There are two sides to a sales tax collections matter: the assessment phase and the collections phase. The CDTFA is infamous for trying to extend sales tax liability to as many corporate officers, directors, and shareholders as possible.
The reason for this? Assessed individuals are jointly and severally liable for sales tax liability. This is why it makes sense for the CDTFA to try and assess as many people as it can. More assessments equal more collections targets.
The Assessment Phase
If the business has closed prior to the CDTFA’s attempt to collect tax, they will assess the liability as belonging to as many individuals who were linked to the business as possible, irrespective of whether those individuals had the control or knowledge of the company’s finances at the relevant time.
Unfortunately for taxpayers, these assessments often are not reflective of who is actually responsible for any past due sales tax liability. The CDTFA has a tendency to use rather tenuous connections in order to make their case for liability.
In other words, the burden is on the taxpayer to prove that they are not responsible for the tax liability and are “guilty until proven innocent.”
The Collections Phase
Unpaid taxes may attract large fines and penalties on top of the original liability, and any delay or confusion can quickly compound a bad situation into something much worse.
If you are still in business at the time that the CDTFA determines there to be an outstanding liability, they will usually insist that repayment is the business’s first priority.
That means that even if immediate repayment will cause financial hardship or permanent consequences to the business, you will be expected to pay the outstanding taxes.
CDTFA collections officers have a reputation for being the most inflexible and the most aggressive when it comes to taking action against a past-due account. Collection officers will frequently demand large, unrealistic payment amounts from businesses (under the threat of levy) in order to get as much money as possible toward the payment of the balance due.
This is not to suggest that this practice is standard across the CDTFA, as some of their collections officers are very nice people. However, it has been my experience in practice that the CDTFA can be the most difficult state revenue organization to deal with. In addition, individuals involved with a corporation (specifically those who supervised filing of sales tax returns and payments) can be held personally liable for the amount of sales tax owed.
There is no requirement that a person hold ownership in the company for this to be true. People routinely involved with sales tax calculations or paperwork (bookkeepers) and those listed on the sales tax license (unrelated parties) are often found to be liable.
Finally, in addition to liens and levies, the CDTFA has the power to revoke the seller’s permit for a business, effectively shutting them down by prohibiting them to make sales. Those businesses that continue to make sales are severely fined by the CDTFA and are occasionally prosecuted and sent to jail (selling without a permit is a misdemeanor offense).
Collection agents will sometimes visit you in what the state terms as a “field call.” Obviously, the goal of these site visits is to collect the money you owe them, preferably in full. There are seven reasons why a field call may occur:
- To reinstate an account after revocation of the permit or license
- To obtain payment and/or delinquent tax returns
- To verify that the business is operating or closed
- To gather collection and skip-tracing leads
- To gather evidence for prosecution
- To maintain a physical presence in the business community
- To conduct certain non-collection related activities, such as permit inspections pertaining to swap meets
In addition to the seven reasons above, there are other reasons to make field calls.
For example, witnessing the destruction of alcoholic beverages or conducting an investigation for city or county annexation purposes.
When a collection agent comes to visit you at your business or personal residence, they are going to demand immediate payment. Unless you have a hardship, the CDTFA will not accept cash as a form of payment.
If you have funds available to satisfy the liability in full, you can make a payment to CDTFA on the spot. If you make this payment, however, you are going to want to get a field receipt.
However, don’t feel obligated to pay the CDTFA collection agent directly just because they are demanding payment. There are lots of collection alternatives and other ways to resolve CDTFA liabilities (or other transitions).
A field receipt will be issued to document your tax payment. The state calls this form a CDTFA-602. Whenever dealing with CDTFA collections, it is important that you keep accurate records of all payments made to collections.
Errors in applying payments sometimes get made and having a field receipt is going to help quickly resolve the situation in the event of a dispute.
You should ensure your receipt is properly filled out by the agent. Make sure the proper name, account number, tax period, amount paid, and remit ID are all on the receipt. Errors in the receipt will make it void, which can be problematic if you need to rely on the receipt. Voided receipts later require a letter of explanation for any corrections.
Out-of-State Tax Collections
Even if you have left California, if you incurred tax liabilities in the Golden State, you will still be liable for them. California will seek to collect from you, regardless of where you are in the country. The CDTFA can seek to attach your assets, even if outside state borders.
Revenue and Taxation Code (RTC) § 6203 requires retailers located outside of California (remote sellers, including foreign sellers located outside of the United States) to register with the CDTFA.
The CDTFA will collect California sales and use tax if, during the preceding or current calendar year, the total combined sales of tangible personal property for delivery in California by the retailer and all persons related to the retailer exceed $500,000.
This is in addition to businesses that have connections to California including:
- keeping inventory in the state,
- leasing equipment,
- having representatives in California, or
- maintaining an office.
Under RTC § 6757, an enforceable state tax lien is created when a taxpayer fails to timely pay its taxes/fees, including interest, penalties, and any additional costs, when they become due. The lien is created by operation of law.
Generally, assets of a taxpayer located outside California are outside the jurisdiction of the state to collect. However, a taxpayer who owes a liability that is located out of state and is employed may have an EWOT be sent to their out-of-state employer.
