A Company Officer’s Guide to Surviving a CDTFA Dual Determination

Part I: The Threat to Your Personal Assets: Understanding the CDTFA Dual Determination

Receiving a notice from the California Department of Tax and Fee Administration (CDTFA) threatening personal liability for a business’s tax debt is a source of significant stress for any corporate officer, director, or manager. This action, known as a dual determination, represents a serious attempt by the state to bypass the traditional liability protections of a corporation or LLC and collect unpaid sales and use taxes directly from an individual’s personal assets. Understanding the legal basis, preconditions, and scope of this threat is the first step toward building an effective defense.

What is a Dual Determination? Beyond the Corporate Shield

The core principle of forming a corporation or a limited liability company (LLC) is to create a legal shield that separates business debts from the personal finances of its owners and managers.¹ However, this shield is not absolute, particularly when it comes to certain tax liabilities. A dual determination is the CDTFA’s primary legal tool for piercing this corporate veil for unpaid sales and use taxes.²

The term “dual determination” signifies that the CDTFA issues two parallel and mirroring assessments for the exact same tax liability: one against the business entity and a second against one or more individuals deemed personally responsible.³ This gives the agency two distinct targets for collection. The CDTFA can pursue the defunct business’s assets (if any remain) while simultaneously taking collection action against the individual’s personal bank accounts, wages, and property.³ Officially, the CDTFA defines a dual determination as a “deficiency assessment issued to a person other than the person who incurred the primary liability”.⁶ Internally, the agency may refer to the targeted individual as a “dualee”.⁷

This personal assessment is comprehensive and can be financially devastating. It includes not only the principal amount of the unpaid sales or use tax but also all accrued interest and penalties associated with that debt.⁵ It is critical to distinguish this specific California liability from other forms of personal tax liability. A CDTFA dual determination for sales tax is governed by a unique set of state laws and should not be confused with the federal “Trust Fund Recovery Penalty” for unpaid payroll taxes or personal liability assessments from California’s Employment Development Department (EDD), which are subject to different rules, triggers, and legal tests.⁴ This analysis focuses exclusively on the CDTFA sales and use tax dual determination.

The Legal Foundation: Revenue and Taxation Code § 6829

The CDTFA’s authority to impose personal liability for business sales tax debt is not arbitrary; it is explicitly granted by a specific state law: California Revenue and Taxation Code (RTC) § 6829.² This statute outlines the precise circumstances under which an individual can be held responsible for the tax obligations of a business entity, including corporations, partnerships, limited partnerships (LPs), limited liability partnerships (LLPs), and LLCs.¹²

The foundational requirement of RTC § 6829 is that personal liability can only be imposed “upon the termination, dissolution, or abandonment” of the business.⁹ This is a crucial limiting factor. Unlike certain federal or EDD liabilities that can be assessed while a company is still a going concern, the CDTFA must wait until the business has ceased operations to pursue individuals under this statute.¹⁰ This condition establishes a clear line of demarcation; for a struggling business, the moment of official closure is what activates the potential for personal exposure under RTC § 6829.

Key Preconditions for Liability

Before the CDTFA can even begin to evaluate whether a specific individual is a “responsible person,” two fundamental preconditions must be met. The absence of either of these conditions can serve as a complete defense against a dual determination assessment.

First, as established by RTC § 6829, the business must have been terminated, dissolved, or abandoned.¹⁰ If the business is still actively operating, even if it is delinquent on its sales tax payments, the CDTFA cannot use this statute to assess personal liability against its officers. This creates a narrow but critical window for strategic planning. For instance, a company facing financial hardship may have the opportunity to negotiate a payment plan for the

business to address the delinquency, potentially staving off the closure that would trigger the officers’ personal liability exposure.

Second, personal liability under RTC § 6829 is predicated on the business having collected sales tax reimbursement from its customers and then failing to remit those funds to the state.⁵ The law also applies if the business consumed tangible personal property and failed to pay the corresponding use tax.¹⁵ This is a vital point: if the sales tax was never actually collected from customers for the transactions in question, this specific type of personal liability does not apply.¹³ The CDTFA bears the burden of establishing that tax reimbursement was included in the selling price, whether it was itemized separately or embedded in the total price.⁵ This means a potential defense can be built by demonstrating through sales records and invoices that tax was not, in fact, collected on the sales for which the CDTFA is now seeking payment from an individual. These two preconditions act as gatekeepers, and a thorough analysis of whether they have been met should be the first step in evaluating any dual determination threat.

