We hear a lot about “sales tax obligations,” but who exactly in your company is “obligated?”
You are, at least in many states.
Since the Supreme Court’s 2018 Wayfair decision, many businesses are required to collect and remit sales tax in multiple states – more so than pre-Wayfair. Various “responsible party” laws across the country mean that a business itself is not the only one at risk: CEOs, CFOs, directors and other execs can be responsible for sales tax shortfalls.
That’s personally responsible, as many states’ sales tax registration forms ask for Social Security or driver’s license numbers (or both) of at least one corporate officer or executive. Other states ask for company documentation verifying leadership. Owners’ individual tax returns have occasionally been compared to those of the company for evidence of “material involvement” in the business.
You’re not the only one potentially on the hook. Rules allow states to demand payment under certain circumstances against any responsible person (which means possibly other leaders in your company – see the Maryland statutes, for instance).
Question of will
Just as economic nexus and taxability are not the same in every state, personal responsibility laws also differ. 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 … .”
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.
Georgia adds that examples include (but are sure not limited to) individuals who serve as officers and directors; control company financials; hire and fire; sign checks (and sales tax returns); and control the company funds and bank accounts.
Personal liability can often apply 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 tax jurisdiction and even if a responsible party’s failure was not intentional or willful. Some states – such as Wisconsin and Florida – do specifically mention “willful” failure to pay sales and use taxes.
(And don’t try hiding behind a corporate veil, as this New York case proved.)
Out of business – now what?
Some states use a company’s bankruptcy as a trigger to personal liability for unpaid taxes – and liability can follow you, too. “The personal liability of such person as provided in this subsection shall survive the dissolution of the corporation or other form of business association,” Wisconsin statutes add.
New York agrees, and so does Texas, where “the dissolution of a corporation, association, limited liability company, or partnership does not affect a responsible individual’s liability.” (Texas and California are, however, among states where personal liability doesn’t always kick in until the actual collection of the sales tax.)
So, what’s the worst that could happen? A slap on the wrist and a promise not to do again? No: penalties, interest and multiples of a company’s tax liability levied against one person. Not to mention, in extreme cases, a criminal record.
Fair perhaps. Harsh possibly. But either way, a reality of sales tax obligations and risk in eCommerce today.
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.