Personal Chapter 7 and Sales Tax

[jenbow]

Our small business owes about $25,000 in az state sales tax.. we are closing his doors down. Since we are personally liable for everything, we have to file chapter 7 personally.. question is, can we claim bk on business sales tax that we are personally liable for?

thanks for any input

[justbroke]

Taxes are non-dischargeable. If you have already been determined to be the person responsible for the taxes, then taxes are non-dischargeable as to you. You could file a complaint to determine dischargeability, but if you're found to be responsible, then the tax won't be discharged. They call it death and taxes for a reason.

Is it from failure to collect or that you collected but never turned them over to the State?

[yomann]

As a former small business owner, if you collected state sales tax they are definitely NOT dischargeable.
The state board of taxation will set up a payment plan with you, but you will have to pay them.

[jenbow]

thanks to you both.. how about the ermployer portion of the Payroll tax?? do you know if this is discharable? I have read somewhere that it is but I am just trying to determine truth from fiction

[justbroke]

Yes, the employer payroll taxes are dischargeable. However, they may have the same 3-year/2-year/240-day rule as income taxes, so you'd have to check.

Also, you may be able to discharge sales tax is you never collected them. However, if you calculated the sales tax into the price and the your customers paid the total prices (including the sales tax), then that is non-dischargeable. If you never even collected the tax, you may be able to discharge your liability since you never were in possession of the tax. Of course, you need to consult a good attorney who would file a complaint to determine dischargeability on that just to get a judgment on it.

[HHM]

Let's clarify a few things.

Based on your other posts, you have a corporation (an actual separate entity). The entity is toast in this situation, it will have to shut down. Right now, the entity (the corporation) is responsible for 100% of the sales tax and employee withholding tax. A corporation can "file" BK, but it does not receive a "discharge" (as I pointed in your other thread).

So, the question is, what happens to the withholding tax and sales tax after the company is liquidated?

The IRS and State Dept. of Revenues have a mechanism to hold the owner (or other responsible parties) liable for unpaid Employee Withholding and Sales Tax. Both of those debts are NON-dischargeable in BK. The next question is, how much are you actually, personally liable for. For Sales Tax it is 100%, but generally, if there are any penalties and interest, that amount may be dischargeable. For Employee Withholding, you are personally liable only for the Principal tax (the actual withholding), however, you are not liable for penalties, interest, and the "employer" contribution. Thus, it is not that the employer contribution is dischargeable, it is that you cannot be held personally liable for that portion of the employee withholding. Only the corporation is responsible for that portion and therefore, the debt dies with the company.

[justbroke]

Thanks for the clarification HHM. It deserved a deeper dive.

[jenbow]

thank you soo much. this is so helpful and I hope everything becomes less confusing as time goes on.