Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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535.0000 SUCCESSOR'S LIABILITY—Regulation 1702

Annotation 535.0800

535.0800 Withhold by Purchaser—No Transfer of Cash. Corporation A holds a perfected security interest in Corporation B's inventory, equipment, receivables, and accounts to secure a promissory note and accounts receivable due from B to A. A is contemplating foreclosing on its security interest. A is also considering purchasing certain intangible property owned by B which is not encumbered by A's security interest. The consideration for the purchase of intangibles would be a credit or set off against B's indebtedness to A. If A acquires the intangible properties of B, it intends to operate B's business using the tangible personal property it expects to acquire through foreclosure. If A does not acquire the intangible property, it intends to resell the tangible personal property to an unrelated third party.

Even though A does not transfer any cash to B, A is liable for payment of B's unpaid sales tax if A completes the scenario as described above. The term "withhold" in section 6812 simply means dealing with purchase consideration in such a manner as to deny to the seller the benefit of the purchase consideration and to thereby make a portion of it available for satisfaction of the tax liability. (Knudsen Dairy Co. v. State Board of Equalization (1970) 12 Cal.App.3d 47, 55.) If, instead of the method discussed above, the tangible assets are actually acquired by a duly conducted foreclosure action, rather than a voluntary surrender or repossession, and A is the successful bidder at the foreclosure sale, this transaction would fall within the transfers pursuant to foreclosure of a mortgage exception to successor liability contained in Regulation 1702(a). Thus, A would not be liable for B's unpaid tax liability. 7/1/96.