What Happens If I Over-Collect or Under-Collect Sales Tax?

Updated - Originally published May 20, 2025

Sales tax rarely makes the top of your to-do list—until an audit notice lands in your inbox or a state comes calling.

Maybe you added a new product, expanded to a new state, tweaked your online checkout, or integrated new software. Suddenly, you’re collecting more (or less) sales tax than you should. And that small misstep can create a big headache.

Over-collecting or under-collecting sales tax might sound minor, but it can trigger serious compliance issues, financial risk, and customer friction. If left unchecked, either mistake can spiral into costly penalties, audits, or even reputational damage.

In this guide, we’ll break down what over-collection and under-collection mean, why they happen, and how your growing business can stay ahead by collecting the correct sales tax rates on every transaction.

Over-Collecting Sales Tax: Definition, Causes & Risks

To over-collect sales tax means you’re collecting more sales tax from a buyer than is legally required for a given transaction. It may feel like a cautious move, charging a little extra just in case, but over-collecting opens the door to compliance issues, audits, and customer disputes.

Common Causes of Over-Collecting Sales Tax

Over-collection typically stems from one of these common missteps:

• Incorrect taxability code mapping: You’ve assigned the wrong code to a product or service, treating it as taxable when it’s exempt.
• Collecting in a state where you don’t have nexus: You’re charging tax in jurisdictions where you’re not actually required to.
• Outdated sales tax rate data: Your rate calculation tool hasn’t been updated to reflect rule changes, new exemptions, or local rate shifts.

Legal & Financial Risks of Over-Collecting Sales Tax

Over-collecting isn’t just a customer service issue: It’s a legal one. Here’s why:

• States don’t let you keep the extra tax: You must either refund the over-collected amount to the customer or remit it to the state.
• Double exposure: If you refund the customer but fail to remit or vice versa, you could still be liable for the amount.
• Legal liability: In some jurisdictions, collecting tax when you shouldn’t have can be considered unlawful. You may face fines or litigation.

Over-collecting doesn’t protect your business: It creates more complexity and potential legal risk.

Under-Collecting Sales Tax: Definition, Causes & Compliance Risks

Under-collecting sales tax occurs when you fail to collect enough (or any) sales tax on a taxable transaction. This is more than just a simple oversight: It’s a direct liability for your business.

Common Causes of Under-Collecting Sales Tax

Businesses commonly under-collect sales tax for a variety of reasons:

• Misjudging Nexus: You assume you don’t have to collect tax in a certain state, but you’ve actually triggered nexus through sales, employees, or inventory.
• Misclassifying taxability: You’ve marked a taxable product or service as exempt without realizing it.
• Applying incorrect sales tax rates: You use the wrong rate for the customer’s location or fail to account for local jurisdiction layers.

Why Under-Collecting Sales Tax Creates Greater Liability

Under-collecting sales tax can quietly become one of the most damaging compliance issues a business faces. Unlike over-collecting, which can often be corrected or refunded, under-collecting puts your business directly on the hook. Even if the customer has already received the product or service, your business is still legally responsible for paying the missing tax. 

And it doesn’t stop there. States typically add penalties, fees, and interest the longer that tax goes unpaid. Under-collecting is also one of the most common triggers for a sales tax audit. Its real danger lies in how quietly it builds and often goes unnoticed until an audit brings a costly surprise to light.

Why Businesses Commonly Make Sales Tax Mistakes

Keeping up with sales tax rules isn’t just hard: It’s nearly impossible without the right support.

In the US, there are over 13,000 sales tax jurisdictions, each with its own rates, exemptions, and filing schedules. And they’re constantly changing. What’s taxable in one state might be exempt in another. Even within a single state, rules can vary by city or county.

Relying on spreadsheets, ecommerce platforms, or generic tax software can leave dangerous gaps. Many of these tools don’t account for accurate product-specific taxability, real-time jurisdictional rate updates, or changes in your nexus footprint caused by remote sales, staffing, or fulfillment centers.

It’s no wonder businesses of every size struggle to get it right. And unfortunately, small errors today can lead to big consequences tomorrow.

How to Collect the Correct Sales Tax Every Time (Step-by-Step Guide)

The key to avoiding both over-collection and under-collection is building a reliable, proactive tax compliance system. Here’s what that looks like:

Step 1: Confirm Your Nexus Obligations

Before you can collect correctly, you have to know where you’re required to. Nexus laws differ by state and are triggered by different activities, including the following:

• Remote or in-person sales
• Number of transactions
• Physical presence (like warehouses or employees)

Nexus is your foundation. Get it wrong, and the rest of your compliance efforts are built on shaky ground.

Step 2: Map Products to Correct Taxability Codes

Every product or service must be mapped to the correct taxability code in each jurisdiction. For example, software as a service (SaaS) might be taxable in Texas but not in California. Get it wrong, and you won’t just mischarge tax—you’ll risk noncompliance in multiple states, open the door to audits, and put your revenue at risk.

Don’t rely on default codes. Review them regularly and make updates based on changes in your offerings and tax law.

Step 3: Automate & Regularly Audit Sales Tax Rate Calculations

Technology can help you calculate rates, but it’s only as good as the data you feed it. Make sure your rate engine meets the following criteria:

• Continuously updated
• Tied to the correct jurisdiction (zip codes aren’t enough!)
• Reviewed periodically for accuracy

Step 4: File Sales Tax Returns Accurately & On Time

You’ve collected the correct sales tax. Now it’s time to remit it. That involves the following:

• Filing in the right states
• Matching returns to your actual collections
• Submitting everything on schedule

Miss a deadline or misreport collections, and you could face penalties, even if you collected the right amount.

Step 5: Reevaluate Your Compliance Regularly

Sales tax compliance isn’t a one-time project—it’s a moving target. As your business grows, new activities can instantly change your tax obligations. You should reevaluate your compliance strategy whenever at regular milestones:

• Launching a new product or service
• Expanding into a new state or market
• Updating your fulfillment or shipping processes

Each of these milestones can trigger new nexus, affect taxability, or change how and where you’re required to collect. Proactive yearly reviews help you stay compliant, avoid surprises, and protect your margins.

What to Do If You’ve Already Over- or Under-Collected Sales Tax

Mistakes happen! Even in well-run businesses with the best intentions. The key is to act quickly and handle the situation transparently. If you’ve over-collected sales tax, your first step should be to refund the customer if possible. If that’s not feasible, you may need to remit the extra amount to the state, depending on local regulations. In either case, it’s important to document the situation thoroughly and adjust your process to prevent it from happening again.

Under-collection is trickier and riskier. It’s not something to ignore, as your liability increases every day it goes unresolved. One potential solution is entering into a voluntary disclosure agreement (VDA), which can often reduce penalties and limit the look-back period. The smartest move is to work with a sales tax expert who can help you assess your exposure, guide you through corrective action, and ensure that your collection process is accurate moving forward.

Partner with a Sales Tax Expert for Peace of Mind

Whether you’ve been over-collecting or under-collecting sales tax, one thing is certain: The longer you wait, the more it can cost you.

Let’s simplify your sales tax together. At The Sales Tax People, we’re your guide to confident, compliant growth. We’ll walk you through the process:

• Calculating your nexus
• Mapping your taxability codes correctly
• Implementing the right tools and rate engines
• Filing returns accurately, on time, every time

Talk to a real sales tax expert today, no strings attached. Book your free “What’s Next?” call now.