We all have paid sales taxes when purchasing consumer items. But where does that money go?
In most states, a merchant selling consumer products is required to collect sales tax from customers and hold that money in trust for the government. Periodically, the merchant is required to report the amount of sales taxes collected and to tender the tax money to the government.
However, some merchants fail to tender the money to the government when business is bad and use the trust fund money as a cash infusion to keep the business afloat. It’s a terrible idea from a bankruptcy attorney’s point of view, but merchants struggling to keep their doors open sometimes grab any life-line they can reach.
Such was the case in Cooper v. Miss. Dep’t of Revenue (In re Cooper), 2015 Bankr. LEXIS 3261, (Bankr. S.D.MS 2015). Cooper was audited by the Mississippi Department of Revenue for a three year period and assessed almost $60,000 in unpaid sales taxes. MDOR filed a lien to secure its claim and started collection efforts against Cooper.
Two years later, Cooper responded by filing Chapter 13 bankruptcy and then initiated an adversary proceeding alleging the sales tax debt was dischargeable. However, the court noted that Cooper failed to site any Bankruptcy Code sections or case law supporting Cooper’s position. MDOR filed a motion for summary judgment asserting that there are no factual issue in dispute and MDOR is entitled to a judgment that the sales tax debts are non-dischargeable. MDOR’s claim had increased with interest to approximately $70,000.
The Court granted MDOR’s motion and held that the sales tax debts were non-dischargeable pursuant to 11 U.S.C. §§523(a)(1)(A) and 507(a)(8)(A). The court’s reasoning for nondischargeability was limited to a one paragraph declaration. Interestingly, MDOR did not allege that the taxes were nondischargeable pursuant to § 507(a)(8)(C), which would have been harder to discharge. But MDOR’s attack on a §507(a)(8)(A) basis opened a dischargeability door for Cooper to walk through, but Cooper failed to take advantage of this strategic opening and had to suffer the consequences of having $70,000 worth of tax debts rendered non-dischargeable.
Practice Pointer: The taxpayer missed an opportunity to discharge the sales tax debt. According to the Cooper court, the sales taxes were a §507(a)(8)(A) tax. This type of debt could have been discharged if the taxpayer had waiting the required time periods set forth in 11 U.S.C. §§523(a)(1)(A) and 507(a)(8)(A). Cooper should have considered before filing bankruptcy the 3-year due date rule, 2-year filing date rule, and the 240-day assessment rule. But Cooper failed to time the filing correctly, which resulted in Cooper not discharging the $70,000 claim. Cooper should have made the investment and paid a little more to acquire expert legal advice.
For follow-up questions, contact attorney Robert V. Schaller by clicking here.