Tax Receipts
Late last year, the Office of the State Comptroller (the “OSC”) estimated that sales and use tax receipts would increase by 2.3% in the SFY 2024-2025.[i]
The OSC also projected that collections from sales and use taxes would increase by 3.5 percent for SFY 2025-2026.[ii]
Part of this increase is undoubtedly attributable to the efforts of the Department of Taxation and Finance to identify taxpayers who failed to collect and/or remit the correct amount of sales tax.[iii]
Delinquent Taxpayer
Within the group of delinquent taxpayers are businesses that may have fallen on difficult times.
Some of these businesses may have collected the proper amount of sales tax but, instead of remitting such amount to the State – on whose behalf the tax was collected and held in trust by the business[iv] – the business diverted at least a portion of these funds toward the payment of various expenses incurred by the business, in the hope of keeping it afloat.
Managing the Business
Of course, a business is managed by individuals, and depending upon the size of the business, as well as other factors, certain of these individuals may have been charged – whether by virtue of their position or otherwise – with the responsibility of ensuring that the business complies with its tax obligations, including the collection and remittance of sales tax.
Unfortunately for some individuals in the business, such an internal division of labor or assignment of duties is not binding upon the State.
The Responsible Person
Many taxpayers fail to appreciate that, under certain circumstances, a shareholder, officer, director or employee of a corporation may be held personally liable for the sales tax collected or required to be collected by the entity.
Duty to Act
Specifically, New York Tax Law (the “Tax Law”) imposes personal responsibility for payment of sales tax on those owners, officers, employees, etc., of a business (“responsible persons”) that the State determines are under a “duty to act” for the business in complying with any requirement of the Tax Law to collect, account for, and pay over sales tax.
More than one person may be treated as a responsible person.[v]
Joint and Several
A responsible person is jointly and severally liable for the tax owed, along with the business entity and any of the business’s other responsible persons.
What Shield (or Veil)?[vi]
A responsible person’s personal assets may be taken by the State to satisfy the sales tax liability of the business.
Thus, an owner of the business may be held personally liable even though the form of legal entity through which the business is conducted would otherwise shield the owner’s personal assets from the creditors of the business.[vii]
Facts and Circumstances
Whether an officer or employee of the business is a responsible person is determined in every case on the particular facts involved.[viii]
Generally, a person who is authorized to sign a corporation’s tax returns, or who is responsible for maintaining the corporate books, or who is responsible for the corporation’s management, is under a duty to act.
Merely holding a corporate office or being a shareholder does not, in and of itself, warrant the imposition of personal liability. Only those who are “under a duty to act” on behalf of the business may be assessed the penalty, with the main inquiry being whether the individual had sufficient authority and control over the affairs of the corporation.[ix]
Separate Liability
Significantly, the personal liability of a responsible person for sales tax is separate and distinct from that of the business – it extends beyond the corporation.[x]
For example, a corporate bankruptcy does not affect the responsible person’s liability for the tax because the latter involves a separate claim than the one that is asserted against the corporation.
Moreover, the liability may survive the termination of the business, as one non-shareholder taxpayer (“Taxpayer”) recently discovered.[xi]
Authority Within a Subsidiary Corp
Corp was a wholly owned subsidiary of Parent Ltd, which was headquartered overseas. Corp was organized in New York and had an office in New York City. It was in the business of providing subscription-based services for computer-related technical support during the nine-year audit period (the “Period”).
Individual Taxpayer co-founded and incorporated Corp at the beginning of the Period. He served as Corp’s “President-Marketing” throughout the Period, and worked at Corp’s New York office during that time.
Taxpayer’s Authority
Among the actions taken by Taxpayer in his capacity as Corp’s “President-Marketing” was the execution of a master service agreement with Parent Ltd.
Taxpayer also executed an executive employment agreement between himself, Corp, and Parent Ltd., in which he agreed to devote 100% of his business time to Corp.
Taxpayer signed a New York State quarterly combined withholding, wage reporting, and unemployment insurance return for Corp on which Taxpayer listed his title as “President-Marketing.”
Taxpayer had, and exercised, the authority to sign invoices for Corp during the Period.
The application to register for a sales tax certificate of authority[xii] that was filed for Corp identified Taxpayer as a responsible person; specifically, as “President.”
