Filing Bankruptcy on Sales Tax – This is like a girl that you got pregnant when you were bored or on vacation. You will be connected to them forever. You can’t discharge the debt, but you can file a Chapter 13 or 11 reorganization to pay it back over time – like your child support from my example.
When you are thinking about filing for bankruptcy, you have to put your debt into 1 of 2 categories: 1. Dischargeable, or
2. Non-dischargeable.
Bankruptcy Code §523 declares certain tax claims to be non-dischargeable. “Non-dischargeability” is a big deal. Non-dischargeable claims do not get erased by bankruptcy. No subsequent bankruptcy can ever erase them. The tax claims covered by Code §523 include (1) any tax, incurred at any time, if “required to be collected or withheld,” and (2) excise taxes accruing within the three years before bankruptcy.
The recent case of State of N.J. Div. of Taxation v. Michael Calabrese (In re Michael Calabrese), ___ B.R. ___ (D.N.J. 2011), makes clear that state sales taxes –accruing at any time before bankruptcy — fall into the category of loathsome disease. Business owners are therefore well-advised to ensure that they promptly and fully pay their sales taxes to the state. The consequences of failing to do so are permanent.
In the case, Michael Calabrese ran a bagel business, which unfortunately foundered. He was then forced into personal bankruptcy. New Jersey filed a claim for sales taxes that were collected from the business customers but never paid over to the State. However, these taxes had accrued more than three years before Calabrese’s bankruptcy, and he accordingly argued that they were “excise taxes” and, therefore, dischargeable as being beyond the three year window. The State argued that the taxes were “required to be collected or withheld” and therefore not subject to the three year limitation.
The court ruled for the State. It noted that no case law existed in New Jersey, and it therefore relied on decisions from the Second Circuit, in In re DeChiaro, 760 F.2d 432 (2nd Cir. 1985), and the Ninth Circuit in In re Shank, 792 F.2d 829, 832 (9th Cir. 1986), both of which supported New Jersey’s position. The court also looked to the policies behind the statute, finding that the purpose of collecting sales tax from customers at the time of sale is to ensure payment of such taxes to the State. Thus, the court held, a sales tax collected by a third party and owed to the State “is a tax clearly held in trust” and therefore non-dischargeable.
In conclusion, let’s go back to my opening sentence. A mistake is a mistake no matter how you look at it. Unlike DUI or even manslaughter, you will never get a mistrial or a motion to dismiss. This one is for life, unless you pay it back.