How to Operate a Business (or Your Life) with a Sales Tax Liability

Installment Plans for Operational Businesses

While a business operates, any outstanding sales tax owed remains a liability of the business and the business only.  Generally speaking, the first, most important ingredient necessary to a smooth resolution is to immediately focus on filing and paying current sales tax returns and payments (what is referred to in the industry as “compliance”).  If compliance is established, the urgency and severity of the Board’s response to your liability will be lessened long enough to get financials gathered and a strategy formulated.  Some clients want to eliminate the balance as quickly as possible and seek an aggressive repayment strategy.  Other clients have business expenses in the pipeline which put pressure on their ability to make large lump sum payments to reduce the balance due or which are already causing cash flow risks to the business which are not desired.  As a general rule, there is no penalty for paying more than the amount the Board agrees to; therefore, I recommend pursuing the lowest installment payments for the business while strongly recommending to my clients that they pay as much as they can when gross receipts are up or business expenses have stabilized.  Financial data about the business’s income and expenses are gathered, reviewed then analyzed.  There must be a way to make the financial package reflect the outcome desired, otherwise the desired outcome must be adjusted.


The Board is a government agency and as such the taxpayer has rights when tax is due.  Professional representation is certainly advised to oversee what documents should be produced, how best to produce them (over what look back period, how to provide information that must be disclosed without divulging incriminating information, etc.), and how best to spin the story of what the taxpayer’s allowable expenses are such that allowable expenses are paid first and deducted from the calculation of the taxpayer’s disposable income.  Disposable income is a key indicator when evaluating what the business can afford to pay for past liabilities.  Negotiations circle around what figure for disposable income is accurate and what figures for expenses are reliable.  Each business is different, some businesses are seasonal, others collect substantial gross receipts but carry very high operational costs that absorb most income earned.  It is important that your representative take interest in and understand the business that owes the liability to line up a strategy that will bring results that provide the taxpayer with the buffer it needs to handle its past missteps while still providing room for survival and growth.

Responsible Person Assessments

If a business terminates operations, dissolves or is abandoned, the Board will begin the process of assessing the unpaid sales tax against a “responsible person” associated with the business.  Pursuant to Part 1, Division 2 of the CA Rev & Tax Code, any responsible person who willfully fails to pay or to cause to be paid any taxes due from a corporation, partnership, limited partnership, limited liability partnership, or limited liability company shall be personally liable for any unpaid taxes and interest and penalties on those taxes not so paid upon the termination dissolution, or abandonment of the business of the corporation, partnership, limited partnership, limited liability partnership, or limited liability company.

To assess an incorporated business’s sales tax liability against an individual as a personal liability, the Board must establish that while the person was a responsible person the corporation, partnership, limited partnership, limited liability partnership, or limited liability company:

1) sold tangible personal property as a part of its business and collected sales tax on the sale and failed to remit such tax when due; or

2) purchased personal property and failed to pay the sales tax to the seller or the Board; or

3) issued a receipt for use tax and failed to report and pay the tax.[1]

Responsible person sales tax assessments are assessments of the business’s outstanding unpaid sales taxes against an individual owner or operator of the business. In common practice, the individual who is at risk of being personally assessed is someone associated with the business or associated with the business’s sales permit who is deemed by the Board of Equalization to have been responsible for foregoing the payment of sales tax when it was due.  To successfully establish that a particular individual should be assessed personally, the Board must find that the individual had access to business funds and directed these funds somewhere other than to payment of the tax when the sales tax was due.  If the business had no funds at the time sales taxes were due and therefore did not divert funds to another obligation instead of using them to pay the tax, there may be grounds to protest quarterly business sales tax assessments against that individual during such periods.  If the individual did not have decision making authority for the business and did not make decisions about what business expenses to pay, there may be grounds to protest assessments against the named individual.  An officer or owner cannot be “responsible” for failing to pay tax when there were no funds available to pay any expenses and none were paid.  These are among the arguments that may be made if circumstances surrounding how the liability arose are conducive.  Careful attention to the timing of receipt of income and the timing for paying out business expenses must be given before protesting an assessment.

