How to Determine Your Client's Sales Tax Obligations
With all of the questions currently surrounding sales tax, what first needs to be established is: What is a "responsible party"? Also, why is asking so invasive?
Clients of ours have been reluctant to give up their social security number (SSN) for sales purposes and use tax registrations. In some cases, it takes a lot of explaining before a CEO, CFO or officer feels comfortable disclosing such personal information as a requirement of their job.
Even employees generally perceive this requirement as “unreasonable,” and I can certainly appreciate this. I mean, who trusts the government to treat one’s information with the care and deference it deserves?
While we communicate to our clients that the “responsible party” a SSN is a requirement that is both legal and binding, it doesn’t always go over well. Per federal and other laws, state and local tax (SALT) jurisdictions have every right to require a wide range of individuals to relinquish their personal information before the business can be entrusted with SALT funds.
Without an SSN and driver’s license information, an entity cannot typically submit a state registration. And without this, uncollected taxes against a business can generate late returns, penalties and interest to contend with, not to mention the fact that it is often considered fraudulent to collect sales taxes (or exemptions certificates for that matter) without the proper license.
Many of my clients believe they are not personally responsible for managing sales tax, claiming the corporation or entity they work for is the responsible party. By releasing their personal information to SALT authorities, they too—in addition to the organization—become a responsible party, on the hook for accurate and timely sales and use tax collection and remittance at the company level.
Several clients who signed on as responsible parties have even taken extra steps, such as setting up a Lifelock account in order to mitigate some of the risk associated with handing over their personal SSN to “unknown entities.” While this may seem unreasonable, it is often necessary. Let’s talk about why.
Assuming Trustee Status
Many retailers fail to appreciate the middleman duty and legal obligation their business is under as a trustee for sales and use taxes. Sales and use taxes do not belong to the company; rather, it merely acts as a trustee in collecting and remitting the proper amount of tax to SALT authorities.
When it comes to personal liability for the debts of an entity, failing to collect or misappropriating sales and use tax can put your people—owners, officers, directors, shareholders and employees—at risk. Each of these individuals may be held personally liable for the failure of a company to properly collect and remit sales and use taxes if they are considered responsible parties. This liability extends beyond the business to their personal assets, which could be claimed to satisfy the company's sales tax liability.
Who You Say You Are
Responsible parties are tracked through personal information, including their SSN. Federal law allows tax authorities to request this as proof an individual is who they claim to be.
Individuals may be legally required to provide their SSN in transactions requiring notification to the IRS and other tax authorities in most financial transactions, employment records and tax returns.
Who is required to submit their SSN and personal information is an amorphous area. No universal parameters exist. Instead, there are state-by-state nuances.
- In Florida, online-only and brick-and-mortar businesses must register to collect sales tax. In addition to basic information, the registration form requires the owner’s SSN unless the entity is a corporation, business trust, non-business trust, estate or Indian tribe.
- Other states won’t open a sales tax account without an officer and director SSN. The Texas sales tax form requires each officer or director of a corporation to provide theirs. We often start at one and see if they ask for more.
Who is Responsible?
A responsible party can include not only the person whose duties involve managing and paying taxes, but may also include any other person who has the authority or ability to control business payments and decisions.
Although almost all states have personal liability rules, California, Georgia, Illinois, New York, South Carolina and Texas are among those that have codified or otherwise require a responsible party to be held personally liable for the uncollected or unpaid taxes of a company.
Identifying responsible parties varies from state to state:
- South Carolina has required corporate board minutes proving a person is legitimately in a position as CEO, CFO or other to prove they can legitimately sign as a “responsible party.”
- Companies must identify the responsible parties when registering for Georgia sales tax or risk having all officers considered responsible.
- In New York, a responsible person is broadly defined as anyone actively involved in operating the business on a daily basis; deciding which financial obligations are paid; hiring and firing employees; has check signing authority; prepares tax returns; has authority over business decisions; or is a tax manager or general manager. In addition, certain individuals are automatically considered responsible persons, including owners, general partners, LLC members, and corporate directors, officers and certain shareholders.
The best way your clients can protect their business and people rom personal liability for sales taxes is to:
- Pay what’s due when it’s due
- Ask questions before releasing SSNs and personal information to tax authorities (ask whether submitting an SSN is required, details on use of the information and, what law or authority requires its use)
- Review tasks and decision-making authority, shareholder agreements, employee contracts, entity disclosures and director and officer agreements to identify responsible parties in jurisdictions where they do business
- Ensure qualified personnel and internal controls are in place to manage and safeguard sales and use tax obligations
- Consult with a tax advisor to avoid or satisfy the tax liability in the first place
Judy Vorndran leads the state and local tax practice (SALT) at TaxOps, developing efficient SALT management functions and advising businesses in all aspects of state and local tax compliance. She is a recognized leader in SALT solutions and is focused on providing the highest level of...