New California Sales Tax Rules Raise Responsible Person Liability Risks

Recently, California enacted S.B. 122, which brings “digital products,” including certain electronically delivered and remotely accessed software, into California’s sales and use tax framework starting on January 1, 2027. This change makes California sales and use tax compliance vital for a broader set of businesses, particularly many that offer software as a service (SaaS). Once a business has an obligation to collect sales or use tax, a failure to collect, account for, or remit that tax can create unpaid liabilities. The frightening potential of personal liability also lurks in the background. Therefore, practitioners should ensure that clients subject to California sales and use taxes engage in careful professional planning beforehand and close monitoring afterward.

That potential personal exposure arises under Cal. Rev. & Tax. Code section 6829, which permits the California Department of Tax and Fee Administration (CDTFA) to seek personal liability against certain individuals who controlled a company’s tax compliance and willfully failed to “pay [the tax] or to cause [the tax] to be paid.” It is true that section 6829 does not make every owner, executive, or employee personally liable; the CDTFA must establish the statutory elements, and the individual may have defenses. Nevertheless, this potential personal liability is a serious risk that owners, officers, and other individuals responsible for the company’s tax compliance should not underestimate. If section 6829 applies, the individual may be held personally responsible for the company’s unpaid tax obligations, and applicable penalties and interest may also be assessed. In other words, a company’s failure to pay its taxes can, in certain circumstances, follow the responsible person, even after the company has ceased operations or otherwise becomes unable to pay.

This article examines the circumstances under which California may impose responsible person liability for unpaid sales or use tax; the CDTFA’s burden to establish the statutory elements, including willfulness; and the defenses available to taxpayers. This information is vital for individuals associated with a terminated or distressed business who may face responsible person assessments, as well as for companies and advisers planning for new sales and use tax collection obligations before liabilities accrue. Understanding when the CDTFA may impose personal liability for unpaid sales or use tax can make the difference between an individual’s ability to wind down a business and move on and a personal tax liability that persists long after the business has ceased operations.

Read the article here.