By Hunt Demarest, CPA, Host of Business by the Numbers Podcast
Running an auto repair shop is a full-time job, and we know you’re juggling a lot. Between managing your team, keeping customers happy, and making sure every car that rolls through your door leaves running like a dream, tax issues are probably the last thing you want to deal with. But here’s the truth: ignoring sales tax can be a costly mistake. In fact, it can land you in some very hot water.
Why You Should Never Mess with Sales Tax
Let’s get one thing clear—sales tax is not your money. When you collect sales tax from customers, you’re acting as a middleman, holding it in trust for the state. It’s your job to pass it along to the authorities, not pocket it for yourself. And if you don’t, the consequences can be severe. Think of it like this: you’re holding someone else’s cash, and if you fail to pass it along, that trust can get you into serious trouble.
A lot of business owners fall into the trap of using that sales tax money for other expenses, especially when cash flow gets tight. But here’s the thing: that’s a dangerous game to play. In fact, one of my clients learned that lesson the hard way.
LISTEN TO MY PODCAST EPISODE 168, FOR MORE ON THIS TOPIC.
A Real-Life Cautionary Tale
Back in 2018, a client of mine fell behind on his sales tax payments. He missed a few payments, and in a desperate move to keep the business afloat, he used the sales tax funds for other bills. He thought he could catch up later. But when the state caught wind, they sent agents to his shop. After some tense conversations and a payment plan, things seemed to settle down. But then, in 2020, with COVID wreaking havoc on businesses, he fell behind again. And this time, things took a turn for the worse.
When the state agents showed up, he blamed his wife for the missed payments—big mistake. The authorities took his claim seriously, and they ended up arresting his wife. Both of them spent over a week in jail over a $50,000 debt. While this is one of the more extreme cases, it’s a reminder of just how quickly things can escalate when it comes to sales tax. Don’t mess with it.
Payroll Tax: A Danger Zone You Don’t Want to Enter
Now, if you think withholding payroll taxes is any better, think again. The IRS takes payroll taxes very seriously. If you withhold taxes from your employees’ paychecks but don’t send it to the IRS, you’re setting yourself up for trouble.
Here’s the scenario: You pay an employee $750, withholding $250 for their taxes. If you decide to hold onto that $250, instead of sending it to the IRS, you’re not just risking penalties and interest—you’re breaking a trust. And trust me, the IRS won’t hesitate to come down on you hard.
Trust taxes, like sales tax and payroll taxes, are some of the most strictly regulated areas. The IRS might be lenient with income tax issues, but when it comes to trust taxes, they show no mercy. State auditors, on the other hand, are often local and may have their own biases, making it even harder to fight back if things go south.
What Happens When You Fall Behind?
If you’ve already fallen behind on paying sales tax, don’t bury your head in the sand. The worst thing you can do is ignore the problem. The IRS is generally willing to work with business owners who are upfront about their situation. But when it comes to sales tax, auditors are less forgiving. And once you’re behind, it’s hard to catch up.
If you’ve missed payments or broken an agreement, expect some serious consequences. Some jurisdictions are aggressive—like, “we’ll chain your door shut until you pay” aggressive. Yes, it’s that real. And even if they don’t lock up your shop, they can levy your bank accounts and withdraw funds without warning. In some cases, you could face both a shop shut-down and your bank account being emptied.
The Sales Tax Audit: Handling it Like a Pro
If you’re selected for a sales tax audit, you’re likely in one of two camps: either you’ve made a minor mistake, or you’ve been playing fast and loose with the numbers. If you’re in the first group, congratulations—you’ve got a much easier road ahead. The auditors will likely work with you to clear things up, especially if it’s a simple error, like not charging tax on a shop supply or misreporting a minor detail.
However, if you’ve been under-reporting sales or intentionally exempting customers from sales tax when they shouldn’t be, you’re in serious trouble. Auditors are experts at spotting discrepancies, and they can cross-check your bank records, sales tax returns, and shop management software to identify any red flags. If something doesn’t add up, you’re in deep water.
The Takeaway: Stay Honest, Pay Early, and Don’t Play Games
Here’s the simple advice every auto shop owner should follow: don’t mess with sales tax. Whether it’s sales tax or payroll taxes, these are trust taxes—and breaking that trust can lead to far worse consequences than just a late fee. Keep accurate records, file on time, and if you can, pay early. If you fall behind, don’t bury your head in the sand. Be proactive, communicate with the authorities, and get back on track as soon as possible.
In the end, it’s always better to pay up than face an audit, a shut-down, or worse. So, take care of your taxes, and you’ll be able to take care of your business—plain and simple.
Feel free to pass this along to fellow shop owners because, let’s face it, nobody wins when taxes are ignored. Stay ahead of the game, and keep your shop running smoothly.
