Am I Personally Liable for Unpaid Sales Tax in CA?
We routinely receive calls from companies with large California sales tax liabilities that often do not have the ability to pay the liability. Many California taxpayers receive bad advice on how to deal with seemingly insurmountable California sales and use tax liabilities. Can’t I just transfer the business? What if I just close down and walk away? Both are obvious questions that we are often asked about. In many states, transferee liability often links the sales tax liability to the purchaser or transferee of a business and responsible person laws can impose personal liability on business owners. Further, California often goes after owners of closed businesses, like in the recent case of GHOLAMREZA SHAFAZAND OTA Case No. 18011844.
California is a state that believes in personal liability for unpaid sales and use tax. R&TC § 6829; Cal.; Regulation 1702.5 provides that on termination of a corporation’s business, any officer responsible for the corporation’s sales and use tax compliance is personally liable for any unpaid taxes, interest and penalties if the officer willfully fails to pay or cause to be paid any taxes due. CDTFA must prove 4 elements:
(1) the business had in fact terminated;
(2) the corporation:
- sold tangible personal property and collected sales tax reimbursement on the selling price but failed to remit such tax when due; or
- consumed tangible personal property and failed to pay the applicable tax to the seller or the Board: or
- issued a receipt for use tax and failed to report and pay the tax.
(3) the taxpayer was a person responsible for the corporation’s sales and use tax compliance; and
(4) the taxpayer willfully failed to pay the tax or cause it to be paid.
The standard of proof required was a preponderance of evidence (documentation or other evidence) (Regulation 1702.5(d)) that the circumstances alleged are more likely than not to be correct (Concrete Pipe and Products of California, Inc. v. Construction Laborers Pension Trust for Southern California (1993) 508 U.S. 602, 622).
Pursuant to R&TC section 6829, the California Department of Tax and Fee Administration (“CDTFA”) brought action against Gholamreza Shafazand (“Appellant”) for the unpaid tax liabilities of Renzo’s Bar and Grill (“Renzo’s”) dba Sabor Tapas amounting to $242,652.94 in unpaid liabilities and $53,428.95 in penalties and interest. CDTFA determined that the Appellant was the Responsible Person when Renzo’s business was terminated and was personally liable for the unpaid tax liabilities of Renzo’s. On May 9, 2019, the Appellant filed an appeal against the CDTFA’s determination and action.
On appeal, the Court determined that there were two primary issues to consider:
- whether the Appellant was personally liable for the sales and use tax liability of Renzo’s; and
- Whether the Appellant willfully failed to pay Renzo’s tax liability
Was the Appellant A Responsible Person?
As explained above CDTFA had to show the existence of the elements to impose personal liability, which can be difficult for the state. Unfortunately, in a prehearing conference, the Appellant conceded elements 1. and 2. but continued to deny he was a responsible person and that he did not willfully fail to pay tax or cause it to be paid.
Like many states, CDFTA turned to extrinsic evidence to show the taxpayer was the responsible party. Specifically, the Appellant executed Renzo’s documents in various capacities ranging from sole signatory of Renzo’s Articles of Incorporation to signing documents as President, including Renzo’s sales and use tax returns and a Responsible Person Questionnaire signed by the Appellant declaring that he was the person “who had control, supervision, responsibility or duty to act for the corporation … in sales and use tax matters when the business was terminated”.
The Appellant claimed he was an absentee business owner removed from day-to-day operations during the two liability periods. In particular, he was receiving medical treatment for various ailments including a cancer diagnosis in 2007 and a broken back. He also claimed he would have been traveling abroad.
Alternatively, the Appellant claimed that upon returning to work, he entered into an agreement with his partners to finish remodeling the business. When the business did open, the Appellant alleged that they took over operations and ran the business. He also claimed the partner, not himself, had check signing authority on Renzo’s checking account.
As evidence, the Appellant submitted his signature stamp purportedly to show that people had been using his signature stamp to sign documents. The Court noted that:
- documents with signatures tendered as evidence may or may not have been signed with the signature stamp;
- the mere fact of a signature on a document created by a stamp did not prove that it was used without the consent of the Appellant;
- a signature stamp being personal property, the owner is charged with a responsibility to prevent misuse.
- no convincing evidence that the use of the signature stamp was anything other than consensual.
During physical absences from Renzo’s, the Appellant continued to be engaged in the business by requiring staff to keep him informed of goings-on particularly in respect of drawings on Renzo’s checking account. The fact that other parties had signing authority on the checking account did not in itself negate the fact that the Appellant:
- himself had signing authority for Renzo’s;
- was apprised of Renzo’s business operations during the liability periods; and
- that Renzo’s returns and tax payments were submitted by him.
The Court found that CDTFA had demonstrated by a preponderance of the evidence that the Appellant was a person responsible for the filing of Renzo’s sales tax returns and the payment of that tax.
Did the Appellant Willfully Fail to Pay?
To demonstrate a willful failure on the part of the Appellant, CDTFA must establish that the responsible person:
- has actual knowledge that the taxes were due and not being paid on or after the date that the taxes come due;
- has the authority to pay the taxes or to cause them to be paid:
- on the date that the taxes come due; and
- when the responsible person has actual knowledge as defined in (1)
(3) had actual knowledge as defined in (1), the responsible person had the ability to pay the taxes but chose not to do so.
The Court found that the Appellant had actual knowledge that taxes were due and unpaid since he had previously signed a Payment Installment Agreement with the CDTFA agreeing to pay the outstanding tax liability to CDTFA for liabilities assessed during the first liability period. By signing the Payment Installment Agreement, the Appellant acknowledged less tax was paid than owed. In respect of the second liability period, the Court found that the Appellant must have known that he had continued to under-report sales as the cost of goods sold reported far exceeded the gross sales reported and as such had actual knowledge. The Court also found that based on the evidence, the Appellant had the authority to pay the taxes or cause them to be paid.
The Court noted that Renzo’s collected tax reimbursement on all taxable sales and as such had funds available to pay the tax liability. During both liability periods, the Appellant continued to pay or caused to be paid Renzo’s operating expenses and creditors. As such, the Appellant had elected to make other payments instead of remitting the sales tax reimbursement to CDTFA. Accordingly, the Court found that the Appellant willfully failed to Renzo’s tax liabilities.
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