Part II: The CDTFA’s Case: Proving Personal Liability

Once the preconditions of business closure and collected-but-unremitted tax are met, the CDTFA must prove two additional legal elements to successfully impose personal liability on an individual. The agency must build a case with specific, factual evidence to demonstrate that the individual was both a “responsible person” and that their failure to pay the tax was “willful”.³ A failure by the CDTFA to prove either of these elements by the required standard of evidence will defeat the assessment.

The First Hurdle: Are You a “Responsible Person”?

The term “responsible person” is broadly defined by statute to include any officer, member, manager, employee, director, shareholder, partner, or any “other person” associated with the business.⁵ However, the law is explicit that merely holding one of these titles is, in and of itself, insufficient to establish liability.³

To be deemed a responsible person, the CDTFA must prove that the individual had actual “control or supervision of, or who is charged with the responsibility for, the filing of returns or the payment of tax” or who had a “duty to act” for the company in its tax compliance.⁵ This is a functional test based on a person’s actual duties and authority, not their title. In its investigation, the CDTFA will scrutinize corporate records, bank documents, and witness testimony to determine who had genuine financial authority. Key factors include ²:

• Authority to sign checks or make electronic payments.
• Control over corporate bank accounts and financial decisions.
• Involvement in the preparation, review, or signing of sales tax returns.
• The power to hire and fire financial personnel, such as bookkeepers or controllers.
• Ultimate authority to decide which creditors were paid and when.

The CDTFA bears the burden of proving responsible person status by a “preponderance of the evidence,” meaning it is more likely than not that the individual meets the criteria.¹⁵ However, the law provides a significant protection for lower-level employees. If the targeted individual is

not an officer, member, partner, or manager with an ownership interest, they are legally presumed not to be a responsible person. To overcome this presumption, the CDTFA must present “clear and convincing evidence,” a higher and more difficult standard of proof to meet.¹⁵ It is also worth noting that the statute provides a specific exemption for any person serving as an unpaid volunteer for a non-profit organization.⁵

The “De Facto” Officer: Lessons from the Appeal of Monzon Case

The distinction between a formal title and functional authority was powerfully illustrated in the recent Appeal of Monzon case before the California Office of Tax Appeals (OTA).² In this case, an individual, Mr. Monzon, was held personally liable for a company’s unpaid sales tax even though he was not an owner of the business, nor did he hold any formal officer title.¹¹

The OTA determined that although someone else was the official Chief Financial Officer (CFO), Mr. Monzon had acted as the “de facto” CFO. The evidence showed that he was the one who actually filed tax returns, made online payments to the CDTFA, and was the primary contact communicating with tax authorities on behalf of the business.² The

Monzon ruling serves as a stark warning: an individual’s actions and day-to-day responsibilities are what ultimately determine liability. A person who assumes the duties of a financial officer cannot later hide behind the lack of a formal title to escape personal responsibility.²

The Second Hurdle: Was Your Failure to Pay “Willful”?

Even if the CDTFA proves an individual is a responsible person, it must still clear a second, equally important hurdle: proving the failure to pay the tax was “willful”.² The legal definition of “willful” is often misunderstood by business owners, with dangerous consequences.

Under RTC § 6829 and its implementing regulation, “willful” simply means the failure to pay was the result of a “voluntary, conscious and intentional course of action”.⁵ Critically, a willful failure does

not require a bad purpose, evil motive, or intent to defraud the state.⁵ An officer who uses collected sales tax funds to pay other “more urgent” creditors, such as rent or key suppliers, in a good-faith attempt to keep the business afloat, has still acted willfully in the eyes of the law. This is because they made a conscious decision to pay another creditor instead of the state.

To establish willfulness, CDTFA Regulation 1702.5 requires the agency to prove all three of the following elements ¹⁵:

1. Actual Knowledge: The responsible person had actual, subjective knowledge that the sales taxes were due but were not being paid. This is not a “should have known” standard; the CDTFA must prove the person actually knew.
2. Authority to Pay: The person possessed the authority to pay the taxes (or direct their payment) both on the date the taxes came due and at the time they had actual knowledge of the delinquency. A powerful defense can arise here if the individual can prove they required approval from a superior, a partner, or a board to make tax payments and that such approval was withheld.¹⁵
3. Ability to Pay: At the time the responsible person had actual knowledge of the unpaid tax, the business had sufficient unencumbered funds to pay the liability, but the person chose to use those funds for other purposes. The CDTFA will often examine bank statements from the periods when taxes were due to see if funds were available and were used to pay other creditors.² If the business truly had no funds available, the willfulness element may not be met.

