In an October 2019 case, the Office of Tax Appeals (OTA) sided with the California Department of Tax and Fee Administration (CDTFA) against appellant Dean Woerner, a corporate officer who was found to have personal liability for the unpaid California sales tax debts of a defunct entity. Though the business had ceased operations in July of 2012, at which point the company was purchased by another entity, Woerner was nonetheless held liable for sales tax debts the business incurred during the period from October of 2011 through March of the following year due to his status as a corporate officer during that time, along with additional factors which are discussed in more detail below.
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In 2017, the Taxpayer Transparency and Fairness Act dramatically restructured the California State Board of Equalization (BOE), reassigning many of the BOE’s long-held duties to two new agencies: the Office of Tax Appeals (OTA), which was created to hear appeals involving state income, sales, and employment tax disputes; and the California Department of Tax and Fee Administration (CDTFA), which administers California’s sales and use taxes, along with various special taxes such as cannabis taxes and diesel fuel taxes.
Today, the BOE’s duties are limited predominantly to the administration of California property taxes, alcoholic beverage taxes, and taxes on insurers. The CDTFA is responsible for performing California sales tax audits (including audits of online businesses), while CDTFA tax audit appeals are heard by the OTA. For example, if the CDTFA finds an individual personally liable for a business entity’s unpaid sales taxes – for instance, if the taxpayer inherits sales tax debts after purchasing a business, which is known as “successor liability” – he or she may file an appeal with the OTA to dispute the amount allegedly owed or seek relief from penalties and interest.
Of course, success depends in part on the taxpayer’s adherence to OTA rules for state tax appeals. Unfortunately, taxpayers do not always prevail on appeal, as this particular case demonstrates.
As a corporate officer, Woerner “was one of the persons responsible for… [the company’s] sales and use tax compliance during the liability period” (i.e. October 2011 through March 2012), according to the appeal. Significantly, Woerner was aware of the company’s sales tax liabilities – and moreover, “had the authority to cause… [the business] to pay them.”
Together, these facts meet the criteria described in Section 6829 of California’s Revenue and Taxation Code (RTC § 6829), which are used to determine whether a taxpayer should have personal liability for a company’s unpaid state taxes. In fact, the California Department of Tax and Fee Administration highlights this statute in CDTFA Regulation 1702.5 (Responsible Person Liability), which discusses when a corporate officer is considered a “responsible person” (or “responsible party”) in the event that taxes are delinquent or penalties are imposed. (Of course, there are also situations where multiple people can be treated as responsible parties, which taxpayers should keep in mind.)
For example, one of the statute’s requirements – a requirement which Woerner met – is that the taxpayer “had the control, supervision, responsibility, or duty to act for the corporation, partnership, limited partnership, limited liability partnership, or limited liability company,” as established by RTC § 6829(b). Another vital requirement is that the taxpayer acted “willfully,” or deliberately, as opposed to negligently or accidentally. This taxpayer could be an “officer, member, manager, partner, or any other person” who “willfully fails to pay or to cause to be paid any taxes due from the” business to the state of California. If a taxpayer meets the criteria set forth under this statute, then under RTC § 6829(a), he or she “shall, notwithstanding any provision… to the contrary, be personally liable for any unpaid taxes and interest and penalties on those taxes” when the business is dissolved, terminated, or simply abandoned.
Ultimately, the OTA sided with the CDTFA against the appellant, dismissing Woerner’s argument that the company’s purchaser, rather than himself, “should be held liable for… unpaid sales and use tax liabilities because… [the purchaser] agreed in the… contract to assume all liability for the outstanding tax liabilities… owed to the CDTFA.” Countering, the OTA pointed out that “any such assumption of liability is a matter of contract… and has no effect upon a taxpayer’s tax liability to the state” (italics our emphasis).
This particular detail offers a valuable lesson for other business owners: namely, that business contracts cannot overrule or invalidate state tax regulations. However, when taken as a whole, this case provides an even more important lesson: that corporate officers and other responsible parties must take their tax compliance duties seriously. Proper due diligence today can prevent a costly acquisition – and resulting tax audit or dispute – in the future.
Work with an experienced business tax attorney if you are concerned about successor liability, need assistance with an upcoming CDTFA tax audit, or are facing other sales tax audit issues in California. Contact the Tax Law Office of David W. Klasing online for a reduced-rate consultation, or call (800) 681-1295 for 24-hour personal and corporate tax support.
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