Responsible Person Liability: It’s Back in the News, But It Never Really Went Away

Earlier this year, the New York Division of Tax Appeals issued a decision holding the vice president of a telecommunications and marketing company liable for the business’ $47,000 in unpaid sales tax. In making the determination, the administrative law judge relied on the fact that the individual in question owned 20% of the company, devoted 100% of his time to the business and signed financial documents for the business. This article discusses how a state can hold an individual responsible for an entity’s tax liability and who needs to be aware of this exposure.

What is Responsible Person Liability?

Many states have various taxes that are classified as “trust” or “fiduciary” taxes. Essentially, the collection and/or remittance of such taxes is performed by third parties acting on behalf of the local tax authority. Payroll taxes are viewed as trust taxes because employers are responsible to withhold and submit these taxes on their employees’ behalf. Similarly, sales tax is considered the paradigm of trust taxes because it is imposed on a retail customer but charged and collected by a vendor who subsequently remits the funds to the state. In other words, the vendor collects the sales tax in trust as an agent of the state. Herein lies the responsible person obligation. Failing to comply with the sales tax rules can result in those with the duty to oversee the sales tax function being held personally liable for the business’ obligations. Their personal assets can then be seized by the state to satisfy the outstanding sales tax liabilities of the business.

Who is a Responsible Person?

Forty-five states, the District of Columbia and localities within Alaska impose a sales tax. Virtually all of these jurisdictions have enacted responsible person laws to ensure compliance. While the exact definition of who is considered a responsible person can vary by state, the scope is often very broad. In New York, for example, “persons required to collect [sales] tax” include corporate officers, directors and employees who are under a duty to act for a corporation in complying with the tax’s requirements. Whether a person is liable for the collection and remittance of the tax is determined based upon the particular facts of each case. The determining factor generally depends upon whether the individual had, or could have had, sufficient authority and control over the affairs of the business. New York case law provides a list of functions to consider, including the individual’s:

• Day-to-day responsibilities;
• Knowledge of and control over the financial affairs of the business;
• Authority to write checks on behalf of the organization;
• Responsibility for maintaining the corporate books;
• Authority to sign sales tax forms;
• Authority to hire and fire employees; and
• Economic interest in the entity.

Conclusion

Responsible person liability is once again in the news with another large sales tax assessment being sustained on a corporate executive. Faced with the possibility of exposing personal assets to satisfy a company’s sales tax debt, every business leader needs to closely monitor their company’s tax compliance. If you have any questions about responsible person liability and whether your personal funds may be claimed by a taxing authority to pay off a delinquent corporate tax liability, please contact Alan Goldenberg, Principal and Leader of the State and Local Taxation and Tax Controversy groups, or your Anchin Relationship Partner.