Who this is for
- US sellers whose paid invoices left out sales tax that applied
- Recurring invoices that went out untaxed for several periods
Not covered here
- Whether and when you had to collect in a state (economic nexus)
- Lookback and voluntary disclosure across several states
- What proves a sale was exempt, and local rate selection
- Canadian GST/HST
Who owes the state sales tax that was never charged?
Generally the seller does. A seller that should have charged sales tax owes it to the state whether or not the customer paid it, and tax paid late can carry penalty and interest. California says the seller is responsible for paying the correct amount. Texas says the seller is responsible for collecting and paying it. New York makes a person required to collect the tax personally liable for it, and that term covers partners and LLC members, and officers, directors, managers and employees who have a duty to comply (section 1131).
Whether you can then bill the customer for it is a separate question. It turns on your state's law and on what the sale agreement and invoices said about tax (next section). If they said nothing, you may end up paying it yourself.
The customer can owe the tax too, as a separate duty. Use tax is the buyer's own tax when the seller charged none (use tax on business purchases): a Texas buyer whose seller did not charge tax must pay it directly to the Comptroller (Texas use tax), a California buyer's use tax liability continues until the tax is paid to the state, apart from a retailer's receipt for it (R&TC 6202), and a New York customer who did not pay the vendor owes it directly to the Tax Department. That is not a reason to leave the seller's own periods unresolved.
A sole proprietor owes the tax directly. For an entity, people behind it can owe it too: Texas makes a responsible individual personally liable for tax collected from customers and not paid over (Tax Code 111.016), and California's personal liability for an entity's sales tax applies after the business ends (R&TC 6829). Who, and for how long, is in filing sales tax returns.
A case is not simple when:
- The price was meant to include the tax, so the tax comes out of what was received.
- Invoices, including recurring ones, went out untaxed for many periods, to many customers, or into more than one state.
- Some buyers may have been exempt, but no certificate is on file.
- Tax was charged on some invoices and never sent in. That is a different and more serious problem.
- A state has already written to you.
Gather first: the invoices and contracts (look for any wording about tax), the ship-to state of each sale, the returns filed and tax paid for the same periods, the rate that applied, and any resale or exemption certificates.
Can I send a corrected invoice and collect the tax from my customer now?
Only if the seller has a right to charge the customer for the tax, and the states differ on where that right comes from. There is no national answer. Three states read for this page:
| State | What the state's own text says | What it means for a rebill |
|---|---|---|
| California | Whether a retailer may add sales tax reimbursement to the price depends solely on the terms of the agreement of sale. Agreement is presumed if the agreement says so, the invoice or other proof of sale shows the amount, or a notice was posted (Regulation 1700). | A contract clause, or a tax line on the invoice or other proof of that sale, supports a rebill. If the contract is silent and that sale's invoice showed no tax, no presumption applies and the agreement's terms decide. |
| New York | A person required to collect the tax has the same right to collect it from the customer as if it were part of the purchase price. A customer who did not pay the vendor must file a return and pay the Tax Department within 20 days of the date the tax was required to be paid (section 1133). | The statute gives the seller the same right to collect the tax from the customer as for unpaid price, and requires the state tax commission to be joined as a party in any action the seller brings to collect it. The text read does not say how a contract silent on tax is treated, so the sale terms still matter. The customer has its own duty to the state. |
| Texas | The seller is responsible for the correct amount, and a buyer who was not charged pays use tax directly (collection FAQ; use tax). A seller who makes a taxable sale must add the tax to the sales price; once added, it is a debt of the buyer to the seller and, if unpaid, recoverable at law like the original price (Tax Code 151.052(a)). | Texas law treats added tax as a customer debt you can collect like the price. It does not say how tax first added after the sale fits a fixed or tax-included price already agreed, so the sale terms still matter. |
| Any other state | Not read for this page. | Do not assume the California or New York answer applies. Find what your state's law says about adding omitted tax to a sale already made, then check it against what your contract and invoices said. |
Charge only the tax that is due: California requires a seller that collects more than the tax due to return the excess to the customer or pay it to the state. A customer who refuses to pay does not end the seller's duty to the state.