The employer must have a place of business, payroll office, payroll account, or some other presence in California or a designated agent for service of process in California. In such cases, the employer has submitted itself to California’s jurisdiction and must honor the EWOT by garnishing the wages of the specified employee.
It is important for taxpayers to understand that even if you move states, a tax liability will remain. Even if California cannot immediately collect, the tax liability will remain on the state’s books. You should consult a tax attorney if you are concerned about any outstanding or potential liabilities you may have in consideration of your move.
The CDTFA is prohibited from collecting from a tax debtor when a tax or fee is discharged in a bankruptcy case. However, if there are any liabilities that are exempted from bankruptcy, then creditors can resume collection activities. The automatic stay which protects the debtor will be invalid.
If the debtor owes the CDTFA, then the bankruptcy team of the CDTFA will determine whether the CDFTA can receive any proceeds from the bankruptcy. In most cases, creditors, including tax agencies, must file proof of claim in order to receive any distributions in bankruptcy cases.
U.S. Bankruptcy Code §362 places a “stay” (stop order) on most collection activity starting the moment the debtor files bankruptcy. Most collection efforts must cease from the date of filing to final discharge of debt. This also applies to the CDTFA’s collections efforts. CDTFA collection actions prohibited by the automatic stay include:
- Revocation of a seller's permit
- Supplier cut off letters
- Levies or withholds
- Warrants (including keepers, till taps, and seize and sells)
- Demands for payment (including demand notices)
- FTB, EDD and other offsets
- Suspension of liquor license
- Earnings Withholding Orders for Taxes (wage
CDTFA actions that are not prohibited by the automatic stay include:
- Demands for tax returns to be filed
- Assessments including compliance assessments, field billing orders, dual determinations, successor billings and audits
- Providing statements of account
- Continuance of any petition or appeal
- Withholds on transfer of liquor licenses
- Filing of criminal complaints
- Correspondence or discussions with the debtor and counsel regarding the things specifically listed in this section.
The taxpayer could and should question any activities of the CDTFA that they feel is in violation of the automatic stay. A violation of the automatic stay can lead to sanctions against the CDTFA.
Dual Determinations on Pre-Petition Corporate Liability
If an officer of a corporation that has a liability with the CDFTA files for bankruptcy, the corporation’s account with the CDTFA should be reviewed for a possible responsible officer dual determination against the officer.
If a responsible person’s dual determination cannot be completed in time to file a proof of claim, but the responsible person’s liability can be established, the Collections Support Bureau (CSB) can file a contingent claim. A contingent claim asserts the potential liability of the corporate officer.
Disposition of Security
If a bankruptcy case is pending with no delinquencies or liabilities pending when an account is closed out, the taxpayer's security deposit should be returned in care of the:
- Bankruptcy trustee (Chapter 7 cases),
- Debtor-in-Possession (DIP) or trustee (Chapter 11 cases)
- Debtor (Chapter 13 cases)
Any security in the form of cash, government bonds, or insured deposits in banks or savings and loan institutions shall be held by the CDTFA in trust to be used solely in the manner provided by Revenue and Taxation Code (RTC) Sections 6701 and 6815. Generally, demands are not made on surety bonds or guarantees until after the bankruptcy case is closed.
Chapter 7 Bankruptcies
Generally, in a Chapter 7 case, state liens on a liability that has been discharged survive bankruptcy if the liens were attached to real or personal property prior to a bankruptcy filing.
The CDTFA retains the legal right to collect the tax or fee liability, but only from the property to which the tax lien was attached prior to the bankruptcy case and not from the tax debtor personally.
If a tax or fee liability is discharged, but the tax lien survives a bankruptcy discharge, the tax or fee liability should not be legally adjusted.
Chapter 13 Bankruptcy Cases
The Bankruptcy Team will monitor Chapter 13 cases to ensure that all payments that the CDTFA is entitled to receive under a confirmed Chapter 13 plan are being paid to the CDTFA in a timely manner and applied correctly to pre-petition liability.
Proof of Claim
In a Chapter 13 case, the CDTFA's proof of claim may include only pre-petition tax and pre-petition interest. CDTFA proofs of claim filed after a claims bar date usually receive no distributions from the Chapter 13 trustee and the liability may be ultimately uncollectible if the debtor receives a discharge in bankruptcy.
Post-Petition Tax Liabilities
A Chapter 13 debtor is required to timely report and pay post-petition tax liabilities while a bankruptcy case is pending. Since the automatic stay remains in effect until a debtor receives a discharge or the case is dismissed, the CDTFA may not take collection action on post-petition liabilities.
The CDTFA may move to dismiss a case or convert a case to a Chapter 7 bankruptcy if a taxpayer does not report or pay a post-petition tax liability.
Chapter 11 Bankruptcy Cases
A Chapter 11 bankruptcy case can be either a reorganization case or a liquidation case. Occasionally, a trustee will be appointed to administer a Chapter 11 case, but generally a debtor remains in control of the assets and business affairs as a DIP.
