In a recent case before the Office of Tax Appeals (OTA), a former officer from a business that was sold was appealing the California Department of Tax and Fee Administration’s (CDTFA) assessment of unpaid sales taxes relating to a business that he served as an officer for. The taxpayer argued that although the law permits the state to go after an officer of the corporation that was responsible for the payment of tax, that he was not the most culpable officer and thus, should not be held solely responsible for the tax liability. This case highlights the importance of sales tax compliance and the need for officers of California corporations to understand the personal tax liability placed upon them by virtue of their role.
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What is the relevant law regarding the sales tax liability of a business?
Under California law, sales tax liabilities can be collected from the office of a corporation that has ceased to exist, if certain circumstances are met. This law can present exposure to former owners and non-owners alike if they served in the capacity of an officer of the corporation that had a responsibility to take care of the accounting and the paying over of California sales tax.
Specifically, California law dictates that an officer of a terminated corporation may be held personally liable for unpaid sales tax if:
- The corporation’s business has terminated,
- The corporation collected, but failed to pay over sales tax to the state,
- The officer was responsible for the filing and payment of tax, and
- The officer willfully failed to pay the taxes at issue.
Details of the Schoettler Tire Case
In the Matter of the Appeal of Paul Neufield before the OTA, the appellant previously served as the CEO of Schoettler Tire of Fresno, while his business partner, Matthew Schoettler served as Vice President and was a co-owner. Neufield had the ability to sign for the company and paid multiple bills on behalf of the business. In 2010, Neufield handed over the CEO title to Schoettler through a written agreement. Between 2007 and 2010, the company collected sales tax from customers but failed to remit the taxes to the State of California. The CDTFA established that during that time, Neufield knew that sales tax was going unremitted. The business was sold as part of an asset sale in mid-2010.
Upon the completion of a sales tax audit, the CDTFA asserted that Schoettler Tire of Fresno had underpaid its sales tax by over $145,000 and took the position that Neufield was responsible for payment of those taxes. Neufield filed a timely petition with the CDTFA, which was denied and an appeal was filed with the OTA.
At the appeals level, Neufield argued, among other things, that although he was an officer of the corporation, he was not the most culpable officer, which he argued was Schoettler. Neufield argued that because Schettler was primarily responsible for tax issues, he should be held solely responsible for the payment of unremitted sales tax. In disagreeing with Neufield and ruling for the CDTFA, the OTA indicated that the law does not impose liability on the most responsible person, but rather, it imposes liability on any responsible person. Lastly, Neufield argued that the successor to a business can generally be held liable for past unpaid sales tax and therefore, the liability should fall upon the buyer of the company’s assets. Similarly, the OTA ruled that just because successor liability would allow the CDTFA to recover sales taxes from a successor in interest, that does not relieve another responsible person from liability.
What do I do if my company has unremitted sales tax?
The key takeaway from this story is that if you are a responsible person for the purposes of sales tax liability, there are very few arguments that you can make to relieve yourself of liability. The existence of others who are liable, even if they are more culpable, does not relieve your liability. If you own a business or are an officer of a company that has failed to properly remit sales tax that the business has collected, it is in your best interest to work with an experienced sales and use tax attorney to help rectify the situation. Coming into compliance is one of the only ways that you can wash your hands of the underlying tax liability. As the appellant in the case above discovered, even when the business is sold, you are still on the hook for unremitted sales tax.
Contact an Experienced Tax Attorney Today
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience representing a diverse group of taxpayers. From individuals to middle market businesses and beyond, our team of zealous advocates will assist in the development of a strategy to help you reach your specific goals and objectives. Whether you are under a tax examination or are in need of tax planning advice, contact the Tax Law Offices of David W. Klasing today, online or by phone at (800) 681-1295, for a reduced-rate consultation.
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