What decides whether I can pass the tax on: the contract, the invoice wording or the state?
All three. The state's law sets the test; the contract and the invoices are the evidence of what was agreed. In California the terms of the agreement of sale decide, and a contract clause adding sales tax, a tax amount shown on the invoice or other proof of that sale, or a posted notice each raises a presumption that the customer agreed (the law treats it as agreed unless shown otherwise). A single total with no tax line and no tax-included wording raises none, so the agreement's other terms decide. The regulation does not say whether a tax line first added on a later corrected invoice counts as proof of the sale, so a rebill built on it is uncertain (Regulation 1700). It covers sales of physical goods; a service or digital product may follow different rules.
Do you factor sales tax into the price or charge it on top?
In Texas and California, either can be right, but the customer must have been told which.
- Texas: the seller must state the tax separately unless it gives the customer a written statement that Texas tax is included in the sales price and displays a sign saying so (Texas Comptroller).
- California: list a separate amount on the invoice or receipt. If tax is included in the price instead, the seller must tell the buyer through a posted notice, a price tag or an advertisement, in the wording Publication 73 sets out.
To back the tax out of a tax-included total, Texas gives this formula: price divided by one plus the tax rate gives the price before tax, and the difference is the tax.
The trap is an invoice that said nothing, followed by "we meant it to include tax". The guidance read for this page ties tax-included pricing to telling the customer in the required form. It does not say a seller can declare a price tax-included afterward, or how a state computes the amount when neither form of wording was given. Work out the exposure both ways: tax on top of the amount received is the larger figure, and the state decides which applies.
Was the sale taxable in the first place?
Some untaxed invoices were right to go out untaxed, so check before computing anything. Four common reasons:
- The item or service is not taxable in that state. States differ on which services, software and digital goods are taxable (for software, see sales tax on SaaS by state). Check the state's own list of taxable sales first.
- The buyer was exempt or buying for resale. Texas treats a sale to a customer who gives a resale or exemption certificate as exempt (Texas Comptroller). Timing matters: New York asks for the certificate no later than 90 days after delivery or performance, and after that the seller and the buyer both carry the burden of proving the sale was exempt (ST-120). A certificate gathered long after the sale may not be enough.
- The goods were delivered out of state. Texas sellers need not collect Texas tax on items shipped and delivered to out-of-state locations, but the records must show proof of delivery, such as a bill of lading, shipping invoice or postal receipt (Texas Comptroller). California generally does not tax a product shipped directly to a purchaser out of state for use outside California; in most cases the sale does not qualify if the purchaser takes possession in California (Publication 101). Neither rule settles tax in the destination state: Texas notes that its sellers may need to collect tax in another state.
- You did not yet have to collect there. See when you must collect sales tax.
When and how a certificate must be taken, and what counts as a valid one, is in exemption certificates from customers; which local rate belongs on a sale is in sales tax sourcing by ship-to address.
How do I fix paid invoices that went out without the correct sales tax?
Where a state accepts amended returns, the tax is generally reported for the period of the sale, not the period in which you found the mistake. California's filing instructions say not to adjust current-period gross sales for an earlier error: amend the prior period and pay the additional tax with penalty and interest (CDTFA). Texas accepts an amended return with any additional tax, penalty and interest.
How far back the state can assess decides how many periods to fix. Texas: 4 years from the date the tax was due, with no limit if no report was filed or the corrected tax is 25% or more above what was reported (Tax Code 111.201 and 111.205). New York: three years from the date a return was filed, and at any time if none was filed (section 1147(b)). California: three years after the later of the month following the quarter or the return's filing, eight years if no return was filed, and no limit for fraud (R&TC 6487).
