When a Tampa business runs short of cash, it usually stops paying the taxes that do not scream immediately. Payroll tax deposits to the IRS. Sales tax returns to the Florida Department of Revenue. The money goes to rent, inventory and payroll instead, with the plan of catching up next month.
Next month rarely arrives. By the time the owner calls me, both agencies are involved. Here is how the two collectors differ, what they share, and how to think about priorities.
Why these two debts are different from ordinary debts
Sales tax and payroll withholding have something in common: the business collected the money from someone else. Sales tax is collected from customers. Withheld income tax and the employee share of Social Security and Medicare are taken from employees’ paychecks. In both cases, the law treats the business as holding the government’s money.
Florida says it directly. Fla. Stat. 212.15(1) provides that sales taxes become state funds at the moment of collection. The federal analogue is IRC 7501, which treats withheld taxes as held in a special fund in trust for the United States. That trust concept is why both governments reach past the business to the people running it.
The Florida side
Florida sales and use tax is imposed under Chapter 212. Key rules:
- Due dates. Under Fla. Stat. 212.15(1), tax for each month is due on the first day of the next month and delinquent on the 21st.
- Personal liability. Fla. Stat. 213.29 imposes a penalty equal to twice the amount of tax not accounted for or paid over on any person required to collect and pay over the tax who willfully fails to do so, and on officers or directors with administrative control who willfully direct employees not to pay. The penalty is abated to the extent the tax is paid.
- Criminal exposure. Fla. Stat. 212.15(2) makes it theft of state funds to fail to remit collected sales tax with intent to unlawfully deprive the state. The degree of the offense depends on the amount.
- Freezes and levies. Fla. Stat. 213.67 lets the Department notify anyone holding the delinquent taxpayer’s credits or personal property, other than wages, of the delinquency. The holder cannot transfer the property until the Department consents or 60 days pass, and the Department can then levy.
- Warrants and liens. The Department can issue warrants for unpaid taxes and record them as liens, and it can pursue other enforcement, including action against the business’s registration to collect sales tax.
The IRS side
The federal counterpart to sales tax exposure is payroll tax. The business owes the full Form 941 liability. Responsible persons who willfully fail to pay over withheld taxes face the trust fund recovery penalty under IRC 6672, equal to the unpaid trust fund amount. My guide on payroll tax problems in Tampa covers that in detail.
The IRS uses its own tools: the federal tax lien under IRC 6321, administrative levies under IRC 6331, and Revenue Officers who visit the business. Florida’s exemption statutes do not limit the IRS, as discussed in Florida exemptions versus IRS levies.
Comparing the two collectors
| Florida Department of Revenue (sales tax) | IRS (payroll tax) | |
|---|---|---|
| Character of the tax | State funds at the moment of collection, 212.15(1) | Held in trust for the United States, IRC 7501 |
| Personal civil liability | Twice the tax for willful failure, 213.29 | Trust fund recovery penalty equal to the trust fund amount, IRC 6672 |
| Bank freeze or levy | Notice to withhold for 60 days, then levy, 213.67 | Levy with 21-day bank hold, IRC 6331 and 6332(c) |
| Lien | State warrants and liens | Federal tax lien, IRC 6321; notice filed under Fla. Stat. 713.901 |
| Criminal exposure | Theft of state funds, 212.15(2) | Willful failure to collect or pay over tax, IRC 7202 |
Who to pay first
I get asked this every week. There is no rule that fits every business, but there is an order of operations that usually makes sense.
- Stop the bleeding. File and pay current sales tax returns and make current federal payroll tax deposits. Both agencies are dramatically more flexible with a business that is current going forward. A business that keeps adding new liabilities is a business both agencies will try to shut down.
- Get every return filed. Unfiled sales tax returns and unfiled Forms 941 make every resolution harder. File them, even if you cannot pay.
- Look at personal exposure. Both agencies can reach the people behind the business for the trust-type taxes. Prioritizing the trust portion of back taxes can reduce the owner’s personal exposure. With the IRS, designating voluntary payments to the trust fund portion is sometimes possible and worth discussing.
- Negotiate with each agency on its own terms. The Department of Revenue has its own payment arrangement and compromise procedures. Fla. Stat. 213.29 itself notes that the penalty can be compromised by the executive director as provided in 213.21. The IRS has installment agreements and offers in compromise. The two plans need to fit within the same cash flow.
A hypothetical Tampa restaurant
Consider a restaurant in Seminole Heights that has a rough summer. The owner keeps the doors open by skipping two months of sales tax returns and three payroll tax deposits. By fall, the Department of Revenue has sent delinquency notices, and the IRS has assessed the unpaid Form 941 liability for the quarter.
The Department’s first serious move may be a notice under Fla. Stat. 213.67 to the restaurant’s bank. The account is frozen for up to 60 days. Payroll bounces. Meanwhile, the IRS sends a final notice of intent to levy. A Revenue Officer schedules a visit and asks for current Forms 941 and proof of deposits.
The owner’s instinct is to borrow money and pay whichever agency is yelling loudest. The better approach is to get current with both on new liabilities, file every missing return, and then present each agency with a realistic plan for the back balance that fits the restaurant’s actual cash flow. Both agencies have seen restaurants close. Both would rather be paid over time by one that stays open, as long as it is not adding new debt.
The owner should also know his personal exposure before he negotiates. Under Fla. Stat. 213.29 and IRC 6672, the trust-type portions of both debts can follow him personally if he was responsible and acted willfully.
Common mistakes
- Paying one agency with the other’s money. Using collected sales tax to make an IRS payment, or the reverse, just moves the hole.
- Closing the business and opening a new one. Both agencies look for successor businesses, and the IRS watches for owners who repeatedly accumulate payroll tax debt.
- Assuming the corporation shields you. For trust-type taxes, both the state and federal statutes are written to reach individuals.
- Ignoring the 213.67 notice. A Department of Revenue freeze on your operating account can stop payroll. Treat it as the emergency it is.
A note on the bigger picture
Florida does not tax personal income, which is why this site talks so much about the IRS. But Florida businesses still deal with a state revenue department, and in a cash crunch the state and federal problems arrive together. My guide on what Florida’s lack of an income tax does and does not change fills in the rest of the picture, and Tampa small business IRS problems covers the federal side for business owners.
GetIRSHelp.com has more on payroll tax problems.
Two collectors, one cash register. Stop adding to both piles first. Then deal with what is already there.