Sales Tax Debt: A Permanent Responsibility

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.

Classifying Debt in Bankruptcy

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.

What Sales Taxes Fall Under Non-Dischargeability

The tax claims covered by Code §523 include:

  • Any tax, incurred at any time, if “required to be collected or withheld”, and
  • Excise taxes accruing within the three years before bankruptcy

Case Example: In re Michael Calabrese

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.

Facts of the Case

  • Michael Calabrese ran a bagel business, which failed
  • He filed for personal bankruptcy
  • New Jersey filed a claim for sales taxes collected from customers but never paid to the state
  • These taxes had accrued more than three years before Calabrese’s bankruptcy
  • Calabrese argued they were excise taxes and thus dischargeable under the three-year window
  • The State argued the taxes were “required to be collected or withheld” and not subject to the three-year limitation

Court’s Ruling

The court ruled in favor of the State
As there was no precedent in New Jersey, it relied on:

  • In re DeChiaro, 760 F.2d 432 (2nd Cir. 1985)
  • In re Shank, 792 F.2d 829, 832 (9th Cir. 1986)

The court found:

The purpose of collecting sales tax from customers at the time of sale is to ensure payment of such taxes to the State

Therefore:

Sales tax collected by a third party and owed to the State “is a tax clearly held in trust” and is non-dischargeable

Conclusion: Sales Tax Debt is for Life

Let’s go back to the 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