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Expert Commentary

Sales and Use Tax Bonds

One of the most frustrating types of commercial bonds is sales and use tax bonds, particularly in California. They are frustrating because the California State Board of Equalization (SBE), the bond obligee, inordinately delays in making claims, does not provide supporting documentation, and demands immediate payment. Unfortunately, the law that governs California sales and use tax bonds and, presumably, other jurisdictions clearly favors the obligee, particularly as it relates to the statute of limitations.


April 2005

Sales and use taxes are assessed under the California Sales and Use Tax Law. Section 6701 is the section requiring sales and use tax bonds and it provides, in relevant part:

  • The board, whenever it deems it necessary to ensure compliance with this part, may require any person subject thereto, to place with it any security that the board may determine…. The amount of the security shall be fixed by the board…. Security held by the board shall be released after a three-year period in which the person has filed all returns and paid all tax to the state or any amount of tax required to be collected and paid to the state within the time required….

There is little to assist the surety in connection with determining the scope of the bond or its terms and conditions. Surprisingly, it does not even mention a surety bond. Therefore, the terms and conditions of the bond are derived from the SBE-provided bond form, which provides, in part, as follows:

  • This bond is executed by the Surety to comply with the provisions of Part 1 (commencing with Section 6001) of Division 2 of the Revenue and Taxation Code … and said bond shall be subject to all of the terms and provisions thereof.

Statute of Limitations

There are no specific provisions regarding the time limit for making a claim/filing an action against a sales and use tax bond. Section 6711 provides the statute of limitations for bringing an action against a sales and use tax bond principal:

  • At any time within three years after any tax or any amount of tax required to be collected becomes due and payable and at any time within three years after the delinquency of any tax or any amount of tax required to be collected, or within the period during which a lien is in force as the result of the recording of an abstract under Section 6738 or the recording or filing of a notice of state tax lien under Section 7171 of the Government Code, the board may bring an action in the courts of this state, of any other state, or of the United States in the name of the people of the State of California to collect the amount delinquent together with penalties and interest.

Thus, there appear to be three different measures:

  1. Three years after any tax becomes "due and payable"

      Pursuant to section 6757(b), taxes become "due and payable" on the date the assessment is final, providing "(b) For purpose of this section, amounts are "due and payable" on … the date the assessment is final."

    The above quote defines "due and payable" for section 6757. As there is no other section that defines "due and payable," it is appropriate to use that definition for analyzing section 6711.

  2. Within the period during which a lien is in force under section 6738

    Section 6736 through 6738 provide guidance as to this second measure. Section 6736 allows the SBE to file a certificate with the office of the Clerk of the Superior Court of Sacramento or any county as to the amount to be paid within 10 years after the amount is due:

      Pursuant to section 6737. upon the filing of the certificate, the clerk of the court is to automatically enter a judgment against the taxpayer.

    Once there is a judgment lien and, as long as it is in force, a section 6711 action is allowed. Section 6738 describes a judgment lien:

      An abstract of the judgment … may be filed for record with the county recorder of any county…. The lien … shall continue for 10 years from the date of the judgment…. The lien may, within 10 years from the date of the judgment, or within 10 years from the date of the last extension of the lien, be extended by filing for record in the office of the county recorder of any county an abstract … of the judgment….
  3. Within the period during which a Government Code section 7171 notice of state tax lien is in force
      Revenue and Taxation Code section 6757 provides:
    1. If any person fails to pay any amount imposed under this part at the time that it becomes due and payable, the amount thereof, including penalties and interest, together with any costs in addition thereto, shall thereupon be a perfected and enforceable state tax lien. The lien is subject to Chapter 14 (commencing with Section 7150) of Division 7 of Title 1 of the Government Code.
    • Once the tax lien is created, then Government Code section 7171 comes into play:
    1. With respect to real property, at any time after creation of a state tax lien, the agency may record in the office of the county recorder of the county in which the real property is located a notice of state tax lien.
    2. With respect to personal property, at any time after creation of a state tax lien, the agency may file a notice of state tax lien with the Secretary of State pursuant to Chapter 14.5 (commencing with Section 7220)….

Pursuant to Government Code section 7172(a), with the filing of the Notices of State Tax Lien with the California Secretary of State, the lien will continue for a 10-year period and allows the SBE 10 years to file an action. Government Code sections 7172(b) and (c) allow the state to renew the 10-year liens.

There is one California case that has examined the statute of limitations applicable to sales and use tax bonds. People v U.S. Fire Ins. Co., 61 Cal App 3d 231, 236, 132 Cal Rptr 139 (1976) interprets section 6711, finding that the 3-year statute of limitations applicable under California Code of Civil Procedure section 338 (3 years for obligation arising under statute) does not apply to the enforcement against a sales tax bond but Revenue and Taxation Code section 6711 does.

Attorney and Consultant Fees

Also, it is likely that a surety is liable for the attorney and consultant fees and costs in the SBE's prosecution of a bond claim. Section 7156 provides, in relevant part:

  1. In the case of any civil proceeding which is—
  1. Brought by or against the State of California in connection with the determination, collection, or refund of any tax, interest, or penalty under this part, and

  2. Brought in a court of record of this state, the prevailing party may be awarded a judgment for reasonable litigation costs [including court costs, expert witness fees and attorneys' fees], incurred in that proceeding...

Surety's Liability for Interest Beyond Penal Sum

A surety is only liable for interest above the penal sum of the bond in the event of the surety's own default, i.e., its failure to pay when payment is due. The general rule is that judgment cannot be rendered against sureties for a greater amount than the penalty of the bond, and they cannot be held liable for interest beyond the penalty of the bond, except for such interest as accrued from their own default in unjustly withholding payment after receiving notice of the principal's default. Trumpler v Cotton, 109 Cal 250, 256-257 (1895) [citations omitted].

While sales and use tax bonds typically state that "the aggregate liability of the Surety hereunder on all claims whatsoever shall not exceed the penal sum of this bond in any event," such language limits the liability of a surety only as security for its bond obligation, but does not "immunize the surety" from "willful failure to satisfy the obligation of a bond after duty to pay has been established." Harris v Northwestern Natl. Ins., 6 Cal App 4th 1061, 1064 (1992).

Conclusion

It behooves a surety to act quickly on receipt of a notice of claim from the SBE or other taxing authorities around the country so as to achieve a speedy resolution with the taxing authority and avoid potential liability for interest and attorney fees.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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