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The Dual Liability Provisions for a Responsible Person under California Sales Tax Law

Tax attorney newport beach
tax attorney newport beach

Can you be held responsible by the CDTFA for the unpaid sales tax of your employer’s company or of the company you own?

A person may be held personally liable for a business’ unpaid sales tax if the elements of California Revenue & Taxation Code (RTC) § 6829 and Regulation § 1702 are met. Section 6829 requires that the person subject to dual responsibility for the taxes is both a “responsible person” and “willful” as to the nonpayment of taxes. The California Department of Tax & Fee Administration (CDTFA) will conduct an investigation to determine if an individual should be liable under these rules.

Only a Responsible Person May Be Dually-Liable

Under Reg. § 1702.5, responsible person liability “applies when the sales taxes are not paid upon termination, dissolution, or abandonment of the corporate business and contains two requirements: the taxpayer must be (1) a responsible person who (2) willfully fails to pay the taxes to the government.” In re Latin, BAP No. EC-08-1082-JuMkH (B.A.P. 9th Cir. 2/11/2009).  “A responsible person may be an officer, but also may be a ‘member, manager, employee, director, shareholder, 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 or who has a duty to act for the corporation … in complying with any provision of the Sales and Use Tax Law….’” In re Latin. citing Reg. § 1702.5(b)(1). 

“[T]he touchstone for being a responsible person under Reg. § 1702.5 is whether the individual being assessed possessed a sufficient degree of authority over corporate decision-making to make him a responsible person.” In re Latin, supra at p. 17.  Essentially, this regulation only applies when two requirements are met: the taxpayer must be (1) a responsible person who (2) willfully fails to pay the taxes to the government. In re Latin, supra at p. 16.

Responsible person liability under Reg. § 1702.6, “imposes personal liability for sales taxes on (1) a corporate officer with control over operations or management of a closely held corporation during a time that the corporation is suspended, or (2) any responsible person who fails to pay or cause to be paid any taxes due from a closely held corporation during a time in which the corporation was suspended.”  In re Latin, supra at pp. 15-16. “The term ‘control over operations or management’ means ‘the power to manage or affect day to day operations of the business’” and there is a rebuttable presumption that an officer has such power.  In re Latin, supra at p. 16, citing Reg. § 1702.6(b)(3).

Only a Willful Person May Be Liable

“The willfulness requirement for imposing liability under section 6829 is satisfied where the failure to pay or to cause to be paid the taxes due was the result of an intentional, conscious, and voluntary course or action… .  A person is regarded as having willfully failed to pay taxes or to cause them to be paid where he or she had knowledge that the taxes were not being paid and had the authority to pay the taxes or to cause them to be paid, but failed to do so.” In the Matter of the Administrative Protest Under the Sales and Use Tax Law of Gordon W. Kelley, Appeals Division Board Hearing Summary Case ID 475764 (Cal. BOE Rev. 1:10/5/12).

Federal courts interpreting these terms have come to the same conclusion.  “Under Reg. § 1702.5(b)(2), willful means ‘voluntary, conscious and intentional.’” In re Latin, supra at p. 17.”  For the taxpayer to be willful, he would have to actually know of the tax delinquencies or act in reckless disregard of those responsibilities.  See Wright v. United States, 809 F.2d 425 (7th Cir. 1987).

Responsible Person Questionnaire

When conducting its investigation to determine whether an employee or owner is a responsible person for purposes of applying dual-liability for the unpaid taxes, the CDTFA will first look to internal records (such as return filings) and public records (such as those on file with the Secretary of State) to see who are potentially responsible persons. Once those individuals are identified, they will reach out to them directly and ask for information orally, for documents such as bank statements and cancelled checks, and for completion of a Responsible Person Questionnaire. Click here for a PDF copy of a blank CDTFA Responsible Person Questionnaire.

The author of this blog post is Daniel Layton, a former IRS trial attorney and ex-federal prosecutor in Los Angeles’s U.S. Attorney’s Office, Tax Division. He is the founder of a tax law practice in Newport Beach, California, where he serves private clients.

Posted on 12/12/2019 by Daniel Layton.

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