KING’ S KORNER
SALES TAX DISCHARGE ISSUES IN BANKRUPTCY
By Morgan D. King, of Morgan King Company & Morgan King Law Offices
SALES TAXES
Assuming the reader is at least somewhat familiar with the“ five rules for income tax discharge,” this essay addresses several related topics. 1
One of these is discharging state sales or excise taxes.
Most states have some form of sales or excise tax. 2 It depends, as a threshold question, on the definition of a“ sales” tax or other term more or less meaning the same thing. 3 This is a question of respective state law.
In a nutshell, a tax imposed on the customer, which typically is required to be collected by the retailer and turned over to the state, is a sales tax 4 that is equivalent to a trust-fund tax under § 507( a)( 8)( C), and hence is nondischargeable. 5
1 The author thanks attorneys Reba Wingfield( AR), Larry Heinkel( FLA), Steven Benda( CA), Lavar Taylor( CA), Nicolas Corry( AR), Daniel Press( VA), Mark Sharf( CA), and Mark Segal( NV) for their helpful comments on certain issues in the topic.
2 The five that do not are Alaska, Delaware, Montana, New Hampshire, and Oregon.
3 For example, terms associated with this issue include sales tax, excise
tax, and use tax.
4 Fugitt v. Mississippi Department of Revenue, 539 B. R. 289, 304( Bankr. S. D. Miss. 2014).
5 Rosenow v. Illinois Dept. of
In contrast, a tax imposed on the retailer only is an excise tax for the privilege of doing business in the state, and is ordinarily dischargeable if the sales event occurred or a return due date was over three years before the bankruptcy is filed, pursuant to § 507( a)( 8)( E). 6
In order to determine whether the tax is dischargeable the attorney will have to identify the category the tax falls into based on the respective state law. In doing that exercise, it is probably prudent to not place too much significance on the name given to the tax by the state statute, whether excise, sales, or other term, because the title the state statute gives to the tax is not the controlling factor, but rather the entity upon whom the tax assessed, i. e., the retailer or the customer.
States sometimes muddle the issue of what category the tax falls into, by mixing up the titles. In a recent case 7 the state statute required the retailer to collect the tax from the customers, even though it might be called an excise tax. Hence, if the retailer collected the tax but did not turn it over to the state, it was nondischargeable. And, the court attempted to address, albeit not artfully, whether the retailer’ s failure to collect
Revenue, 715 F. 2d 277( 1983); In re King, 117 B. R. 339( Bankr. Tenn. 1990); In re Shank, 792 F. 2d 829( 9 th Cir. 1986).
6 In re Groetken, 843 F. 2d 1007( 7 th Cir. 1988). 11 U. S. C. § 507( a)( 8)( E)( i).
7 Fugitt, at 538-539. the tax made a difference.
The question may be asked, to be dischargeable does an excise tax have to satisfy the 5 rules imposed on the dischargeability of ordinary income taxes?
At least one case has held that the“ 5 rules”(§ 523 and § 507) ordinarily applicable only to personal income taxes, also apply to state excise taxes by ruling that the California excise tax is subject to § 507( a)( 8)( A), describing a tax“ on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition … for which a return, if required, is last due …” etcetera.
This language describes personal income taxes. The court ruled that the California tax falls into that category as well as that of an excise tax, and hence the 5 applicable requirements of § 523 and § 507 for personal income taxes also applied to the sales / excise taxes. 8
That, in turn, may raise another question, and that is, is the document the retailer is supposed to file with the state to report sales or excise taxes a“ return,” or“ equivalent report or notice” required to be filed by § 523( a)( 1)( B)? The Code draws a distinction, at least as to excise taxes, and excepts from discharge taxes for which-
§ 507( a)( 8)( E)( i) a transaction occurring before the date of
8 In re Raiman 172 B. R. 933( 9 th Cir. BAP 1994).
18 CONSUMER BANKRUPTCY JOURNAL Summer 2016 National Association of Consumer Bankruptcy Attorneys