Sales tax ‘responsible party’ laws still going strong

Business truism has it that limited liability corporations and similar entities shield the personal property and assets of their owners and major shareholders from company bills and missteps. That’s true for many of the fiscal messes that can befall a company.

But not for sales tax liability, where most states still maintain strong responsible party laws. And they can come as a real shock: CEOs, CFOs, directors, and other execs can be held personally responsible for sales tax shortfalls.

Recent cases

All states with sales and use taxes have responsible party definitions and rules that impose responsibility for tax liabilities on certain parties. Many of the rules expressly allow the respective state to file a demand for payment against any responsible person.

How do they know who’s responsible? Most states’ sales tax registration forms ask for Social Security or driver’s license numbers (or both) of at least one corporate officer or executive. Other states ask for company documentation verifying leadership. Owners’ individual tax returns have occasionally been compared to those of the company for evidence of “material involvement” in the business with a focus on the presence of a Schedule K-1, surtax, and qualified business income exemptions, and even the salary size as recorded on a W-2.

Know the nuances of the law in states where you have to collect and remit sales tax, because states take this all seriously. In an appeal involving the listed owner of an Ohio cleaning company and the responsible party services for tax assessments, for instance, the state Board of Tax Appeals affirmed that the listed owner was indeed the responsible party of the business.

The listed owner countered – and lost – that he shouldn’t be a “responsible party” given changes to the business operations managers. The state responded that he met the definition of officer and employee per Ohio code: A responsible party does not “need to be a direct overseer of business operations” but only “direct or indirect authority over” the person preparing and filing return.”

New York’s Division of Tax Appeals considered whether an individual who was both an officer and the sole shareholder of a corporation was personally responsible for the corporation’s sales tax liability. In an audit, the state made the determination based on the shareholder’s: access to and overseeing the books and records of the business; ability to explain the business’s operations; being the registered agent for the business, and listing as the responsible person and president on state records; execution of a consent on behalf of the business extending the statute of limitations for the audit; and the signing of a state audit forms, business checks and state sales tax returns.

And in a case similar to one that might have involved sales tax, the president of a corporation was properly held liable for the corporation’s unpaid Ohio personal withholding taxes. The individual acknowledged that he was the corporation’s sole shareholder and was ultimately responsible for the business operations, but that he wasn’t liable for the tax delinquency because he was duped by an employee who handled the corporation’s finances. Ohio law, however, prevents responsible corporate officers from dodging personal liability by just delegating responsibility to file an organization’s tax returns.

General rules

Just as economic nexus and taxability are not the same in every state, personal responsibility laws also differ. For example, in Georgia:

“An individual can be liable for the unpaid taxes of a business. When a business fails to pay the taxes it has collected or should have collected to the Georgia Department of Revenue, the Department sends an assessment notice to the person it has identified as responsible for payment. This notice creates a personal liability against the individual and gives the Department the ability to take collection actions against the individual.”

Some states' responsible party definition designates CFOs or CEOs, even to the point of requiring board minutes as documented proof. Among specific statute language of responsibilities, Georgia, to name one state, adds that examples include (but are sure not limited to) individuals who: serve as officers and directors; control company financials; hire and fire; sign checks (and sales tax returns); and control the company funds and bank accounts.

Willful failure in sales tax duties counts more heavily in some states than in others, as does the phrase “duty to act” for corporate officers. Minority members of partnerships can even find themselves on the hook for more than their investment in the company.

And in Wisconsin, among other states, going out of business doesn’t rescue you:

“Any person who is required to collect, account for or pay the amount of tax imposed under this subchapter and who willfully fails to collect, account for or pay to the department shall be personally liable for such amounts, including interest and penalties thereon if that person's principal is unable to pay such amounts to the department. The personal liability of such person as provided in this subsection shall survive the dissolution of the corporation or other form of business association.”

New York agrees, and so does Texas, among other states, where “the dissolution of a corporation, association, limited liability company, or partnership does not affect a responsible individual’s liability.”

As you consider your personal responsibility regarding your company’s sales tax, remember that unfiled sales tax returns also have no statute of limitations; unpaid tax liabilities can compound indefinitely.

Get the risk and liability associated with sales tax off your plate by partnering with TaxConnex. We can help with responsible party definitions, services, and more. Contact us to learn what it means when sales tax is all on us.