Laws on State Sales Tax Crimes

Perhaps you have traveled out of state to buy a car. Or maybe you've simply cursed the fee added to the purchase price of your groceries. If so, you are responding to a state sales tax. Both retailers and consumers are responsible for these sales taxes, whether they like them or not. Intentional acts to avoid paying these sums to the state can result in civil and criminal penalties.

What Is a State Sales Tax?

A state sales tax is an add-on to the purchase price and must be collected by the merchant. Sales tax is governed by state law and not every state has a sales tax.

Public Purpose of Sales Tax

Sales taxes support a wide array of public services. These include the upkeep of public parks, libraries, prisons, and the like. Sales taxes may also fund police and fire departments, courts, health care, and roads.

Retailers who properly collect and remit sales taxes support these public services. Retailers who don't comply with sales tax laws fail to support these essential services and have an unfair advantage over their competitors who do obey the law.

Collection of State Sales Tax

Certain states impose a sales tax at the point of purchase of goods or services within the state. The seller both collects the tax (at the time that the consumer pays for the good or service) and reports and pays the tax to the state. The amount of the tax is a percentage of the purchase price. For example, California's state sales tax rate is 7.25% of the sales price.

Collection of Internet Sales Tax

States can also impose and collect taxes for internet sales based on where the consumer lives. An internet or e-commerce transaction takes place as if the e-retailer was physically present in the state. These types of laws put e-retailers on the same footing as brick-and-mortar sellers. (South Dakota v. Wayfair, 138 S.Ct. 2080 (2018).)

How Is Sales Tax Collected and Reported?

You've probably noticed the sales tax on receipts at the supermarket and elsewhere. It appears under the purchase price and is a percentage of the sales price. This is part of the merchant's record of collecting the sales tax from you for the purchase. By law, the merchant must then report the sales tax collected and turn over that amount to the state. If a merchant fails to collect the state sales tax, it's up to the consumer to report the tax due on their state income tax return and pay the tax to the state.

Consumers in states with sales tax might try to avoid being hit with these taxes (either at the point of sale or when they file their own returns) by traveling out of their home states to states without sales taxes for major purchases, such as vehicles. However, this tactic doesn't generally avoid one's tax obligation to the state. In most states, once the consumer brings the personal property back into the taxing state, the consumer is liable for a use tax in their home state.

Failure to Collect and Report State Sales Tax by Retailers

When a retailer intentionally fails to collect the tax, or fails to report taxes collected, that retailer has committed tax evasion—a crime. Here are examples of how this can happen.

Not Collecting the Tax

Some merchants don't collect the sales tax. This can occur in more informal settings, such as street fairs, or flea markets. But, a large retailer may also ignore the tax to undercut competitors thanks to the lower bottom-line price to the consumer. As a result, not only is the public deprived of the taxes needed to fund important services, the cheating merchant's competitors suffer the loss of sales due to the unfairly low prices of the cheater.

Not Reporting and Turning Over Collected Taxes

Another way that some merchants evade sales taxes is by collecting the tax but not reporting it to the state and thus pocketing the tax. This is, of course, stealing from both the state and the consumer, who naturally assumes that the sales tax they pay will find its way to the public services for which it was intended.

State Investigations Into Sales Tax Evasion

States discover sales tax evasion through several means. Their revenue departments typically have units devoted to investigating tax fraud and evasion. These units can gather information from consumer tip lines, random audits, or targeted audits.

Signs of Sales Tax Evasion

Among the signs that a merchant may be evading state sales tax are:

• failure to issue sales receipts
• failure to ring up purchases on a cash register
• failure to report sales taxes collected (employees may notice this), or
• very low prices.

In some cases of sales tax evasion, the IRS may become involved in the investigation and conduct its own audit.

Criminal Penalties for Sales Tax Evasion

Sales tax crimes may be either misdemeanors or felonies. Penalties vary by state. Some states impose harsher penalties for repeat offenses or offenses involving higher dollar amounts.

For instance, California makes sales tax evasion a misdemeanor. But once the tax liability exceeds $25,000 in a one-year period, the penalty increases to a felony. Georgia law makes it a first sales tax evasion conviction a misdemeanor of a high and aggravated nature. Subsequent convictions are felonies. (Cal. Rev. & Tax. Code §§ 7153, 7153.5; Ga. Code §§ 48-8-7, 48-8-8 (2024).)

Civil Penalties for Sales Tax Evasion

Civil penalties for sales tax evasion can be steep. A retailer can be penalized for failure to file a tax return and failure to pay the tax. Generally, these penalties are a percentage of the tax due (plus interest).

Consult a Lawyer

If you or your business have been audited or are under investigation for sales tax evasion or any other crime, a criminal defense lawyer with experience in the laws of your state is an invaluable resource. Consulting an attorney early in the process may enable you to negotiate a settlement that avoids jail time and increased fines, and may limit the harm to your business and finances.