The CDTFA’s need to prove each of these distinct elements creates multiple potential points of failure for its case and, consequently, multiple avenues for a robust legal defense.

Part III: The Path to Personal Assessment: From Investigation to Notice

The journey from a closed business’s tax debt to a personal liability assessment follows a distinct procedural path. The CDTFA does not act rashly; it conducts an investigation designed to build a legal case against an individual. Understanding this process is essential for recognizing critical junctures where timely legal intervention can significantly alter the outcome.

The Investigation Begins: Audit Triggers and Information Gathering

A personal liability investigation typically originates from a standard sales tax audit of the business.¹⁸ While audits can be random, they are often triggered by specific red flags, such as a history of late filings, a high ratio of exempt sales, or operating in an industry known for non-compliance.¹⁸ However, one of the most significant triggers for the CDTFA to begin scrutinizing individuals is the termination, dissolution, or abandonment of a business that has an outstanding sales tax liability.¹⁸

Once triggered, investigators will create an initial list of potential targets. They do this by reviewing their own internal records, such as the original seller’s permit application and past tax returns, as well as public records from the California Secretary of State that list corporate officers and directors.⁴ The CDTFA is known for casting a wide net at this stage, often assessing liability against as many individuals linked to the business as possible to maximize its chances of collection.¹⁹

The Responsible Person Questionnaire and CDTFA Interview

After identifying potential targets, the CDTFA employs specific tools to gather evidence. The primary instrument is the “Responsible Person Questionnaire”.⁴ This is not a neutral survey; it is a formal investigative document designed to elicit information and admissions that can be used to satisfy the legal tests for “responsible person” status and “willfulness.”

Alongside the questionnaire, the CDTFA will typically request an interview and an array of documents, including corporate minutes, bank statements, account signatory cards, and cancelled checks for the periods in question.³ It is of paramount importance that any individual who receives such a questionnaire or a request for an interview understands the legal jeopardy they are in. Completing the form or speaking with an investigator without first securing legal representation is a profound risk. The answers provided can, and will, be used to build the legal case against the individual.³ The most prudent course of action is to decline any direct communication and refer the agency to a qualified tax attorney.

The Notice of Determination: The 30-Day Clock Starts Now

If the CDTFA’s investigation leads it to believe it has sufficient evidence to prove both responsibility and willfulness, it will formalize its assessment by issuing a “Notice of Determination” for personal liability to the individual.⁵ This is the official billing document that assesses the specific amount of tax, interest, and penalties against the person.⁵

The issuance of this notice is a pivotal moment because it starts a critical, and unforgiving, countdown. The recipient has exactly 30 days from the date printed on the notice to file a formal appeal, known as a “Petition for Redetermination”.⁵ If this 30-day deadline is missed, the assessed liability becomes final, due, and legally payable. At that point, the right to appeal is forfeited, and the CDTFA can begin enforced collection actions.²²

Critical Deadlines: Understanding the Statute of Limitations

The CDTFA does not have an unlimited amount of time to pursue a dual determination. The law imposes a strict statute of limitations on how long the agency has to issue a Notice of Determination for personal liability. This deadline is the earlier of two distinct time periods ⁵:

1. Three Years from “Actual Knowledge”: The CDTFA has three years to issue the notice, with the clock starting on the last day of the calendar month following the quarterly period in which the agency obtains actual knowledge of the business’s termination, dissolution, or abandonment.
2. Eight Years from Termination: The CDTFA has eight years to issue the notice, with the clock starting on the last day of the calendar month following the quarterly period in which the business was actually terminated, dissolved, or abandoned.

The definition of “actual knowledge” is key. The law specifies that this knowledge must be obtained through the CDTFA’s own audit or compliance activities, or via a direct written communication from the business or its representative informing the agency of the closure.⁵

This creates a dangerous trap for the uninformed business owner. Many assume that filing dissolution paperwork with the Secretary of State is sufficient notice. However, the law is clear: notifying any other state or local agency does not constitute “actual knowledge” for the CDTFA and therefore does not start the shorter, three-year statute of limitations.³ A business owner who quietly closes their doors and only notifies the Secretary of State, hoping the CDTFA will not notice, is making a grave strategic error. This failure to provide direct, written notice to the CDTFA means the three-year clock never starts, leaving the individual exposed to personal liability for the much longer eight-year period.¹⁰ Counter-intuitively, the most protective action an owner of a failing business with tax debt can take is to proactively send a certified letter to the CDTFA explicitly stating that the business has terminated. This single action starts the three-year statute of limitations running on their own personal liability exposure.

