The consequences of falling behind on your taxes are difficult for anyone, but when we are talking about businesses, sales taxes, and the California Department of Tax and Fee Administration (CDTFA), the results can be devastating. The CDTFA is particularly aggressive about investigating and pursuing unpaid sales taxes, and will often demand immediate payment of any liability, no matter what other types of financial responsibilities or consequences the business may be facing. One of the most powerful “weapons” in the CDTFA’s arsenal of collection tactics is the tax lien. Understanding how liens work, why they happen, and what to do if one is recorded against you is important in order to protect your business during times of financial difficulty.
The California Department of Tax and Fee Administration
The is the body responsible for overseeing, administering, and collecting sales and use taxes, along with several other tax programs. The CDTFA is in charge of sales and use tax audits in cases where there is suspected tax evasion or fraud. They also look for accidental omissions and mistakes in paying sales and use tax, and will seize on any opportunity to recover tax funds they determine are due. Once your business comes to the attention of the CDTFA, they are authorized by law to investigate your financial records and, if they determine that you owe sales tax, begin a series of collection actions.
Sales tax and owing the CDTFA
Sales taxes are imposed on individuals and businesses who sell goods or services in the state of California. The amount of the tax is calculated by determining the gross receipts of a business, minus any exempt (non-taxable) sales. The sales and use tax rates are the same, and are subject to change. In addition to the state sales tax rate, various local jurisdictions add additional municipal sales tax rates. These district rates increase the total sales tax owed by a business, and must be remitted to the CDTFA along with the basic California rate. You can see an updated list of the state and district sales tax rates on the CDTFA website.
Taxable retail sales in California include “tangible personal property,” which covers a huge range of items: clothing, furniture, toys, housewares and much more, including digital goods such as the finished artwork for a website. Service and labor costs can also be taxable if they “result in the creation of tangible personal property.” Use tax is the other side of sales tax, and it refers to the purchase of items from out-of-state retailers for use in California. This means that if your business is outside California, you are still required to collect use tax on any items you sell in California, and then remit the funds to the CDTFA.
There are a wide variety of items which are exempt from sales tax in California, including certain foodstuffs intended for human consumption, prescription drugs, and sales to the U.S. Government. The rules and regulations surrounding exempt sales are complex, and this is a frequent point of trouble for businesses who do not understand what items are exempt and how to document exempt sales properly. A helpful guide to exempt sales is available from the CDTFA.
Businesses are allowed to collect sales and use tax from their customers at the time of sale, but to do so they must list the amount of sale tax reimbursement separately on receipts or invoices, or state on a posted sign, price tags and/or other printed material for the customer that sales tax is added to all price. If you are dealing with a sales or purchase agreement, that agreement must specifically call for the addition of sales tax to the purchase. It is important to note that while you can charge your customers sales tax, failing to do so does not absolve you from paying sales tax to the CDTFA. The responsibility for paying sales tax rests only on the business owner.
What you need to know about tax liens
Once the CDTFA has determined that you owe unpaid sales tax, they will begin collection processes. One of the most unpleasant collection actions available to the CDTFA is the tax lien. In essence a tax lien is a public notice which states that the CDTFA has a legal claim to your personal or real property until your tax debt is paid. This lien encumbers your property, and means that you cannot sell, refinance, or transfer the property through escrow. If you obtain new property after the lien is recorded, it automatically attaches to that property as well.
Recorded liens are public records, viewable by anyone, including credit bureaus, and their effect on your credit rating can be immediate and disastrous. Even if the lien is eventually released, it will remain on your credit reports for seven years, unless the lien was originally filed in error. If a state sales tax lien is recorded against you before you file for bankruptcy, the lien will remain even if the tax debt is discharged in the bankruptcy. California state tax liens have a ten year lifespan. After ten years the lien expires and is unenforceable, however it can be renewed for another ten years if the CDTFA files extension paperwork within 90 days of the expiration date. This renewal can be filed twice, for a total lifespan of 30 years.
The tax lien process effectively begins with a notice from the CDTFA, which they must send you 30 days before they intend to file the lien with the county recorder. If you receive such a notice, you must act quickly. If you believe that the CDTFA has committed an error, you should contact them immediately, preferably after consulting with a qualified tax attorney to ensure that your rights are protected. If you do actually owe the CDTFA the amount they claim, it is in your best interest to pay the debt in full, as soon as possible. The faster you pay, the smaller the total amount of taxes, penalties, interest and other fees will be. If you pay within the 30 day period, you should be able to avoid having a lien recorded at all.
Unfortunately for many taxpayers, the difficult financial circumstances that led to the tax debt in the first place often make it impossible to pay the entire debt immediately. While this situation understandably adds a lot of stress, it does not mean that a lien is inevitable. If you make contact with the CDTFA within the 30 days to pay what you can and to discuss a payment plan, you may still be able to avoid the recording of the lien.
The CDTFA may withhold a lien if it believes that the taxpayer can and will make payment arrangements in good faith. Short term payment plans are sometimes accepted. The CDTFA will usually withhold a lien if you can pay the full amount within 12 months, if you have never had payment problems before, and if you fulfill the terms of the plan perfectly. Payments are usually made weekly, and all of your tax returns and filings must be kept up to date. Longer term payment plans are more difficult to arrange and will require a thorough investigation into your finances to ensure that you do not have the means to pay off the debt more quickly.
Releasing the lien
If you have been unable to reach an arrangement with the CDTFA and they have recorded a lien against you, all is not lost. It is possible to have the lien released. While the damage to your credit report has been done, releasing the lien is the first step to rebuilding your financial life.
The first and most obvious way to release the lien is to make payment in full, including any interest, fees, and penalties. It is also possible to request a partial release of the lien if there is a need to sell or transfer a specific piece of property and there are insufficient funds or equity to satisfy the tax debt, or when the party with the lien does not actually have any rights to the title of the property. To request a partial release of a lien, you must provide the CDTFA with a variety of documents outlining the need for a partial release and evidence of the proposed disbursements to both seller and buyer. If the partial release is granted, the lien will remain in effect on all other property.
The other way to release a lien is to have your balance set to zero by the CDTFA. This may be possible by requesting relief. In some circumstances, you may be eligible to make an Offer in Compromise, where you settle with the CDTFA for an amount less than what you owe, but as much as they believe you can reasonably pay. The rules around the CDTFA Offer in Compromise program are very strict and only apply to businesses which have been closed. If you were the spouse or domestic partner of a taxpayer with a lien against them and have ended your relationship, you may be able to apply for “innocent spouse or domestic partner relief.”
Once a lien is released, the CDTFA will issue a Release of the Notice of State Tax Lien to the County office where the lien was recorded. You can also request that copies of the lien release be sent to yourself, title companies, or escrow agents.
No matter where you may be in the tax lien process, you should seriously consider getting expert advice from a tax professional. Because of the size and power of the CDTFA, many taxpayers feel helpless to advocate for their rights, or confused about the intricacies of California sales tax law. A qualified tax attorney is a powerful ally in any dispute with the CDTFA. Their familiarity with the law and with CDTFA rules and regulations can help you smooth the way to resolution, and help remove some of the stress from a difficult situation.
As with all tax matters, the most important thing you can do is to face the situation straight on with the best information and advice available.