Employees, Officers and Owners: You May be Personally Liable for Your Company’s Taxes

Officers, certain employees and owners of a business can be held personally liable for the failure of a company to collect and remit certain “trust taxes,” most notably sales/use and withholding taxes.

By Jeff Weinkle, SALT manager

Employees and officers of a business, and certain owners of limited liability entities, generally take comfort in the fact that they may not be held personally liable for debts of the entity. However, such protections do not extend to certain taxes held in trust for the state, most notably sales/use and withholding taxes. [1] And while federal employer withholding taxes have long been held as the legal responsibility of certain officers and employees by the IRS, it’s important not to downplay the various state trust tax obligations. Officers, certain employees and owners can be held personally liable for the failure of a company to collect and remit these trust taxes. [2]

While this obligation has been codified in Georgia law for decades, on Aug. 14, 2015, the Georgia Department of Revenue adopted a new tax regulation that provides more detailed guidance on this obligation. [3] The regulation describes who may be held personally responsible and sets forth guidance for protesting a personal assessment. [4] It is unclear whether or not the Department plans to increase the volume of assessments made on individuals responsible for state trust taxes of delinquent business taxpayers as a result of adopting this regulation.

Georgia’s rule, which closely follows the corresponding federal law, holds a person liable for the uncollected taxes (or taxes collected and unpaid) of a company when that person is a responsible party and the nonpayment of tax was willful. [5]

In order to be considered a responsible party, the person must have the direct or indirect ability to control or manage the disposition of the business entity’s funds or assets. A responsible party can include not only the person whose duties involve the management and payment of these taxes, but may also include any other person who has the authority or ability to control such payments. Companies must identify the responsible parties when registering for Georgia sales tax or withholding tax accounts and may edit this information through the Georgia Tax Center online portal. [6] If no responsible parties are listed, there is a rebuttable presumption that all officers are responsible.

Failure to collect and pay trust taxes is considered willful when it is the result of voluntary action or reckless disregard of the responsibility. This means that the responsible party has knowledge of the tax and ability to pay but has chosen not to, or that the parties have ignored or failed to investigate the risk of nonpayment. Ignorance of the law is no defense, as willfulness does not require bad intentions by the responsible party. Further, delegating the responsibility to collect and remit these taxes does not relieve a responsible party of any liability. In cases of financial hardship, payment of trust taxes such as sales & use and withholding comes first. By paying other creditors before remitting such taxes to the state, the responsible person has demonstrated a willful nonpayment of tax.

It is important to note that these personal liability rules exist almost universally across all other states. One particularly strong example is New York, which holds responsible any officer or owner and any employee whose duties include complying with state trust taxes. [7] Even partners or members of a partnership or limited liability company who have no part in handling the company’s tax obligations and only hold a minority or passive business interest can still be held personally responsible for delinquent tax, as was the case in a recent New York Tax Appeals Tribunal opinion. [8]

The takeaway here is that business owners should ensure they have the right personnel in place to manage trust tax obligations, and business officers have a duty to ensure that the taxes are properly managed. Even on the employee level, the responsibility of collecting and remitting sales and withholding tax should not be taken lightly. HA&W’s SALT team can assist taxpayers with understanding how to comply with their trust tax obligations so that none of the employees, officers or owners are held personally responsible.

Contact Jeff Weinkle, SALT manager, at [email protected] or Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at [email protected] for more information.

[1] These taxes are often referred to as “trust fund taxes” or “trust taxes” because the taxpayer is acting as the state’s trustee in collecting/withholding the taxes at the source and in remitting those taxes to the state. In this article, those taxes may be referred to as “trust taxes.”

[2] This personal liability rule is not to be confused with state successor liability rules, which exist in almost every state and provide that a purchaser of a business may be held liable for unpaid trust taxes of the seller. For example, Georgia law has a successor liability provision for sales & use taxes, where the purchaser of the assets or property of an existing business is personally liable for the payment of any delinquent sales/use tax owed by the seller. O.C.G.A. § 48-8-46 requires a successor to withhold payment from the proceeds of the sale equal to such liability if the seller does not provide a certificate of tax compliance from the Department of Revenue stating that no such taxes are due. This rule was recently examined by the Georgia Tax Tribunal in Douglasville Hospitality, Inc. v. Commissioner (TAX-SUT-1526300), where the Tribunal ruled that there is no separate statute of limitations period for a successor liability assessment. Georgia successor liability tax laws also extend to withholding taxes under O.C.G.A. § 48-7-106. A few states extend successor liability tax rules to taxes other than trust taxes.

[3] O.C.G.A. § 48-2-52 covers the personal liability of officers or employees for trust tax delinquency. The new regulation is Ga. Reg. 560-1-2-.01.

[4] It is worth noting that the new regulation defines trust taxes to include not only sales/use and withholding taxes, but also prepaid 911 taxes and “any amounts that are required to be collected and remitted to the Department.”

[5] See Internal Revenue Code § 6672.

[6] The Georgia Tax Center is accessed online at http://gtc.dor.ga.gov/.

[7] See N.Y. Tax Law §§ 1131(1) and 1133(a).

[8] See In the Matter of the Petitions of Eugene Boissiere and Jason Krystal, DTA Nos. 824467; 824937; 824938, July 28, 2015.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.