By Morgan D . King , of Morgan King Company & Morgan King Law Offices

SALES TAXES

Assuming the reader is at least somewhat familiar with the “ five rules for income tax discharge ,” this essay addresses several related topics . 1

One of these is discharging state sales or excise taxes .

Most states have some form of sales or excise tax . 2 It depends , as a threshold question , on the definition of a “ sales ” tax or other term more or less meaning the same thing . 3 This is a question of respective state law .

In a nutshell , a tax imposed on the customer , which typically is required to be collected by the retailer and turned over to the state , is a sales tax 4 that is equivalent to a trust-fund tax under § 507 ( a )( 8 )( C ), and hence is nondischargeable . 5

1 The author thanks attorneys Reba Wingfield ( AR ), Larry Heinkel ( FLA ), Steven Benda ( CA ), Lavar Taylor ( CA ), Nicolas Corry ( AR ), Daniel Press ( VA ), Mark Sharf ( CA ), and Mark Segal ( NV ) for their helpful comments on certain issues in the topic .

2 The five that do not are Alaska , Delaware , Montana , New Hampshire , and Oregon .

3 For example , terms associated with this issue include sales tax , excise

tax , and use tax .

4 Fugitt v . Mississippi Department of Revenue , 539 B . R . 289 , 304 ( Bankr . S . D . Miss . 2014 ).

5 Rosenow v . Illinois Dept . of

In contrast , a tax imposed on the retailer only is an excise tax for the privilege of doing business in the state , and is ordinarily dischargeable if the sales event occurred or a return due date was over three years before the bankruptcy is filed , pursuant to § 507 ( a ) ( 8 )( E ). 6

In order to determine whether the tax is dischargeable the attorney will have to identify the category the tax falls into based on the respective state law . In doing that exercise , it is probably prudent to not place too much significance on the name given to the tax by the state statute , whether excise , sales , or other term , because the title the state statute gives to the tax is not the controlling factor , but rather the entity upon whom the tax assessed , i . e ., the retailer or the customer .

States sometimes muddle the issue of what category the tax falls into , by mixing up the titles . In a recent case 7 the state statute required the retailer to collect the tax from the customers , even though it might be called an excise tax . Hence , if the retailer collected the tax but did not turn it over to the state , it was nondischargeable . And , the court attempted to address , albeit not artfully , whether the retailer ’ s failure to collect

Revenue , 715 F . 2d 277 ( 1983 ); In re King , 117 B . R . 339 ( Bankr . Tenn . 1990 ); In re Shank , 792 F . 2d 829 ( 9 th Cir . 1986 ).

6 In re Groetken , 843 F . 2d 1007 ( 7 th Cir . 1988 ). 11 U . S . C . § 507 ( a )( 8 )( E ) ( i ).

7 Fugitt , at 538-539 . the tax made a difference .

The question may be asked , to be dischargeable does an excise tax have to satisfy the 5 rules imposed on the dischargeability of ordinary income taxes ?

At least one case has held that the “ 5 rules ” (§ 523 and § 507 ) ordinarily applicable only to personal income taxes , also apply to state excise taxes by ruling that the California excise tax is subject to § 507 ( a )( 8 )( A ), describing a tax “ on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition … for which a return , if required , is last due …” etcetera .

This language describes personal income taxes . The court ruled that the California tax falls into that category as well as that of an excise tax , and hence the 5 applicable requirements of § 523 and § 507 for personal income taxes also applied to the sales / excise taxes . 8

That , in turn , may raise another question , and that is , is the document the retailer is supposed to file with the state to report sales or excise taxes a “ return ,” or “ equivalent report or notice ” required to be filed by § 523 ( a )( 1 )( B )? The Code draws a distinction , at least as to excise taxes , and excepts from discharge taxes for which -

§ 507 ( a )( 8 )( E )( i ) a transaction occurring before the date of

8 In re Raiman 172 B . R . 933 ( 9 th Cir . BAP 1994 ).

18 CONSUMER BANKRUPTCY JOURNAL Summer 2016 National Association of Consumer Bankruptcy Attorneys