Which route fits depends on how many periods are affected and whether the state has contacted you; check it before filing anything. A voluntary disclosure agreement is a deal you ask a state for before it contacts you: you report and pay the past tax, and the state limits penalties and, in some states, how far back it looks.
| Your situation | Route to check | What the state's text says |
|---|---|---|
| One or a few periods, registered and filing, no contact from the state | Amended returns for each period | California and Texas each describe an amended return for the period, with the additional tax, penalty and interest. |
| Many periods, periods never filed, or you want penalty relief across periods | Voluntary disclosure agreement | Texas: open to a business the Comptroller has not contacted about the liability or notified of an audit; review is limited to reports due four years before the business first contacts the Comptroller; statutory penalties are waived and, in most cases, interest (Texas). New York: open to a taxpayer not under audit for the tax and periods and not billed; you pay the disclosed tax and interest, with no penalties; do not file the returns before the acceptance letter (New York). |
| The state has already contacted, audited or billed you | Respond to the notice | Texas closes its program once the Comptroller has contacted you about the liability or notified you of an audit; New York closes its program once you are under audit for those taxes and periods or have been billed. See sales tax audit. |
New York also says a taxpayer who filed a return but did not pay in full is not eligible. A seller that filed returns reporting the sales but not the tax should ask the Tax Department which route applies before filing anything. California's disclosure program does not apply to sales subject to California sales tax or to anyone who holds or held a seller's permit (CDTFA); a registered California seller with many periods should ask CDTFA which route fits. Step-by-step filing is in filing sales tax returns; several states and lookback periods are in catching up on uncollected sales tax.
Will penalties and interest apply, and can they be waived?
Penalty and interest apply when the tax is paid after its due date, and waiver depends on the state and the reason.
| Texas | California | |
|---|---|---|
| Late-payment penalty | 5% if paid 1–30 days late, 10% if later; $50 more for each late report; 20% in total if paid after the date on a Notice of Tax/Fee Due (Texas) | 10% for a late return or late payment, not more than that rate together (CDTFA) |
| Interest | Starts on the 61st day after the report was due, at a variable yearly rate | For each month or part of a month the payment is late |
| Penalty waiver | All reports filed and all tax paid first; not if a waiver was granted in the past two years, absent extenuating circumstances; limited to one annual, two quarterly or six monthly report periods (Texas) | Reasonable cause and circumstances beyond your control despite ordinary care; not for lack of funds, willful neglect or lack of ordinary care; request on form CDTFA-735 (CDTFA) |
| Interest waiver | In most cases under a voluntary disclosure agreement, but not on tax collected and not remitted (Texas); the waiver request form also covers interest (Texas) | Narrow: a disaster, an unreasonable agency error or delay, or reliance on erroneous written advice from the agency |
Texas sends requests beyond its period limits to its voluntary disclosure program. Each state decides a request on its facts. California also adds separate penalties when it finds unreported tax came from negligence, intentional disregard of the law or fraud (CDTFA).
Tax you actually collected from customers and did not send in is treated differently. Texas sets no lookback limit for it and does not waive interest on it in a disclosure agreement (Texas), and California can add a separate penalty when a seller knowingly collects the tax and does not remit it on time (CDTFA). See catching up on uncollected sales tax.
How do I stop recurring invoices going out without sales tax?
Fix the recurring template or schedule first, so the next cycle goes out right; invoices already sent and paid follow the steps above. Then fix the cause in the invoice setup and the sale agreement, and check every period against the return.
- Find the cause. Common ones are tax switched off for a customer, an item marked nontaxable, no ship-to state on the customer record, or no registration yet in a state where one is needed (if so, see catching up on uncollected sales tax).
- Put the tax in the paperwork. California and Texas guidance looks for a separate tax amount on each invoice or the state's tax-included wording, and California also accepts a contract clause adding the tax; check your state's rule. For a fixed-price or subscription contract, read what it allows before the next invoice adds tax.
- Mark customers who are really exempt, and keep the certificate. Texas requires certificate records for at least 4 years (Texas).
- Set the rate under the state's sourcing rules. Depending on the state and the sale, the seller's location or the delivery address sets the local rate; Texas local sales tax is in general based on the seller's place of business (Texas Comptroller). See sales tax sourcing by ship-to address.
- Reconcile each period. Compare taxable sales times the rate, the tax shown on invoices and the tax paid on the return, so a gap shows up in the first period, not after a year. If they already disagree, see sales tax payable that does not match the return.
How do a rebill, a dispute or an absorbed tax show in my books?
