The penalties depend on where you operate, but since most of our clients are in Tennessee, that’s where I’ll focus. Tennessee treats sales tax as a trust fund tax. The money belongs to the state the moment your customer pays it. You’re just holding it temporarily and forwarding it on schedule. When you don’t, the state treats that as their money you kept.

There are two scenarios here, and they’re different. Not remitting means you collected the tax from customers but didn’t send it to the state. Not collecting means you never charged customers sales tax in the first place. Both carry penalties, but the second one hurts more because you absorbed the cost out of your own revenue.

For late filing, Tennessee charges a penalty of 5% of the unpaid tax for each month it’s late, up to a maximum of 25%. Interest also accrues on the unpaid balance from the original due date. These stack up fast. A few months of missed filings can turn a manageable tax bill into something significantly larger.

The real pain hits when you haven’t been collecting sales tax at all. You still owe the tax on every taxable transaction even if you never charged your customers for it. If Tennessee audits you and finds three years of uncollected sales tax, you owe the full amount plus penalties and interest on all of it. For a business doing $400,000 in annual taxable sales at a combined rate near 9.75%, that’s around $117,000 in tax alone before penalties and interest get added. That number can put a small business under.

Personal liability is the part most owners don’t see coming. Because sales tax is a trust fund obligation, the state can go after the individuals responsible for collecting and remitting it. Your LLC or S-corp won’t protect you. If the business can’t pay, Tennessee comes after you personally. This applies to owners, officers, and anyone with authority over the company’s finances.

Criminal penalties are possible in extreme cases. Willfully failing to collect or remit sales tax in Tennessee can result in misdemeanor charges. This isn’t typical for honest mistakes or ignorance of the rules, but it exists for deliberate evasion.

States are getting better at finding businesses that aren’t compliant. Tennessee has access to payment processor data, marketplace facilitator records, and business license filings. If you have an active business license and aren’t filing sales tax returns, that inconsistency can trigger a review.

If you’re behind, the best move is to get compliant before the state contacts you. Tennessee offers voluntary disclosure agreements for businesses that come forward on their own. These can reduce or eliminate penalties, though you’ll still owe the underlying tax and interest. The penalty savings alone make voluntary disclosure worth pursuing over waiting and hoping nobody notices.

Getting sales tax management right from the start prevents these problems from compounding. That means collecting the correct rates, filing returns on schedule, and keeping records that hold up under scrutiny. If you’re unsure whether your business should be collecting sales tax or you’ve fallen behind on filings, a bookkeeper in Franklin who understands Tennessee’s requirements can help you figure out where you stand and get current before penalties pile up further.