Part IV: Mounting Your Defense: Challenging the Dual Determination

Receiving a Notice of Determination for personal liability is the beginning of a formal legal dispute, not the end. A robust framework exists for appealing the assessment and challenging the CDTFA’s case. However, navigating this process requires immediate action, strategic planning, and a deep understanding of the procedural rules and effective defense arguments.

Immediate Steps After Receiving a Notice

The actions taken in the first few days after receiving a dual determination notice are critical and can set the tone for the entire case. The following steps are essential:

• Step 1: Do Not Ignore the Notice. The 30-day appeal deadline is absolute. Ignoring the notice will result in the liability becoming final and enforceable.²²
• Step 2: Do Not Contact the CDTFA Directly. As with the initial investigation, all direct communication should cease. Any statements made, even with the intent to cooperate, can be misinterpreted or used to weaken a potential defense. All communication should be handled by a legal representative.³
• Step 3: Immediately Engage an Experienced Tax Attorney. The complexities of RTC § 6829, the rules of evidence, and the tight deadlines of the appeals process make professional representation indispensable. An attorney can immediately take steps to preserve appeal rights and begin formulating a defense strategy.³
• Step 4: Preserve All Records. All business and personal financial records related to the audit period must be gathered and preserved. This includes bank statements, check registers, corporate minutes, operating agreements, emails, and any correspondence related to the company’s finances and tax compliance.³ These documents are the raw material for building a defense.

The Formal Appeal: Filing a Petition for Redetermination

The first official step in challenging the assessment is to file a “Petition for Redetermination” with the CDTFA.²² This must be done within the 30-day window from the date on the Notice of Determination.²³

The petition must be in writing and, at a minimum, must identify the account number, state the specific amounts being disputed, explain the grounds or reasons for the appeal (i.e., why the individual believes they are not liable), and be signed by the individual or their authorized representative.²⁴ The CDTFA provides a specific form for this purpose, CDTFA-416, “Petition for Redetermination,” which can be submitted by mail or through the CDTFA’s online services portal.²³ While the form can be used, a more detailed petition drafted by an attorney is often advisable to properly frame the legal arguments from the outset.

Strategic Defenses and Factual Arguments

A successful appeal hinges on systematically dismantling the CDTFA’s case. This involves presenting evidence and arguments that directly counter the elements of “responsible person” status and “willfulness.”

• Challenging “Responsible Person” Status: The goal is to prove a lack of actual authority or control over tax matters. Effective evidence can include ²:
  • Corporate bylaws, LLC operating agreements, or partnership agreements that explicitly assign the duty for tax compliance to another individual.
  • Board meeting minutes or internal communications demonstrating that another officer or partner had overriding authority on financial matters.
  • Proof that check-signing authority was limited (e.g., required a co-signer who refused to approve tax payments) or that the individual was not a signatory on the relevant bank accounts.
• Refuting “Willfulness”: This is often the most effective area of defense, as it requires the CDTFA to prove a specific state of mind and a chain of events. Key arguments include ³:
  • Lack of Knowledge: Demonstrating that the individual was justifiably unaware of the tax delinquency. This can be supported by showing reasonable reliance on a seemingly competent bookkeeper, CPA, or business partner who concealed the problem.
  • Lack of Authority: Providing evidence that the individual needed approval from a superior to make the tax payment, and that approval was explicitly denied. This directly negates the second prong of the willfulness test.
  • Lack of Ability: Using bank statements to prove that the business had insufficient funds to pay the tax liability when it came due. This counters the CDTFA’s argument that the individual had the ability to pay but chose to pay other creditors instead.
  • Intentional Interference: Presenting evidence that another individual within the company actively prevented the tax payment, for example, by misappropriating or diverting corporate funds for personal use. This can shift liability away from the targeted person.³
• Asserting a Statute of Limitations Defense: This is a complete bar to the assessment if it can be proven. The defense involves a meticulous reconstruction of events to show that the CDTFA issued its Notice of Determination after the applicable three-year or eight-year period had expired.³ This requires pinpointing the exact date the business terminated and, crucially, the date the CDTFA gained “actual knowledge” of that termination.

Navigating the CDTFA Appeals Bureau and the Office of Tax Appeals (OTA)

Filing a petition initiates a multi-stage administrative appeals process.

