A retailer's employee embezzled company funds, including sales tax collected from customers. Can the retailer get a refund or waiver of the sales tax that was stolen, since the retailer never actually got to keep that money?

Plain-English summary

A retailer wrote in after an employee embezzled company funds, including sales tax the retailer had collected from customers, asking why the State of Texas won't refund that stolen tax money.

The Comptroller explained the underlying trust-fund structure of sales tax: the purchaser pays the sales tax; the retailer collects it and holds it in trust for the state, remaining personally liable for remitting it to the Comptroller's office. This liability holds even if the retailer fails to collect the tax in the first place — the retailer can then pursue the customer for that unpaid amount like any other debt, but the state still gets paid. Because the money was never legally the retailer's own (it belongs to the state, collected on the state's behalf), a refund isn't possible just because it was lost, stolen, or embezzled. A refund is available only when the underlying sale was itself EXEMPT and the retailer can prove the tax was actually refunded to the purchaser, per Rule 3.325(b)(2) — not when a taxable sale's tax proceeds are later misappropriated.

The Comptroller acknowledged the hardship but confirmed the only available relief in this kind of situation is a possible waiver of penalty or interest if the embezzlement caused a late sales tax return — the underlying obligation to report and remit the tax itself is never waived, even for a natural disaster or other circumstance that destroys the funds. Pursuing restitution from the employee is a separate matter outside the scope of sales tax refunds.

What this means for you

Retailers who experience employee theft or embezzlement of collected sales tax

Don't expect a state refund for stolen sales tax proceeds — you're still on the hook to remit the full amount to the Comptroller, since that money was never legally yours to begin with (you held it in trust for the state). Your only possible relief through the Comptroller's office is a penalty/interest waiver if the theft caused your return to be late; the tax itself still must be paid. Separately pursue restitution against the employee through the civil or criminal justice system.

Accountants and tax professionals advising retail clients

If a client experiences internal fraud involving sales tax funds, flag immediately that this creates NO sales tax refund or forgiveness — plan client cash flow around still owing the full remittance, and separately pursue any available penalty/interest waiver for lateness plus restitution from the responsible employee.

Common questions

Q: If an employee steals sales tax money before it's remitted, can the retailer get that tax refunded by the state?
A: No. The retailer holds sales tax in trust for the state and remains liable to remit it, even if it's stolen, lost, or embezzled.

Q: Is there ANY relief available in this situation?
A: Only a possible waiver of penalty or interest if the theft caused a late return — the underlying tax obligation itself is not waived.

Q: When IS a sales tax refund available?
A: Only when the underlying sale was itself exempt and the retailer can prove the tax was actually refunded to the purchaser, per Rule 3.325(b)(2) — not when taxable-sale proceeds are later lost or stolen.

Q: What if the retailer never collected the tax from the customer in the first place?
A: The retailer is still liable for paying the tax to the state, though it may pursue the customer for that amount as it would any other debt.

Q: Can I rely on this letter for my own embezzlement situation?
A: No. This opinion is based on the facts submitted, and other facts, though similar, may yield different results; it can be relied on only by the taxpayer it was issued to.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.325(b)(2) (sales tax refunds — requires the sale be exempt and proof the tax was actually refunded to the purchaser)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200001966L

Original ruling text

January 11, 2000

Dear **:

Thank you for your letter concerning the embezzlement of funds by an employee
that included sales tax collected from your customers. Raul Cruz in our
Revenue Accounting Division asked me to provide you information on why the
State of Texas is not authorized to refund tax to a retailer in this situation.

I will briefly review how the sales tax works. Sales tax is a tax imposed on
transactions in which taxable goods or services are sold. The sales tax is
paid by the purchaser and collected by the retailer for remittance to the State
of Texas. The retailer holds the tax in trust for the state and is responsible
for payment of the tax to the Comptroller's office. Even if a retailer fails
to collect the tax from the purchaser, the retailer is still held liable for
payment of the tax into the State of Texas. Of course, the retailer is allowed
to pursue the purchaser for payment of the tax in the same manner as other
legal debts owed to the retailer.

A refund of the tax is not possible when the tax is lost or stolen because the
purchaser pays the sales tax and the retailer is not entitled to the tax. A
retailer may only request a refund when the sale to the purchaser is exempt and
the retailer has proof the tax was actually refunded to the purchaser. See
subsection (b)(2) of Rule 3.325 on refunds. Sales tax cannot be refunded when
the sales are not exempt sales.

I realize the embezzlement of funds by an employee has created hardships for
you as a business owner, but the Comptroller's office is not authorized to
refund sales tax collected or due from your customers. The only relief that
may be granted in such cases is the possible waiver of penalty or interest when
there are circumstances beyond the retailer's control that cause a late sales
tax return. However, there is no waiver of the requirement to report and remit
the tax even when a natural disaster or other circumstance causes the loss of
the tax money held by the retailer. I hope you are successful in obtaining
restitution for your loss, but that is a matter outside the scope of allowable
refunds for sales tax.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division

cc: Raul Cruz