Track the tax owed to the state apart from what customers paid. Where the tax is imposed on the buyer, it passes through a payable and stays out of sales; where a state words it as the seller's tax, it may belong in gross receipts, and a preparer should settle which applies before you post. Both cases are in sales tax journal entries; the three cases look like this:
| What happened | In the books |
|---|---|
| The customer pays the rebill | For buyer-imposed tax, the payment clears the amount billed to the customer, and the liability clears when the return is paid. Check first whether you already paid the state, so the tax is not booked twice. |
| The customer disputes or refuses | The tax is still owed to the state. The unpaid rebill is a receivable you may not collect (writing off unpaid customer invoices), and the tax you owe may end up as your own cost. |
| You absorb the tax from the start | The tax you pay may reduce what you kept from the sale. Penalty and interest go on their own lines so they stay visible. |
How these amounts are treated on the income tax return is a separate question for the person preparing it.
Example
These examples are illustrative. All figures are in US dollars. The Texas example uses the state's maximum combined rate; the California and New York rates are assumed, not published rates for any sale.
Texas: $12,000 of taxable sales, no tax shown
An Austin seller billed $12,000 of taxable sales, all paid, with no tax on the invoices. At Texas's 8.25% maximum combined rate, the tax on top of the amount received is about $990. With the required tax-included statement and sign, the tax inside the price would be $12,000 minus ($12,000 divided by 1.0825), about $915. Without that wording, the higher figure is the safer one to plan around, and the state decides. It owes the Comptroller either way. Tax added to the price is a customer debt under Texas law; an agreed fixed or tax-included price can affect what it can still collect.
California: $30,000 to six customers, contracts silent on tax
A furniture maker billed $30,000 to six customers. No contract mentioned tax, no invoice showed it and no notice was posted. At an illustrative 8% combined rate the tax is $2,400. No Regulation 1700 presumption applies, so the agreement's terms decide, and they say nothing. The maker may have to treat the $2,400 as its own cost, and it amends the returns for the periods of the sales.
New York: $5,000 of taxable printing, no tax shown
A print shop billed $5,000 of taxable work with no tax. At an illustrative 8% combined rate the tax is $400. If the work was taxable, the shop is liable, and a customer who did not pay the shop also owes the tax to the Tax Department under section 1133. Settling the shop's own liability and rebilling the customers are separate steps; the state's route depends on whether the shop has filed returns and been contacted.
Different for you?
- Invoices have gone out untaxed for months, customers have already paid, or a state has written to you: which state and period rules apply, whether to rebill or absorb, and whether to correct through amended returns or a disclosure agreement are decisions to make with the records in hand. See bookkeeping help and catching up on uncollected sales tax.
- You are not sure you had to collect in that state: see when you must collect sales tax.
- A buyer says it was exempt and you have no certificate: see exemption certificates from customers.
- A state has opened an audit or sent an information request: see sales tax audit and bring the notice to a bookkeeping review.
- You charged tax and never sent it in: see catching up on uncollected sales tax and match the deposits and returns first.
- Your books cannot show what was invoiced, paid and taxed by state, or the tax on the returns does not match the invoices: the amount owed cannot be worked out until they do. See catching up on overdue books and bookkeeping help.