1. CDTFA Appeals Conference: Initially, the case is typically reviewed within the CDTFA’s Business Tax and Fee Division. If not resolved, it can proceed to an informal appeals conference with an impartial staff member from the CDTFA Appeals Bureau. This conference provides an opportunity for both sides to present their arguments and evidence in a less formal setting.²²
2. Appeal to the Office of Tax Appeals (OTA): If the dispute is not resolved to the individual’s satisfaction within the CDTFA, the agency’s decision can be appealed to the Office of Tax Appeals (OTA). The OTA is a completely separate and independent state agency created to provide a neutral forum for resolving tax disputes.²⁴ An appeal to the OTA must generally be filed within 30 days of the CDTFA issuing its final decision.²⁶
3. The OTA Process: An appeal at the OTA involves a more formal process, including a briefing schedule where both the individual’s representative and the CDTFA submit detailed written arguments. The individual then has the option to have the case decided based on these written submissions or to request an oral hearing before a panel of three impartial Administrative Law Judges (ALJs).²⁶
4. OTA Decisions and Precedent: The OTA issues a formal written opinion in every case. These opinions are designated as either “non-precedential” or “precedential.” Precedential opinions serve as binding authority for the OTA in future cases with similar facts and legal issues.²⁸ A key part of legal strategy involves researching and citing favorable precedential OTA opinions on responsible person liability to support the current appeal.

Part V: Resolution Pathways: Managing and Settling Your Liability

While mounting a vigorous defense is paramount, it is also prudent to understand the available options for resolving the liability if the appeal is ultimately unsuccessful or if a settlement is the most strategic path forward. The CDTFA has established programs for managing and potentially reducing a finalized personal tax debt.

When Liability is Final: Facing the CDTFA’s Collection Powers

Once a dual determination becomes final—either through a failure to appeal in time or after all appeal rights have been exhausted—the CDTFA is empowered to use its significant collection authority to seize the individual’s personal assets.⁵ These are not idle threats; the agency is known for its aggressive enforcement actions.⁵

The primary collection tools at the CDTFA’s disposal include ⁵:

• Filing a State Tax Lien: A lien is a public claim against an individual’s property, including real estate. It encumbers the property, making it difficult to sell or refinance, and secures the state’s interest in the event of a sale.
• Issuing a Levy: A levy is the actual seizure of assets. The CDTFA can levy personal bank accounts, forcing the financial institution to turn over funds up to the amount of the liability.
• Garnishing Wages: The CDTFA can issue an earnings withholding order to an individual’s employer, requiring a portion of their wages to be sent directly to the state.

These collection powers are far-reaching. The CDTFA can pursue an individual’s assets even if they have moved out of California and reside in another state.¹⁹

Negotiating an Installment Agreement

For individuals who cannot pay the full finalized liability at once, the CDTFA offers the option of an installment agreement.²⁹ This allows the debt to be paid off through a series of regular monthly payments over time.

The amount of the monthly payment is not arbitrary; it is determined by the individual’s documented ability to pay. This typically requires the submission of a detailed financial statement and supporting documentation to the CDTFA.⁵ The agency has created an online portal where taxpayers can request a payment plan, and in some straightforward cases, receive instant feedback or approval.³⁰ It is crucial to adhere strictly to the terms of any approved installment agreement. A single missed or late payment can result in the agreement being defaulted, which can trigger immediate and aggressive collection actions like bank levies.⁵

The Offer in Compromise (OIC): A Lifeline for the Financially Distressed

In situations of significant financial hardship, the Offer in Compromise (OIC) program can be a vital lifeline. An OIC is a formal agreement between an individual and the CDTFA to resolve the entire tax liability for a lesser amount than what is fully owed.³¹ This option is generally reserved for individuals who do not have the income or assets to pay the debt in full, either now or in the foreseeable future.³³

To be eligible for an OIC for a dual determination liability, an individual typically must meet several key criteria ³²:

• The liability must be final and undisputed.
• The individual must no longer be associated with the business that incurred the debt.
• The individual must be unable to pay the full amount in a reasonable time.

