Heavy is the head that wears the crown – even if the crown is not real.  Individuals can face personal responsibility or a dual determination for the CDTFA sales tax liabilities of a corporation or LLC.  Usually, the individual the CDTFA finds personally liable is the owner and/or officer of the corporation or LLC.  The recent Office of Tax Appeals (OTA) Appeal of Monzon case shows even someone who is neither an owner nor an officer of a corporation can be personally responsible for a corporation’s CDTFA sales tax debts. Learn more about the personal responsibility for CDTFA sales tax liabilities.

The CDTFA can hold an individual personally responsible or issue a dual determination for a business’ sales tax debts if (1) the business is closed; (2) the business collected sales tax from its customers and failed to remit the tax; (3) the individual had responsibility for paying the taxes; and (4) the individually willfully failed to pay the tax.  The IRS and EDD can hold an individual personally liable for a business’ payroll tax under a similar test, except the business does not need to be closed for an individual to be personally liable for EDD or IRS payroll taxes.  The CDTFA often assesses owners of closed businesses with a dual determination because business owners are almost always responsible for paying the taxes of a business.  The Monzon case is unusual as the responsible person was not the owner of the business nor was, he an officer of the business.

Monzon involved a closed auto repair business that owed about $17,000 in sales taxes.  The CDTFA found Mr. Monzon was personally responsible for the sales taxes, even though Mr. Monzon did not own the business.  Some other person owned the business and held all the officer positions including the CFO position. Mr. Monzon did not sign checks for the business, and he was not on the bank signature card for the business bank accounts.  Mr. Monzon did file some sales taxes for the business as the “CFO” even though Mr. Monzon was not truly the CFO of the company.  Even though Mr. Monzon was not actually the CFO of the business, being a “de facto officer” of the business was enough to support the CDTFAs dual determination.  The fact that Mr. Monzon had made online payments to the CDTFA may have been the detail that tipped the balances in favor of Mr. Monzon being personally liable. 

Business owners of closely held businesses often find themselves personally responsible for sales and employment taxes owed by the businesses.  There is usually little a business owner of a closely held business can do to avoid the risk of personal exposure besides paying the tax.  Members of the business’ management, even if they are not officers or hold no ownership stake, can face exposure to liability as well.  Staff accountants, bookkeepers, and other individuals who have some financial control over a business should be careful when the business is facing tax troubles. 

At RJS LAW, we help people, businesses, owners, and/or officers with a wide range of tax problems including CDTFA audits and CDTFA collections.  Please feel free to contact us for a free consultation at 619-595-1655 or via the web if you have any tax related questions, including CDTFA tax questions. 

Written by Joseph Cole, Esq., LL.M.