If you own a brick and mortar business or online business that sells “tangible” (physical) goods in California, such as clothing, furniture, or electronics, you are likely subject to the state’s sales and use tax regulations, which are vigorously enforced by the California Department of Tax and Fee Administration (CDTFA), unless an exception applies. If you do business in California, you must generally apply for a seller’s permit from the CDTFA, regardless of whether the company is structured as a corporation, partnership, LLC, or sole proprietorship. (For detailed criteria, refer to CDTFA Publication 107 regarding seller’s permit requirements.) However, if you decide to sell your business later, be sure to surrender your permit back to the state; otherwise, you could remain liable for the company’s sales taxes, even though it is no longer under your ownership or control. Continue reading to learn more about this hazardous pitfall for California business owners – and how a business tax lawyer can help you avoid it.
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A California seller’s permit is mandatory for limited liability companies (LLCs), C corporations, S corporations, and other business entities, in addition to individuals who engage in business in the state of California. Likewise, California business entities must register with the CDTFA (with failure to do frequently triggering CDTFA tax audits). This rule applies not only to local and in-state businesses, but additionally, to “foreign” or out-of-state entities that have nexus with, or economic connections to, the state of California. Exhaustive details are provided in CDTFA Publication 73 (Your California Seller’s Permit: Your Rights and Responsibilities Under the Sales and Use Tax Law), which discusses how to calculate, collect, and report sales taxes correctly. However, while the guide can serve as a helpful starting point, business owners are advised to consult with a sales tax audit attorney for tailored legal guidance.
It is critical that you do not forget about or ignore your seller’s permit when the time comes to sell your business. You must cancel or surrender the permit – unless, that is, you wish to assume personal liability for the entity’s sales taxes.
Some taxpayers have learned this lesson the hard way, such as the former owners of the Tower Club, described in an appeal as “a members-only facility located in Oxnard, California,” which the appellant owned “from April 2011, until it was sold on or about February 15, 2015.” The Office of Tax Appeals (OTA) – a new agency which hears various audit-related disputes, effectively functioning as California’s version of the IRS Independent Office of Appeals – held that, because the owners retained certain of the company’s assets, such as its liquor license, the original owners had failed to satisfy the requirements for completely transferring or selling the company to its new owners. Therefore, they were held personally liable for the sales tax liabilities incurred during the period under review. Significantly, the taxpayers were unable to prove that they notified the CDTFA of the entity’s sale or transfer, a detail which proved a major factor in the decision to hold them liable.
Fortunately, there is no need to face the unplanned (and often costly) tax bills that can result from failure to cancel your permit and sell the business properly. The best way to protect yourself is to work with a knowledgeable CDTFA tax audit lawyer, who can guide you through the sale or transfer process while helping you navigate around the obstacles that might arise on the path.
Sales tax compliance is frequently a thorny issue for small, midsize, and large businesses alike. At the Tax Law Office of David W. Klasing, we understand the unique challenges that arise around sales tax disputes and apply more than 20 years of experience to resolving even the most difficult problems California taxpayers face. Providing civil audit representation, CDTFA audit appeals representation, and criminal tax defense related to sales tax fraud, the Tax Law Office of David W. Klasing is a full-service, award-winning tax firm serving businesses, contractors, and freelancers throughout Northern and Southern California.
If you are seeking answers to a California sales tax question, we can provide the answers you need to engage in effective business tax planning. Contact us online to set up a sales tax consultation today, or call (800) 681-1295 to speak with an attorney.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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