Bankruptcy and Sales Tax Problems

A sales tax debt is a tough debt to have. Because of penalties and personal liability, bankruptcy may sometimes be the only way to manage a tough sales tax problem.

What is the sales tax and who is required to pay it?

The Massachusetts sales tax is 6.25% of the sales price or rental charge of tangible personal property sold or rented inside the commonwealth. The sales tax is required to be charged by all “sales tax vendors” to the purchaser at the time of sale. Sales tax vendors are any person or business that sells, rents or leases tangible personal property that is subject to the Massachusetts sales tax. Certain products are exempt from the sales tax, including food (but not meals in restaurants), clothing, newspapers, magazines, event tickets and sales of utilities and heating fuel to residential customers. You can get more details about sales tax in MA here.

All Massachusetts sales tax vendors are required to collect from their customers the sales tax on the actual retail price (not including sales or discounts) at the time of sale of all property subject to the tax. Vendors must separately itemize the tax in any invoices, receipts, bills or contracts.

Vendors must pay the Massachusetts sales tax when they file their sales tax returns with the Department of Revenue. Most businesses are required to file electronically using the Department of Revenue’s online system, Webfile for Business. The required frequency of filing depends on how much sales tax an individual or business collects in a given period. For businesses collecting less than $100 in sales tax in a given year, the sales tax return need only be filed once a year. For businesses collecting between $101 and $1,200 in a year, the sales tax return must be filed quarterly. For businesses collecting more than $1,201 a year, the sales tax return is due monthly. All returns must be filed within 20 days of the end of the reporting period.

Are there penalties for failing to pay sales tax or file returns?

Yes, the penalty for failing to pay sales tax is one percent of the amount due for each month (or any portion of a month) that the tax remains unpaid, up to 25% of the total amount due. There is also a penalty for failing to file a required a sales tax return on time. Like the penalty for failure to pay, the penalty for failure to file is equal to one percent of the tax owed (whether paid or not) for the filing period for each month (or any portion of a month) that the return is not filed, up to 25% of the tax reported for that period. In addition to the penalties, interest is charged on any amounts due at a rate equal to the federal short term rate (which can change quarterly) plus four percentage points. Once it has assessed an unpaid sales tax liability, the Department of Revenue has the power to issue bank levies, place liens on property, or even seize business assets to get what it can.

My business is organized as a limited liability company, corporation or partnership, can I be held personally liable for the business’ sales tax liabilities?

Yes, Massachusetts law imposes personal liability on the individual responsible for the collection of sales tax on behalf of a business. This “responsible party” is generally an officer, manager or director of the business. Personal liability can be assessed against an individual regardless of whether the sales tax was actually collected from the customer at the time of sale and regardless of whether the responsible party was personal aware of the failure to collect or pay the tax. Once a personal liability against a responsible party has been assessed, the Department of Revenue can enforce it against that individual’s personal property, even if the business ceases operations. Responsible party liability can be enforced for up to 10 years after the date of the assessment of the liability.

How can the bankruptcy system help deal with sales tax related debts?

The Bankruptcy Code is a federal law which, under the United States Constitution, supersedes all conflicting state laws, including those regarding the enforcement and collection of sales taxes. While the Bankruptcy Code does not allow a business to discharge its sales tax liabilities completely, it provides important protections from enforcement actions, including restrictions on the imposition of liens and allows for reasonable payment plans of sales tax liabilities.

In many cases, bankruptcy can discharge penalties that have accrued prior to a bankruptcy filing and will stop future penalties from accruing during and after the bankruptcy process. Even if the Department of Revenue has already placed a lien on property, once in Bankruptcy, that lien can be reduced to an amount equal to the value of the business’ assets, rather than the amount of tax, penalties and interest owed. Addressing sales tax liabilities in bankruptcy proceedings is very complex and requires careful analysis of each individual case.

Our firm is highly experienced in helping individuals and businesses deal with sales tax debts through the bankruptcy process. If you or your business owes Massachusetts sales taxes, feel free to contact our office at 617-338-9400 for a free consultation with one of our attorneys.