Often, the responsible person assessed business sales taxes on their personal account was in fact a responsible person for the business who, due to cash flow issues or late payment from accounts receivables, made an executive decision to pay a business obligation before paying the sales tax.  In these cases where assessments against the business or a responsible person for the business are high and bankruptcy is not possible (which is most often the case) the most important strategy to employ is that of cooperation with the Board.  This does not mean that an individual should simply turn over their records to a demanding collections agent.  This means the business (or the liable individual) must agree to provide disclosure and should do so in a timely fashion, but they must be tactful about their disclosure and take advantage of historical data in conjunction with recent events to argue the lowest payment possible.  Of the California state agencies, the Board of Equalization is often the most aggressive about collections.  The Board is short fused and impatient about being paid back when sales tax is owed and a liable party has been identified.  To that end, installment agreements are feasible and can be accomplished such that an individual can dig themself out of the debt or establish an installment agreement long enough to line up a different exit strategy for addressing the liability.  The key to a good financial disclosure is to be cooperative with the agency while maintaining razor focus on the strategy employed to reach your payment goal.

If you are faced with an outstanding sales tax liability, I am available to discuss your matter for purposes of representing you before the Board.  A plan can be created together, with my expertise and your intimate knowledge of your business.  We will form an informed plan, then we execute, together, and as a team.

[1] Business Taxes Law Guide, Revision 2013, Article 18, Regulation 1702.5

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Part One

By. Elizabeth Gonsalves, ESQ.

A recent 9th Circuit case, Ilko v. California State Board of Equalization, 2011 WL 2520271 (9th Cir., 2011) outlined the requirements for successfully discharging sales tax in bankruptcy.  Until recently, California sales taxes were interpreted as “trust fund” taxes that are never eligible for discharge in bankruptcy.  A debate has ensued in the courts for decades over whether the legislative history associated with statutes governing priority of certain creditor claims intended sales taxes to be a type of tax liability that could never be discharged or a type of tax liability that can be discharged after rigid and specific time requirements and filing requirements are met.

Many cases have involved arguments by taxpayer’s counsel that sales tax should be interpreted as a tax to be categorized as either a type of “gross receipts” tax (dischargeable under 11 U.S.C. s. 507A) or, in the alternative, as an “excise tax” (dischargeable under 11 U.S.C. s. 507E).  Until recently, the 9th Circuit held sales tax was to be treated as a trust fund tax that was not dischargeable in bankruptcy.  In re Shank, 792 F2d 829.

In 2011, in Ilko v. California State Board of Equalization, 2011 WL 2520271 (9th Cir, 2011) the 9th Circuit ruled sales tax was dischargeable under both 507A and 507E.  In finding sales tax was dischargeable under both 507A and 507E, the court noted sales tax could be interpreted as either a type of gross receipts tax or a type of excise tax.

Ilko only discusses discharging sales tax in circumstances where there has been a personal bankruptcy filing as to the owner of the business who has been assessed “responsible person” sales tax liabilities (as opposed to a corporate bankruptcy filing).  It is required that the business has ceased operations because only then does the three year statute begin to run for assessing a responsible person who can then seek relief from personal liability through bankruptcy (the 3 year statute for assessing a responsible person only applies if the owner gave notice to the BOE that the business ceased operations, otherwise it is an 8 year statute for assessing a responsible person).

The Ilko court ruled that the following elements, if met, may serve to successfully discharge “responsible person” sales taxes:

  1. The business must have terminated because a “responsible person” cannot be assessed personal liability for the unpaid sales tax under Tax Code § 6829 until the corporation terminates or abandons its business or dissolves; and
  2. The State Board of Equalization must receive timely notification that the business has terminated (this is important to establish a 3 year assessment statute because balances which are not assessed before bankruptcy but which are still assessable after the bankruptcy filing are never discharged, thus an 8 year assessment statute should be avoided); and
  3. Filing a custom personal tax return for the sales tax liability (because the corporation and the “responsible person” are viewed as separate persons under Tax Code § 6005.18); and
  4. At least 3 ½ to 4 years must pass before filing a personal bankruptcy case (to provide for timing requirements as set forth for excise tax and gross receipts tax in 11 U.S.C. § 507(a)(8)(A) & (E), §523(a)(1).

It is important to note that there is a strong likelihood that the state will file a lien against the responsible person personally assessed sales taxes.  Any perfected lien survives bankruptcy and is enforceable against the real property or personal property of the responsible person after bankruptcy.  Therefore, even if the responsible person successfully discharges responsible personal sales tax assessments from collection action against them personally, their attachable property may be subject to the sales tax after bankruptcy.