June 3, 2020
Sales taxes are a significant obligation for many California businesses. Businesses subject to sales tax are required to collect the sales taxes from their customers, file quarterly sales tax returns, and timely pay the taxes owed for each quarter to the California Department of Tax & Fee Administration (“CDTFA”). A failure to comply with these rules can result in a business owing significant amounts of interest and penalties, in addition to the underlying taxes. A harsh reality is that sometimes new businesses are not able to turn a profit and end up closing. Established businesses may hit a rough patch from which they cannot recover financially and may ultimately have to close. In these unfortunate circumstances, businesses can be tempted to ignore their sales tax obligations and to use the sales taxes collected from their customers to pay business obligations instead of paying those taxes over to the CDTFA. When a business entity (such as a corporation, partnership, LP, LLP, or LLC), that has unpaid sales taxes fails, certain individuals associated with that business entity may be held personally liable for the unpaid sales taxes owed to the CDTFA. Imposition of this personal liability against a person means the CDTFA can use all of its collection power against that person and their assets, including liens and levies, to satisfy the delinquent taxes, penalties and interest.
Depending on the type and structure of the business, various managers and/or employees may be responsible for assuring tax compliance, including compliance with the California sales tax laws. This responsibility is what may lead to personal liability for unpaid California sales taxes. Personal liability for unpaid sales taxes arises under California Revenue and Taxation Code section 6829 (“section 6829”). This personal liability may only be imposed under certain circumstances.
- First, personal liability for unpaid sales taxes can only be imposed when a business collects the sales taxes from its customers and fails to pay these taxes to the CDTFA. If sales tax is not actually collected from the customers, there is no personal liability for the unpaid sales taxes.
- Further, personal liability for unpaid sales taxes under section 6829 can be imposed only upon the “termination, dissolution, or abandonment” of the business, of a corporation, partnership, LP, LLC, or LLP.
If these requirements have been met, there are two additional requirements that must be satisfied to impose personal liability on a person for the business’s unpaid sales taxes: (1) The person must have been a responsible person as defined in the statute for the relevant period(s) of time during which the sales taxes were not paid, and (2) the person must have willfully failed to pay or to cause to be paid the sales taxes during the relevant time period.
Defining a Responsible Person
Persons are considered “responsible persons” under section 6829 if they fall within either of two categories of persons: (1) Persons who have control or supervision of or who are charged with the responsibility for the filing of the sales tax returns or the payment of the tax by the business; and (2) persons having a duty to act for the business in complying with the business’s sales tax obligations. Section 6829 specifically refers to corporate officers, LLC members, partners, and managers as persons who may be “responsible persons,” but the law requires a person to have control, supervision or responsibility for a person to be a “responsible person.” The law also says that merely having the title such as “partner” or “officer” is not sufficient for a person to be treated as a “responsible person.” In theory, it is possible for a person who has the title “president” of a company to not be a “responsible person” if they lacked actual authority to control the operations of the company. And in theory, it is possible for someone who has no formal title or position in a company to be a “responsible person” if they had actual control over the company’s business operations.
Determining who actually exercised control over the operations of a business, or who had the ability to exercise control over the operations of a business, is not always an easy task. Careful investigation of the facts and consideration of the evidence is normally important.
Importantly, an individual can be held personally liable only for the taxes that became due during the time period in which that person had “control, supervisions, responsibility, or duty to act” for the business. The CDTFA has the burden of proving a person is liable under the statute by a preponderance of the evidence. And there is a special relief provision for unpaid volunteers working for a non-profit organization.
Section 6829 defines willfulness simply as an “intentional, conscious, and voluntary course of action.” A person “willfully” fails to pay taxes or causes them to be paid if: (1) They had knowledge that the taxes were not being paid on or after the date they become due; (2) they had the authority to pay the taxes, or to cause them to be paid; and (3) they chose not to pay the taxes even though they had the ability to do so. Willfulness does not require evil intent but merely an intentional failure to pay. So, where the CDTFA can prove that a person associated with a business could have paid the sales taxes but chose not to, willfulness has been proven, regardless of the motive for the failure to pay the taxes.
Providing Proper Notice to the CDTFA of the Termination, Dissolution or Abandonment of the Business Triggers the Statute of Limitations for Any Assessment under Section 6829
The CDTFA will not seek personal liability for a business’s unpaid sales taxes under section 6829 until the agency has actual knowledge that a business has terminated, dissolved or been abandoned. Providing proper notice to the CDTFA that a business has terminated, dissolved or been abandoned is important, because the date on which the CDTFA acquired actual knowledge that a business has terminated, dissolved or been abandoned will determine the deadline by which the CDTFA must assert personal liability under section 6829.
Where the CDTFA acquires actual knowledge that the business has terminated, dissolved or been abandoned, the statute of limitations on the ability of the CDTFA to assert personal liability under section 6829 is three years from the last day of the month following the quarter during which the CDTFA acquires actual knowledge that the business has terminated, dissolved or been abandoned. This rule can be illustrated by this example: If the CDTFA learns on April 2, 2020 (2nd quarter of 2020), that a business has closed with delinquent sales or use tax, the agency has until July 31, 2023 to propose an assessment of personal liability under section 6829, otherwise they are barred from doing so.
If the CDTFA does not acquire actual knowledge that the business has terminated, dissolved or been abandoned, the statute of limitations is eight years from the last day of the month following the quarter during which the business closed. In the example provided immediately above, that deadline would be July 31, 2028.
If you have any questions about your own circumstances or have been contacted by the CDTFA regarding these matters, please contact our office to see how we can help.
Author: A. Lavar Taylor, Managing Partner
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