30 Jan 2023 Cautionary Tale: Owner Personally Liable For Sales Tax
Authored by RSM US LLP, January 30, 2023
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.
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.
DO YOU HAVE QUESTIONS OR WANT TO TALK?
Fill out the form below and we’ll contact you to discuss your specific situation.
This article was written by Brian Kirkell, David Brunori, Anna Cronic, Mo Bell-Jacobs and originally appeared on 2023-01-30.
2022 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Haynie & Company is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.