You can eliminate (discharge) sales tax obligations in bankruptcy if certain criteria are met.
In California, sellers are required to pay sales taxes to the State Board of Equalization (“SBOE”) now the California Department of Tax and Fee Administration (CDTFA) based on receipts from sales.
On July 1, 2017 the State Board of Equalization became the California Department of Tax and Fee Administration (CDTFA).
Many bankruptcy attorneys (and others) believe that sales taxes in California can never be discharged.
This is simply not true.
Many of my clients have discharged sales tax debts in bankruptcy.
Naysayers claim that sales taxes are like “trust fund” tax liabilities which are, in fact, never dischargeable.
But in California, sales taxes are not trust fund taxes anymore.
They used to be, but many years ago the law changed to make sales taxes the sole liability of the seller (and, hence, not being held in “trust” for anyone).
So what happens when a corporation (or a sole proprietorship) “goes out of business” and still owes a bunch of unpaid sales taxes?
Are You A Responsible Officer For Tax Liability?
The typical scenario looks like this:
With much sadness (and sometimes relief), you have closed your business and are ready to move on with your life.
But if you are found to be a responsible officer of the corporation, or your business was a sole proprietorship, you can become personally liable for any unpaid sales taxes.
Eventually, sometimes many years later, you will get a notice from the California State Board of Equalization (“SBOE”) stating that you owe unpaid sales taxes from your business.
I have seen many cases where assessments of over $1 million are made against individual officers of a corporation.
What can you do if that happens?
California Sales Taxes Can Be Discharged In Bankruptcy
In California, the rules for discharging sales tax liabilities are essentially the same as those for discharging income taxes.
The important elements for discharge are:
- All required sales tax returns have been filed and it has been more than 2 years since they were filed.
- It has been more than 3 years since the returns were last DUE to be filed.
- The taxes were assessed more than 240 days ago (plus any extensions which can occur through certain events).
- The taxes cannot still be assessable.
If all the above elements are met, the sales taxes can be discharged in a bankruptcy case.
The trickiest part of the above is the assessability of the tax.
The Business Must Be Closed Or Terminated Prior To Assessment
In order for a sales tax to no longer be assessable, several things must occur.
- The business must be terminated, dissolved, or abandoned; and
- Notice of termination, dissolution or abandonment must be given to the Board of Equalization
Pursuant to California Tax Code section 6829(f), the Board of Equalization has up to three years to assess the tax by designating a responsible party and sending out a notice of deficiency determination letter. That three year period starts to run from the last day of the calendar month following the quarterly period in which the above notice was given to them.
Thus, it is critical in a corporate termination setting to make sure all sales tax returns have been filed and that formal notice is given to the SBOE of the termination.
Once the tax has been assessed and the personal liability determination made, 270 days needs to pass and then a bankruptcy case can be filed (assuming the other requirements above have been met by then) to potentially discharge the taxes.
How To Determine If Your Sales Taxes Are Dischargeable In Bankruptcy
Tax discharge analysis is very tricky. Most attorneys focus on dischargeability of income taxes, because they are the most common.
But sales taxes owed to the California Board of Equalization can also be discharged in bankruptcy if the prerequisites are met.
You need to find a bankruptcy attorney who has knowledge and experience dealing with California sales taxes.
What You Need To Give Your Bankruptcy Attorney:
To determine whether your sales taxes are dischargeable in bankruptcy, you need to provide your attorney with a copy of the “Billing and Refund Notice” sent by the SBOE (or DTFA) which shows the assessment of taxes against you as the responsible officer and contains the breakdown of tax periods and amounts.
When you are ready, schedule a consultation to determine your options.
Image courtesy of Richard Masoner