Since the 2018 Wayfair decision, many more businesses are now required to collect and remit sales tax, and they are not prepared. What these businesses don’t realize is that due to tax responsible party laws, a business itself is not the only one at risk. CEOs, CFOs, Directors, and other individuals that have influence over a business’s tax and accounting processes can be held personally responsible for any sales tax shortfalls according to personal responsibility laws.
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 just as economic nexus and taxability are not the same in every state, personal responsibility laws also change state to state.
Many states codify how a responsible party can be personally liable for uncollected or unpaid taxes. Though details can vary by state and case by case, personal liability applies whether the imposed tax was collected or not. This opens the door to liability even if a company simply wasn’t aware of its tax-collection and remittance obligation in a given tax jurisdiction and even if a responsible party’s failure was not intentional or willful. (Some states – such as Wisconsin and Florida – specifically mention “willful” failure to pay sales and use taxes and some don’t.)
The wording of the Georgia Department of Revenue offers a guide to what states expect:
“An individual can be liable for the unpaid taxes of a business. When a business fails to pay the taxes it has collected or should have collected to the Georgia Department of Revenue, the Department sends an assessment notice to the person it has identified as responsible for payment. This notice creates a personal liability against the individual, and gives the Department the ability to take collection actions against the individual of the business for unpaid taxes … Persons subject to personal liability include individuals who have the authority and control to collect and pay tax to the state as well as any person who has control or authority over the business’s funds and assets.”
Different states also put their own spin on this. New York stipulates that relevant factors when determining a responsible person include whether the person is actively involved in operating the business regularly, is involved in deciding which financial obligations are paid, is involved in personnel activity, and so on. New York might also hold accountable a member of a partnership or LLC regardless of whether the individual has a duty to act on behalf of the company.
Separation or closure of a company also doesn’t mitigate all liability in states like Texas, where “an individual who controls or supervises the accounting for and paying over of the tax or money, and who willfully fails to pay or cause to be paid the tax or money is liable as a responsible individual for an amount equal to the tax or money not paid or caused to be paid. The dissolution of a corporation, association, limited liability company, or partnership does not affect a responsible individual’s liability.”
Some states use a company’s bankruptcy as a trigger to personal liability for unpaid taxes. Note too that there is no statute of limitations for unfiled returns; unpaid tax liabilities can compound indefinitely. Penalties associated can start at 25% of tax liabilities. Even non-filing of zero taxable sales can result in penalties.
Don’t let your sales and use tax responsibilities get away from you. In this constantly evolving landscape of sales and use tax, states are only going to get more aggressive in capturing tax revenue. Get the risk and liability associated with sales tax off your plate by partnering with TaxConnex. Contact us to learn what it means when sales tax is all on us.