Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2012
 

Sales And Use Tax Law

CHAPTER 6. COLLECTION OF TAX

Article 1. Security for Tax

Section 6701

6701. Security. The board, whenever it deems it necessary to insure compliance with this part, may require any person subject thereto, to place with it such security that the board may determine. Any security in the form of cash, government bonds, or insured deposits in banks or savings and loan institutions shall be held by the board in trust to be used solely in the manner provided by this section and Section 6815. The amount of the security shall be fixed by the board but, except as noted below, shall not be greater than twice the estimated average liability of persons filing returns for quarterly periods or three times the estimated average liability of persons required to file returns for monthly periods, determined in the manner that the board deems proper, or fifty thousand dollars ($50,000), whichever amount is the lesser. In case of a person who, pursuant to Section 6070 of this part, has been given notice of hearing to show cause why his or her permit or permits should not be revoked, or a person whose permit or permits has been revoked or suspended, the amount of the security shall not be greater than three times the average liability of persons filing returns for quarterly periods or five times the average liability of persons required to file returns for monthly periods, or fifty thousand dollars ($50,000), whichever amount is the lesser. The limitations herein provided apply regardless of the type of security placed with the board. The amount of the security may be increased or decreased by the board subject to the limitations herein provided. Security held by the board shall be released after a three-year period in which the person has filed all returns and paid all tax to the state or any amount of tax required to be collected and paid to the state within the time required. The board may sell the security at public auction if it becomes necessary so to do in order to recover any tax or any amount required to be collected, interest, or penalty due. Notice of the sale may be served upon the person who placed the security personally or by mail; if by mail, service shall be made in the manner prescribed for service of a notice of a deficiency determination and shall be addressed to the person at his or her address as it appears in the records of the board. Upon any sale any surplus above the amounts due shall be returned to the person who placed the security.

History.—Stats. 1945, p. 1725, operative July 1, 1945, added next to last sentence. Stats. 1947, p. 1557, operative July 1, 1947, added provision in second sentence limiting amount of security to three times estimated average liability of persons filing returns monthly. Stats. 1955, p. 1450, in effect September 7, 1955, substituted "place" and "placed" for "deposit" and "deposited", respectively, throughout section, added "except as noted below" in second sentence, and added third and fourth sentences. Stats. 1991, Ch. 236, in effect July 29, 1991, added the second sentence, and added "or her" after "him" in the fourth and eighth sentences. Stats. 1994, Ch. 903, in effect January 1, 1995, substituted "that" for "as" after "security" in the first sentence, substituted "the" for "such" after "determined in" and "that" for "as" after "manner" in the third sentence, and deleted former ninth sentence which provided, "Security in the form of a bearer bond issued by the United States or the State of California which has a prevailing market price may, however, be sold by the board at private sale at a price not lower than the prevailing market price thereof." Stats. 1996, Ch. 1087, in effect January 1, 1997, substituted "fifty thousand dollars ($50,000)" for "ten thousand dollars ($10,000)" in the third and fourth sentences, and added the seventh sentence.

Surety liable on bond.—Surety was held liable on a bond in effect prior to the termination of a prior bond by another surety when the subsequent bond stated the date of effectiveness and the surety collected the premium on the bond even though the board did not approve the bond until a later date, and the fact that both bonds total more than $10,000 did not preclude the board from asserting the claim against the subsequent bond. People v. Great American Ins. Co. (1963) 222 Cal.App.2d 552.

Duplicate notice to surety not required.—Plaintiff, an insurance company acting as surety for persons required to post security for payment of sales and use taxes, sought a refund of certain penalties paid by it on its bonds. Plaintiff contended that it was entitled to duplicate notice of tax determinations issued against its principals, so that it could make payment of the tax before the determinations become final and penalties were added thereto. The court, in affirming the judgment of the trial court, held that there is no constitutional compulsion for the state to give a duplicate notice to the surety; notice to the taxpayer is sufficient. Nor was this a situation requiring notice to the surety under Civil Code Section 2808, because the surety could have acquired notice of default from its principal through the exercise of due diligence. Lastly, the court held this was not an illegal agreement to indemnify a wrongdoer prohibited by Civil Code Section 2773, because here the indemnity was for the benefit of the State under a reasonable procedure to secure payment of revenue. American Fidelity Fire Insurance Co. v. State Board of Equalization (1973) 34 Cal.App.3d 51, cert. denied (1974) 415 U.S. 990.

Surety liable for penalties and interest on transactions occurring prior to cancellation of bond.—The State of California sought to enforce respondent's liability on a surety bond for penalties and interest assessed against respondent's principal subsequent to the effective date of the cancellation of the bond. The penalties and interest were assessed for transactions all of which had occurred prior to the cancellation date. The contract of surety provided that the surety could terminate its liability to the extent and in the manner set forth in Civil Code Section 2851, but that in no event would the surety be relieved from liability as respects transactions occurring before the effective date of cancellation of the bond. The surety contended that it was not liable for penalties and interest assessed subsequent to the cancellation of the bond since Civil Code Section 2851 provides that after the effective date of cancellation ". . . the surety is relieved of all liability which otherwise thereafter would arise on its bond." The court, observing that Section 2851 does not stand alone but must be applied to the contract of surety, held that respondent had waived the provisions of Civil Code Section 2851 and had agreed to be liable for the sums at issue. Since no public policy dictated that the agreement not be enforced, its terms were binding upon respondent. People v. Pacific Employers Ins. Co. (1973) 36 Cal.App.3d 296.

Surety not exonerated because of taxpayer's waiver.—A surety who had guaranteed the tax liability of the taxpayer was not exonerated of such liability because of a waiver signed by the taxpayer extending the time in which the Board might issue a delinquency determination. The language of the Board's standard guarantee form that "the surety's liability shall be coextensive with that of the taxpayer" overrides the provision of Civil Code Section 2819 exonerating a surety if the terms of the principals obligations are altered without the surety's consent. State Board of Equalization v. Carleton (1990) 223 Cal.App.3d 1607.

Bankruptcy.—Property held by the Board as security prior to the taxpayer's filing of a petition for reorganization pursuant to Chapter 11 of the bankruptcy law belongs to the bankruptcy estate and is not immune from the claims of general creditors. The Board violated the automatic stay in bankruptcy by cashing the certificate of deposit taken as security from the taxpayer. In re Sluggo's Chicago Style, Inc. (9th Cir., 1990) 912 F.2d 1073.