Taxpayer signed the U.S. corporation federal income tax returns for Corp, form 1120, during the Period that identified Taxpayer as “President-Marketing.”
The forms 1125-E, Compensation of Officers, that were filed with Corp’s forms 1120 during the Period listed Taxpayer as an officer, reported that he devoted 100% of his time to the business, and received a significant sum of compensation. No other officers were listed on this schedule.
Corp’s website identified Taxpayer as Corp’s co-founder and “President-Marketing.”
Taxpayer and his co-founder were the largest shareholders of ordinary shares of Corp’s parent, Parent Ltd., during the Period, with each holding 28.37%; combined, they had a controlling interest in Parent Ltd.
The Audits
About halfway through the Period, the Division of Taxation (the “Division”) commenced a sales tax audit of Corp for the first five years of the Period (the “first audit”). Thereafter, the Division expanded the audit period to cover three more years.
Indicia of Taxpayer’s Authority
Several times during the course of this first audit, Taxpayer agreed to, and executed,[xiii] extensions of the time within which the Division could assess sales tax against Corp and against Taxpayer as a responsible person of Corp.
During this timeframe, Taxpayer retained and authorized CPA to represent Corp in connection with the audit. Taxpayer signed a power of attorney form as “President” of Corp.
During the course of the audit, the Division’s auditor retrieved a “consumer disclosure report” for Corp on which Taxpayer was identified at various times during the Period as Corp’s Chairman, President, and Director.
Notices of Determination
At the conclusion of the first audit, the Division issued a notice of determination to Corp for the first five years of the Period, asserting additional sales tax owing of approximately $6.4 million (plus penalties and interest), and a second notice of determination for next three years, asserting tax of approximately $11.75 million (plus penalties and interest).
Also as a result of the first audit, the Division determined that Taxpayer and two other individuals were responsible persons for Corp for sales tax purposes.
Consequently, the Division issued two notices of determination to Taxpayer as an officer/responsible person of Corp, the first asserting tax of approximately $6.4 million, and the second asserting tax of for approximately $11.75 million.[xiv]
Corp requested a Conciliation Conference with the Bureau of Conciliation and Mediation Services (BCMS). After BCMS agreed with the Division’s conclusions, CPA filed petitions with the Division of Tax Appeals (the “DTA”) on behalf of Corp to protest the conciliation orders from that sustained both notices of determination. Attached to each petition was a power of attorney form signed by Taxpayer on behalf of Corp.
Settlement
During the pendency of the proceedings arising from the first audit, the Division and Corp agreed to a settlement. Specifically, they agreed to a 30 percent taxable ratio on sales, and executed a stipulation for discontinuance agreeing to a tax deficiency in the amount of $5.107 million (plus interest, and zero penalties) for the eight years covered by the first audit. The DTA issued an order of discontinuance reflecting the terms of the stipulation
As a result of this settlement, Taxpayer’s associated responsible person assessments for those periods were adjusted to reflect the amounts agreed to in the stipulation for discontinuance.
Second Audit
While the above proceedings were in progress, the Division commenced a follow-up audit of Corp for the next three years (the second audit). The Division contacted Taxpayer as a responsible person for Corp.[xv]
During the course of the second audit, CPA indicated that Corp went out of business during the first year covered by the second audit. CPA also indicated there were no records for Corp for this final year, and stated that he would settle the audit on the basis of the agreement reached for the first audit.
The auditor calculated the amount of tax due from Corp for the second audit based on the same 30 percent taxable ratio on sales used for the first audit. Based on this calculation, Corp owed tax in the approximate amount of $1.173 million; accordingly, the Division issued a statement of proposed audit change to Corp asserting this amount of tax (plus interest).
Corp agreed to the assessment of the tax, but when payment was not forthcoming, the Division issued Corp a notice and demand for payment.
Taxpayer’s “Defense”
The Division also issued a notice of determination to Taxpayer as an officer/responsible person of Corp, asserting tax of about $1.173 million (plus interest) for the same period.
Taxpayer filed a petition with the DTA to contest the above determination.
