Texas Finds Individual Personally Liable for Unpaid Sales Tax

August 29, 2018

A Texas Administrative Law Judge found that the president and sole owner of a business should be personally liable for the unpaid sales tax of the business because he had control over and supervised the payment of taxes.

By Jess Johannesen, SALT Manager

States view sales tax as a trust fund tax, meaning that when a seller collects sales tax from a purchaser, that seller holds those amounts in trust for the state until they are paid.  In other words, the moment that a seller collects sales tax, that seller is holding the state’s money.  Therefore, states often impose rules regarding sales tax that they don’t for other taxes.[1]

For example, purchasers of a business typically succeed to any sales tax liabilities of the business even if those liabilities relate to a period prior to the purchase, a concept known as successor liability (which we wrote about in this article from the current newsletter).  Another example is the fact that states may hold “responsible individuals” personally liable for any unpaid sales taxes.  What constitutes a “responsible individual” can vary from state to state and is often based on the specific facts and circumstances of each situation.  This is the subject a recent Texas Comptroller’s Decision issued on June 7, 2018, in which the Administrative Law Judge found the sole owner and president of a corporation personally liable for the business’ unpaid sales tax.[2]

In the ruling, the company sold construction materials consisting primarily of ready-mix concrete.  The president and sole owner’s responsibilities were detailed through the course of an audit to include reviewing monthly financial statements, providing additional funding as needed and signing the company’s application for a sales tax permit.  However, the owner described that he was not involved in the day-to-day operations of the business, referring to the roles of the office manager, plant manager and other assistants who were responsible for the sales and use tax returns.

During an audit, the owner described the business’ difficulties as a result of the economic downturn in 2008.  The owner eventually fired the managers and assistants after discovering that they were stealing from the business, among other offenses.  He alleged that they stole and cashed checks that were intended for the Comptroller’s office (he filed a report with the sheriff but never followed through).    At that time, the owner described how he was trying to save the business by assuming many of the day-to-day tasks, such as going to customer locations to pick up checks and delivering them directly to the customer’s banks to eliminate the waiting period for them to clear.  Ultimately, the company filed for bankruptcy.  During the course of the audit, it was discovered that the company had collected $140,415 in sales and use tax that it did not remit to Texas.

Texas’ laws provide that any individual who controls or supervises the collection of tax from another person, or an individual who controls or supervises the accounting and payment of the tax money, and who willfully fails to pay the tax is liable as a responsible individual for the tax not paid.[3]  The responsible party includes an officer, director or employee who is under a duty to perform an act with respect to the collection, accounting or payment of the tax.[4]  In prior Comptroller’s Decisions, the Comptroller has repeatedly held that evidence must show the officer or director exercised financial control over the company to the extent that her or she was in a position to either properly remit the collected tax or divert them for another purpose.

The ruling states that the individual is not viewed as a responsible individual solely on the basis of his roles as the sole owner and president of the business.  Based on the activities and evidence, the state found that the owner collected money from the business’ customers and cashed those checks, and he also directed an employee to remit sales tax.  Further, the owner filed for a tax refund on behalf of the company.  Based on the accumulation of evidence, Texas held that the owner was indeed a responsible individual personally liable for the unpaid sales tax plus fraudulent penalties and interest.

This Texas Comptroller’s Decision serves as an important reminder that the “corporate veil” may not shield individuals from a business’ sales tax exposure.  As a result, proper sales tax compliance is vital to the overall financial health of the business, maintaining its value to prospective purchasers, and as protection against personal liability.  Aprio’s SALT team has broad and deep experience in sales and use taxes in all 50 states.  We consult with businesses to help them understand their sales tax compliance obligations, and we can serve as a business’ outsourced provider for their sales tax compliance needs.  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.

Contact Jess Johannesen, SALT manager, at jess.johannesen@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the August 2018 SALT Newsletter.

[1] Many states treat withholding taxes the same way.

[2] Texas Comptroller’s Decision No. 109,643, 06/07/2018.

[3] Tex. Tax Code §111.016

[4] Id.

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.