96-0035

SALES & WITHHOLDING

Signed 9/9/97

 

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

 

PETITIONER, )

:

Petitioner, ) ORDER

:

v. ) Appeal No. 96-0035

:

COLLECTION DIVISION OF THE ) Account No.

UTAH STATE TAX COMMISSION, :

)

Respondent. : Tax Type: Sales & Withholding

_____________________________________

 

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for an Initial Hearing pursuant to the provisions of Utah Code Ann. §59-1-502.5, on February 3, 1997. G. Blaine Davis, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioner was PETITIONER REP, from the law firm of FIRM. Present and representing Respondent were Mr. Gale Francis, Assistant Attorney General, together with Mr. Richard Evans from the Collection Division.

Respondent has proposed to make Petitioner, as the purchaser of the business of COMPANY A, formerly owned by NAME, liable for the unpaid sales and use taxes and unpaid withholding taxes of COMPANY A.

NAME, dba COMPANY A, incurred sales tax liability during various calendar quarters prior to November 1993, and those sales and use taxes remain unpaid. NAME, dba COMPANY A, also incurred withholding tax liability during various calendar quarters prior to November 1993, which withholding taxes also remain unpaid.

Prior to November 1993, several warrants were filed by the Utah State Tax Commission with the Third District Court, Salt Lake County, State of Utah, which warrants were based upon the sales and withholding taxes heretofore referred to.

On November 24, 1993, NAME sold the business known as COMPANY A to PETITIONER, the Petitioner herein.

The contract between Petitioner and the seller of the business contained a provision in which Seller represented that any and all debts, liens, encumbrances, security agreements, tax liens, or other attachments of record would be fully discharged at the time of the closing except for one small monthly payment of $$$$$ per month for two years to COMPANY B. The agreement also required the Seller to pay, assume, and hold the Buyer harmless from all debts and liabilities, and to indemnify and hold the Buyer harmless from all claims and causes of action arising prior to possession of the assets.

The assets sold to Petitioner by NAME included tangible and intangible personal property, but did not include any real property.

The terms of the sale required a total payment price of $$$$$, to be paid by depositing $$$$$ with the agent who made the sale, $$$$$ to be paid by cash or cashier's check at the time of the closing, and a Promissory Note of $$$$$ to be paid on or before January 7, 1994. Part of the purpose of the Promissory Note was to permit the Buyer, Petitioner herein, to determine whether there were any unknown liabilities, and to be entitled to offset any such liabilities against the amount of the Promissory Note.

Petitioner did not contact the Utah State Tax Commission to inquire what amount of tax, if any, was due to the Tax Commission by NAME on her business, COMPANY A.

On August 9, 1995, the Utah State Tax Commission notified Petitioner of its proposed assessment of him as the successor of the business for the amount of sales and withholding tax owed by NAME for the operation of COMPANY A.

Petitioner has properly perfected his right to appeal the proposed assessment by filing a Petition for Redetermination with the Tax Commission. The parties have agreed that the only issue to be resolved at this initial hearing will be the issue of the liability of Petitioner. If the Petitioner is determined to be liable, then the parties have agreed that the amounts will be discussed and determined at a later date. Petitioner does not agree that the amounts assessed against NAME, dba COMPANY A, were correct amounts because some of the amounts determined were based upon estimates made by Respondent.

At the time of the closing, Petitioner and NAME set aside the $$$$$ Promissory Note with a right of offset plus $$$$$ cash for the payment of taxes or other obligations which might be due by NAME to any creditor, including the Utah State Tax Commission. Thereafter, in December 1993, the Internal Revenue Service levied upon the amounts so set aside and those amounts were seized by the Internal Revenue Service in February, 1994.

Petitioner was not notified of the proposed assessment against him as a successor business owner by the Utah State Tax Commission until August 9, 1995, several months after the Internal Revenue Service had seized the amounts set aside and reserved for payment of debts.

SALES TAX

The position of Petitioner is that he is not responsible for the taxes because he set aside the amounts which would have paid most of the taxes, but those amounts were seized by the Internal Revenue Service, which was beyond his control, and also because the Seller of the business represented that there were no taxes, liens, or other encumbrances which were not disclosed, and the Seller lied about that fact.

The position of Respondent is that liability is imposed upon Petitioner by Utah Code Ann. §59-12-112, as amended, which provides as follows:

 

A) The tax imposed by this chapter shall be a lien

upon the property of any person who sells out

his business or stock of goods or quits business.

Such person shall complete the return provided

for under Section 59-12-107, within 30 days

after the date he sold his business or stock

of goods, or quit business. Such person=s

successor in business shall withhold enough of

the purchase money to cover the amount of taxes

due and unpaid until the former owner

produces a receipt from the commission showing

that the taxes have been paid, or a certificate

that no taxes are due. If the purchaser of

a business or stock of goods fails to withhold

such purchase money and the taxes are due and

unpaid after the 30-day period allowed, he is

personally liable for the payment of the taxes

collected and unpaid by the former owner.@

(emphasis added)

 

Based upon a reading of the statute, it is clear that retaining money from the sale is not sufficient to avoid personal liability if the money is not ultimately used to pay the taxes due to the Utah State Tax Commission. It is also clear from the statute that placing a provision in the contract in which the Seller represents that there are no taxes or that they will be paid when due is likewise not sufficient to escape personal liability. Under §59-12-112 of the Utah Code, a party who sells a business is required to complete sales tax returns within 30 days of selling the business. This code section also imposes on the purchaser an obligation to withhold from the sales price an amount that will cover all taxes due until the seller produces proof of tax clearance from the Commission. If the purchaser fails to withhold the amount due and fails to ensure that the sales tax is paid within 30 days of the date of sale, the statute imposes personal liability for the taxes due on the purchaser.

