Did a former employee become a successor merely by opening a similar business at the same location with the old phone number, suppliers, sign, and former owner present?

Plain-English summary

After one auto-accessory business stopped operating, a former employee opened a similar business at the same location the next day. She used some of the same suppliers and telephone number, retained a sign with the predecessor's name, and the former owner reportedly continued working there.

California found those facts insufficient to establish a purchase. There was no evidence that the new operator bought inventory or fixed assets, paid the predecessor's debts, assumed liabilities, or entered an express or implied sale agreement. Applying a $1,000 security deposit to the predecessor's tax was attributed to their relationship rather than payment for the business.

The decision said the facts possibly suggested that the petitioner was the predecessor's alter ego, but that was not the successor-purchaser theory before it. With no purchase price from which to withhold, sections 6811 and 6812 did not apply. The petition was granted.

What this means for you

New operators, former employees, landlords, and tax advisers

Operational continuity can trigger scrutiny, but successor liability still requires proof of a purchase or assumption of value under this theory. Keep records showing independently acquired inventory, equipment, leases, and supplier accounts.

Common questions

Q: Did the same location and phone number prove a purchase?

A: No.

Q: Was any consideration shown?

A: No.

Q: Did the decision rule out every collection theory?

A: No. It mentioned possible alter ego but did not decide it.

Citations and references

• California Revenue and Taxation Code §§ 6006, 6010, 6811, and 6812
• California Sales and Use Tax Regulation 1702
• People v. Buckles, 57 Cal. App. 2d 76 (1943)
• Knudsen Dairy Products Co. v. State Board of Equalization, 12 Cal. App. 3d 45, as cited in the source

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 535.0095
• Original supporting opinion: 535.0095 PDF

Original ruling text

535.0095
STATE OF CALIFORNIA
BOARD OF EQUALIZATION
BUSINESS TAXES APPEALS REVIEW SECTION
In the Matter of the Petition for
Reconsideration of Successor’s
Liability Under the Sales and
Use Tax Law of:
Petitioner

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DECISION AND RECOMMENDATION

The Appeals conference in the above-referenced matter was held by Paul O. Smith, Staff Counsel on March 23, 1994, in Sacramento, California. Appearing for Petitioner:

Appearing for the
Sales and Use Tax Department:

Robert O. Colivas
Tax Compliance Supervisor
Roger Schwarting
Senior Tax Representative
Protested Item

The protested tax liability for the period April 1, 1992 through December 31, 1992, is measure by: Amount

Item
Liability due as a successor to account number ______

$557,412

Petitioner’s Contentions
Petitioner contends that she is not subject to successor’s liability because she did not purchase the business or stock of goods of the predecessor. Petitioner also contends that this matter is without any legal basis at all, and is being pursued out of malice, ill will, and spite. Summary In November 1992, __ ceased the operation of his business at _. In this month
’s former employee, petitioner ___ secured a seller’s permit and commenced the operation of a similar business at the same location. Petitioner operated her business under the

535.0095
name __ and did auto window tinting. Petitioner also engaged in the sale and installation of auto alarms and auto stereos to individuals and auto dealerships, as well as the sale of auto accessories and auto sun roofs. According to an unexecuted “Standard Sublease” provided by petitioner, on November 20, 1992, petitioner entered into a sublease agreement for the premises with _ and . The agreement shows petitioner’s rent was $5,600 per month, payable inn weekly payment of $1,400. Though the landlord is not a party to this sublease or consented to its execution, the landlord accepted the rental payments by petitioner. Petitioner states that she did not purchase ’s inventory or fixed assets, and did not leave any of these items at the premises. Petitioner further states that she has not paid any of ’s liabilities.1 On may 23, 1994, petitioner provided copies of invoices that shows she purchased goods from (hereinafter ) under her dba name.2 Also included was a letter dated July 22, 1993, from to Mr. Colivas that acknowledged
knew that changed owners as well as [its] business name.” (See Exhibit A.) On April 13, 1993, Mr. Colivas requested the issuance of a successor billing to petitioner. Mr. Colivas made this request because: “1. owed delinquent taxes for the 2nd and 3rd quarters of 1992. When the Board began pursuing collection action he closed out his permit. Effective the next day, [petitioner] applied for a permit in her name changing the DBA from to . “2. and are boyfriend/girlfriend.3 “3. is still working in his business. An EWO has been sent but no response has been received, (we may refer this to the AG [Attorney General]). “4. is dealing with some of the same suppliers. “5. The telephone number for the business did not change. “6. Radio advertisements on FM 96.9 state is now . “7. The business sign still reads ___ as of April 5, 1993.” On May 13, 1993, the Sales and Use Tax Department (Department) issued a Notice of Successor’s Liability to petitioner, and on June 10, 1993, petitioner submitted a timely Petition for Reconsideration.

