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Governor Newsom’s Terrible Sales Tax Deferral Plan

| Dec 2, 2020 | CDTFA, IRS, New Laws |

On its face, deferral from paying over sales tax collected by California businesses may sound like a good idea.  As a seasoned tax attorney, I can tell you the many reasons this is a bad idea and I urge businesses not to fall for this “relief” which really is just a very high interest loan.

When business owners collect sales tax on their sales, they act as a fiduciary holding the money due from the customer to the California Department of Tax and Fee Administration (CDTFA).  The same is true for employers who withhold employees’ share of their employment taxes, which must be paid over to the IRS and the California Employment Development Department, on behalf of the employees for their employment taxes.

Few things make the government more aggressive than holding on to tax money that is not yours, and using it to pay bills or for purposes other than for what the customer or employee would have intended, i.e. sales taxes or employment taxes.

Governor Newsom announced that “small businesses” with less than $1 million in sales tax (which equates to over $10 million in sales in all counties) can defer paying the tax to the CDTFA for 90 days.  Business owners need to be aware this is not forgiveness for paying over the sales taxes to the CDTFA, but merely a deferral which is sure to cause a massive headache in the future.  Will three months really make a big difference?  Will it be worth finding that additional sum in three months to pay the CDTFA?  Apparently, businesses with sales up to $5 million will be able to enter into interest-free payment agreements.  Those with higher sales can expect to pay the CDTFA interest which is currently at a rate of 8%.

So picture three months from now, needing that nearly 10% in additional income to pay back the sales taxes, plus for many businesses, an additional 8% in sales tax.  I urge business owners to think carefully if they need to use these funds to keep their doors open, whether this relief is really the thing that will make them thrive in six- nine- or even 12-months from now.  Even if your business closes, you may still be responsible personally to repay the sales taxes to the CDTFA.  Governor Newsom forgot to mention that fine point, too.

 

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