California Sales Tax Debt

California sales tax debt can be discharged in bankruptcy if specific federal and state requirements, generally involving the age of the tax debt and proper filing procedures, are properly met. Unlike some states where sales tax is considered a non-dischargeable “trust fund” tax, California treats it as a tax on gross receipts, which may be dischargeable under certain conditions. 

Key Conditions for Dischargeability

For a California sales tax debt, owed to the California Department of Tax and Fee Administration (CDTFA), to be dischargeable, the following conditions must typically be met:

• A return was filed: The required tax return for the period in question must have been filed. If no return was filed, the debt is generally not dischargeable.
• Returns due more than 3 years ago: The tax return must have been due (including extensions) at least three years before the bankruptcy case is filed.
• Returns filed more than 2 years ago: The return must have been filed at least two years before filing for bankruptcy.
• Assessment at least 240 days old: The tax debt must have been assessed by the CDTFA at least 240 days before filing the bankruptcy petition (this period can be tolled by certain events).
• No fraud or willful evasion: The tax debt cannot be a result of a fraudulent return or a willful attempt to evade paying the tax.
• Business termination properly handled: For business owners (especially corporations or LLCs), personal liability for business sales tax typically arises after the business is terminated or abandoned. Explicit notice of the business termination must be provided to the CDTFA to start the clock ticking on the assessment period for the responsible individual. 

Important Considerations

• Tax Liens: If a state tax lien was filed against your property before you filed for bankruptcy, the lien generally survives the bankruptcy discharge, even if the underlying personal debt is discharged. The CDTFA or FTB may still be able to collect on the lien from the attached property.
• Responsible Person Liability: Individuals responsible for the business’s finances (e.g., corporate officers) can be held personally liable for unpaid sales taxes.
• Automatic Stay: Filing for bankruptcy triggers an “automatic stay,” which stops most collection activities (such as liens, wage garnishments, or seizures). You must notify the CDTFA and the Franchise Tax Board (FTB) of your bankruptcy case number.
• Ongoing Obligations: You are still required to file all post-petition tax returns when they become due. 

How RJS LAW Can Help | California Sales Tax Debt

If you are facing mounting debt and are unable to pay your sales tax or other liabilities, filing for bankruptcy may be a viable option. Understanding the nuances and navigation the complexities of bankruptcy law can be daunting. The experienced tax and bankruptcy attorneys at RJS LAW are available to assist in determining if bankruptcy is your option.  Please call 619-595-1655 or click on RJS LAW to schedule a free confidential consultation and assessment.

Written by Andy J. Epstein, Esq., CPA, LL.M.