The question before the administrative law judge (the “ALJ”) was whether Taxpayer was a person required to collect and remit sales tax[xvi] so that he was personally liable for the sales tax determined as due from Corp, for the Period.[xvii]
Taxpayer testified that he had the ability to sign checks for Corp, and that he issued checks for Corp’s rent, cleaning services, and health insurance. According to Taxpayer, he would sign a check for Corp “if somebody [from Parent Ltd] told [him] there was a check that had to be issued[.]”
Taxpayer presented the testimony of Accountant, whose business relationship with Corp was “strictly” limited to the preparation of corporate income tax returns. Accountant testified that he dealt with individuals overseas (presumably from Parent Ltd) for the preparation of Corp’s federal corporate returns and did not recall speaking with Taxpayer about the preparation of these returns. According to Accountant, Taxpayer was not involved in preparing the corporate income tax returns.
ALJ’s Decision
The ALJ began by reciting the applicable law: “[e]very person required to collect [sales] tax . . . shall be personally liable for the tax imposed, collected or required to be collected under [the Tax Law].”[xviii]
The Court then explained that the terms “[p]ersons required to collect tax” and a “person required to collect any [sales tax]” include, among others, corporate officers, directors and employees who are under a duty to act for such corporation in complying with the requirements of” the sales tax.[xix]
Responsible Person Status
Whether a person is an officer or employee liable for tax, the ALJ continued, must be determined based upon the particular facts of each case. “The pivotal question,” the Court stated, “is whether the individual had or could have had sufficient authority and control over the affairs of the corporation.” Among the factors to be considered in making this determination are the individual’s status as an officer, director, or shareholder; the individual’s day-to-day responsibilities; the duties and functions as outlined in the certificate of incorporation and bylaws; knowledge of and control over the financial affairs of the corporation; the authority to write checks on behalf of the corporation; responsibility for maintaining the corporate books; authority to sign sales tax forms; the preparation and filing of sales tax returns; authority to hire and fire employees; and the individual’s economic interest in the corporation.
Significantly, the ALJ added that one’s failure to exercise such authority does not relieve the individual of liability; the fact that one did not exercise their responsibilities is irrelevant.
Taxpayer’s Status
The ALJ observed that Taxpayer did not dispute the underlying sales tax liability assessed against Corp, including the amount of sales tax due as agreed to by Corp for the Period. Thus, the only issue in dispute was whether Taxpayer had, or could have had, sufficient authority and control over the affairs of Corp to be considered a person under a duty to collect and remit the unpaid taxes in question.
The ALJ then explained that Taxpayer had to overcome “the presumed correctness” of the Division’s assessment. Specifically, in order for Taxpayer to prevail, he “was required to establish by clear and convincing evidence that he was not an officer having a duty to act on behalf of the corporation, i.e., that he lacked the necessary authority or he had the necessary authority, but he was thwarted by others in carrying out his corporate duties through no fault of his own.”
Upon review of the record, the Court stated, it was clear that Taxpayer failed to meet this burden and, thus, was “properly held responsible for [Corp] as an officer under a duty to act for such corporation in complying with the requirements of” the sales tax.
In support of its conclusion, the ALJ relied upon the following facts:
- Taxpayer was the co-founder and incorporator of Corp;
- He was an officer of Corp with the title of “President Marketing” during the Period and devoted 100% of his time to the business;
- Taxpayer listed his title as “President” of Corp on several documents he had signed, including consents extending the time for tax assessments on behalf of Corp and himself as a responsible person thereof, and power of attorney forms he signed on behalf of Corp;
- He was a shareholder of Corp’s parent, Parent Ltd; he and Corp’s co-founder together held a controlling interest in the parent company, which owned 100% of Corp;
- Taxpayer had an economic interest in Corp, both through his shares in Parent Ltd, as well as through his significant compensation as Corp’s officer;
- He derived substantial income from Corp during the Period, as evidenced by the corporation’s federal tax returns;
- Taxpayer had the authority to sign tax forms on behalf of Corp during the Period at issue, as evidenced by his signature on the power of attorney forms and consents extending the time for tax assessments provided to the Division during the audit;
- He signed tax returns on behalf of Corp, including Corp’s withholding tax and income tax returns;
- Taxpayer had the authority to sign invoices for Corp during the Period and exercised that authority; and
- He admitted that he had the “ability” to sign checks for Corp and issued checks for rent, health insurance, and other expenses.
