Personal Liability for Business Sales Tax – What Was The Point Of Having Corporation?

You can be held personally liable for the unpaid sales or use tax of your corporate business.   Bankruptcy does not solve this.

For instance, you own a retail business and get audited by the state.  The Board of Equalization says “your business owes $100,000 in sales tax that you failed to send to us.”  You decide to close the business and walk away because you cannot pay that.  The state can assess that $100,000 liability against you personally!  You will then complain to me “…but I had a corporation, isn’t a corporation supposed to protect me?  what was the point of having a corporation?!”

Then you calm down and say “….ok, I will file chapter 7 bankruptcy.”  The state can hold the “responsible person” personally liable.  The definition of “responsible person” is broad and can include the business’s CPA!  The standard is if the “responsible person” willfully fails to pay the tax.

Let’s take a look at the law and break it down….

Here is the California law on this… (I parsed it out).

Cal. Rev. & Tax Code Section 6829

(a) Upon the termination, dissolution, or abandonment of the business…any officer, member, manager, partner, or other person having control or supervision of, or who is charged with the responsibility for the filing of returns or the payment of tax ["Responsible Person"]…..shall….be personally liable for any unpaid taxes….for willfully failing to pay or to cause to be paid any taxes due from the corporation, etc…..

(d) …“willfully fails to pay or to cause to be paid” means that the failure was the result of an intentional, conscious, and voluntary course of action.

 

So, before you say “well the business owes the tax not me” then read the above again.

Who can be a “Responsible Person”?  The person who signs the corporate tax return!  Your CPA!

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