Katherine M. Johnson, CPA, CTRS
I used the Kentucky sales tax I collected to keep the business running
Kentucky treats sales tax you collected as money held in trust for the Commonwealth, which is why this particular shortfall follows the owner personally — and why the sooner it is dealt with the smaller it stays.
Kentucky treats sales tax you collected as money held in trust for the Commonwealth, which is why this particular shortfall follows the owner personally — and why the sooner it is dealt with the smaller it stays.
This is the most common thing nobody says out loud. A slow quarter, a payroll that has to be met, and the sales tax account is the only place with money in it. Almost nobody decides to do this; they decide to make payroll and this is the consequence. Being here doesn't mean you set out to keep the state's money — it means the business ran out of options in a particular order, which happens to good operators in bad quarters.
(800) 236-3741, answered around the clock. You will not be the first person that week.
Key takeaways
- 1Kentucky law says the tax "collected or required to be collected by the retailer … shall be deemed to be held in trust for and on account of the Commonwealth."
- 2That characterisation is why the exposure is personal — corporate officers and LLC managers are liable under KRS 139.185.
- 3The department may revoke or suspend a sales and use tax permit for non-compliance, and operating without one carries a criminal charge for the business and its officers.
- 4Kentucky's penalties do not offset each other the way the federal ones do: late filing and late payment run separately.
- 5Filing the returns matters even when you cannot pay them. The two largest penalties in the structure attach to not filing at all.
- 6A sales tax shortfall usually travels with a withholding one. If money was short enough to reach the sales tax account, check the payroll withholding for the same quarters before anyone else does.
The short answer
Kentucky treats collected sales tax as trust money, so a shortfall is not an ordinary business debt: it reaches corporate officers and LLC managers personally, it puts the sales and use tax permit at risk, and the penalty structure punishes non-filing far harder than non-payment. Filing the returns and arranging payment is the whole of the good news, and it is available today.
Why this debt behaves differently
Most business debts are the business's. This one is not, and the reason is in the words the statute uses.
KRS 139.340(1) provides that the taxes collected or required to be collected by a retailer "shall be deemed to be held in trust for and on account of the Commonwealth." The withholding statute says the same thing about money taken out of an employee's wages: sums withheld "shall be deemed to be held in trust for the Commonwealth."
Trust money is not the company's money. From that single characterisation everything else follows — the personal liability, the seriousness with which the department treats it, and the fact that ordinary corporate protection does not apply.
That is worth understanding rather than fearing, because it explains what the state is actually reacting to. Kentucky is not treating a struggling retailer as a criminal. It is treating collected tax as something that was never the business's to spend, and the remedies follow from that.
What actually happens next
The exposure becomes personal
KRS 139.185 makes corporate officers, and LLC managers, personally and individually liable, jointly and severally, for the taxes imposed under the sales and use tax chapter. It does this expressly notwithstanding KRS 275.150, the LLC liability shield. There is no wilfulness element in the Kentucky provision — the escape is having had no relevant authority — and the full mechanism is on the personal liability page.
The permit is at risk
KRS 139.760(1) provides that where a person fails to comply with the chapter or its regulations, "the department may revoke or suspend any one (1) or more of the permits held by the person." And a new permit will not be issued after a revocation unless the department "is satisfied that the former holder of the permit will comply."
The statute specifies no notice period, no hearing and no court order — it is written as a departmental power. I am not going to tell you a hearing right attaches, and I am not going to tell you one does not; the section is silent and I would rather say so than fill the gap.
What is not silent is what happens if you keep trading anyway. A permit is valid only for the named person at the named place and must be conspicuously displayed. Engaging in business as a seller after a permit has been suspended is a criminal offense, and the statute reaches "each officer of any corporation which is so engaged in business."
The balance grows on a schedule
Kentucky's late filing and late payment penalties each run at 2 percent of the tax due for each thirty days or fraction, capped at 20 percent, minimum $10. Under federal law those two offset each other. Under KRS 131.180 they do not — subsection (11) says nothing in the section prevents the collection of more than one of its penalties.
Failing to file at all is a different order of magnitude: 5 percent per thirty days, capped at 50 percent, minimum $100. And sixty days after the original notice date, the department may add a 25 percent cost-of-collection fee. Interest runs at 9 percent for 2026 and is not waivable for reasonable cause.
Read that structure and it tells you what to do. The heaviest charges are attached to not filing. Filing a return you cannot pay is not an admission of anything and it is materially cheaper than the alternative.
