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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 2

By Robert S. Schriebman



This is Part 2 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. All too often sharp business owners put young people in officer positions and give them titles while owners go through the back door siphoning off cash flow and leaving the company a shell of its former self. I have seen too many sad cases where young business graduates are left holding the personal liability bag while the owner escapes exposure all-together. If you find yourself in this position or you suspect foul play, my best advice to you is to get off your executive chair, and run out the front door, but first make sure you tender a written resignation so you can prove the date that you left the company. This may minimize your exposure.

Basic Elements of Personal Exposure

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.

Let’s see how the OTA used these four elements to find Cody Lee Bass personally liable for corporate level unpaid sales taxes.

The Corporation or LLC Collected Sales Tax Reimbursements from Customers

It was clear from the discussion of the history of Capitol Wellness, Inc. (Capitol) that the corporation collected sales taxes between 2007 and 2010 but failed to remit over $333,000 in collected sales tax. This element was met because the sales tax people conducted an audit and these were the audit findings.

The Business Has Been Terminated

A business does not have to be defunct in order for this element to apply. The “termination” of the business of a corporation or LLC includes discontinuance or cessation of all business activities for which the corporation or LLC was required to hold a seller’s permit. The OTA, as evidence of termination, used filed EDD quarterly payroll tax returns. The last returned filed was marked “final return.” The FTB and the SOS suspended the corporation for non-payment of income taxes.

The Targeted Person Was Responsible for Sales Tax Compliance During the Liability Period

According to official regulations, a responsible person includes any person having control or supervision of, or who is charged with the responsibility for the filling of returns, or the payment of tax, or who has a duty to act for the corporation or LLC in complying with the sales tax law (Cal. Code Regs., tit. 18, Sec. 1702.5)

Many times the defense to the issue of responsibility turns into a “finger-pointing” contest. Here Bass contended that he acted solely under the direction of the president and that he had no decision-making authority. This is a common defense used by young and naive people who are given high titles but little true decision-making authority. Unfortunately, neither the EDD nor the sales tax people, or the IRS for that matter, pay any attention to this defense unless third-party witnesses can be produced to offer backup testimony.

In reality, Bass got himself into a bad spot by doing the following:

  • Bass filed official papers with the Secretary of State (SOS) stating that he was one of two Directors and the treasurer.
  • Bass 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.

It was clear to the OTA that Bass was a key responsible person who failed to collect, account for, and pay over sales taxes.

The Targeted Person Willfully Failed to Pay or Caused to Be Paid the Taxes

Even if a person, such as Bass, is found responsible, he cannot be held personally liable unless and until the state can prove that he willfully failed his duties of compliance. “Willfully fails to pay or to cause to be paid” means that the failure was the result of a voluntary, conscious and intentional course of action. In order to meet the state’s burden of proof, it must establish the following:

  • On or after the date that the taxes came due, the responsible person had actual knowledge that the taxes were due, but not being paid.
  • The responsible person had the opportunity to pay the taxes or to cause them to be paid.
  • The responsible person had the ability to pay the taxes but chose not to do so.

NOTE: Nowhere does it say that the government must show it has exhausted its collection efforts from the corporation or LLC.

It was clear from the facts that Bass signed quarterly returns and filed them without sending any money. He also represented Capitol during a sales tax audit and he communicated frequently with the sales tax people regarding unpaid taxes.

Should Only the “Most Responsible” Person be Assessed?

An interesting argument was put forth by Bass as a defense. He argued that the personal assessment should only be levied upon the “most responsible” person in the company. Bass argued that the president was more responsible than he because the president had the ultimate decision-making authority. The OTA responded that the law does not require that the most responsible person be assessed, rather the law imposes liability on any and all responsible persons as to whom all four elements are met. When this argument is raised, the IRS and the EDD use a shotgun approach – everyone is targeted and they can fight amongst themselves. Very often the IRS and the EDD will assess everyone equally. However, this raises very practical questions. How does one tell how much of a liability has been paid by each target? How do you obtain accounting transcripts showing how much is currently owed? It is possible that the assessed liability may be overpaid and this raises questions about the refund process.

The OTA used bank statements, EDD returns, and other documentation to show willfulness on Bass’ part as follows:

  • Bass signed checks for the payment of sales taxes before the company stopped making payments;
  • Bass signed tax returns;
  • Bass paid wages;
  • Bass paid the rent and utilities;
  • Bass paid suppliers;
  • Bass signed loan applications.

Bass did not provide third-party witnesses to help him prove that he was operating under the direction and control of the president.


Too many people are suffering the economic hardships brought about by COVID-19. There will be business closures. If you are thinking about closing your corporation or LLC, and you have outstanding unpaid sales taxes or payroll taxes, at both the IRS and EDD levels, get professional advice before you close your doors. I’m sure you are taking steps to protect yourselves from being infected by the coronavirus. Take the necessary steps to protect your personal assets from being taken by the State of California. The CDTFA is very aggressive in making personal level assessments; more so than the EDD. Nothing would be more tragic than to be subjected to both taxing authorities. If you have recently been put into a high management position, or given an executive title, take the steps necessary to take advantage of additional time allowed for the payment of quarterly taxes due in 2020. Also, check the solvency of a company so you do not put yourself at risk.


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.

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