Arizona and Ohio Cases Remind Responsible Parties of Personal Liability for Sales and Withholding Taxes
May 28, 2020
As businesses affected by COVID-19 assess whether to take advantage of state sales and payroll tax relief, recent cases serve as an important reminder that responsible individuals can be held personally liable for non-payment of these taxes.
By: Jess Johannesen, SALT Manager
While responsible party laws are not a new concept (refer to prior SALT Newsletters which cover personal liability cases), two recent cases out of Arizona and Ohio serve as timely reminders of this rule, particularly as businesses and owners consider guidance in some states that are providing relief from timely payment of sales and/or payroll taxes due to COVID-19.
While the specific details vary to state, a responsible party generally has the authority and/or control over the collection and payment of the tax. These responsible parties may be held personally liable for the business’ unpaid taxes – typically “trust fund” taxes like sales tax and withholding tax where businesses serve merely as collection and remittance agents on behalf of the state. Two recent cases in Arizona (sales tax) and Ohio (withholding tax) illustrate the application of these responsible party rules.
In the Arizona case, the member-manager and CEO of a company was held liable for Transaction Privilege Tax (Arizona’s version of a sales tax) assessed in an audit. In this case, the CEO argued that sales tax duties and functions belong to the CFO, and that his duties as CEO were limited to the overall strategic vision of the business, negotiating loans, and handling large customers. However, the Arizona Court of Appeals held that the CEO held ultimate authority for the tax stating that, “a corporate entity cannot evade taxes simply by failing to delegat[e] a person responsible for their payment. In the absence of someone who has been given that responsibility, it must be the person with ultimate responsibility for the entity.”
In the Ohio case, the Vice President was one of three owners, and he was held liable for the business’s unpaid income tax withholding. The Vice President argued that he lacked any control, supervision, or responsibility for filing the payroll report or making the payments. He maintained that his role was limited to store development (design and construction), leasing, and preparing some legal documents during the formation of the company. He claimed that the other two owners (the President and the Treasurer/Secretary) were responsible for all financial aspects of the business. The Ohio Board of Tax Appeals ultimately rejected the Vice President’s contention that his own liability should be limited based on the other owners whom he argued were more properly assessed as responsible parties. The Board of Tax Appeals noted that while the other owners may have had responsible roles, the commissioner can assess multiple person under Ohio law and that, “if more than one person…is personally liable for any unpaid liability, their liabilities shall be joint and several.”
These two cases illustrate two different applications of the responsible party rules within each state’s laws. The first responsible party tried to argue that the authority was delegated elsewhere, while the second responsible party tried to argue that other parties were more responsible for the tax. Both instances resulted in the states rejecting these arguments, and the personal liability of these individuals was upheld.
In these uncertain times, with certain states providing COVID-19 relief for the payment and filing of sales/use and/or payroll taxes, it may be tempting to use collected but unremitted tax to replace lost revenues in the short term in order to cover other fixed expenses. These cases serve as an important reminder that if these taxes go unpaid, states have the authority to hold responsible parties personally liable for these unpaid taxes.
Aprio’s SALT team is available to answer any questions and assist you with your state tax issues. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the May 2020 SALT Newsletter.
 Arizona Department of Revenue v. Karl Tunberg, Court of Appeals of Arizona, 1 CA-TX 18-0008, 04/21/2020.
 George J. Papandreas v. Jeffrey A. McClain, Tax Commissioner of Ohio, Ohio Board of Tax Appeals, 2019-991, 04/20/2020.