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Sydney Kida | March 25, 2020 |
The uncertain 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.
Using sales tax as working capital is a horrible idea. Remitting sales tax as a "patch" isn't a solution in normal or extraordinary circumstances. Sales tax should never be viewed as an interest-free short term loan from the government to be used to run your business. This revenue belongs to the state. 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.
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.
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 governmental agency such as the SBA (Click Here) 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. Click here for details.
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.
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. Consider these tips to help plan for managing sales tax moving forward.
DAVO Automated Sales Tax is here to help you through this difficult period. Feel free to contact me at david@davosalestax.com 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 such as Revel 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 david@davosalestax.com or (888) 659-8432.