Are You Minding The Store? Executives Held Personally Liable For Unreported Sales Tax
Two recent decisions provide an important reminder for executives and tax managers of Internet retailers and remote sellers: Make sure that you: (1) understand your company’s sales and use tax obligations; (2) have a defensible position on state tax issues; and (3) pay attention to notices from state revenue departments, including those that come from outside your home state ― or you could find yourself subject to personal liability for unreported sales and use tax.
Most states’ tax laws deem sales/use taxes collected by a company to be held in trust for the state, and allow the state to impose personal liability upon responsible corporate officers for the failure to report and remit such “trust fund” taxes. Some state statutes go farther and impose liability on corporate officers for unreported tax.
In a New York State Tax Tribunal Decision (DTA No. 822971) issued on February 23, 2012, the CEO of a publicly-traded, online vendor of wireless phone devices and accessories was determined to be personally liable for unpaid sales tax, largely with respect to shipping and handling fees charged by his company on sales to consumers. The CEO argued that he could not be held personally liable because, among other things: (1) the company had a tax department that handled such matters, on which he relied, and that reported to the company’s CFO; (2) the company further relied upon outside accountants and auditors to ensure tax compliance; (3) the size of the company and number of transactions involved made monitoring them impossible for the company’s chief executive; and (4) the CEO did not sign the company’s sale tax returns. The Tax Tribunal rejected all of the CEO’s arguments, holding that he was a responsible officer with the power to exercise oversight over all functions related to sales tax compliance, and could not avoid liability by arguing that he relied upon others – even a full tax department and outside tax professionals – to ensure the company’s compliance.
In Eberhardt v. Michigan Department of Treasury, Michigan Court of Appeals No. 299532 (March 8, 2012), the Court upheld the imposition of personal liability against the sole shareholder and responsible corporate officer of an Indiana retailer of spas and related supplies, for unreported tax on sales to Michigan residents. The Department had previously issued an assessment for unpaid sales/use tax to company, which failed to respond. The Department subsequently assessed the shareholder for the amounts not paid by the company on the theory that he was personally liable as a responsible corporate officer. The appellant responded by arguing that the State of Michigan lacked jurisdiction to issue the earlier assessment to the company. The Michigan Tax Tribunal upheld the assessment, and the Court of Appeals affirmed. The Court found that the corporate officer was barred by the company’s failure to respond to the original sales tax assessment to raise the issue of lack of jurisdiction over the company as a defense. The Court therefore affirmed the imposition of liability of over $225,000 against the appellant.
These recent decisions should be a wake-up call for all corporate officers and tax managers – whether they work in a sole proprietorship, small private company, or even in a large, publicly traded company – to be certain that the they are confident the company’s state sales/use tax affairs are being handled appropriately, and tax counsel consulted where they have meaningful doubt or uncertainty regarding the company’s compliance. Failure to exercise proper oversight responsibility could mean the company’s tax liabilities become their own.