many states, filing a tax return without a payment carries a lower penalty than filing late. Even if you don’t have the funds to pay, it is better to file on time than it is to go back 9 months or a year from now and try to reconcile your sales records.
- Don’t use sales tax as working capital: Sales tax is not a good source of working capital. Penalties are high and repayment terms are short. Find better alternatives.
- Missed sales tax filings and payments invite an audit: Even in tough times, there will be sales tax audits. Missing filings for extended periods of time will send up a flag to the tax authority.
- Even if you close for an extended period of time, file your sales tax returns: If you temporarily close your business, you are still required to file sales tax returns to avoid a minimum penalty for late filing.
- Pay any amount you can: The intent to pay will go a long way when it’s time to negotiate a payment plan with the State.
- Check your State website frequently: States will be putting all options on the table to help businesses cope and recover. This may include extending filing periods, waiving penalties for late payments or tax holidays. Find your state’s tax website here.
- Be proactive: Don’t make decisions and hope it all works out in the end. Plan for the worst and hope for the best.
DAVO Automated Sales Tax is here to help you through this difficult period. Feel free to contact me at firstname.lastname@example.org or call us at (888) 659-8432 with any questions and we will point you down the correct path.
Disclaimer: The information contained in this article does not constitute tax advice and is for informational purposes only.
David Joseph is the co-founder of DAVO Technologies (davosalestax.com) and a former restaurant owner. DAVO Automated Sales Tax integrates with many popular POS systems to set aside sales tax daily and file and pay it when it’s due, on-time and in-full. Put your sales tax on autopilot and never worry about it again. David can be reached at email@example.com or (888) 659-8432.