BOE Tax Clearances

When a business that sells or leases goods at retail owes sales taxes to the California Board of Equalization (BOE), the buyer of the business can be responsible for paying the BOE the amount owing if the seller does not pay them.

The liability applies to any person who is a successor or assignee of someone who sells out his business or stock of goods or quits the business, not just a buyer. This post assumes that the purchaser is buying assets from someone selling his business or at least selling all his inventory.

Under the law, unless the seller produces a certificate from the BOE stating that no amount is due, the purchaser must withhold enough money to cover the amount owing by the seller. If the purchaser fails to do that, the purchaser will be personally liable to the BOE for paying the amount due from the seller. These obligations are imposed on the buyer by Revenue & Taxation Code sections 6811 and 6812.

The buyer’s liability is limited to the purchase price of the assets acquired. Thus, if a seller’s liability to the BOE is $100,000 and the business is sold in an arm’s-length transaction for $12,000, the buyer is only liable to the BOE for $12,000. But that’s $12,000 more than the buyer was expecting!

How to avoid this pitfall?  The purchaser can submit a written request to the BOE for a certificate of tax clearance. The purchaser of a business will be released from the obligation to withhold money from the purchase price if the purchaser obtains a certificate from the BOE stating that no taxes, interest, or penalties are due from the seller. This is customarily referred to as a tax clearance certificate.

The BOE has 60 days to issue a tax clearance certificate. The failure to issue a tax clearance certificate 60 days of the date the BOE receives the written request releases the buyer (assuming the sale has not already closed). Obviously, if a statement indicates that money is due the BOE, the buyer should make sure it is paid.

To avoid delay, the buyer (or escrow company) should request a tax clearance certificate as soon as possible.

If the business has more than one location and the purchaser is buying one or more locations (but not all), the purchaser should request a clearance for each location. If the business has more than one location and the purchaser is buying all the locations, only one clearance is needed.

Whether or not the BOE issues a tax clearance certificate, the seller remains liable for any amount due to the BOE.

There is no need for a tax clearance certificate if the buyer is buying stock of a corporation (or a membership interest in an LLC) because the underlying assets remain owned by the entity and are not transferred to the buyer. The entity remains liable for its obligations to the BOE.

For information about Franchise Tax Board Tax Clearance Certificates, see https://richardburtlaw.com/franchise-tax-board-tax-clearance-certificates/.

For information about Employment Development Department Tax Clearance Certificates, see https://richardburtlaw.com/edd-tax-clearances/

Posted in Bulk Sale, Buy-Sell Agreement, Mergers & Acquisitions, Purchase and Sale of a Business | Tagged , , , , | Comments Off on BOE Tax Clearances

EDD Tax Clearance Certificates

When a business is an employer that owes contributions, interest, or penalties to the California Employment Development Department (EDD), the buyer of the business can be responsible for paying the EDD the amount owing if the seller does not pay them.

By the way, the statute applies to any person who “acquires” the business (or substantially all the assets of an employer), not just a buyer. This post assumes that the seller is an employer and that the acquirer is a buyer of assets.

Under the law, unless the seller produces a certificate from the EDD stating that no contributions, interest, or penalties are due, the buyer must withhold in trust money sufficient to cover the amount of any contributions, interest, and penalties owing by the seller and pay the EDD that amount at the closing. If the buyer fails to do that, the buyer will be personally liable to the EDD for the payment of the contributions, interest, and penalties due from the seller. These obligations are imposed on the buyer by Unemployment Insurance Code sections 1731 and 1733.

The buyer’s liability is limited to the purchase price of the assets acquired. Thus, if a seller’s liability to the EDD is $100,000 and the business is sold in an arm’s-length transaction for $12,000, the buyer is only liable to the EDD for $12,000. But that’s $12,000 more than the buyer was expecting!

How to avoid this pitfall?  Either the buyer or the seller can submit a written request to the EDD for a Certificate of Release of Buyer (DE 2220). The request is made on Form DE 2220R (Release of Buyer Request Form). The certificate is customarily referred to as a “tax clearance certificate.”

The EDD has 30 days to issue a certificate stating that no contributions, interest, or penalties are due or a statement showing the amount of any contributions, interest, and penalties claimed to be due. The failure to issue such a certificate or statement within 30 days is legally equivalent to the issuance of a certificate stating that no contributions, interest, or penalties are due. Obviously, if a statement indicates that money is due the EDD, the buyer should make sure it is paid at closing.

To avoid delay, the buyer or the seller should request a tax clearance certificate as soon as possible after agreeing on the sale.

Whether or not the EDD issues a tax clearance certificate (or statement showing the amount due) within the 30-day period, the seller remains liable for any amount due to the EDD.

