Most investors feel confident investing in a Limited Liability Company (“LLC”) because they are, for the most part, free from liabilities. This confidence stems from the LLC laws which explicitly state that a member of an LLC cannot be held personally liable for the LLC’s obligations solely based on their status as a member. Yet, in a recent case, In The Matter of The Petitions of Eugene Boissiere and Jason Krystal, decided by the New York State Division of Tax Appeals, two members of an LLC were held responsible to pay for a portion of assessed sales tax that was not remitted by the LLC to the State even though they were just minor investors in the LLC.
Eugene Boissiere and Jason Krystal were less than 15% owners of the LLC, who did not have any obligations with respect to the entity other than as mere investors. They had no managerial responsibilities, no ability to hire or fire employees, no knowledge of, or control over, the LLC’s financial affairs, and no authority to sign the entity’s tax returns. Additionally, they did not participate in the sales tax audit and therefore did not know the basis of how the sales tax was computed. They were just simply members of the LLC. Yet, under New York State Law, that was enough to make them responsible persons for the outstanding sales tax.
New York State has taken the position that by being a partner in a partnership or member of an LLC you can be held responsible for unpaid sales tax. In fact, the applicable statue specifically includes in its definition of a “responsible person” any partners of a partnership or members of an LLC. Thus, a partner or member can be held responsible for outstanding sales tax liabilities, even if that partner or member did not engage in the culpable behavior of failing to remit sales tax to the State.
New York State’s position on partners of partnerships and members of LLCs as responsible persons for the collection of sales tax has raised concerns for such partners and members. Their worry arises from the fact that a responsible person can be held 100% liable for the full sales tax liability even though they have not been in control of the reporting. Understanding the harshness of this rule, New York State has granted some relief for certain partners and members who truly have no involvement in or control over the partnership’s or LLC’s business affairs. The applicable New York State pronouncement, TSB-M-11(17)S, limits the liabilities of these partners and members to the percentage of the applicable liability that corresponds to their percentage of ownership in the entity. However, in order to get the benefit of the relief under this publication, the partner or member must document their ownership interest and percentage share of the partnership’s or LLC’s profits and losses, state that the partner or member was not under a duty to act for the partnership or LLC in complying with the entity’s sales tax obligations, and cooperate with the Tax Department in providing information about other potentially responsible persons and the structure and ownership of tiered entities, including out-of-state entities (if the partner or member is aware of this information). Furthermore, this relief is not available to general partners, partners of a Limited Liability Partnership (“LLP”) and any LLC member holding a 50% or greater ownership interest, or entitled to a distributive share of 50% or greater of the profits and losses of the LLC. With all this in mind, careful consideration should be given to follow the listed steps and rules of TSB-M-11(17)S.
If you have any questions regarding the “responsible person” area, please contact Andrew Cohen at ACohen@Friedmanllp.com, or your Friedman LLP tax advisor.