1

A letter dated January 28, 1993, from Mr. Robert O. Colivas, Tax Compliance Supervisor for the State Board of Equalization (hereinafter “Board”) requested petitioner to post a $1,000 bond. Petitioner posted a $1,000 cash bond, and one February 24, 1994 (when I believe she quit the business), instructed Mr. Colivas to apply the $1,000 against the outstanding tax balance of
______.
2

In a letter dated December 1, 1992, __ advised petitioner that her line of credit would be $1,500, subject to review in 90 days. A _ invoice dated December 21, 1992, acknowledged that was previously ___.

3
__’s ex-wife (_) is employed by the Board at the office where petitioner applied for her seller’s permit. Petitioner claims that the location of petitioner’s business was brought to the Board’s attention by ’s ex-wife. Mr. Colivas, however, states that he reviews all applications, and he was aware that the business address of and ___ were the same.

535.0095
Analysis and Conclusions
Revenue and Taxation Code section 6811 provides that, when a person with a sales or use tax liability sells a business or stock of goods or quits the business, his successor shall withhold an amount from the purchase price sufficient to cover the tax liability unless a receipt or certificate is obtained from the Board stating that no such liability existed. (See People v. Buckles (1943) 57 Cal.App.2d 76.) Section 6812 provides in relevant part that failure to obtain this documentation and to withhold the liability from the purchase price renders the purchaser personally liable for payment of the liability to the extent of the purchase price. (See also Cal. Code Regs., tit 18, reg. 1702.) When a statute seeks to impose the tax liability of one person on another to facilitate its collection, the tax laws are to be strictly construed in favor of the taxpayer. (See Knudsen Dairy Products Co. v. State Bd. of Equalization (1970) 12 Cal.App.3d 45, 52-53.) To hold petitioner personally liable for __ tax liability under sections 6811 and 6812, it must be established that petitioner was a purchaser of _ business. Absent the relationship of buyer and seller petitioner would not be in a position to withhold a sufficient amount of the purchase price to satisfy tax liability. (Id. at 53.) Here, petitioner states that she did not purchase inventory or fixed assets, and that
did not leave these items at the premises. There is no evidence of an express or implied agreement of sale between petitioner and regarding the business.4 In a purchase and sale, the purchase price need not necessarily flow directly to the seller. The buyer can make payment of the purchase price to some creditor or obligor of the seller, or assume some liability or obligation of the seller. Here, there is no evidence of the payment of the debts or obligation of
or the assumption of liabilities by petitioner. Though petitioner applied her
$1,000 security deposit to tax liability, I believe this occurred because of their relationship, not as a payment for the business. While it is true tat the day after closed out his permit, petitioner applied for a seller’s permit in the name .5 I do not consider this to be evidence of petitioner’s purchase of the business. Neither is the alleged relationship between petitioner and evidence of petitioner’s purchase of the business. The Department has interpreted the fact that is still working in his business; that petitioner dealt with some of ’s suppliers; that the business telephone number remained unchanged; that radio advertisements merely showed a name change from to ; and that the business sign still reads as evidence that the petitioner purchased the business. These facts suggests to me that possibly petitioner is the alto ego of ___, and not a successor to his business. Since there is no purchase price from which petitioner could withhold the tax liability owed by , I must conclude that sections 6811 and 6812, as interpreted by Title 18, California Code of Regulation 1702, are not applicable. (See also Knudsen Dairy Products Co. v. State Bd. of Equalization, supra, 12 Cal.App.3d at 53.) Further, since I have reached this

4

Section 6006 provides in relevant part that the term “sale’ means any transfer of title or possession of tangible personal property for a consideration. (See also Rev. & Tax. Code, § 6010 which provides a similar definition for the term purchase.)

5

It is my understanding that each application for a seller’s permit asks the applicant whether he or she is “buying a business”. If the reply is yes, the name and account number of the former owner, the purchase price, and value of fixtures and equipment must be given. I assume from the Department’s silence that petitioner did not answer this question in the affirmative.

535.0095
conclusion I need not address petitioner’s argument that the Department’s pursuit of this matter arises from malice, ill will, and spite. Recommendation Grant the petition.

Paul O. Smith, Staff Counsel

7/15/94
Date