Sales Tax Horror Stories - Responsible Party Laws

Sales tax is a significant revenue source for many states. In fact, according to the Tax Policy Center, for many states, it can comprise 25%-35% of a state’s revenue.

The 2018 Wayfair decision caused a huge shift in how businesses and states had to manage sales tax. Now, more businesses than ever are collecting sales tax on behalf of the state, and many more still haven’t figured it out or are avoiding adding new states until they get caught. What these businesses don’t realize is that due to responsible party laws, a business itself is not the only one at risk. According to responsible party laws, CEOs, CFOs, Directors, and other individuals who have influence over a business’s tax and accounting processes can be held personally responsible for any sales tax shortfalls. Is that person you? 

What is a responsible party law and why would you be held accountable for your company’s missteps?

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 sales tax responsibility for mistakes and non-compliance? The company? Employees? Corporate officers? 

Personal liability for sales tax can extend to owners, directors, shareholders, officers, and even employees. 

The sales tax responsibility 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 its'  personal assets, which could be claimed to satisfy a sales tax liability of the business. That’s a lot to risk if your business isn’t currently complying and is at risk of an audit. 

Below are seven questions to ask yourself to determine if you, personally, are at risk for your company’s non-compliance. 

1. Are you listed as an officer or director of the business? 
2. What is your ownership percentage?
3. Do you have the authority to hire or fire employees? Do you have knowledge of or control over financial affairs? Are you authorized to operate the business, review its books and records, and determine and authorize payment of creditors?
4. Do you participate in the daily operation of the business or in shareholder or director meetings?
5. Are you involved in the preparation of sales tax returns or the payment of sales taxes?
6. Do you receive a Form W-2 from the business, reflecting significant compensation? Do you receive a Schedule K-1 that identifies you as a general partner or managing member?
7. Do you complete Schedule SE, Self-Employment Tax, for your tax return Form 1040, with respect to any of the allocations made or any of the payments received from the business?

If you are repeatedly answering “yes” to these questions, it could be you. The best solution to take this risk off your back is to have your business comply with sales and use tax laws. 

If your company sells into multiple states and has established sales tax nexus (check out our economic nexus guide) this won’t be an easy task, but 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. 

If you’re looking for help in managing your sales and use tax obligations and gaining a better understanding of how to comply, TaxConnex can help! Get in touch to learn how we can alleviate the burden and risk of having the sales tax responsibility for you and your business. 

Learn more about Responsible Party Laws in our eBook on the subject.