There is no need for a tax clearance certificate if the buyer is buying stock of a corporation (or a membership interest in an LLC) because the underlying assets remain owned by the entity and are not transferred to the buyer. The entity remains liable for its obligations to the EDD.

For information about FTB Tax Clearance Certificates, see:  https://richardburtlaw.com/franchise-tax-board-tax-clearance-certificates/

For more information about Board of Equalization tax clearances (sales tax liability), see https://richardburtlaw.com/boe-tax-clearances/

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New LLC Statement of Information Form

Every two years, a California limited liability company must file a statement of information with the California Secretary of State. The same is true for  a limited liability company formed in another state but registered to do business in California.

In the past, if there was no change to the information in the statement of information from the prior filing, the LLC checked a box on Form LLC-12 to report no change. Now there is an additional form. If there is no change to the information from the last complete statement of information, the LLC can report that on LLC-12NC. Or it can complete all the blanks on the Form LLC-12 and file that.

The filing fee for either the initial statement or the biennial update is $20.

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Perils of Dissolution, or Hey, FTB, Where’s My Dough?

Sometimes a California limited liability company (LLC) or California corporation dissolves and files a final tax return which shows it has a refund coming, but the refund is $800 short. How could this happen? It’s because the Franchise Tax Board (FTB) may deduct $800 and apply it to next year’s taxes.

Let’s say that a business entity files a tax return and has a refund coming. In that case, the FTB computer looks to see if the business entity had paid the tax for the next year (estimated tax for a corporation). If the next year’s tax payment is past-due, the FTB may take $800 out of the refund and apply it to the next year’s tax. The intent is to help the taxpayer avoid penalties and interest for late payment of the tax for the next year.

But if the entity is dissolving and filing its final tax return (and the appropriate box on the tax return is marked to show that it’s the final tax return), there shouldn’t be a next year for the entity, let alone a tax for that next year.

Here’s the rub. Although a California LLC or corporation files a tax return marked “Final,” the termination of the entity for tax purposes does not occur until the proper paperwork is filed with the California Secretary of State. In the case of an LLC, the minimum paperwork is ordinarily a certificate of cancellation. In the case of a corporation, the minimum paperwork is ordinarily a certificate of dissolution. In some cases, additional paperwork might be needed, particularly if the entity has been delinquent on its filings with the Secretary of State.

If the paperwork is not timely filed, the business entity continues to exist for tax purposes until the next tax year. (And it will continue until it files the correct paperwork with the Secretary of State.) In that case, it incurs the next year’s taxes. This applies even if the tax return filed was marked “final.”

Once the Secretary of State notifies the FTB that the correct paperwork has been filed, assuming the correct paperwork has been timely filed, the FTB should remit the $800 balance to the taxpayer (less, of course, any other amount that may be owing).

But if the taxpayer neglects to file the paperwork on time or never files the paperwork with the Secretary of State, then the $800 deducted from the tax refund will be consumed by being applied to the next year’s tax. And the business entity will probably incur penalties and interest in succeeding years if the paperwork is not filed before the end of the next year.

Filing the correct paperwork with the Secretary of State prior to filing the final year’s tax return may avoid this problem. There are other pitfalls to terminating a California entity, and it can pay to have competent legal assistance in the process.

If you have a California business entity to wind up, dissolve, or terminate, I can help.

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LLC Annual Fee Clarified by Franchise Tax Board

A limited liability company (“LLC”) doing business in California (whether organized under California law or the law of another state) must pay an LLC annual fee on its “total income from all sources derived from or attributable to this state.” (The annual LLC fee is really a tax, but the legislature didn’t want to call it a tax, so it’s an LLC fee. But it still quacks like a tax.)

The LLC annual fee is in addition to the $800 flat annual franchise tax. The LLC annual fee is graduated, starting at $900 for LLCs with total income of $250,000 and topping out at $11,900 for LLCs with total income of $5 million or more.

The Franchise Tax Board (FTB) recently ruled on how to calculate the “total income” in the case of an LLC taxable as a partnership that sells real property. FTB Legal Ruling 2016-01 (July 14, 2016).

If the LLC holds the real property for sale to customers in the ordinary course of business (i.e., it’s a “dealer” in real property for income tax purposes), then according to the FTB, the total income for the purpose of calculating the LLC annual fee includes the adjusted basis of the real property (not just the gain realized).

If the LLC holds the real property for investment (and not for sale to customers in the ordinary course of business), then the total income for the purpose of calculating the LLC annual fee is the gain realized (and the adjusted basis of the real property is not included in the calculation).