According to the Court, these uncontested facts showed that Taxpayer had, or could have had, sufficient authority and control over Corp’s affairs to be considered a responsible person for Corp.
“Absent compelling circumstances which establish that apparent authority is not actual authority,” the ALJ continued, “an individual with the indicia of responsibility for the collection and payment of sales tax will be liable for the failure to do so.” The ALJ indicated that Taxpayer failed to meet his burden of proving any such compelling circumstances to establish that he did not have actual authority.
Taxpayer’s Position
Next, the ALJ rejected Taxpayer’s assertion that Corp’s overseas parent (Parent Ltd) was responsible for the unpaid sales tax. Taxpayer, the Court stated, was a shareholder of the parent company that owned 100% of Corp during the Period. Moreover, he and his co-founder were the largest shareholders of the parent’s ordinary shares; combined, they had a controlling interest in Corp’s parent company. “Establishing a corporate structure,” the Court explained, “in which the corporation in question is wholly held by a parent company does not relieve the officer of that corporation of his sales tax duties. It is well settled that an officer cannot relieve himself of his responsibility for operating his corporation and expect that he will be relieved of sales tax liability.”
Moreover, while Taxpayer contended that his actions on behalf of Corp and his signature on tax returns, tax forms, checks and other business documents for Corp were directed by other individuals from Parent Ltd, he failed to carry his burden of proving that he lacked sufficient authority or control over Corp to be considered a person under a duty to collect and remit the unpaid taxes in question.
Taxpayer did not submit sufficient evidence proving his roles and responsibilities as an owner and officer of the corporation, but instead relied upon self-serving testimony which was insufficient to meet his burden of proof. He contended that his responsibilities were determined by the board of directors of Parent Ltd, but he failed to show that he lacked sufficient authority to ensure that the business’s sales tax obligations were paid, or that he was thwarted by others in carrying out his corporate duties through no fault of his own. Furthermore, Taxpayer’s claim that he had no control over tax issues was “disingenuous, based on the documentary evidence to the contrary.” Indeed, the above-referenced agreement between Corp and Parent Ltd that Taxpayer signed on behalf of Corp required that Corp bear the cost of any taxes imposed on its customer support services. Thus, Taxpayer clearly had the authority to dictate Corp’s payment of taxes, and he failed to meet his burden of proof to show that he did not have or could not have exercised sufficient authority and control over Corp’s affairs during the Period so as to be excused from responsibility for its tax obligations.
Finally, the ALJ rejected Taxpayer’s contention that other individuals from Parent Ltd were responsible for Corp’s unpaid taxes. “It is well settled law,” the Court responded, “that more than one person can be held liable as a responsible officer under the statute, and liability is joint and several. Merely pointing to another individual and alleging such individual is a responsible officer does not establish that other individuals are not responsible officers as well.” Moreover, the Court added, the Division was under no obligation to pursue other allegedly responsible persons before proceeding against Taxpayer. “[W]hether other individuals [could] also be responsible for [Corp’s] sales tax obligations [did] not relieve [Taxpayer] of liability.”
With that, Taxpayer’s petition was denied, and the notices of determination were sustained.
Takeaways
Unpaid sales taxes rarely occur in a vacuum; rather, they may be one of several signs that a business is likely in economic straits, and are often accompanied by unpaid employment taxes. Together, these unpaid liabilities can turn into an expensive proposition for the business and its owners.
In many, if not most, cases the responsible person of a struggling business may face the difficult choice of either (i) paying over to the government the sales tax collected, thereby denying its use by the business, or (ii) using the collected funds to continue operating the business and exposing themselves to personal liability for the unpaid sales tax.
According to the tax authorities and the courts, economic difficulties do not excuse a responsible individual from ensuring that their business fulfills its obligation to collect and remit sales tax on behalf of the government.
In the case of any individual who may be treated as a responsible person of a business, the best way to protect them from personal liability for the sales tax obligations of the business would be to ensure that the business pays the collected sales taxes when due. This may require the implementation of a process for periodically reviewing the assignment of duties and responsibilities for tax matters within the business, and confirming that such are being performed satisfactorily by the designated individuals. It would be worth the effort.
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.
