Sales Tax Escrow Practice

Trust-fund treatment

When you collect sales tax on a transaction, you're acting as the state's agent. The funds are legally trust-fund taxes. In most states, owners and officers can be held personally liable for unpaid sales tax even after a corporate bankruptcy — there's no LLC shield.

Several states (notably New York and California) routinely pursue personal collection from owners for trust-fund tax violations. A few thousand dollars of misappropriated sales tax can produce six-figure penalty assessments.

The escrow practice

Open a separate bank account labeled 'Sales Tax Escrow.' On every sale that includes sales tax, immediately transfer the tax portion from the operating account to the escrow account. When the filing is due (monthly, quarterly, or annual depending on state and volume), pay from the escrow account.

Modern e-commerce and POS platforms can automate this transfer. For invoice-based businesses, set a recurring weekly task: total sales tax collected this week, transfer to escrow. The discipline cost is 5 minutes; the protection is total.

Multi-state sales tax in the post-Wayfair world

Since the 2018 Wayfair ruling, every state can require remote sellers to collect and remit sales tax once economic nexus thresholds are met — typically $100k of sales or 200 transactions in the state. For service businesses this matters less than for product businesses, but states are increasingly taxing digital products, SaaS, and certain professional services. The compliance burden is real even when the dollar amounts are modest.

Sales tax collected from customers is not yours. It belongs to the state and is held in trust until remittance, which means it should be tracked separately on the balance sheet (sales tax payable) and ideally swept into a separate bank account along with the daily revenue deposit. Treating sales tax as cash you can spend is the path to a personal liability assessment if the business can't pay when filings come due.

Most small businesses use compliance software (Avalara, TaxJar, Anrok, Stripe Tax) once they have nexus in more than 2-3 states. Manual compliance is feasible for one or two states; beyond that, the audit risk and time cost of getting it wrong almost always exceeds the software cost. Engaging a sales-tax specialist for a one-time nexus study is a good first move whenever a business expands into new states.

When evaluating a business for acquisition, sales tax exposure is one of the most common buried liabilities. Sellers often have unregistered nexus in multiple states with cumulative back-tax exposure in the six or seven figures. A nexus study during due diligence is standard practice; the cost of skipping it has bankrupted more than one acquirer who inherited an unexpected multi-state assessment.