Corporate officer liability has been a hot topic with the State Board of Equalization over the past several years. At one point proposed Regulation 1702.6 would have effectively changed the existing statue (see Sales & Use Tax update 12-92.) Existing law (RT&C 6829) requires the state to establish tax was collected (or included in the price) and not remitted in order to hold officers liable for sales tax. The proposed Regulation (which failed) said that in order to hold officers liable it would be presumed that tax was collected on all unreported sales. That would have meant anytime the State Board of Equalization did a markup audit (which are inherently subject to error, see 1-92 Sales and Use Tax update) it would be presumed officers collected tax. This presumption would have existed even in a business where virtually all sales were for resale.
Final Regulation 1702.5 adopted in February of 1997 has correctly interpreted code section 6829 by leaving the burden of proof with the state. Personal liability shall apply only if the board establishes that while a person was a “responsible person,” the corporation or limited liability company:
1. Sold tangible personal property in the conduct of its business and collected sales tax reimbursement on the selling price (whether separately itemized or included in the selling price) and failed to remit such tax when due; or
2. Consumed tangible personal property and failed to pay the applicable tax to the seller or the board; or
3. Issued a receipt for use tax and failed to report and pay the tax.
A responsible person means any person having control, supervision of, or who is charged with the responsibility of filing returns for the payment of tax. The responsible person must willfully (voluntary, consciously, and intentionally) fail to pay or cause to be paid the taxes due.
Additionally, the corporation or LLC must be terminated, (discontinued business activities), dissolved, or abandoned.
On this note, more history is in order. In June 1980, before Revenue and Taxation code section 6829 was law, the Board adopted a policy of asserting tax against corporate officers of closely held corporations when sales tax reimbursement was collected from customers and the corporation’s powers, rights & privileges were suspended by the FTB for failure to pay the Franchise Tax.
In November 1995 the Board heard a case involving personal liability of a corporate officer who argued that no personal liability should be assessed because his corporate suspension was not a result for failure to pay taxes to the FTB. The Board agreed with the petitioner and granted the petition.
In a recent memorandum opinion, however, the State Board of Equalization held that a taxpayer was personally liable for taxes owed while operating as a corporation during the time his corporate powers were suspended even though they were not suspended by the FTB for nonpayment of taxes. (Freels, Ca SBE. mem. opin. 97-001 September 1997.)
In essence, the memorandum opinion states that when corporate officers/shareholders conduct selling activities during a period in which the corporate powers are suspended they are not exercising the corporate powers but are acting as individuals. As such these individual sellers are required to have a permit and have the responsibility to report and pay the sales tax to the state. It appears this conclusion would apply to all taxable sales whether or not tax is collected. Moreover, the statue of limitations would be 8 years if the individual sellers have no sellers permit. Again a competent business tax consultant or sales tax consultant could obtain unclaimed refunds for an excess of their cost.
