A sales tax bond is a type of surety bond that ensures a business pays its local and state sales taxes. The tax is imposed by the state government and businesses must show proof of the bond to legally operate their business. Sales tax bonds can cost 1% to 5% of the minimum bond amount and requirements can vary by state.
Taxes suck (we know), but they’re part of doing business. In this guide, we’ll break down how sales tax bonds work and how to get one at an affordable cost so you can get back to serving your clients and customers.
In this sales tax bond guide, we’ll cover:
Definition & Example
How It Works
Types of Sales Tax Bonds
Where to Find & How to Apply
A sales tax bond is a financial guarantee to a state or local government that ensures businesses will fulfill their sales tax obligations (as required by the state and local government). If a business fails to pay its taxes, the governing agency can file a claim against the bond to collect the unpaid taxes owed. General sales tax bonds are the most common, but some government agencies may require bonds for specific taxes, like alcohol and fuel.
There are three different parties involved in a bond contract:
Principal: The business owner that purchases the bond and must pay sales taxes (you).
Obligee: The local and/or state government agency requiring the bond.
Surety: The surety bond company that sells you the surety bond and guarantees to the obligee that you will pay your sales taxes.
Let’s say you operate a clothing outlet and you failed to pay your sales taxes for two consecutive quarters. The amount you owe is $2,800. Your state tax agency files a claim against the bond. The surety confirms the taxes were unpaid and pays the state agency the full $2,800 due.
If you’re selling products, you will need to purchase a surety bond for sales tax alongside your business license. The bond requires business owners to report their sales revenue so that the government can calculate the correct amount and you pay your taxes on time (usually every quarter). If you don’t pay up, the government can still collect the amount owed by filing a claim against your sales tax bond. Essentially, the bond is a protection for the government and ensures that they get what’s owed.
Approvals and denials for claims on sales tax bonds are straightforward. If you paid your taxes and you can prove it, then you’re not financially liable for any claims. If you did NOT pay your taxes, then the amount owed (up to the bonded amount) will be paid to the governing agency. You will still be financially liable for the amount — your debt is just now owed to the surety company.
Keep in mind that failure to pay your taxes or paying late may subject you to fines and penalties.
General sales tax bonds are the most common type of bond. There are other sales tax bonds specific to the product being sold, including:
Cigarette tax bonds
Alcohol tax bonds
Marijuana tax bonds
Fuel tax bonds
Sales tax bonds typically cost 1% to 5% of the bond amount for business owners with good credit and strong business financials. However, business owners with low credit and little experience may pay premiums as high as 10% and up. Generally, you can expect to pay lower premiums over time as you demonstrate timely payment and improve your score.
Obtaining a sale tax bond is also a necessary condition for obtaining your business license. Keep in mind you may need to obtain an additional type of sales tax surety bond, depending on what you sell (e.g., cigarettes, alcohol, marijuana, fuel).
Since sales tax rates can vary by state, the minimum amount required will also depend on your state and county. Your projected gross revenue over a period may also affect the minimum requirement.
Terms on sales tax bonds generally last for 12 months and must be renewed annually. Your tax governing agency may require you to stay bonded over the life of your business permit or license. If you demonstrate timely payment, your tax governing agency may waive the bond requirement.
The surety may impose their own in-house requirements when selling you a bond. Sales tax bonds with lower amounts — generally $25,000 and under — may be approved with only a credit check. Bonds for higher amounts may require you to supply additional documents, like your business and personal financial statements, to get approved.
Sales tax bonds are often available through insurance carriers or companies that specifically deal in surety bonds. Fortunately, obtaining a bond is often a quick and easy process that can be done completely online:
Submit an application that includes your personal and business information (e.g., business name and address).
Receive a premium quote based on your qualifications.
Purchase and receive your bond (or refuse and shop around).
File your sales tax bond with the state governing agency that regulates commercial taxes.
Obtaining a sales tax bond is easy when applying with Worldwide Insurance, Inc. Just fill out our initial application form and get an instant quote in minutes. With rates starting as low as 1%, we issue all types of surety bonds in all 50 states. No credit check required and no obligation.
Sales tax bonds are financial guarantees that ensure a business satisfies all of their sales tax obligations to state and local governments. If the business does not pay their sales taxes, the government can file a claim against the bond to collect the amount owed.
Business owners with good credit can expect to pay 1% to 5% of the required bond amount. The minimum amount required will vary since sales tax rates vary by state.
Sales tax bonds generally last one year and you must pay another premium to renew the bond for another year. If you have a good payment history, your tax governing agency may eventually waive the bond requirement.
Yes, bad credit applicants can still get bonded but may face higher premiums. Worldwide Insurance, Inc. works with thousands of business owners — even those with low credit — to help them meet their bonding requirements.
Delaware, Montana, New Hampshire, and Oregon do not enforce a statewide sales tax. Alaska sales taxes are determined by local municipalities, and not set at the state level.