What I can't promise you
Nobody can make trust-fund exposure go away, and you should be careful with anyone who implies otherwise. It is personal by statute, it survives dissolving the company, and it is the category of tax debt the states treat most seriously. What can change is the size of it, how fast it grows, and whether the permit survives — which is a smaller promise and a real one.
I cannot promise the permit will be kept. That is the department's decision, the statute gives it wide discretion, and it specifies no process I can point you to. What I can tell you is what the statute rewards: KRS 139.760(3) says a new permit will not issue after a revocation unless the department "is satisfied that the former holder of the permit will comply." Filed returns and an agreement in place are the evidence that sentence is asking for.
And I am not going to tell you an offer in settlement is your route. Kentucky will not consider an offer from a business that is still trading — the department's form says offers are reviewed only "on businesses which are closed." If your business is open, that door is shut regardless of your finances, and the $500 application deposit is non-refundable. That is the single most useful thing on this page for anyone who has been told otherwise.
What to do next
- 1File everything, including the returns you cannot pay. This is the step that stops the largest penalty in the structure. Do it before you work out how to fund anything.
- 2Separate the trust money going forward, today. A separate account for collected sales tax, moved the week it is collected. It is a simple change and it is the one that stops next quarter looking like this one.
- 3Get a payment agreement in place inside sixty days of the notice date. The 25 percent cost-of-collection fee is what sixty days buys you against, and while the statute's carve-outs are tied to a 2024 amnesty window rather than to any agreement made today, the department's own wording is that the fee may be added — and the commissioner can waive collection fees for reasonable cause. Engagement is the part of that you control.
- 4Work out who was an officer or manager in which periods. Personal liability attaches to whoever held the office when the tax became due, and documenting that is easier now than later.
- 5If nobody has contacted you about a period yet, ask about voluntary disclosure before they do. It halves the look-back and waives penalties, and a representative can approach the department without naming you until the agreement is final. Two things to know before you pin hope on it: it closes the moment the department makes contact, so it only reaches the part of this you have not been written to about — and the tax plus interest falls due within sixty days of the agreement. For a business that is short of cash right now, that second condition is often the one that decides it.
Download: the Kentucky License Risk Checklist, by profession
The permit and license consequences of a Kentucky tax problem, by trade — including which board issues what, and what a tax clearance requires before anything is reissued.
First name and email. Being straight about it: that is a form, and it does add you to a list — one we use to send corrections when something on the checklist changes, not to chase you. One click to leave it, and a download is not a request for a call.
Frequently asked
If this is your quarter
I am a CPA and a Certified Tax Resolution Specialist, and I practice from an office in Georgetown, Kentucky — a real address with a suite number, which is worth checking about anyone you are considering, including me.
Bring what you have, including nothing. A shoebox and an approximate memory of which quarters were filed is a normal starting point, and coming in without the paperwork organized doesn't mean you are further behind than the person who arrives with a folder — it usually just means you have been busy running the business.
If the answer is that you can file the back returns yourself and set up the agreement online, I will tell you that and how.
Three things worth knowing before you dial, because they are the ones that keep people from dialling.
The money: you will know what the first conversation costs before it starts.
The exposure: nothing is filed, and nobody at the department is contacted, without your written authorization. Ringing this office does not put your name in front of the Department of Revenue.
The name: you can describe the situation and find out what Kentucky does with it without telling me who you are. If that is what makes today possible rather than next month, do it that way.
Any hour; overnight it is an automated assistant, and a person rings back.
Katherine M. Johnson, CPA, CTRS
Katherine M. Johnson is a licensed CPA with over 30 years of experience and a Certified Tax Resolution Specialist (CTRS). She personally handles every case — representing individuals and businesses before the IRS and state revenue departments nationwide.
More on Kentucky: Kentucky personal liability · can Kentucky shut my business down · the Kentucky section index. Kentucky state matters: state tax resolution. Federal notices: the IRS notices index.
This article is general information about Kentucky tax law, not tax or legal advice for your situation. What applies to your business depends on facts specific to it.
Next Level Tax Resolution is not affiliated with, endorsed by, or acting on behalf of the Internal Revenue Service, the Kentucky Department of Revenue, or any other government agency. No outcome is promised or implied; what any program or provision means for you depends on your own account.
Katherine M. Johnson, CPA, CTRS
Published: October 2026 · Last reviewed: August 2026
Sources: KRS 139.340 · KRS 139.185 · KRS 139.760 · KRS 131.180 · KRS 131.440 · KRS 131.175. All checked August 2026.
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