Cautionary tale: Owner personally liable for sales tax

TAX ALERT | January 30, 2023

Authored by RSM US LLP

Executive summary: Personal responsibility for sales taxes is an ongoing concern

A New York Division of Tax Appeals administrative law judge (ALJ) recently found that an individual who partly owned a property management company was an officer and personally liable for unpaid New York sales taxes. Failure to remit sales and use taxes, and many other taxes, can result in substantial monetary penalties and interest, and even business closures. Personal liability for unremitted taxes could also extend to a broad range of responsible parties based on the facts and circumstances, with potential exposure to criminal penalties.

Cautionary tale: Owner personally liable for sales tax

The individual at issue was a 30% owner of a company that owned 30% of a property management company. The property management company failed to timely file three months of sales and use tax returns or pay sales taxes. The New York Division of Taxation assessed $49,639.19 in tax plus penalties and interest against the individual as a responsible person for the property management company. 

On appeal, the ALJ found that the individual signed checks, payment and authorization agreements and partnership and other tax returns. Additionally, he was listed on a power of attorney form signed by the individual as a “managing member” for the property management company, although he subsequently testified he was a limited partner and not a managing member or general manager. He was also identified as a “responsible person” on a New York Form AU-431, Responsible Person Questionnaire, for the company. In finding for the division, the ALJ also noted that the individual had the authority to hire and fire employees. The ALJ concluded that the evidence “clearly” established sufficient authority and control over the company to be personally liable for the tax. It should also be noted that in this case, the individual’s reply brief was not considered by the ALJ because it was not timely filed. 

Takeaways

Ultimately, the facts of the case are not unique as another in a long-line of personal responsibility findings. Those owning and managing businesses must remember to be cognizant of their role and the corresponding tax ramifications. Anyone who has control over a company’s tax and accounting operations may be a responsible party – and subject to personal liability for failure to collect or remit sales and other trust fund taxes. There are many cases where CEOs, CFOs and directors have been held personally liable, even when their day-to-day activities are not at all tax related. 

Additionally, one need not be an executive to be held responsible. Some examples of activities that could lead to personal liability include being involved in deciding financial obligations that must be paid, having the power to hire and fire employees, having check signing authority, signing tax returns or having substantial authority over business decisions. Corporate officers, owners and responsible parties of businesses with sales tax collection obligations should be aware of the consequences for failing to timely remit the tax.

Responsible party personal liability usually arises from situations where the business is in distress. State taxing authorities will pursue responsible persons if they determine that the business cannot satisfy sales and use tax liabilities. 

Sales and use tax liability for responsible parties

As a general rule, officers, members, owners and anyone with any responsibility for financial decisions could be held personally liability for unpaid sales tax. Most states have specific statutory provisions for personal liability. While officers and owners can almost always be held personally liable for failure to remit sales and use taxes, employees with responsibility for financial decisions can also be liable under facts and circumstances tests. These tests look to whether the individuals had access to bank accounts, made management decisions, signed or filed tax returns, signed checks or had any control over any financial matters or financial-related oversight, or authority to exert that oversight. 

Ignorance of the sales tax compliance function is rarely a successful defense if the individual was an owner of the business, a corporate officer or a party with any responsibility for financial decisions. Businesses that have never reviewed their sales and use tax compliance processes and controls should consider a process review to identify inefficiencies and opportunities in all stages of sales and use tax compliance.