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  • Writer's pictureDaniel Rodriguez

Are Business Sales Tax Debts Dischargeable in a California Chapter 7 Bankruptcy?

Certain Income Tax and Other Debts Are Dischargeable Provided Requirements Are Met Many individuals are aware that the U.S. Bankruptcy Code generally provides for the discharge of debts upon the completion of a successful bankruptcy proceeding. Under § 727(b) there is generally a presumption to grant a discharge. The discharge is intended to provide debtors with a fresh start. Medical bills, credit card debts, certain tax obligations, and other liabilities can all be eliminated through bankruptcy. However, the U.S. Tax Code also makes certain debts non-dischargeable meaning that they will not be eliminated even if an otherwise successful bankruptcy proceeding occurs. Section 523(a)(1)(A) makes certain tax debts non dischargeable in bankruptcy. Trust fund taxes are typically non-dischargeable in bankruptcy. In most states, this means that unpaid sales tax obligations are not dischargeable in bankruptcy. However, California is unique and the state’s treatment of state sales tax debts in bankruptcy can result in a discharge of the liability provided certain requirements are met.

Sales Tax is Not a Trust Fund Tax in California or Otherwise Barred from Being Discharged When Legal Requirements Are Satisfied In California, like in most states, sales tax is collected by retailers and others before it is paid over to the government. In most states, this would mean that sales tax debts are non-dischargeable trust fund taxes. However, in California, state law makes sales tax the sole liability of the retailer or seller of goods despite the fact that sales tax is customarily collected from customers. Thus, under California law, sales tax debts are dischargeable provided certain requirements are met. The requirements that determine whether the sales tax debt is dischargeable closely tracks the test for debts incurred due to unpaid income taxes. Essentially, all tax returns must have been filed and at least two years must have elapsed since the tax was actually filed (2-year rule). Additionally, at least three years must have elapsed from when the tax return or other filing was due (3-year rule). Finally, the taxes must have been assessed a minimum of 270 days ago and the taxes cannot still be assessable. For sales tax debt discharges, the business must have been dissolved or otherwise closed and the California Board of Equalization must have been provided a notice of the company’s closing. Provided these requirements are met, it is likely that a discharge of tax debts, including sales tax debts, will be granted by a bankruptcy court.

Facing Sales Tax Debts? Work with a Sacramento Bankruptcy Lawyer from The Bankruptcy Group If you are considering a sales or income tax motivated bankruptcy, the attorneys of The Bankruptcy Group can provide careful, step-by step guidance. Our attorneys always take the time to get to know you and your goals before suggesting any bankruptcy or non-bankruptcy solutions to tax debt and other liabilities. To schedule a confidential consultation with our team, call The Bankruptcy Group at today.

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