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The high cost of sales tax mismanagement

by Katherine Martinez March 25, 2026

In the world of e-commerce compliance, there is a dangerous misconception: the idea that all the money flowing through your point-of-sale system is yours to manage. In reality, when it comes to sales tax, your business is merely a temporary custodian.

The moment a customer pays sales tax at checkout, that money belongs to the state and local taxing jurisdictions. Treating it as regular cash flow for operations or failing to calculate it accurately isn’t just a bookkeeping error, it’s a high-stakes gamble with your company’s future. To understand the risk, we have to look at the two ways a business can lose: by keeping what isn’t theirs, or by collecting what they shouldn’t have.

To help, we asked an expert from our Audit and Risk team, Katherine Martinez, to explain these scenarios and how they can lead to audit or business seizures. Katherine helps safeguard the integrity of the tax ecosystem at TaxJar. She has valuable experience in tax compliance and filing from her previous role at the Texas Comptroller.  

Scenario A:  Collected sales tax but didn’t remit

Sales tax is often referred to as a pass-through tax. This means the tax is collected by the business but passes through to the appropriate state or local tax authorities. It’s never the businesses’ money to keep permanently. 

The risk: fraud and seizure

When cash flow gets tight, some businesses dip into the sales tax bucket to cover payroll or rent. From a state’s perspective, this isn’t just a late payment—it’s an illegal act. 

Because you took money from a customer under the guise of taxes and then spent it on your own business, the penalties are aggressive:

• Business seizure: States like Colorado are notorious for seizing businesses. If you fail to remit, the Department of Revenue can (and will) physically chain your doors, seize your equipment, and auction your assets to settle the debt. One example that comes to mind from her previous experience with the Texas Comptroller is when a sneaker retailer had multiple pairs of shoes confiscated by the state and sold to cover unpaid sales tax. Cash on hand was also seized and applied to the outstanding tax debt.
• Personal liability: Most business tax laws allow authorities to hold owners personally liable for unpaid taxes. This means the state can come after the business owner’s personal bank accounts, car, or home to satisfy the unpaid tax, regardless of whether the business is an LLC or a corporation.

The real-world reality

A restaurant in Colorado recently made headlines when state officials arrived during business hours to seize the property. They had used collected sales tax to fund other business operations. The result? They didn’t just owe the tax; they lost the entire business and their reputation in one afternoon.

Scenario B: Over-collected tax

On the other end of the spectrum is collecting sales tax on items that are exempt or charging a higher rate than required. While this might seem like a harmless error, after all, you aren’t short-changing the government, it’s a magnet for litigation.

The risk: class action and unjust enrichment

When you over-collect, you are effectively overcharging the consumer. If you remit that extra money to the state, the state has unjustly enriched itself at the consumer’s expense. If you don’t remit the over-collected portion, you’ve committed fraud. 

• Class action lawsuits: Trial lawyers actively hunt for retailers who miscalculate tax on a large scale. If you incorrectly charge 8% tax on a $50 item to 100,000 customers, you’ve overcharged $40,000. A class-action firm will sue you for that $40,000 plus millions in legal fees and punitive damages.
• Civil penalties: Even without a lawsuit, states can penalize businesses for improper collection, forcing them to undergo grueling audits to prove where every penny went.

The best thing to do in this scenario is to refund the excess sales tax to your customers. 

The real-world reality

The apparel brand SKIMS faced a high-profile class-action lawsuit for allegedly collecting sales tax on transactions in jurisdictions where those specific items were exempt (such as clothing exemptions in certain states). Even for a massive brand, the cost of defending a class-action suit and the resulting negative headlines far outweighed the convenience of using a simplified, inaccurate tax engine.

How TaxJar protects your bottom line

The complexity of product taxability is where most businesses stumble. For example, a sweatshirt might be taxable in one state but exempt in another if it’s under a certain price threshold. TaxJar can help you avoid these costly mistakes by managing all the different aspects of compliance, including:

1. Calculating real-time rates: Ensures you aren’t over-collecting based on hyper-local district taxes. We also only charge sales tax when required based on state and local sales tax laws, backed by our guarantee.
2. Automating remittance: Ensures the money you collect actually reaches the state, keeping your doors open and your personal assets safe, also backed by our guarantee. TaxJar can also help you file an amended tax return. 

To learn more about TaxJar and get started automating your sales tax compliance, start a free, 30-day trial today or book a demo with our sales team.

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