Minnesota and Masschusetts Hold Individuals Personally Liable for Unpaid Sales Taxes

May 31, 2017

If a business owner or officer has significant authority over payment of taxes and/or control of the company’s financial operations, they can be held personally responsible for unpaid sales taxes.

What happens when state sales tax goes unpaid? State sales taxes are referred to as trust-fund taxes because a company that collects the sales tax is presumed to hold the tax in trust for the benefit of the relevant governmental authority. Therefore, unique enforcement provisions exist for sales taxes that do not necessarily exist for other types of taxes. [1] For example, even in cases where an entity sells all of its business assets, the purchaser of those assets has successor liability for the seller’s pre-closing sales tax liabilities. Another unique enforcement provision, as illustrated by a recent Supreme Court case in Minnesota is that business owners and/or officers may be held personally liable for unpaid sales tax liabilities. [2]

In the Minnesota case, a married couple each owned 50 percent of a corporation that owned a property on which their son decided to open a restaurant. While the son managed the restaurant, the father remained the director of the corporation and signed tax returns, held power of attorney and regularly signed checks on the restaurant’s behalf. When the corporation’s sales tax went unpaid, the Minnesota Supreme Court held that the father was personally liable for the sales tax because the father funded the company, signed checks on its behalf, had a 50 percent stake in the company and delegated day-to-day control of the business to someone else. The totality of these factors proved that the father had sufficient control and responsibility over the unpaid sales taxes.

Similarly, the Massachusetts case addresses the personal liability of one individual (the taxpayer) who, along with two other men, founded and operated a wireless retail business. The taxpayer was noted to be the Secretary, Officer and Director in the company’s Articles of Organization. The second man provided the financial investment to start the company, and the third man provided his knowledge of the cell phone industry. Over time, the man with the industry knowledge siphoned cash from the business for non-business expenses (gambling, personal debts and other business debts), resulting in the business having unpaid bills and declining financial operations. Eventually, the second man grew frustrated and wanted his initial investment returned, so the taxpayer ultimately issued two checks to return the initial $20,000 investment.

The totality of the facts led Massachusetts to determine that the taxpayer had sufficient control over the company’s finances to hold him personally responsible for the company’s unpaid sales tax liabilities. The state noted that he was a founding principal; was an owner, partner, officer and director; oversaw the day-to-day retail operations; regularly exercised control over the financial aspects, including payment of bills (such control does not need to be exclusive, only significant); and had check-signing authority. Moreover, Massachusetts noted that the taxpayer was aware of the company’s unpaid sales tax liabilities and still continued to pay other non-tax expenses (e.g., the return of the second man’s investment and rent payments to its landlord).

These cases are illustrative of the factors that states use to determine personal liability for sales tax – authority over the payment of taxes and/or control of the company’s financial operations. The Massachusetts case also cites two instances where the state found that an individual was not a responsible person to be held personally liable for delinquent sales tax. [3] The first instance involved a treasurer who did not have any managerial duties or control over corporate funds, and his check-signing authority could only be exercised at the direction of other individuals in the company who held all management control and controlled all payments. The second instance involved a man who did not participate in the financial affairs of business or exercise his check-signing authority during the tax periods at issue in the case, which occurred after his retirement.

Business owners and officers often forget that they can be held personally liable for the business’ unpaid sales taxes, but these recent cases serve as a sobering reminder. Therefore, it is especially important that a business be in compliance with state sales tax requirements.

Aprio can help your company evaluate the sales tax landscape and determine where the company should be filing sales tax returns. We can assist your business with becoming compliant with its sales taxes so that you avoid personal liability. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

This article was featured in the May 2017 SALT Newsletter. You can view the full newsletter here.

[1] It is worth noting that withholding taxes are also considered trust fund taxes and similar enforcement provisions exist for those types of taxes as well.

[2] Lo v. Comm’r of Revenue, A16-0918, Supreme Court, 04/12/2017, and Almaleh v. Comm’r of Revenue, Docket C319808, Mass. ATB, 03/29/2017.

[3] MacLean v. Comm’r of Revenue, Mass. ATB Findings of Fact and Reports 1998-16; Caradimos, Executrix v. Comm’r of Revenue, Mass. ATB Findings of Fact and Reports 1997-589.

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 the matter.

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About the Author

Jess Johannesen

Jess Johannesen, Senior Tax Manager at Aprio, is a state and local tax advisor with expertise in sales/use tax and state income tax matters, state tax credits and incentives, and state and local tax M&A due diligence. Known for quick response times and technical expertise, Jess helps business leaders and decision makers in an array of industries maximize state tax benefits, and minimize risks and exposures while keeping in compliance. Defined by kindness and passion for Georgia sports, Jess is a thoughtful, curious and detail-oriented advisor.