4 sales tax mistakes costing Massachusetts small businesses
Updated October 2026
Sales tax isn't your money. When you collect it, you're holding it for the Commonwealth until your return is due, and the state isn't forgiving when it shows up late or short.
Late filing and late payment each carry a penalty of 1% per month, up to 25%, plus daily-compounding interest. Most sales tax problems aren't fraud. They're small, honest bookkeeping mistakes that quietly add up. Here are four we see most often, and what they cost you.
1. Booking sales tax as revenue
When sales tax lands in a revenue account, your sales look bigger than they really are. Everyone loves to see higher sales. But that money was never yours. Inflating your revenue only helps your ego.
Inflated revenue also throws off your margins and every ratio built on sales. You can't accurately see how your business is doing, or how it compares to other companies, if sales tax isn't recorded correctly on the books.
The fix: Record sales tax collected in a Sales Tax Payable liability account, not in income.
2. Leaving the liability off the balance sheet
If sales tax isn't sitting in a liability account, you have no running number for what you owe. Cash in the bank looks like cash you can spend, right up until the return is due. Then the payment catches you short on cash you thought you had.
The fix: Track sales tax payable on the balance sheet, and bring it back down each time you pay the state.
3. Not checking whether you're over- or under-collecting
If sales tax is buried in your income statement, problems are easy to miss. When it's tracked correctly, you can see right away if your Sales Tax Payable balance doesn't match what your return says you owe. Your POS may be charging the wrong rate, an item may have the wrong tax setting, or you might not be charging tax on everything you should.
Under-collecting is the one that really hurts. You owe the state tax on your taxable sales whether you charged your customers enough or not, so the shortfall comes out of your pocket. We had a client who had been quietly under-collecting for years without realizing it.
Over-collecting is a problem too, because that's customer money that isn't yours to keep. Either way, a monthly check catches it early.
The fix: Each period, reconcile the payable balance to your sales tax return before you file.
4. Not filing on time
Can't cover the payment this month? File anyway. Massachusetts charges separate penalties for filing late and paying late, so filing by the deadline avoids one of them. Interest and the late-payment penalty still build until you pay, so pay as soon as you can.
The fix: File by the 30th day after the period ends, even if you can't pay in full.
Bonus tip: Give sales tax its own bank account
The easiest way to never be short on sales tax is to never have it in reach. Open a separate bank account just for sales tax, and treat it as off-limits.
Here's how it works:
Every week, pull the sales tax collected from your POS report.
Move that amount from your operating account into the sales tax account.
When the return is due, pay it straight from that account.
Each month, check that the account balance matches your Sales Tax Payable on the balance sheet.
When the deadline comes, the money is already waiting. No scrambling, no dipping into payroll, and no spending money that was never yours. If your sales tax is fairly steady month over month, you can transfer an estimated amount each week and true it up if necessary.
Catch it before the state does
Every one of these mistakes shows up in the books before it shows up in a notice from the Department of Revenue. Monthly bookkeeping that reconciles sales tax collected against what's filed is the simplest way to catch them early.
Not sure where your business stands? A Bookkeeping Health Check-Up from Varsity Bookkeeping Solutions reviews your books and flags issues like these before they turn into penalties.
This article is general information, not tax advice. Rules change, and every business is different.
