ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – COVID-19 – HIDDEN EDD AND SALES TAX TRAPS AND DANGERS LIE IN CLOSING YOUR BUSINESS – PART 1
By Robert S. Schriebman
This is Part 1 of a 2-Part series that will discuss hidden EDD and sales tax traps and dangers if you close your business. If I may paraphrase Charles Dickens, “It is frightening times and it is dangerous times.” (Tale of Two Cities). COVID-19 has brought economic devastation to many. Small and mid-sized businesses may be on the verge of closing. If your business is a corporation or LLC, there may be hidden traps exposing you to personal liability for unpaid payroll taxes and sales taxes. The hidden exposure comes from failing to collect, account for, and pay over these taxes to the State of California.
Desperate and unscrupulous business owners who have reduced their workforce, may give replacement personnel titles such as CFO, or Treasurer during these hard times. While these titles may stroke the ego, they carry with them terrible exposure. These are the lessons learned in the case of Cody Lee Bass decided by Office of Tax Appeals, (OTA) in January 2020. Since the beginning of the year I have seen numerous OTA decisions taking hardline approaches to personal liability for unpaid corporate or LLC level taxes. It has become all too clear that if you expect justice, and fairness from the OTA, you may rudely be confronted with the reality that the OTA is not your friend.
It takes a long time to bring your case to the OTA and to await its decision. It looks like the average length of time is over 6 years, before a matter is decided by the OTA.
Strong Parallels between OTA Decisions and EDD CUIC Sec. 1735 Assessments
The OTA hears cases from the FTB and the Sales/Use Tax assessments from the CDTFA. The OTA does not hear EDD matters. That is the function of the CUIAB. Having said this, there are strong parallels in the elements necessary to hold an employer personally liable for unpaid employment and withholding taxes. This is why the Cody Lee Bass case is so important. The OTA, in arriving at its decisions concerning personal exposure, uses information obtained from the EDD. The same elements necessary for a CUIC Sec. 1735 assessment is also used to establish personal liability for unpaid sales taxes. The world-views are the same and the logic applied is virtually identical.
The Facts in the Cody Lee Bass Case
Bass was a Director and the treasurer of Capitol Wellness Inc., a medical marijuana dispensary with two locations in Sacramento. Bass was not the president. However, Bass was active in running the business as follows:
- He filed official papers with the Secretary of State (SOS) stating that he was one of two Directors and the treasurer.
- He electronically filed quarterly sales tax returns and signed his name electronically on the returns during the years 2007 through 2010.
- At one time the company owed sales taxes and Bass negotiated and signed an installment payment arrangement.
- Bass signed payroll checks and paid company bills.
- Bass filed and signed EDD payroll tax returns showing the company had 28 workers in 2009, but only one in 2010. The business closed in 2011.
Between 2007 and 2010 Capitol filed quarterly sales tax returns but did not remit any payments. The debt eventually grew to $333,000 plus penalties and interest. The SOS suspended Capitol in 2011 for failing to meet its tax payments to the FTB.
In 2014, the sales tax people issued an assessment against Bass personally for $87,700 in unpaid sales taxes plus $30,000 in penalties and interest for unpaid taxes in 2009 and 2010. Bass filed an appeal with the OTA. Let’s look at how he came out.
The OTA’s Decision
(Note: The basics of the following discussion can provide the framework for an EDD personal assessment pursuant to CUIC Sec. 1735. This decision is not solely about sales taxes.)
The Basic Elements of Personal Exposure
Rev. & Tax Code Sec. 6829(a) states in substance that the government has the burden of proof whenever it seeks to make a personal assessment for unpaid sales taxes. The same burden falls on the EDD under CUIC Sec. 1735. I have discovered in my law practice and in reviewing cases over the years, that part of the government’s burden does not require them to make a showing that an unsuccessful attempt was made to collect back taxes from the corporation or LLC. They are not required to offer one shred of evidence that any effort whatsoever was made to collect at the business level. The issue is never raised by judges, and sadly it has not been raised by professional representatives such as attorneys or CPAs. This issue needs to be a defense that should be vigorously pressed.
There are four elements that must be met by the State of California before personal liability can be attached.
- The corporation or LLC collected sales tax reimbursements from customers.
- The business has been terminated.
- The targeted person was responsible for sales tax compliance during the liability period.
- The targeted person willfully failed to pay or caused to be paid the taxes.
Once again, the state has the burden to prove these elements by a preponderance of the evidence, but in reality, as we will see in Part 2, the state does not have to work very hard to meet its burden.
I have discussed the basics of a personal level assessment and we briefly outlined some of the activities that Cody Lee Bass undertook to put himself in harm’s way. In Part 2, I will explore how the elements were used by the OTA to find him personally liable. I will also show you how these elements are used in an EDD personal level assessment.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Web Site Article 446