The CDTFA evaluates each OIC application based on its own unique facts and circumstances, giving strong consideration to the individual’s ability to pay, the equity in their assets, and their present and future income and expenses.³¹ The goal for the CDTFA is to accept an offer that represents the most the agency can reasonably expect to collect.³⁴ The application process is rigorous and requires extensive financial disclosure on Form CDTFA-490.³¹ The CDTFA also provides an online OIC Pre-qualifier Tool that can help individuals get a preliminary sense of their eligibility and a potential offer amount.³⁴

The Role of Bankruptcy

Personal bankruptcy is another potential, though highly complex, avenue for resolving a dual determination liability. While bankruptcy can discharge this type of tax debt, the rules are intricate and timing is absolutely critical.¹⁰

A key rule is that a tax liability that is still “assessable” by the CDTFA is generally not dischargeable in bankruptcy.¹⁰ This means if the statute of limitations for the CDTFA to issue the dual determination has not yet run out, filing for bankruptcy may not eliminate the potential debt. Furthermore, even for assessed taxes, specific bankruptcy timing rules, such as the “240-day rule” (the tax must have been assessed more than 240 days before filing) and the “3-year rule” (the tax return due date must be more than three years old), must be met.¹⁰

The decision to pursue an OIC versus bankruptcy is a profound strategic choice. Both paths require extensive financial disclosure. Information provided in a rejected OIC application could potentially be used by the CDTFA in a subsequent bankruptcy proceeding to challenge the discharge of the debt. Therefore, these options must be evaluated holistically with an attorney who possesses deep expertise in both tax law and bankruptcy law before a path is chosen.

Part VI: Proactive Protection: Best Practices for Corporate Officers

The most effective way to deal with a dual determination is to prevent it from ever happening. For officers, directors, and managers of active businesses, implementing disciplined corporate governance and meticulous record-keeping practices can create a formidable defense against future personal liability assessments. These practices are not merely good business hygiene; they are specific, legally grounded defensive maneuvers.

Corporate Governance and Documenting Roles

The foundation of a strong defense is a clear and unambiguous paper trail created during the normal course of business. The legal framework used by the CDTFA to impose liability can also serve as a blueprint for avoiding it.

• Clarify Roles in Writing: The corporate bylaws, LLC operating agreement, and board meeting minutes should explicitly designate which officer or manager has the ultimate responsibility and authority for tax compliance. If this duty is assigned to a specific position, like the CFO or controller, it helps insulate other officers from being deemed “responsible persons”.²
• Avoid Misleading Titles: An individual should never sign tax returns, payment authorizations, or other official CDTFA correspondence with a title like “CFO” or “Treasurer” if they do not actually possess the authority that comes with that title. As the Monzon case demonstrates, actions create “de facto” status, and signing a document as an officer can be used as powerful evidence of responsibility.²
• Document Efforts to Comply: If a responsible person becomes aware of a sales tax delinquency, they should immediately document their efforts to rectify the situation. Sending emails or formal, written memos to fellow partners, board members, or superiors urging that the taxes be paid creates a contemporaneous record. This evidence can be invaluable in refuting a later claim of “willfulness,” as it shows an intent to comply rather than a conscious choice to disregard the obligation.²

The Critical Importance of Meticulous Record-Keeping

Clean, accurate, and complete financial records are a cornerstone of personal liability protection.

• Maintain Separate Finances: Commingling personal and business funds is a critical error. It blurs the line between the individual and the entity, making it easier for the CDTFA to argue for piercing the corporate veil. All business transactions should run through dedicated business bank accounts.¹
• Ensure a Clear Audit Trail: The business’s accounting system should be robust enough to track all sales and tax collections at the individual transaction level. The records must be able to demonstrate the flow of data through the system and show what internal controls are in place to ensure accuracy and prevent unauthorized changes.³⁶
• Adhere to Record Retention Rules: The CDTFA requires that all business records be retained for a minimum of four years. However, if a particular period is under audit or becomes the subject of a dispute, those records must be kept until the matter is fully and finally resolved, even if it is longer than four years.²⁵

Successor Liability and the Value of a Tax Clearance Certificate

For individuals considering buying a business, a related threat known as “successor liability” exists. This doctrine allows the CDTFA to hold the buyer of a business or its assets liable for the seller’s outstanding sales tax debts.⁴

To protect against this inherited liability, any prospective buyer should, before closing the transaction, insist that the seller request a “Tax Clearance Certificate” from the CDTFA. The buyer can also make the request. The CDTFA will audit the seller and, if no liability is found or the liability is paid, will issue the certificate. This certificate formally releases the buyer from any responsibility for the predecessor’s unknown tax debts, providing crucial protection for the new owner.⁵

By understanding the legal framework and proactively implementing these best practices, corporate officers can significantly reduce their risk of facing a dual determination and protect their personal assets from the debts of their business.