Did a secured creditor's prior UCC filing entitle it to the sales-tax reimbursement component of a retailer's receipts?

Plain-English summary

California legal staff concluded that a secured creditor's earlier UCC filing did not entitle it to the sales-tax reimbursement component of a retailer's receipts.

The letter said a seller may contract for reimbursement of the tax it owes California, but that reimbursement is not part of the selling price available to satisfy a secured claim. Allowing the seller or security holder to keep it while the tax remained unpaid would create unjust enrichment.

California therefore intended to retain the collected reimbursement to reduce the seller's tax debt. If reimbursement had not been collected, the secured creditor had no claim to a hypothetical equivalent amount, although the retailer still owed the tax.

Common questions

Did the secured filing otherwise have priority?

The letter recognized that the earlier UCC filing was superior to the Board's lien.

Could the creditor claim collected sales-tax reimbursement?

No.

What if the retailer never collected reimbursement?

The creditor could not claim an equivalent amount, but the retailer's tax still remained due.

Citations and references

• California Civil Code section 1656.1 — contractual tax reimbursement discussed
• Decorative Carpets, Inc. — unjust-enrichment principle discussed by name in the source

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/170-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/170-0260.pdf

Original ruling text

170.0260

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM K. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-2705

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

June 22, 1992

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

REDACTED TEXT

Re:

REDACTED TEXT

REDACTED TEXT:
Thank you for your frank telephone discussion of the issues in the case of the above entitled account. As I stated, while the Decorative Carpets, Inc. case involved excess tax reimbursement, it also clearly stands for the proposition that the seller of tangible personal property cannot be unjustly enriched at the expense of the consumer or the state. If I, as a retailer, sell tangible personal property to you, I may contract with you as the purchaser to “reimburse” myself for the tax I am obligated to pay to the state. (See civil Code § 1656.1). If I do not pay the tax to the state, what have I collected but something other than “reimbursement”. By the same token, a third party cannot be unjustly enriched by taking the “reimbursement” which is not part of the selling price as part of its security interest. If tax reimbursement is not collected by the seller, a third party with a security interest has no right to an amount equal to what was not collected. However, the tax is still due and owing to the state regardless of whether such reimbursement was collected or not. In the case at hand, while it is recognized that a Uniform Commercial Code filing, which is recorded prior in time to the Board's lien, is superior, the amount equal to the sales tax reimbursement should not be part of the receipts that is payable to a third party since that which would result is unjust enrichment to the seller would also unjustly enrich the security holder. Therefore, we intend to retain an amount equal to the sales tax reimbursement that was collected in order to reduce the tax obligation of the seller for tax liability due and owing to the State of California.

REDACTED TEXT

-2-

June 22, 1992
170.0260

If you have further questions, please do not hesitate to call. Very truly yours, Gordon P. Adelman Senior Tax Counsel GPA:sr cc:

Mr. Alan Giorgi
Sacramento District Compliance