Are you a "responsible party" party when it concerns the collection and remittance of your company's sales tax? Most corporate accounting and finance people would respond to this question by saying "I don't know" or "I'm not an officer of the company, so how can I be personally liable?" If you answered "I don't know" you may want to find out for sure. If you believe that only corporate officers can be personally liable, guess again. Under most state statues, the Department of Revenue of a state has the option to pursue collection of unpaid sales tax against any party who has any part in the accounting, collection, and remittance of the sales tax. In the illustration below, the mere act of signing the sales tax return could make you personally liable.
The so called "corporate officer liability" statutes have been in the law for many years and were, for the most part, rarely enforced. But don't let the name of these statutes confuse you. In most states, the personal liability that attaches to these responsible persons is not limited to only officers. In most states the risk of personal liability extends to anyone-regardless of title-who has responsibility for collecting and paying sales tax. Most states have re-labeled these statutes as "responsible party" statues to express their desire to not limit this liability only to those parties who are officers.
As an administrative matter, states pursue personal liability only as a matter of last resort. In some instances, states may have difficulty pursuing liability against officers and others who reside outside the taxing state. In other situations, states can only pursue personal liability against a party only for those periods when that person was a responsible party.
Be Careful What you Sign
Here is a real situation from Missouri where the Department of Revenue pursued personal liability against an unlikely party—and won!!
Pam Martin was the manager of a bar (The Countyline) located in Fair Play, Missouri. The bar owner was a family friend of Pam's who lived in Kansas. The owner asked Pam to manager the bar for him and authorized her to purchase merchandise and sign certain checks. Pam routinely filed the Missouri sales tax return and signed these returns herself. On each return that Pam signed, was the statement "I have direct control, supervision, or responsibility for filing this return and payment of the tax due."
For the 1st and 2nd quarters of 2003, The Countyline failed to file its sales tax return and the Department issued written assessments against The Countyline for $1,261.75 in tax and $315.43 of penalties, plus interest. Unfortunately, The Countyline failed to appeal the assessment and a collection judgment was issued by the Department. Because Pam lived in Missouri, it was much easier for the Department of Revenue to pursue her than to pursue the owner who lived in Kansas. As such, the Department sent a collection notice directly to Pam and demanded that she pay the state the past due tax and penalty. Pam argued that she was not a "responsible party" since she was not an officer. The Department did allow Pam to get a notarized statement from the owner indicating that she was not a "responsible party" with regard to the sales tax.
Unfortunately for Pam, the owner and family friend would not sign the statement indicating that Pam was not a responsible party. (Some friend!) As such, the Missouri Administrative Hearing Commission found Pam to be personally liable for the taxes due and imposed a 100% willful failure to file penalty. At the end of the day, Pam was personally liable for $1,846.86 of tax (which reflects some tax payments applied by the department to the account and the 100% penalty) plus $460 of regular penalties, plus interest.
The Commission ruled that Pam was a responsible party and could be sued personally for the back due taxes because she signed returns and checks for tax payments, she attested that she was a responsible party when she signed the return, and she was aware of the responsibly to file return sand pay the tax and failed to do so.
This example shows how someone who is not an owner or an officer of a company can be made to pay the taxes due for a company out of their own pocket. Most states do not impose any proportional ownership test to the taxes due. That is, a 1% owner is liable for 100% of the taxes if no one else is available. Most states issue assessments for 100% of the tax against all the owners and officers and other responsible parties let them fight it out among themselves as to who is going to pay.
States pursue responsible party liability as a last resort. The most frequent cases involve bankruptcy or other business solvency issues. Regardless, this threat is real and is aggressively enforced. If you routinely prepare sales tax returns, you may want to double check whether this is a problem you need to deal with. If you are an officer who has any supervisory responsibly for the filing and payment of these taxes, you should be doubly sure they are being filed and filed properly. With the states all experiencing revenue shortfalls, the availability of some deep pockets at the "C level" of the business may make for some easy collections.
A word or caution, if your name is listed as a corporate officer with a Department of Revenue and you are no longer an officer of the company, be sure the state has removed your name from its records to minimize any potential that you may be personally liable for taxes due for periods after you left the company.
No longer are the "responsible party" statutes being used only as a threat. States are beginning to impose these statutes with vigor especially with respect to trust fund taxes such as sales and payroll tax. In many cases you may be a "responsible party" for the unpaid tax even though you have never filed a sales tax return in your life. If you have supervisory responsibility for payment of theses taxes that may be sufficient to pull you into the list of people the state wishes to pursue.
By Ned Lenhart, CMI, CPA, Partner, TaxConnex LLC