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California Makes Important Clarifications to Business Tax Law

Posted on in Small Business Taxes

california business taxes, San Jose tax lawyerThe California State Board of Equalization (BOE) has changed sales and use tax Regulation 1702.5. This regulation governs when a responsible party must personally pay taxes owed by a business entity that is closed or abandoned. These changes could alter your tax obligation, and so it is important to understand the new regulation and seek counsel to determine if it modifies your circumstances. These changes could prohibit the BOE from seizing your personal assets. The amendments to the law will be effective on April 1, 2017.

Amendments to Business Tax Regulation 1702.5 

The current regulation is defined by the following: “Any responsible person who willfully fails to pay or to cause to be paid... any taxes due from a [business entity] shall be personally liable for any unpaid taxes and interest and penalties on those taxes not so paid upon termination, dissolution, or abandonment of the business...” (Emphasis added.)

There are several notable changes to the new law, including: 

  • The definition of “responsible person” has been clarified. The definition now provides that simply because someone was an officer, member, manager, employee, director, shareholder or partner of a defunct business is not in and of itself proof that such a titleholder is responsible for the taxes.

  • The definition of “willfully fails to pay or to cause to be paid” has been clarified. The new law provides that this phrase is defined as a failure that was “the result of a voluntary, conscious and intentional course of action.” The amendment provides that the BOE must prove that the person being held responsible had “actual knowledge” that the taxes were due and had the responsibility to pay on the day the taxes became due. This person must also have the authority within the business to pay the taxes.

  • The BOE’s burden of proof has been clarified. The BOE must prove the elements set forth in the regulation by a preponderance of the evidence.
  • A rebuttable presumption of no personal liability will now apply if the person being held responsible is not an officer, member, partner or manager.

What Caused the Amendments

These changes affect California’s ability to hold certain people personally responsible for sales and use tax obligations that have gone unpaid by a shuttered business.

Some believe that the Board of Equalization had in recent years ramped up its efforts to collect business taxes from individuals personally. Also, there have been concerns that the elements set forth in the law were not always proven by the state. These laws could make enforcement more consistent and fair.

Call Our San Francisco Bay Area Tax Attorney

This change in the law has real implications for California business owners. At John D. Teter Law Offices, we have already helped clients see how the change in this law may be able to reduce tax burdens. Contact skilled San Jose tax law attorney John D. Teter by calling 408-866-1810 to schedule a consultation.


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