If it is determined that your business owes unpaid sales or use taxes, the CDTFA may take steps to claim that money. “State sales and use taxes provide revenue to the state's General Fund, to cities and counties through specific state fund allocations, and to other local jurisdictions.” Perhaps this is why they often take quite an aggressive approach in tracking down businesses with liabilities.
If you receive a notice from the CDTFA about a sales and use tax liability, you may benefit from the help of an experienced tax attorney to help you navigate the issue.
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.
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.
The burden is on the taxpayer to prove that they are not responsible for the tax liability and are “guilty until proven innocent.”
For further information on whether part or all of your business is exempt, you may contact the CDTFA for more information. There are pamphlets and even classes available to help business owners understand the sales and use tax system. You may also request written advice on a particular transaction and rely on that advice if you are audited.
Make sure you understand your obligations before carrying on business, and don’t hesitate to seek help from an experienced tax attorney if you get into trouble.
Although I am generally a big proponent of self-help legal solutions, I am also cognizant of the situations that require the assistance of an experienced sales tax attorney. One of the areas where I feel sales tax attorney representation is essential, not just an option, in the areas of sales tax collection matters.
Given the difficulty that I have encountered in practice when taxpayers try to handle their own California Department of Tax and Fee Administration (CDTFA) collection matters and the rigidity of the CDTFA, I would recommend hiring a sales tax attorney for the following general reasons.
There are two sides to a sales tax collections matter: the assessment phase and the collections phase. On the one hand, the CDTFA is infamous for trying to extend sales tax liability for as many corporate officers, directors, shareholders and others involved with the corporation as possible.
The reason for this is that assessed individuals are jointly and severally liable for sales tax liability. Thus it makes sense for the CDTFA to try and assess as many people as possible (more assessments equals more collections targets).
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.
The Collections Phase
On the other end of the spectrum, when it comes to collections, California Department of Tax and Fee Administration 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 California Department of Tax and Fee Administration and are occasionally prosecuted and sent to jail (selling without a permit is a misdemeanor offense).
In conclusion, for the reasons stated above, I believe the presence of a qualified sales tax attorney can greatly make a difference when it comes to dealing with a California Department of Tax and Fee Administration collection matter.
Sales tax attorneys have a practical grounding in the law along with CDTFA procedures and their knowledge can make a difference when it comes to successfully resolving your sales tax matter.
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