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Sales Tax Surety Bond

States and local municipalities rely on sales taxes to raise revenue for government services. According to the Tax Foundation, 45 states and the District of Columbia collect sales taxes, and the highest rates in the country (9.47%) are found in Tennessee and Arkansas. Not every business is subject to this tax, but many are. If you're one of those businesses, you may need a sales tax surety bond as well. Read on to learn everything you need to know about this important business requirement.

What is a Sales Tax Bond?

A Sales tax bond, also referred to as a Sales and Use Tax bond, is a type of financial guarantee surety bond. Sales Tax bonds are required of some retailers and other businesses that provide taxable goods and services. The bond provides a guarantee that the sales tax collected by the business will be remitted to the state or local government in a timely manner. Without the safety provided by a bond, state and local governments are at higher risk of businesses defaulting on their sales tax obligations, potentially leading to deficits and revenue shortfalls.

How does a Sales Tax Bond work?

Sales Tax bonds may be required up front prior to the business starting operations or, in some cases, the bond may not be required until there has been a delinquency in the sales tax remittances.

The state or local government agency will determine or provide a way to determine the required bond amount. Oftentimes, the bond amount is based on a multiple of the average monthly sales tax liability for the business over a period of time. Common sales tax bond amounts range from $2,000 to $50,000. The bond amounts can be lower or higher than that range of course.

Once you're aware of the bond requirement, you will seek out a surety company like Viking Bond Service that's authorized to issue surety bond sales tax agreements in your state. The surety will quote you a premium price to activate the bond for 12 months. After you pay the premium, the surety will provide you with documentation proving you have a sales tax bond that meets the government's requirements.

Who should get a Sales Tax Bond?

That varies depending on where you're located, what kind of business you're operating, and your record as a taxpayer. Some businesses may never need to get a bond while others need one before they can even open. If you require one of these bonds, it will likely become apparent as you're establishing your business. State and local governments have a vested interest in collecting the sales taxes owed to them, so they tend to be proactive about telling businesses when bonds are necessary to guarantee payment. Anyone with questions about whether they need a bond is welcome to contact the experts at Viking Bond Service for free advice.

What parties are involved in a Sales Tax Bond?

There are three:

  • Principal - The business owner required to get the bond. The principal is also responsible for paying for any claims filed against the bond — most likely because you failed to remit sales taxes.
  • Obligee - The government agency that requires the principal to get a bond. The obligee also has the right to file claims against the bond and receive compensation if those claims prove valid.
  • Surety - The company that issues the bond to the principal. The surety also agrees to pay the obligee if the principal is unable or unwilling. Afterwards, however, the surety has the right to collect that same amount from the principal since the business owner always has final financial responsibility for unpaid sales taxes.

How much does a Sales Tax Bond Cost?

The bond total is the maximum amount the surety company is willing to pay out to settle valid claims. Agencies that collect sales taxes will assign the total, usually based on historical tax payments. The actual cost (known as the premium) of the bond is only a small percentage of the total, often around 5%. So a bond valued at $50,000 would only have a premium somewhere around $2,500. Sales tax bond premiums are based on credit and also the circumstances that lead to the bond requirement. Business owners must pay the premium whenever they renew the bond, making this an ongoing cost that's important to budget for. There's also the cost of claims to consider, but that total is zero as long as you remit all sales taxes correctly.

How are claims handled for Sales Tax Bonds?

If the obligee — the government agency responsible for sales tax collection — believes you haven't properly paid your bill, they will file a claim with the surety company. The surety company will investigate the claim to ensure it's valid, then compensate the obligee for the amount of the claim. Since surety companies guarantee payment, tax collectors know they can always recover sales tax revenue even if the principal refuses to pay, creating an important safeguard. Finally, the surety uses whatever legal means are available to collect the amount of the claim from the principal.

How to apply for a Sales Tax Bond?

Sales tax bonds are simple to apply for and usually have a very quick turnaround. You will need to fill out an application, which will ask for information about your business, your background, and your finances. Financial guarantee type surety bonds like this one often require financials to accompany the bond application as well. A Viking Bond Service agent will let you know exactly what is needed to get the best quote for your Sales Tax Bond. Expect to get a quote back in less than 24 hours.

Request a Sales Tax Bond Quote from Viking Bond Service

If your business requires a sales tax surety bond, it's illegal to operate without one. Get a great bond in little time with the help of Viking Bond Service. Complete our online application at any time. You can also get more information using the contact form on this page or by calling us a 1-888-278-7389. For the best service, the best bond, and everything in between, partner with our team.

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