How (and Why) To Cancel Your Sales Tax License

A sales tax license, also known as a sales tax permit, is required to collect and remit sales tax in a given state. If a business has established nexus in a state, it must register for a license before officially collecting sales tax. All new businesses and businesses new to a state must have a license to operate in that state.

However, business needs change, and you may find yourself not needing a sales tax license in that state. As sales tax obligations change and a business evolves, it may be time to cancel your sales tax license. In this article, we’ll examine the reasons to cancel a sales tax license, why it matters, and the steps to take. 

4 Reasons To Cancel a Sales Tax License

Canceling a sales tax license isn't something that should be taken lightly. There are four main reasons to cancel your sales tax license:

• Closing your business. If you are closing your business and will no longer be making sales or employing people, you should cancel your sales tax license. You will no longer be collecting or remitting sales tax in that state, so you don't need to maintain a permit. 
• Changing business structure or ownership. Most states require you to disclose your business structure and ownership status when applying for a sales tax license. If that structure changes, such as moving from an S-corp to a corporation, or if the ownership changes, such as adding another owner or transferring ownership, it could affect your sales tax license. To stay compliant, your sales tax license needs to reflect the company's current structure. Depending on the state, you may have to cancel your sales tax license and apply for a new one with the most current information to avoid penalties. 
• No longer selling taxable goods or services. If you are changing the structure of your business and moving from selling taxable goods or services to selling something else that doesn’t require sales tax, you don’t need a sales tax license. For example, you may be moving from selling downloadable guides on bookkeeping (which would be taxed) to offering bookkeeping services (a professional service that isn’t taxed in most states). In that case, you don't need to maintain a license for sales tax you don't collect. 
• Relocating to another state. If you move your business to another state and no longer have nexus in the current state, you can cancel your sales tax license because you no longer need to collect sales tax in that state. 

Timing Considerations When Canceling Your License

If your business falls into one of the four common categories above, what timing should you follow for canceling your sales tax license? 

The timing depends on the reason for canceling your license and the state where you do business. 

• When closing a business, most states require business owners to file closing paperwork within 30 days of officially closing.
• When changing business structure or ownership, most states require notification within 30 days of the change.
• When no longer selling taxable goods or services or relocating to another state, some states may require trailing or residual nexus that may require sales tax to be collected and remitted for up to six months after the change. In these cases, it’s wise to wait until the last residual sales tax has been collected.

In all situations, there is generally a waiting period between a change and the cancellation of a sales tax obligation. Businesses are still responsible for fulfilling all tax obligations during that window. Because sales tax differs in each state, it’s important to understand the unique requirements and schedules for each state. 

What Happens if You Don’t Cancel Your License 

Why should businesses officially cancel their sales tax license instead of just letting it lapse or no longer submitting sales tax? State tax regulations can cause serious issues for a business if the process isn’t followed carefully.

One of the most common consequences is continued tax filing requirements. Your business may still be responsible for submitting sales tax even after transactions are complete. Failing to submit those taxes without canceling the sales tax license can lead to penalties, interest, and other consequences for non-compliance. Businesses are required to submit tax returns even if the sales tax due is zero, so not submitting sales tax can still be costly, even if nothing is due. 

Not canceling your sales tax license can also impact your future business endeavors. If you file for a new sales tax license for a new business down the road, the state may connect you to the previous license issues and make it more difficult to secure a permit for your new business. 

Steps To Cancel Your Sales Tax License

There are three basic steps if you’re truly ready to cancel your sales tax license. Note that the process varies by state, with some states having very simple processes and others being much more involved. 

1. Contact your state’s tax authority. Start by contacting the state's tax department or agency. Most states have an FAQ page for canceling a tax license and can direct you to the right forms. This is also the time to set your cancellation date and learn about timelines and processes in the state. 
2. Complete the required documentation and forms. Most states require business owners to state why they are canceling the sales tax license and when the cancelation will take effect. You may also need to provide contact information for yourself and anyone taking over the business, plus EIN or tax information. Most states allow businesses to conveniently complete these forms online. 
3. Submit the final tax return filing. Check with your state to see how long you are required to pay sales tax after you have submitted the paperwork. Once your sales tax license is canceled and nexus is complete, you can file your final tax return. 

Special Considerations

Of course, not every situation is the same. Some businesses have special circumstances to consider as they cancel their sales tax license.

If your business has multi-state operations, meaning you have nexus in multiple states, you need to be careful about which sales tax license you cancel. Nexus can still be established by having customers or conducting a certain amount of transactions in a state. That means nexus can fluctuate as your business grows and changes, and you may re-establish if you gain more customers in that state. With that in mind, it’s wise not to rush the decision and to be sure you qualify to cancel your license.

Seasonal businesses that only operate for parts of the year likely don’t want to cancel their sales tax license every year just to have to reapply again. In these cases, keeping an eye on your sales tax responsibilities in the off-season without canceling your license is best. You likely will still have to file sales tax returns (likely with nothing due to the state), but that could be more convenient than canceling and reapplying for a permit. 

Some states, however, allow businesses to temporarily suspend their sales tax license instead of canceling it outright. Businesses often have to reach specific criteria to be eligible. Check with the tax authority in your state to see if this is possible. 

What Happens After You Cancel?

The process isn't complete even after you cancel a sales tax license. Sales tax is vital to any business, and canceling the license doesn’t remove its history. Businesses are required to keep sales receipts (either electronic or paper) for seven years after the transaction. That means that you need to retain records for seven years after your last transaction before canceling your license, no matter the current status of your business. 

You should also keep a record of your sales tax filing indefinitely, regardless of the status of your business. These records prove that you’ve paid sales tax and can come in useful in case of an audit. Sales tax records also establish your credibility as a taxpayer, which can help with future financial obligations. 

In some states, canceling your sales tax license is likely to trigger a sales tax audit. This is most common if you’re canceling multiple licenses at once or didn’t fully explain your reason for canceling. In most cases, these audits aren’t predatory but a chance for the state to ensure everything is in order before they miss out on your sales tax revenue. The audit will likely go smoothly if you've maintained records correctly and followed state sales tax regulations. 

If you decide to reapply for a sales tax license later on, you will likely need to go through the entire application process for a new permit, not the reapplication process. This process can be more time consuming than simply reapplying and require more paperwork. As always, be sure to check with your state’s tax authority about the best process for reapplying. 

Conclusion

Understanding the ins and outs of sales tax licenses can be challenging, especially when operating a business in multiple states. Need help knowing when (and how) to cancel your sales tax license? The dedicated team at The Sales Tax People specializes in providing comprehensive sales tax services. Our in-depth knowledge and strategic approach help you navigate the intricate landscape of sales tax regulations, ensuring compliance and peace of mind. Contact us to learn how we can support your business.