If your company sells into multiple states and has established sales tax nexus, it is critical that you evaluate your business’s exposure to sales-and-use-tax liability as soon as possible. There are more than 10,000 taxing jurisdictions and many have their own unique set of rules and interpretations. Not taxing a product or service appropriately could lead to significant exposure over time. And, you may be the person on the line to pay the penalties and interest, not your business.
All states with sales and use taxes have rules that impose responsibility for tax liabilities on certain parties when their associated businesses cannot satisfy these liabilities. Many of the rules expressly allow the respective state to file a demand for payment under certain circumstances against any responsible person.
But who exactly holds the responsibility for sales tax mistakes and non-compliance? The company? Employees? Corporate officers?
Personal liability for sales tax can extend to owners, directors, shareholders, officers and even employees.
Responsible parties can also trickle down to the person whose duties involve managing and paying taxes or any other person who has the authority or ability to control business payments and decisions. This liability extends beyond the business to their personal assets, which could be claimed to satisfy a sales tax liability of the business.
A “responsible person” is liable for the sales and use tax owed, as is the business entity and any of its other responsible persons. But how do you determine exactly who in your organization is “responsible?” It may not be as simple as looking at the title of the individual.
Questions to help determine a responsible party include:
Are they listed as an officer or director of the business?
What is their ownership percentage?
Do they have authority to hire or fire employees? Do they have knowledge of or control over financial affairs? Are they authorized to operate the business, review its books and record, and determine and authorize payment of creditors?
Do they participate in daily operation of the business or in shareholder or director meetings?
Certain tax specific questions also need to be considered:
Are they involved in the preparation of sales tax returns or the payment of sales taxes?
Do they receive a Form W-2 from the business, reflecting significant compensation? Do they receive a Schedule K-1 that identifies them as a general partner or managing member?
Do they complete Schedule SE, Self-Employment Tax, for their tax return Form 1040, with respect to any of the allocations made or any of the payments received from the business?
Any officer or employee of a corporation who is under a duty to comply with any requirement of tax law can be a responsible person.
Furthermore, a person who is authorized to sign a corporation’s tax returns or who is responsible for maintaining the corporate books can be a responsible person. With partnerships, in general every person who is a member of a partnership is a person legally required to collect tax.
What is your exact risk? Gain an understanding of your exposure by performing a review of systems and processes to identify gaps or risk factors. Scrutinize each state’s rules with an eye to nontraditional products and services, sales activity thresholds and products that are not taxable in one state but might be taxable in others.
Review jobs and decision-making authority in your company, as well as shareholder agreements, employee contracts, entity disclosures and director and officer agreements. Make sure that controls and people are in place to manage and safeguard sales and use tax obligations – and make sure too that you and your people know their responsibilities and obligations.
In this constantly evolving landscape, this is a lot to keep up with. Alleviate the burden and risk associated with sales tax by working with a sales tax compliance partner. Talk to TaxConnex to see how we can take the burden of sales tax off your plate.