Personal liability for unpaid sales tax

Sales tax collected from customers is the state's money. Using it to pay suppliers or rent is treated as choosing to pay other creditors with the state's funds. That's the logic behind responsible-person statutes, the state counterpart to the federal Trust Fund Recovery Penalty for payroll taxes.

California's Regulation 1702.5 makes a responsible person who willfully fails to pay, or to cause to be paid, the sales tax of a corporation, partnership or LLC personally liable for the unpaid tax, interest and penalties — but only upon termination, dissolution or abandonment of the business. The department must show the person was responsible, the business collected tax or included it on its returns (or sold with tax reimbursement), and the failure was willful. Other states have their own versions with different triggers and tests; check your state sales tax page.

Titles alone usually don't decide it. States look at who signed checks, who filed returns, who decided which creditors were paid, and who knew the tax was going unpaid. Owners, officers, managing members and sometimes bookkeepers with real authority can qualify. A passive investor with no control over finances is less likely to.

Willful generally means you knew the tax was due and chose to pay other expenses while the business had funds — not that you intended to defraud anyone. Paying employees, landlords or vendors while knowingly skipping sales tax returns is the classic fact pattern.

In states like California, closing is exactly what can trigger personal assessment. Selling the business can also create successor liability for the buyer. If the business is still operating, a payment plan protects owners better than letting the business fail.

Respond to any responsible-person notice before the appeal deadline; that's the cheapest point to contest responsibility or willfulness. Size a sales tax payment plan and run the free assessment.