Petitioner admits that he became NAME'S successor in business by his purchase of COMPANY A in 1993. As NAME'S successor in business, Petitioner had an affirmative duty to investigate the existence of outstanding tax obligations and actually withhold from the proceeds of the sale an amount that would satisfy those obligations. Although Petitioner claims that NAME failed to notify him of the unpaid tax debt, he had constructive notice because various tax liens had already been filed against NAME and COMPANY A prior to his purchase of the business. Petitioner knew or should have known about the unpaid tax liability.

Petitioner and NAME apparently agreed to set aside $$$$$ in cash plus a promissory note for $$$$$ to pay off any outstanding obligations. Without regard to other outstanding obligations, Petitioner had a legal duty to withhold an amount equal to the outstanding sales tax obligation and to either obtain a tax clearance from NAME or pay over that amount to the Tax Commission within 30 days of closing. By his failure to comply with the provisions of §59-12-112, Petitioner subjected himself to personal liability for the unpaid sales tax. Under section 59-1-705, the term Atax@ includes penalties and interest. Therefore, Petitioner is liable for the unpaid sales tax, including penalties and interest.

Based on the evidence presented, the Commission finds that Petitioner is NAME'S successor in business and that he is personally liable for the unpaid sales tax. Pursuant to §59-1-302(7), the Commission directs the Division to issue a final assessment notice and demand for payment of the sales tax. Although the issue of personal liability is settled, Petitioner has a right to appeal the final assessment itself as provided by law.

WITHHOLDING TAX

Under §59-10-406, an employee is required to withhold income tax from wages paid to employees. The employer is liable to the Commission for the tax required to be withheld. This tax is considered the tax of the employer. The Commission may levy a lien on the employer's business assets so long as any delinquency continues.

Unlike the sales tax provisions, the withholding tax statutes do not provide for an action on a delinquent account against the employer's successor in business. The Commission finds, therefore, that Petitioner is not personally liable for NAME'S outstanding withholding tax obligations.

LIENS

Petitioner argues that tax liens on the business assets of COMPANY A do not create tax liability for the Petitioner. We agree. As discussed above, Petitioner's liability arises from statute, not from the tax liens. The liens merely secure payment of the liability. However, Petitioner purchased the business assets subject to the outstanding tax liens. Therefore, the assets were subject to seizure.

Petitioner's arguments regarding lien notices are not relevant here. Notice requirements for sales tax liens are set out in §38-12-103 of the Utah Code. Whether the Collections Division complied with those requirements is not an issue properly before the Commission because the liens were filed against NAME, not Petitioner who did not have a right of notice of the liens filed against NAME. Even if Petitioner had standing to challenge the liens, Petitioner's argument that §59-12-112 is unconstitutional must be addressed to the Utah Supreme Court. The Tax Commission does not have jurisdiction to pass on the constitutionality of a legislative enactment. Shea v. State Tax Comm=n., 101 Utah 209, 209, 120 P2d 274 (9141).

Utah Code Annotated §'59-10-406(6) makes the amount of withholding tax which has not been paid to the Tax Commission a lien upon all the assets of the employer and all property owned or used by the employer in the conduct of his business, including stock in trade, business fixtures and equipment. Therefore, to the extent that the liability imposed on Petitioner was for withholding taxes not paid to the state, and further to the extent that appropriate warrants were docketed pursuant to law, the State Tax Commission has a valid lien upon the assets of the business which were transferred to Petitioner. However, it is recognized that the assets which constituted inventory, and perhaps other assets, may no longer be in a position for that lien to be enforced.

DECISION AND ORDER

Based upon the information presented at the hearing, and the records of the Tax Commission, the Commission finds that the assessment made by Respondent against Petitioner should be sustained to the extent of the sales and use taxes including penalties and interest. The liens imposed upon the assets are sustained to the extent that they were for withholding tax not remitted to the Commission.

This decision does not limit a party's right to a Formal Hearing. However, this Decision and Order will become the Final Decision and Order of the Commission unless any party to this case files a written request within thirty (30) days of the date of this decision to proceed to a Formal Hearing. Such a request shall be mailed to the address listed below and must include the Petitioner's name, address, and appeal number:

Utah State Tax Commission

Appeals Division

210 North 1950 West

Salt Lake City, Utah 84134

 

Failure to request a Formal Hearing will preclude any further administrative action or appeal rights in this matter.

DATED this 15 day of APRIL, 1997.

 

BY ORDER OF THE UTAH STATE TAX COMMISSION.

 

W. Val Oveson Richard B. McKeown

Chairman Commissioner

 

Joe B. Pacheco Alice Shearer

Commissioner Commissioner