Sales & Other Taxes – Are You Legally Responsible?
Most individuals have a misconception that only owners or officers are held responsible for a company’s tax compliance. However, over the last several years, states have taken the definition of responsible person to another level to include other individuals, like employees, and have enforced that definition in order to help collect taxes, penalties, and interest. Additionally, states have applied the responsible person definition to all types of trust fund taxes.
A trust fund tax is any tax collected or withheld from a person or company, which is held in trust for the government. In Indiana, trust fund taxes include payroll withholding, sales, county innkeeper’s, food and beverage, motor vehicle rental, tire, excise, and several others. While this article focuses on sales tax, it’s important to know legal responsibility also applies to other trust fund taxes.
Another misconception people have is that they are only responsible for sales tax, and other trust fund taxes, for which they collect and remit. However, this is not the case. A responsible person can also be on the hook for taxes that should be collected and remitted. From a sales tax perspective, this could come into play more often due to the Wayfair case decision, which confirmed states can now assess sales tax on an economic nexus standard. As a reminder, the general guidelines to use in considering economic nexus within a state is $100,000 in gross sales or 200 separate sale transactions (some states have higher or lower thresholds). With these revised guidelines, and more states going to them for sales tax, as well as, many believing income tax not being too far behind, many individuals may want to consider if they could be considered a responsible person.
States have varying definitions of what it means to be a responsible person for tax purposes. In general, states have held that a responsible person may be held personally liable for tax collected or required to be collected. Additionally, states have held individuals to be jointly and severally liable and can go after multiple responsible persons within a company. Even if the company is a limited liability company or a corporation, which both can provide liability protection from creditors, that protection does not transfer to the government. States can go after a responsible person’s assets in order to pay for the company taxes, penalties, and interest owed.
Some examples of what states and courts have used to determine if someone is a responsible person include signing company tax returns, maintaining corporate books, authorizing payments to creditors, signing checks, participating in business meetings, having responsibility for company’s management, and having knowledge, control or discretion over business and financial matters. In some states all owners in a partnership are responsible persons, while in other states, the silent/investor only partner may not be considered a responsible person.
If you think you may be considered a responsible person, there are several steps you can take to help protect yourself. For example, always make sure those trust taxes are paid first and on time, don’t ignore any government requests or letters of inquiry, establish internal controls for oversight of tax payments, and use outside professional services to help research, file and pay taxes. If you are unsure of whether you may be considered a responsible person, you may want to check with us or your attorney or to determine a state’s specific law regarding responsible persons.