The Perils of Responsible Person Status for a Company’s California Sales & Use Tax
The California Department of Tax and Fee Administration (CDTFA), like other state revenue and treasury departments, assesses sales and use tax against responsible persons when a corporation or LLC fails to pay its tax bill. A recent case with the California Office of Tax Appeals offers a cautionary tale on the financial risks of personal liability for corporate officers and others when it comes to managing the sales tax compliance of their organization. We discuss that case in further detail below, explain who a responsible person in California could be, and how you might defend against these assessments.
Who Could Be a Responsible Person for California Sales Tax Under the CDTFA Regulations?
A responsible person generally refers to anyone involved in the operation of a corporation, LLC, partnership, or another business entity who has been charged with responsibility for filing tax returns, paying taxes, and otherwise acting for the business on its compliance with California sales and use tax law. See CDTFA Regulation 1702.5. This could include the following types of people within a business:
- Officers (e.g., a president, secretary, CFO, vice president, CEO, etc.)
- LLC members
- Tax representatives
However, simply having one of these listed titles does not, by itself, establish your status as a responsible person. The list excludes people who hold one of these titles as unpaid volunteers of a non-profit. Businesses must meet one of the following criteria while the individual being held personally liable as a responsible person had their authority:
- Collected tax on sales of tangible personal property but did not remit the tax to the CDTFA when due;
- Consumed tangible personal property but did not pay use tax to the CDTFA or sales tax to the seller; or
- Issued a receipt for use tax but did not report or pay it.
When Could a Responsible Person Be Personally Liable for a Business’s Unpaid California Sales and Use Tax?
For the CDTFA to hold a responsible person as being personally liable for a business’s unpaid California sales tax, it must show the person willfully failed to pay the tax. This requires the CDTFA to show all the following events that occurred:
- The responsible person had actual knowledgethat taxes were due but not being paid as of the date they became due.
- The responsible person had the authority to pay the taxes when they became due and when the responsible person had actual knowledge of that fact.
- The responsible person must have had the ability to pay the taxes but decided not to do so.
How to Defend Against Personal Liability for California Sales & Use Tax Through a Showing of Reasonable Cause
When the CDTFA becomes aware of a business’s unpaid sales & use tax, it could attempt to collect from individuals associated with the business that it identifies as potentially responsible persons (regardless of if they are, in fact). This is especially the case for dissolved or defunct businesses where repayment of sales tax is doubtful. However, certain facts and defenses might exist that could limit your personal liability as a responsible person in these cases. Some examples could include the following:
- Your title in the company was symbolic, and you did not have access or authority to the items necessary to pay the sales tax.
- Another person within the business had greater responsibility and decision-making authority over the payment of California sales and use tax.
- Other events outside your control led to the nonpayment of sales tax (e.g., medical emergency, natural disaster, etc.).
- The CDTFA failed to follow administrative rules in place (e.g., the statute of limitations or proper notice).
Consider exercising caution when the CDTFA contacts you about the sales and use tax liability of the business and your potential involvement. Remember, you are entitled to representation from an attorney, CPA, or another sales tax professional who can inform you of your rights and look out for your interests. Such communication from the CDTFA could include a phone call, email, letter, Notice of Determination, or another method, all of which might signal the time to seek professional sales tax help.
Recent California Office of Tax Appeals Case Highlights the Downside of Responsible Person Status
The California Office of Tax Appeals (OTA) recently upheld the responsible person status of the president of a printing company, Irvine Photo Graphics, Inc (the Taxpayer). The decision, In the Matter of Appeal of R. Farrell, resulted in personal liability for a Notice of Determination (NOD) that included $468,489.52 of outstanding tax and interest plus a 25 percent fraud penalty of $117,122.82 for a total liability of $585,612.34.
The basis for the tax debt was from the excess collection of sales tax reimbursement involving exempt, at the time, out-of-state sales that took place before the Wayfair Decision. The Taxpayer received a sales tax refund from the CDTFA for the excess collections but did not return the funds to its customer, nor did the Taxpayer return the funds to the CDTFA. The business subsequently closed, and, as a result, the CDTFA sought a NOD for the unreturned amount against the taxpayer personally. In its decision, the OTA relied on the following to determine the Taxpayer was a responsible person who willfully failed to pay the company’s taxes:
- The Taxpayer had the authority to pay the tax owed because of their status as the president and CEO.
- The Taxpayer had signed an authorization agreement allowing electronic payments of tax from the company to the CDTFA.
- The Taxpayer was the one who filed the sales tax refund claim on behalf of the company’s customer.
Questions About Your Status as a Responsible Person for California Sales and Use Tax?
Businesses with large volumes of taxable sales can quickly accrue significant sales tax liability. Disregarding this payment over time can snowball into large assessments against unsuspecting persons involved in the company. Such cases can become very complex and difficult to navigate without professional sales tax help. If you recently received notice from the CDTFA about a sales tax assessment or have questions surrounding your potential liability as a responsible person, consider a consultation with our sales tax professionals today. We exclusively work on all matters related to sales and use tax in California and other states across the country, including defending against CDTFA assessments of responsible persons.