Perhaps there is no area of state and local tax law that is more perplexing to businesses than sales and use tax. Forty-five states, plus the District of Columbia, impose sales and use tax. Moreover, many of those jurisdictions authorize localities within their borders to impose their own sales and use tax, making the total tax rate a combination of both the state and local rate. Adding to that are the differences that abound among the various jurisdictions with respect to the taxability of specific items of tangible personal property, intangible property and services, as well as the applicability of exemptions, often leaving companies in a quagmire of tax compliance from which they have much difficulty freeing themselves.
The Problem Defined
Compounding the sales and use tax dilemma is the concept of “responsible person” liability. Sales tax is considered a “trust” tax since it is not imposed on the vendor charged with collecting the tax. Rather, it is imposed on the retail customers of the vendor, who is under an obligation imposed by the state to charge the right amount of sales tax, and subsequently remit it to the state. In essence, the vendor collects the tax in trust for the state. Failure to charge the tax at all or charging too little tax can result in those deemed by the state as being under a duty to supervise the collection and remission of sales tax being held personally liable for this failure. Their personal assets can be attacked by the state and used as a source to satisfy outstanding sales tax liabilities of the business.
Many states have enacted some form of responsible person liability as part of their sales and use tax law. The definition of those considered to be responsible persons may vary from state to state, as may the exact nomenclature used to refer to such persons. Often, the scope of those considered to be responsible persons can be quite broad in nature. For example, Section 1131(1) of the New York Tax Law defines “persons required to collect tax” (i.e., responsible persons) to be every vendor of tangible personal property or services, including any officer, director or employee of a corporation, any employee of a partnership, or any employer or manager of a limited liability company who is under a duty to act on behalf of the business entity in complying with the sales and use tax law. Further, under New York law, partners in a partnership and members in a limited liability company are also considered responsible persons.
A recent case decided by the New York State Tax Appeals Tribunal, In the Matter of the Petitions of Eugene Boissiere and Jason Krystal, DTA Nos. 824467, 824937 and 824938 (July 28, 2015), provides a clear illustration of the unexpected difficulties that can sometimes be encountered by individuals who are considered to be responsible persons. In that case, the petitioners were both members of a limited liability company (“LLC”) who each held less than 15% interests in the business entity. Neither of them had any managerial responsibility, the ability to hire and fire employees, knowledge of or control over the entity’s financial affairs, or the ability to sign the LLC’s tax returns.
Upon audit, the LLC was assessed a significant sales tax liability by the New York State Department of Taxation and Finance (the “Department”). Notices of Determination were issued by the Department to each of the petitioners, since as members of the LLC, they were deemed to be responsible persons under New York State law.
The petitioners based their argument against being held liable for the entity’s sales tax liability on the protection from personal liability that is articulated in New York’s Limited Liability Company Law with respect to members of an LLC. The Tax Tribunal, in rejecting the petitioners’ argument, found that the specific liability imposed on members of an LLC by the state’s Tax Law by reason of them being viewed as responsible persons, prevailed over the general liability protections provided members pursuant to the Limited Liability Company Law. Thus, the assessments issued by the Department to the petitioners were sustained. The petitioners, who assumed they were protected by operating through a limited liability vehicle, received a very unwelcome surprise.
When entering the world of sales and use tax, business owners often find themselves lost in a labyrinth of uncertainty. The possibility of facing responsible person liability makes it imperative a strategy be found for meeting all the responsibilities that sales and use tax entails. After all, potential loss of your personal assets is no joke at all.
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