The CDTFA often has a priority tax claim in a Chapter 11 case. The bankruptcy code requires a priority tax creditor to be treated no less favorably than as follows:
For cases filed after October 17, 2005:
- Regular installment payments
- Payment of a priority tax claim under a plan cannot extend beyond five years from the petition date
- Treatment of a priority tax claim will include all pre-petition taxes or fees and all interest accrued to the petition date and will not be less favorable than the most favored non-priority unsecured claims
- The CDTFA's allowed priority tax claim must be paid post-confirmation interest at the CDTFA's rate as of the date of confirmation
If a proposed plan does not properly provide for treatment of the CDTFA's claim, the CDTFA may object to confirmation of the plan.
After a taxpayer receives a discharge in bankruptcy or a proof of claim that a tax or fee liability is paid through a bankruptcy case, or both, it will be the responsibility of the Collections Support Bureau to:
- Determine the extent to which a CDTFA liability has been satisfied through payment
- Determine whether or not a CDTFA tax or fee liability has been discharged in bankruptcy
- Legally adjust discharged liabilities using the legal adjustment process
- Apply discharge-in-bankruptcy status to any liability periods in the system that are discharged
- Post notes in the system that specifically describe the discharged and non-discharged status of pre-bankruptcy balances
- Analyze whether a pre-bankruptcy CDTFA tax lien has survived the discharge (CPPM 740.160)
Release CDTFA tax liens that have not survived a bankruptcy discharge
- Post notes in the system specifically describing property/ conditions to which any surviving lien remains attached
- Post notes in the system regarding any joint debtor accounts (partnership, husband and wife co-ownership, etc.) as to dischargeability for the specific joint debtor who has received a discharge
- Issue a demand for any non-discharged liability
If a taxpayer wishes to obtain a lien release on a liability that was discharged through bankruptcy, it must establish to Collection Support Bureau's satisfaction that the lien did not attach to any pre-petition property.
Evidence to support this assertion includes:
- A title report certifying that a search of the grantor/grantee index of the county where the lien was recorded discloses no property in the debtor's name or transferred to or from the debtor's name from the time the lien was recorded until the petition date.
- Copy of bankruptcy schedule "A" showing no real property.
- Copy of IRS tax returns for the years between the day the lien was recorded to the day the bankruptcy petition was filed.
- Statement under penalty of perjury that the taxpayer owned no property, nor had property transferred to or from their ownership between the date the lien was recorded and the petition date.
- If property was owned but was subject to foreclosure, all documents/deeds verifying this transfer must be provided.
Enforced collection against a tax or fee debtor or a tax or fee debtor's property must not take place on any discharged debt, except as against property to which the CDTFA's tax lien attached and as permitted under CDTFA.
Partners in Bankruptcy
When two or more persons are jointly responsible for payment of a CDTFA tax liability (partnership accounts, husband and wife co-ownership accounts, etc.), the Collections Support Bureau will be responsible for determining which liabilities, if any, have been discharged by a joint debtor's bankruptcy discharge.
If all joint debtors have discharged liabilities, the liabilities may be legally adjusted. If not, the tax liability should not be adjusted, nor should the Discharge From Bankruptcy (DFB) status code be set.
If a lien release is appropriate for a discharged joint debtor, but not for all joint debtors, a partial release as to the affected person should be issued.
A partner who is not in bankruptcy is not protected by the automatic stay of a partner in bankruptcy. Collections can continue against the partner not protected by the automatic stay
When a partnership consists of a married couple, marital community property and funds will be protected from collection by the automatic stay of 11 U.S.C. Section 362(a).
It does not matter whether one or both of the spouses file for bankruptcy. Most or all of the marital community property and funds will belong to the bankruptcy estate pursuant to 11 U.S.C. Section 541(a)(2)(A).
When an amount due from a taxpayer is not economically feasible to pursue or collection efforts have been unsuccessful or improbable, the CDTFA may request a discharge from accountability from the State Controller’s Office. A discharge from accountability is also known as a “write-off.”
A write-off effectively removes the CDTFA from being required to pursue the account, but it does not remove the liability from the taxpayer
If assets that can be garnished are discovered after a write-off, the CDTFA can still pursue the tax liability. Oftentimes, the state is not collecting on these debts due to inability to pay or some other valid reason for the state to forego collection.
Despite High Taxes, California Offers Business Opportunities
Out of every eight Americans, one is a Californian and yes, California does tax the richest of its citizens more than most states. It has for decades and still attracts the wealthy for its economic advantages. It might be looked at as the opportunity for the rich to make more money outweighs higher taxes.
The sheer size of the state and the beckoning opportunities – as far back as 1849 with the start of the California Gold Rush or the early 1970s when Silicon Valley started to grow – is reason enough for people to want to do business in the state. But with each business opportunity there exists some danger for those who don’t pay their California sales and use taxes, whether by mistake or on purpose.
If you’ve stepped into the CDTFA’s net, you should call a tax attorney who has experience rescuing clients from the state’s collections officers immediately. They can quickly close the doors of your business – sometimes for weeks and sometimes forever.
I’ll help hold off the CDTFA if you have past-due accounts. Together, we’ll work with them to reduce the size of your payments, reduce any threats of levy, and keep your doors open for business.