A bond of seller, also known as a sales tax bond or a sales and use tax bond, is a type of surety bond required by certain states to ensure that businesses pay their yearly taxes. The bond is required in Texas and California. In California and Texas, the bond is required as part of an application process to sell taxable products. Texas and California each have their own ways of determining the bond amount required. We’ll go over below. But it’s important to know that the bond amount is based on your sales volume in both states and the maximum bond amount for Texas and California are $100,000 and $50,000, respectively.
The cost of a bond of seller will depend on the required bond amount and the rate that the principal receives. Each state has different regulations for the bond amount that is required.
In Texas, a business needs a bond of either $100,000 or 4 times their average monthly tax liability, whichever is greater.
In California, the bond amount is the lesser amount of the following:
Typically, you only pay a percentage of the bond amount. This percentage is known as a rate and is determined by the insurance company based on your financial history. Each surety company will determine this rate differently, but the applicant's credit score is the most significant factor in rate calculations. An applicant with a 700+ credit score will receive a rate closer to 1% of the bonded amount while applicants with a lower credit score may pay 15%-20% of the bonded amount. Bond of sellers are considered high-risk because of the strict regulations on tax law, so surety companies are generally pretty cautious when it comes to issuing these bonds.
Since each surety company determines rates differently different, we’ve partnered with over 10 insurance partners. This allows us to receive multiple quotes for the same bond to ensure we are offering our customers the best market available on the market. Our prices for a $100,000 bond and $50,000 start at $1,000 and $500 respectively (1% of the bond amount).
A bond of seller is required for businesses that sell taxable products in certain states to be sure that every business is forwarding the government the appropriate amount of taxes for their business. If a business misses taxes to the state government, then the state can file a claim on the bond to collect the missing taxes.
California and Texas.
A bond of seller is required every year as long as a business is in operation in order to keep your business legally operating. With that being said, a bond of seller will not automatically renew, therefore, a business will need a new bond following the expiration of their active bond. In most states, the bond amount can change each year depending on the state’s calculations for the bonded amount, so it’s best to confirm the bonded amount required each year.
While a tax permit will need to be renewed every year, it’s possible to purchase a multi-year bond so that a bond can run continuously through multiple permits. Other than saving time, getting a multi-year bond can usually also lead to a 15% annual discount, so you can save time and money by purchasing a multi-year bond. If the bonded amount required for your business changes yearly, it’s super easy to get the bond amount updated.
Making changes to a bond of seller is extremely important. If there are any changes to your business, then your bond will also need to be updated to keep your business in compliance. This would include your business name change, address change, or anything related to your business’s information. Every year, the required bond amount for your business can also change if your average monthly tax liability changes. Making these changes is really easy because of a form called a bond rider. A bond rider allows the surety company to update the bond without the need to cancel and reissue a new one.
For simple changes like your business name or address change, there will not be a charge since the risk of the business has not changed. However, if the bond amount changes, then there may be an increase in the premium in order to cover the additional risk.
The purpose of a bond of seller is to ensure that the state receives the correct amount of taxes due to them each month, quarter, or year, depending on the state. The best way to avoid claims being filed on a bond of seller is by paying the correct amount of tax for your business before it’s due date. If a business fails to pay the required tax amount by the due date then, a claim may be filed by the state against the bond in order to collect the missing tax payment.
Once a claim is filed, the surety company will investigate the validty of the claim by examining the evidence provided by the obligee and the principal. If the claim is valid, the surety company will pay up to the bonded amount for the claim to the state to cover the missing taxes. After the claim has been paid out, the surety company will expect the bond's principal to repay them for the claim. Since a bond is intended to cover the obligee and not the principal, the principal is responsible for repaying the surety for the claim, like a loan from a bank. It’s important to repay the claim amount because if you no nor repay the surety it can lead to your bond being canceled and also a harder time getting a bond in the future.