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In California, Ignorance Isn't Bliss

  • Oct 26, 2012 | Gail Cole

A recent case reviewed by the California Board of Equalization points out that individuals may be held responsible for the unpaid tax liabilities of a business. This is sobering news, and not the first time the California BOE has held an individual personally liable.

This most recent case involves a business that operated between July 1999 and September 2005. At the time it ceased operations, Southland Fireplaces had unpaid liabilities related to an audit for the period July 1, 2000, to June 30, 2003.

The individual (Taxpayer) held responsible for unpaid sales and use taxes admitted to being responsible for Southland's sales and use tax compliance. However, Taxpayer argued that Southland did not collect "sales tax reimbursement with respect to retail sales" and that Taxpayer did not willfully fail to pay the taxes. Both of these conditions must be met, pursuant to Revenue and Taxation Code section 6829, in order for an individual to be held personally liable.

Sales Tax vs Use Tax

The BOE determined that use tax was "owed on the primary taxpayer's consumption of tangible personal property,"noting that "Southland was the consumer of materials it used in the completion of lump sum construction contracts, but failed to report and pay that use tax."

Ignorance vs Willfulness

The Taxpayer argued that his failure to pay taxes was not willful because he relied upon the advice of a man he believed to be a Certified Public Accountant and "who stated that no sales or use taxes were required to be paid… ." In response, the BOE wrote:

"A person is regarded as having willfully failed to pay taxes … where he or she had knowledge that the taxes were not being paid and had the authority and ability to pay the taxes …, but failed to do so."

When Southland applied for its seller's permit, it was provided copies of "several regulations and Board publications" from the Sales and Use Tax Department, "including the California Code of Regulations … 'Tax Tips for Construction and Building Contractors."" These publications make clear that businesses such as Southland "are consumers of materials and owe use tax on cost if not paying tax or tax reimbursement to their vendors… ." The Taxpayer signed the seller's permit application. Therefore ignorance, or lack of willfulness, cannot be claimed as a defense.

Southland Fireplaces was found to be negligent. As a result, the Taxpayer, an individual, is now liable for Southland's unpaid taxes, interest, and a negligence penalty.

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Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.