Am I Personally Liable for a State Sales Tax?

Faced with a large assessment or unpaid state sales tax, many companies ask, “What happens if I do not pay the state sales tax my company owes?”  Can the state come after me individually for a state sales tax liability of my company?  Most business or tax lawyers, CPA’s, and other state sales tax professionals often give bad advice. Many tax lawyers recommend filing bankruptcy, which does not generally help the tax situation, while others give the advice to simply start a new company, which may only make things worse.

Of course, the answer varies largely depending on the state.  However, in most states, if you collect tax and don’t remit it, the state can come after you civilly and criminally.  Likewise, even if the tax was not collected, if a state can show you committed fraud to evade or defeat the tax, then you are often personally on the hook.  Still, in other states, like California, the person “responsible” for complying with the state’s sales tax can be personally liable for corporate liability.

In re: Rolando Garcia, Caribbean BBQ Island’s Inc.

Caribbean BBQ was a very typical small family business.  As the name suggested it manufactured and sold custom BBQ islands, primarily in California.  The CFO and his wife, the sole shareholder, ran the company and were the only two listed on the company’s bank account.  Sometime in 2007, it was discovered that its employees had embezzled about $200,000 from the business.  California’s revenue agency, CDFTA, audited the business and uncovered unreported taxable sales of around $2 million.

Following the assessment and closure of the business, CDFTA went after the business owners individually.  Under California law, section 6829, the “responsible person” is liable for the unpaid tax of a closed company if the person willfully failed to pay the sales tax that was due.  CDFTA took the position that the willful requirement could be inferred because of the large discrepancy between deposits and taxable sales.

As usual, the taxpayer had a different version of the story.  In short, the business owner argued that he was unaware of the unpaid tax.  Testimony was offered that the business owner had limited literacy, not business experience, and worked predominantly on an unrelated trucking business.  The owner, like many owners, do, trusted his employees to handle the tax obligations of the business.  After appealing to the agency, the CDFTA ultimately determined that the business owner was personally liable for the tax.

Office of Tax Appeals

As most states allow, taxpayers in California can challenge the final determination by an agency in administrative or tax court.  Likewise, it is often advantageous to go to administrative or tax court and in most states, it is imperative that you have adequate representation, which may or may not be a state sales tax attorney.

Ultimately, the office of tax appeals agreed with the business owner.  The administrative law judge recognized that while the owner signed checks, he really was not aware as to where the embezzled funds were going.  Further, the individual in charge of tax filings concealed records, altered invoices, and made it difficult for the owner to be aware of the tax underpayments.  In this case, the business owner’s ignorance saved the day.

This case can be a learning opportunity for business owners and small business owners across the country.  It can create a myriad of problems by trusting others to take care of your day-to-day operations and your tax filings.  At a minimum, it is critical to have a system of checks and balances in place to catch the dishonest employee.  Obviously, it is a bad idea to blindly sign corporate checks as well.  Perhaps, most importantly, it is crucial to have a competent state sales tax attorney or professional on your team to make sure these types of problems do not occur.  And, if they do, all the more reason to have a state sales tax pro to fight the issue all the way through tax or administrative court.

At Sales Tax Helper we help those in need of sales tax auditsprotests, and administrative litigation. More importantly, we provide services equivalent to tax attorneys at the price of a sales tax consultant. Simply put, this is what we do, and we will work hard to reach a reasonable resolution for your business’s sales tax liabilities. We welcome the opportunity to handle your sales tax issues and be part of your team!