[i] Ending March 31, 2025.
[ii] https://www.osc.ny.gov/files/reports/pdf/budgets-receipts-disbursement-24-27.pdf.
[iii] In general, the sales tax is a transaction tax, with the liability for the tax arising at the time of the transaction. It is also a “consumer tax” in that the person required to collect tax, the seller, must collect it from the buyer when collecting the sales price for the transaction to which the tax applies. The seller collects the tax as trustee for and on account of the State. The tax is imposed on the purchase of a taxable good or service; it is collected from the purchaser by the vendor, and then held by the vendor in trust for the State, until the vendor remits the tax to the State. All sales of property are deemed taxable until the contrary is established. The burden of proving that any sale is not taxable is upon the seller and the buyer. In all cases, the parties to the sale transaction must maintain records sufficient to verify all sales tax-related aspects of the transaction.
[iv] The sales tax is a “trust-fund” tax, which is why the person charged with ensuring its collection and remittance may be held personally liable.
[v] Personal liability attaches whether or not the tax imposed was collected. In other words, it is not limited to tax that has been collected but has not been remitted. Thus, it will also apply where a business might have had a sales tax collection obligation, but was unaware of it. Along the same lines, the personal liability applies even where the individual’s failure to take responsibility for collecting and/or remitting the sales tax was not willful. In addition, the penalties and interest on the corporation’s unpaid sales tax passes through to the responsible person.
[vi] According to Crusader lore, at some point during the Third Crusade, Richard the Lionheart (of England) and Saladin (from a prominent Kurdish family) once compared swords – the King used his heavy longsword to break through an iron bar, while the Sultan used his scimitar to slice through a silk kerchief. Not quite a shield and veil, but close enough for my purposes.
[vii] The corporate shield is ignored for this purpose.
[viii] Typically, owners are assessed personally, but ownership is not required in order to be found responsible.
[ix] In considering the nature and extent of the taxpayer’s involvement with a business, one must consider several factors including both the taxpayer’s federal income tax returns as well as the business entity’s returns. The following factors, if present, can indicate that the taxpayer has significant involvement in the business.
- Has the taxpayer described their participation in any business as active or passive?
- Did the taxpayer claim an exemption from the 3.8% surtax on net investment with respect to their share of S corporation income, on the basis of having materially participated in the business?
- How can they reconcile the exemption with their claim that they are not active in the business for purposes of determining their status as a responsible person?
- Did they receive a W-2 from the business, reflecting significant compensation, which may also point to active participation in the business?
[x] Because the responsible person’s liability is distinct from that of the corporation, it has its own statute of limitations for assessment purposes. Thus, the extension of the corporation’s limitation period does not automatically extend the limitation period for assessing tax against the responsible person.
[xi] In the Matter of the Petition of Vishal Dhar, Division of Tax Appeals, DTA No. 830620,December 19, 2024.
[xii] Form DTF-17.
[xiii] Form AU-2.10.
[xiv] Same as the deficiencies asserted against Corp.
[xv] Along with two others.
[xvi] Under NY Tax Law Sec. 1131(1) and Sec. 1133.
[xvii] As mentioned earlier, the determination of one’s status as a responsible person is fact specific. However, a review of the case law highlights the factors that are routinely considered important, and many of the rulings reflect consistent themes that may be useful for planning purposes.
Among the questions that are asked in evaluating one’s status as a responsible person are the following: Did the person receive a salary? What was their ownership percentage interest? Did they enjoy a return on their investment? Did they have authority to hire or fire employees? Did they have knowledge, control or discretion over business/financial affairs? Did they participate in daily operation of the business or in shareholder/director meetings? Were there prior tax assessments against them or the business? Were they involved in the preparation of sales tax returns or the payment of sales taxes? Did they sign sales tax returns? Did they have authority to operate the business, review its books and records, and determine and authorize the payment of creditors? Did someone else have complete control of daily operations, financial affairs and management of the business? Did they have knowledge of the business’s industry? Did they have check-signing authority? Did they sign only in the absence of, and at the direction of, another person? Were they listed as an officer or director of the business? Did they and the business use the same CPA to prepare their returns?
[xviii] NY Tax Law Sec. 1133(a)(1).
[xix] NY Tax Law § 1131(1).
