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.