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Are past due California sales taxes dischargeable in a Chapter 7 bankruptcy?

Yes. California sales taxes are not trust funds.  Therefore, they can potentially be discharged (forgiven, wiped out) in a Chapter 7 bankruptcy.  But you must meet the 5 requirements for discharge outlined below in this article.

See In re Raimon, 172 BR 933 (9th Cir BAP 1994); In re Ilko, 651 F.3d 1049 (9th Cir. 2011).  

In California (and some other states), sales tax is not assessed against the purchaser.  Instead, the tax is assessed against the retailer.  Therefore, rather than being a non-dischargeable trust-fund tax, they are a potentially dischargeable excise tax.

Courts have held that California sales tax is an excise tax (dischargeable if over 3 years old pursuant to 11 U.S.C. 507(a)(8)(E)).  It is also a tax based on gross revenue (and, therefore, similar to personal income tax) pursuant to 11 U.S.C. 507(a)(8)(A)).

Five Discharge Conditions: For bankruptcy discharge purposes, California sales tax is treated the same as an income tax.  Thus, California sales tax is dischargeable using the same 5 conditions for discharge of personal income taxes.

The five rules for discharge of personal income (and sales) taxes in Chapter 7 bankruptcy are:

(1) The most recent due date for the sales tax return is over three years before to the bankruptcy filing date (including any extensions given pursuant to CA Revenue and Tax Code 6459);

(2) The tax was assessed at least 240 days prior to the bankruptcy filing date;

(3) The tax return was filed more than two years before the bankruptcy filing date;

(4) The return was not fraudulent; and

(5) For each quarter at issue, the taxpayer did not willfully attempt to evade or defeat the tax.

Generally, all five conditions must be met for the sale tax debt to be discharged.

Little Known Fact: In California, customers are charged sales tax because it is a custom for retailers to pass on the sales tax to the customer. But customers are not legally responsible for the tax.  It is an excise tax to the retailer for doing business in state of California.


The information provided in this article is informational, only. The subject matter and applicable law is evolving and/or constant state of change. No legal advice is given and no attorney/client or other relationship is established or intended.  The information provided is from general sources, and I cannot and do not represent, guarantee or warrant that the information contained in this website is accurate, current, or is appropriate for the usage of any reader. It is strongly recommended that readers of this information consult with their own legal and/or professional counsel rather than relying on any information in this article.

This article contains only a summary of the treatment of sale taxes in Chapter 7 bankruptcy. The effect of certain activities which affect tax debts and other details of covered material herein have been omitted for simplicity.  

To determine whether or not and how the above bankruptcy tax laws apply to your particular situation, you are urged to seek counsel from an experienced and knowledgeable bankruptcy attorney or, alternatively, a tax attorney with specialized knowledge in bankruptcy discharge laws.

Copyright 2012

Article's Author: Christian Bankruptcy lawyer  Matthew B. Tozer.



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