The reason for the difference is that “total income” for purposes of calculating the LLC fee is defined in Revenue & Taxation Code § 17942(b)(1)(A) as “gross income, as defined in Section 24271, plus the cost of goods sold that are paid or incurred in connection with the trade or business of the taxpayer.” If the LLC is a dealer in real property, then it’s in a “trade or business,” and the adjusted basis of the real property is part of cost of goods sold. If the LLC holds the real property for investment, the income from the sale of the real property is not from a “trade or business,” and the concept of “cost of goods sold” does not apply.

Here’s a link to the FTB ruling:

FTB Legal Ruling 2016-01

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Here’s One Way Not to Pay Taxes – Legally!

California charges a minimum franchise tax of $800 each year. This is a tax on the privilege of being a corporation. It doesn’t matter whether the corporation is profitable or even if it has any revenue. The state wants its $800 from every corporation every year, and if it’s not paid, the state will suspend the corporation. There is one exception, however.

If you’re planning on forming a corporation near the end of the year, it can sometimes pay to wait a bit. Corporations with a first tax year of 15 days (or fewer) will not have to file a tax return or pay the $800 tax if the corporation conducts no business during those remaining 15 (or fewer) days in its first tax year.

Let’s say that a business owner is planning on incorporating in December (and let’s assume, as is common, that the corporation’s tax year is the same as the calendar year). If the articles of incorporation are filed on December 16 (or earlier), the corporation will have to file a tax return and will owe the $800 franchise tax for that year, even though it existed for only 16 days of that year and even if conducted no business!

On the other hand, if the articles are filed December 17 (or later that month) and the corporation conducts no business that month, no tax return is required and no $800 tax is due for that year.

Not all corporations have a tax year (that is, a fiscal year) that coincides with the calendar year (Jan-Dec.). The following table shows the earliest date in a month when a corporation’s articles of incorporation can be filed with the California Secretary of State and there will be 15 days or fewer in the tax year.

Month Incorporated and Tax Year Ending on: Day of the Month:
January, March, May, July, August, October, and December (31-day months)  

 

17th or after
April, June, September and November (30-day months) 16th or after
February (29-day month) 15th or after
February (28-day month) 14th or after

The conduct-no-business requirement is a bit tricky. To take advantage of the exception, the corporation must conduct no business at all during the remainder of the month. Doing anything more than simply filing the articles raises a question as to whether the corporation is doing business. To answer that question, professional guidance should be sought.

If you are planning to form a corporation, call Richard Burt first and ask about an entity-selection consultation. A corporation is not always the best form of business organization, even for those looking to limit their liability.

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FTB Tax Clearance Certificates

When a business is required to deduct and withhold taxes and remit them to the Franchise Tax Board (FTB), a successor to the business can be responsible for paying the amount owing to the FTB  if the business does not pay them.

Who is a successor? A “successor” is anyone who acquires a substantial portion of the assets or the business.  It doesn’t matter how the assets were acquired. They can be purchased, transferred, distributed to shareholders or other owners in liquidation, or inherited.

By virtue of Revenue & Taxation Code section 18669, the obligation to pay required withholding tax (and interest and penalties, if applicable) is transferred with the assets. The successor’s liability is limited to the fair market value of the assets acquired. Thus, if a seller’s liability to the FTB is $100,000 and the business is sold in an arm’s-length transaction for $60,000, the buyer is only liable for $60,000. But that’s $60,000 more than the buyer was expecting!

How to avoid this pitfall?  A purchaser (or other potential) successor can submit a written request to the FTB for the amount of withholding taxes, interest, or penalties due. This is customarily referred to as a “tax clearance certificate.” The FTB has 60 days to issue a tax clearance certificate or a statement showing the amount due. Sixty days, however, can be a long time to wait for the buyer and seller of a business. One way to deal with that delay is to get the ball rolling right away and submit the request for the tax clearance certificate as soon as possible.

If a written request for a tax clearance certificate is not made, the unpaid amount of withholding taxes (and interest and penalties, if applicable) is due the day the business or assets are acquired. If payment is not made then, a 10% penalty, based on the amount payable, can be assessed.

If the FTB does not issue a tax clearance certificate (or statement of amount due) 60 days after request is made, the FTB is deemed to have issued a certificate stating no withholding taxes, interest, or penalties are due. Thus a purchaser would have no liability for the seller’s withholding taxes, interest, or penalties. Although the buyer may be off the hook, the seller is not.

Whether or not the FTB issues a tax clearance certificate (or statement showing the amount due) within the 60-day period, the original business owner (or entity) remains liable for the amount due.

