Sales Tax Update - May 2026

The recent decision by the California Office of Tax Appeals (OTA) is a reminder that states have owner / officer liability provisions under which persons defined as “responsible persons” can be held personally liable for the sales tax debts of the organization. [Z. Sultana, California Office of Tax Appeals, 2026-OTA-204P, May 2026]

California Department of Tax and Finance Administration (CDTFA) conducted a sales tax audit of Ark (a clothing store) for sales tax for the periods 2014-2016, and reviewed z-tapes (i.e., cash register tapes), bank statements and daily sales worksheets.  The auditor found a material difference of nearly $700,000 in reported sales for the period, on which CDTFA assessed additional sales tax, resulting in this appeal.  The owner of Ark, Ms. Z. Sultana, was listed in California Secretary of State documents as Ark's CEO, Secretary, CFO, and Director.  Ms. Sultana claimed that she was a housewife and had no responsibility as to the tax matters pertaining to the now-defunct business.  CDTFA disagreed, and held Ms. Sultana personally liable for over $70,000 in unpaid sales tax. 

Pursuant to California Code Section 6829, an individual may be found personally liable for the sales tax debts of business if all of the following elements are met:

1. the corporation's business has been terminated, dissolved, or abandoned;
2. the corporation collected sales tax reimbursement on its sales of tangible personal property and failed to remit such tax reimbursement to CDTFA when due;
3. the person had control or supervision of, or was charged with the responsibility for, the filing of returns or the payment of tax, or had a duty to act for the corporation in complying with the Sales and Use Tax Law; and
4. the person willfully failed to pay taxes due from the corporation or willfully failed to cause such taxes to be paid.

The OTA determined the first two requirements were met because the business was terminated, and the records reflected sales tax was collected on sales.  Under the third requirement, while not solely determinative, the OTA noted that being an officer is evidence that one had broad implied and actual authority to ensure compliance with sales tax, even if delegated to others.  With respect to the willful failure to file or pay taxes, OTA found that Taxpayer was the owner, president, and sole officer of Ark, as indicated by Ms. Sultana’s signings of numerous documents and returns filed with CDTFA.  OTA determined Ms. Sultana clearly had a duty to act for the corporation, and that in performing her duties, she filed numerous returns for Ark during the period and engaged in discussions with CDTFA concerning Ark's delinquent taxes, returns, and payments. Therefore, the evidence shows that appellant was responsible for Ark's sales and use tax matters, including filing and paying tax for the entire liability period. Accordingly, OTA found Ms. Sultana to be a responsible party.   

New York’s Division of Tax Appeals has steadily held that the “primary function” test is not applicable to determine taxability of mixed bundled transactions involving tangible personal property (see, e.g., In the Matter of FacilitySource LLC, DTA Nos. 829500 and 829501 (N.Y. Tax App. Trib. Sept. 18, 2025); In the Matter of Strata Skin Sciences Inc., DTA No. 828704 (N.Y. Tax App. Trib. May 5, 2022), aff’d, Matter of Strata Skin Sciences Inc. v. N.Y. State Tax Appeals Tribunal, 225 A.D.3d 953 (N.Y. App. Div. 2024)].  However, the N.Y. Appellate Division recently upheld a Tax Appeals Tribunal decision in which the Appeals Tribunal, while not calling it a primary function test, effectively used the primary function test to determine the taxability of a transaction involving the provision of a nontaxable service in conjunction with access to a software platform.

The Appellate Division stated “we find no grounds to disturb the Tribunal's ultimate determination that the license provided by petitioner was the core function of the transactions at issue, thus rendering them subject to a tax as a sale of tangible personal property.” [Matter of Beeline.com Inc. v. N.Y. State Tax Appeals Tribunal, No. CV-24-1494 (N.Y. App. Div. Jan. 15, 2026)(emphasis added)]. “In that respect, the Tribunal ultimately assessed the use of the VMS software in conjunction with petitioner's services and determined that that the software was central to those services rather than incidental.” [Id. (emphasis added)]

For Taxpayers providing nontaxable service in conjunction with access to a software platform, this is a call to ensure that your tax treatment accurately reflects what you are providing, particularly if it involves access to software, and particularly in New York, which has historically taken an expansive view of transactions involving software.

We recently onboarded a client for sales tax compliance that had been using another automated solution provider for several years.  They indicated that they were a remote seller and we reviewed their nexus, verifying that they were registered everywhere that they had economic nexus.

We then asked about physical presence nexus.  “Oh no, they said, we only have independent contractors in other states; not employees.”  Red flags everywhere.  Alarms go off in our heads.  “What do these independent contractors do?”, we asked.  “They sell our products,” the company replied.  “You have sales tax nexus in those states as well,” we replied.

We ended up doing Voluntary Disclosure Agreements in a handful of states to clean up their overlooked nexus exposure and get them registered.  

Moral of the story: Have a sales tax expert review your sales tax nexus – both physical presence and economic nexus, before the state does.  Implementing sales tax software is a very important step in getting sales tax compliant.  However, more important than automation is working with a sales tax expert that can help you understand where you have nexus, and can quantify historical exposure, map out a path forward and resolve any material historical exposure.  They can then manage the ongoing compliance for you, so that you can focus on your business.