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
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