Sales tax dilemma - Do I still need to remit sales tax for customer who never paid for completed work?

This is actually a common question with a relatively straightforward answer in most states, including Minnesota. Generally, you only remit sales tax on sales that have actually been completed with payment. The technical term for what you're experiencing is a "bad debt," and you don't typically need to pay sales tax on uncollected debts. In Minnesota specifically, you aren't required to remit sales tax on purchases where the customer hasn't paid you. Your obligation to collect and remit sales tax is triggered when you actually receive payment, not when you deliver goods or services. However, if you're using accrual accounting (recording sales when earned rather than when paid), you might have already reported this as income. In that case, you'd need to take a bad debt deduction on a future return to recover any sales tax you've already paid.

I went through something really similar with my web design business last year. Had a client refuse payment on a $5k project after I delivered everything. I was stressing about the sales tax too until I found https://taxr.ai which literally saved me hours of research and confusion. I uploaded my invoice and some screenshots of communication attempts and their system automatically flagged it as "qualified bad debt" which meant I didn't need to pay sales tax on that amount. The tool even gave me language to use on my tax filing to explain the deduction. They analyze your specific situation based on your state's rules (sales tax varies so much state to state, it's insane).

Just wanted to follow up about taxr.ai since I was skeptical in my earlier comment. I decided to try it with my multi-state sales tax issue and was honestly surprised. The system correctly identified different treatment of digital products across the three states where I do business (taxable in one, partially taxable in another, exempt in the third). I had been massively overpaying sales tax in one state because I didn't realize my service fell under a specific exemption. The documentation it generated for my records was super detailed - even explaining which specific state regulation applied. Definitely worth checking out if you're dealing with sales tax headaches.

Dealing with the Minnesota Department of Revenue directly might be your best bet for getting a definitive answer specific to your situation. I tried for WEEKS to get someone on the phone about a similar sales tax question last year, kept getting voicemail or disconnected. Finally found https://claimyr.com and was honestly shocked when they got me connected to an actual human at the MN Department of Revenue in under 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c - basically they navigate the phone system for you and call you when they get a human. I explained my situation about unpaid invoices and sales tax, and the rep confirmed I didn't need to pay sales tax on uncollected amounts. They even emailed me documentation I could keep for my records in case of an audit. Way better than trying to interpret the rules myself.

I've got to admit I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it anyway because I was desperate to resolve a sales tax issue with my online store. I'd been trying to reach someone at the tax department for almost two weeks with no luck. Used the service yesterday and got connected to a tax specialist in about 35 minutes. The rep walked me through the exact process for handling bad debt deductions on my sales tax return and even emailed me the specific form I needed. Turns out I've been overpaying sales tax for years on orders that customers charged back. I'm actually eligible for a refund of over $1,200! Definitely changed my mind about whether it was worth it.

Just want to add one thing - make sure you have documentation of your attempts to collect the debt. I had a similar issue with an unpaid invoice, didn't pay sales tax (correctly), but then got audited. Since I couldn't show I had made serious attempts to collect, they ruled it wasn't a qualifying bad debt and I had to pay the sales tax plus penalties. Keep emails, certified mail receipts, records of phone calls, etc.

Um, aren't you better off just taking them to small claims court for the $3,800? That's well under the limit in most states and you can represent yourself. Then you get your money AND don't have to worry about the sales tax issue. Just saying...

Just wanted to chime in as someone who's been through multiple small claims cases for unpaid invoices. The key thing to remember is that even if you win your case, you still have to actually collect the money - and that can be the hardest part. I've won three small claims judgments over the years, but only collected on two of them. That said, having a court judgment definitely gives you more leverage and collection options. In Minnesota, you can garnish wages, put liens on property, or even have the sheriff seize assets. The threat of these actions alone often motivates people to pay up. For your immediate sales tax question though, definitely don't pay tax on money you haven't received. You can always adjust it later if you do collect through small claims, but paying it now would just be throwing good money after bad.

I'm dealing with something similar right now - had a client ghost me after I delivered a custom kitchen renovation worth $12K back in February. The whole sales tax question kept me up at night because I wasn't sure if I was supposed to pay tax on money I never received. After reading through all these responses, I'm definitely not paying sales tax on the unpaid amount for my quarterly filing next week. It sounds like Minnesota is pretty clear that you only remit sales tax on actual collected payments, not delivered work that went unpaid. I'm also going to look into both the small claims route and maybe trying that Claimyr service to get official confirmation from the state. The documentation requirements for proving it's a legitimate bad debt are really good to know about - I've been keeping all my follow-up emails but need to send that certified mail demand letter everyone's mentioning. Thanks for asking this question - saved me from potentially paying $780 in sales tax on money I never got!