For information about Board of Equalization tax clearance certificates (for sales tax liability), see https://richardburtlaw.com/boe-tax-clearances/

For information about Employment Development Department tax clearance certificates, see https://richardburtlaw.com/edd-tax-clearances/

Posted in Buy-Sell Agreement, Mergers & Acquisitions, Purchase and Sale of a Business, Successor liability | Tagged , , | Comments Off on FTB Tax Clearance Certificates

Officer Liable for Restitution of Corporation’s Gains in Violation of FTC Act

In Federal Trade Commission v. Commerce Planet, Inc. (9th Cir. March 3, 2016) 16 C.D.O.S. 2355, the Federal Trade Commission (FTC) sued Commerce Planet, Inc., and three of its top officers for violating § 5(a) of the FTC Act, which prohibits unfair or deceptive business practices (15 U.S.C. § 45(a)). The company and two of the individual defendants settled with the FTC. The remaining defendant, appellant Charles Gugliuzza, elected to stand trial. After a 16-day bench trial, the district court found that Commerce Planet had violated § 5(a) and held Gugliuzza, the company’s former president, personally liable for the company’s unlawful conduct. The court permanently enjoined Gugliuzza from engaging in similar misconduct and ordered him to pay $18.2 million in restitution.

Gugliuzza challenged the validity of the restitution award. Among other things, he contended that the district court either lacked the authority to award restitution at all or, at the very least, had to limit the award to the unjust gains he personally received, which in this case totaled roughly $3 million.

The federal courts have established a two-pronged test for determining when an individual may be held personally liable for corporate violations of the FTC Act. The FTC must prove that the individual: (1) participated directly in, or had the authority to control, the unlawful acts or practices at issue; and (2) had actual knowledge of the misrepresentations involved, was recklessly indifferent to the truth or falsity of the misrepresentations, or was aware of a high probability of fraud and intentionally avoided learning the truth. The court found that the FTC’s evidence satisfied both prongs of this test.

Gugliuzza contended that any such award must be limited to the unjust gains each defendant personally received. The court disagreed, holding that he could be held jointly and severally liable for the full amount of the award against the corporation, not just the amount he received as a result of the corporation’s unlawful conduct.

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Don’t go to MyFTB.com. It’s not the official site.

To access your MyFTB account, go to the FTB’s website: www.ftb.ca.gov . Note that the word “my” is NOT part of the URL.

MyFTB.com has been reported as a malware site.

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Acquirer Can Enforce Arbitration Agreement with Acquired Company Employees

The following is the text of an e-bulletin that I authored and that was published by the Corporations Committee of the Business Law Section of the State Bar of California.

Francisco Marenco was employed by 180 Connect, Inc. As a condition of employment, he entered into an arbitration agreement that required both parties to submit to binding arbitration all claims arising from the employment relationship. Subsequently, 180 Connect was acquired by DirecTV LLC in 2008. DirecTV retained 180 Connect’s employees, and Marenco continued working for DirecTV until February 2010.

Marenco brought a putative class action against DirectTV, contending that it violated state wage and unfair-competition laws. DirecTV moved to compel arbitration pursuant to the arbitration agreement signed with 180 Connect. Marenco objected, arguing that DirecTV lacked standing to enforce the arbitration agreement because it was not a party to the agreement. DirecTV responded that as a successor in interest to 180 Connect, it had succeeded to all the rights and obligations arising from 180 Connect’s employee relationships, including the arbitration agreement between Marenco and 180 Connect.

The trial court granted the motion to compel arbitration, and the court of appeal, in what it referred to as a case of first impression, affirmed, concluding that DirecTV had standing to enforce the arbitration agreement.

By suing DirecTV for unpaid wages, Marenco acknowledged the existence of an employment relationship with it. DirecTV, the surviving corporation, assumed all of the disappearing corporation’s rights and liabilities, including the obligations owed to the disappearing corporation’s employees.

Although DirecTV was not a signatory to the arbitration agreement between Marenco and 180 Connect, the court said that the agreement formed one of the terms of employment for Marenco. When Marenco sued DirecTV for violating the terms of his employment, DirecTV was entitled to invoke the arbitration clause to compel Marenco, as a signatory plaintiff, to arbitrate his claims pursuant to the employment agreement.

Citing the principle that a voluntary acceptance of the benefit of a transaction constitutes consent to the obligations arising from it, the court ruled that continued employment provides implied consent to maintaining the existing terms of employment, including the arbitration agreement.

It’s hard to conclude from the opinion whether the acquisition was a purchase of assets with an assumption of liabilities or a merger. There are discussions in the opinion to support both conclusions, but in an April 2008 8-K report filed with the SEC, 180 Connect announced that it had entered into a merger agreement with DirecTV. Consequently, while there is dictum that would support the holding applying to an asset acquisition with an assumption of liabilities, the case may be binding precedent only with respect to mergers.

If you need assistance with arbitration, buy-sell agreements, or outside general counsel, contact Attorney Richard Burt. Mr. Burt can be reached at (408) 286-7333 or by filling out the online contact form.

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