Figures on this page
| Figure | Value | Source |
|---|---|---|
| New York customer deadline to file and pay tax the vendor was not paid A customer who failed to pay the tax to the person required to collect it must file a return and pay the tax directly within this time of the date the tax was required to be paid | 20 days | New York Tax Law section 1133 Checked |
| New York window to get a Certificate of Capital Improvement from the customer After rendering services. After that, the contractor bears the burden of proving the work was a capital improvement. | 90 days | New York Tax Department: Form ST-124, Certificate of Capital Improvement (12/15) Checked |
| Texas general tax assessment limit Generally measured from when the tax becomes due and payable; exceptions and tolling can apply | 4 years | Texas Tax Code: Section 111.201 Checked |
| Texas gross-error threshold removing the assessment limitation Section 111.205(b): corrected tax due and payable exceeds the amount initially reported by at least 25 percent. | 25% | Texas Legislature: Tax Code section 111.205(b) Checked |
| New York general sales tax assessment limit Counted from the date a return was filed; the tax may be assessed at any time if no return was filed or the return was willfully false or fraudulent | Three years | New York Tax Law section 1147 Checked |
| California general sales tax deficiency determination limit After the later of the last day of the month following the quarterly period or the return's filing; not for fraud or intent to evade | Three years | California Revenue and Taxation Code section 6487 Checked |
| California sales tax determination limit when no return was filed After the last day of the month following the quarterly period for which the amount is proposed to be determined | Eight years | California Revenue and Taxation Code section 6487 Checked |
| Texas voluntary disclosure review period Reports due four years before the business first contacts the Comptroller; no limit for tax collected and not remitted | Four years | Texas Comptroller: Voluntary Disclosure Program (Publication 96-576) Checked |
| Texas late tax payment rate, days 1–30 Share of past due tax | 5% | Texas: Penalties for Past Due Taxes Checked |
| Texas late tax payment rate, after day 30 Share of past due tax | 10% | Texas: Penalties for Past Due Taxes Checked |
| Texas late sales tax report penalty Per late report, including a report with no tax due | $50 | Texas: Penalties for Past Due Taxes Checked |
| Texas late tax payment rate after notice date Total share of past due tax if paid after date stated on Notice of Tax/FEE Due | 20% | Texas: Penalties for Past Due Taxes Checked |
| California late sales and use tax return or payment penalty rate Share of the tax due for the period; a late return and a late payment together do not exceed this rate | 10% | California CDTFA: Publication 75, when interest and penalty apply Checked |
| Texas statutory interest start on past due sales tax Interest begins accruing on the 61st day after the due date of the report; the rate is variable and set each calendar year | 61st day | Texas Comptroller: Penalties for Past Due Taxes Checked |
| Texas penalty waiver look-back for a prior waiver A business that received a waiver in this period is not eligible unless there are extenuating circumstances | Two years | Texas Comptroller: Penalty Waivers Checked |
| Texas penalty waiver maximum report periods Requests beyond these limits go to the voluntary disclosure program | One annual, two quarterly or six monthly report periods | Texas Comptroller: Penalty Waivers Checked |
| Texas minimum sales and use tax certificate record retention Keep longer during an audit, appeal or refund proceeding; special obligations may require longer. | 4 years | Texas Comptroller: Keeping Records FAQ Checked |
Primary sources
- California CDTFA: Publication 73, Your California Seller's Permit
- California CDTFA: Regulation 1700, Reimbursement for Sales Tax
- California CDTFA: Publication 75, when interest and penalty apply
- California CDTFA: Publication 75, relief from interest, penalty and the collection cost recovery fee
- California CDTFA: Amend a Return
- California CDTFA: Online filing instructions for the sales and use tax return
- California CDTFA: Publication 101, Sales Delivered Outside California
- California CDTFA: Out-of-State Voluntary Disclosure Program
- New York Tax Law section 1133
- New York Tax Law section 1131
- New York Tax Law section 1147
- Texas Tax Code chapter 151, Limited Sales, Excise, and Use Tax
- Texas Tax Code chapter 111, Collections and Procedures
- Texas Comptroller: Local Sales and Use Tax (Publication 94-105)
- California Revenue and Taxation Code section 6202
- California Revenue and Taxation Code section 6487
- California Revenue and Taxation Code section 6829
- New York Tax Department: Form ST-120, Resale Certificate, with instructions
- New York Tax Department: Voluntary Disclosure and Compliance Program
- Texas Comptroller: Sales Tax Collection FAQ
- Texas Comptroller: Use Tax
- Texas Comptroller: Voluntary Disclosure Program (Publication 96-576)
- Texas Comptroller: Penalty Waivers
- Texas Comptroller: Penalties for Past Due Taxes
- Texas Comptroller: Reporting and Paying FAQ
- Texas Comptroller: Keeping Records FAQ
- Texas Comptroller: Online Orders (Publication 94-171)
About this guide
Published by Cloud Accounting under standing professional approval. This version has no separately recorded personal review. It explains general rules for the tax year shown. It is not advice for your situation.
Changes
- : First published.