Firms and people who get sales and use tax wrong in ways that do harm can face civil or even criminal punishments.
Too few owners ever consider the potential for personal liability in a company’s tax errors. That’s probably fair enough: just staying compliant is already more than a full-time job, and there’s no shortage of worries.
Every day the questions arise over registering a seller, formats of data, what exemption certificate is correct, is a product taxable? But in this stew of activity the danger to an individual can get lost. In some ways, tax problems can be disastrous for the individuals involved.
When a business screws up sales and use tax compliance, can states come after the managers, executives or owners individually? Yes they can. The good news is that you don’t have to be caught off guard.
Personal Tax Liability
The largest exposure to states may be with leaders and managers of small and mid-market businesses. Anyone at a company that signs returns or is responsible for tax and accounting may face personal tax liability.
You also don’t have to be an executive. And employees further down the chain can get into trouble, too.
Sales tax is a trust fund tax. The seller takes it in as the state’s agent, standing in its stead. The business only holds the money until the seller “remits” it to the state. The trouble comes when it isn’t remitted.
Having any of the following types of authority can make a boss liable for tax violations:
- Determining which bills and liabilities get paid when they become due.
- Hiring and firing the people on the team.
- Signing the checks for the company’s costs and other amounts due.
- Signing the company’s sales tax returns.
- Having substantial control of business decisions.
If any of that sounds like your job, then you need to understand what the impacts are when the tax a company collected isn’t paid over to the state on time.
Treating the Sales Tax as Income
The usual story you’ll hear goes like this: business is down, and there’s just no way to make payroll. So the sales tax collected is used to cover costs. You’d be surprised how many businesses actually do this. Many don’t even realize it’s a problem. Typically, they plan to pay the taxes later.
Then, when the business shuts down, the money is all gone and responsible people may face a state looking for repayment.
The second story is less sympathetic. It’s when a business collects sales tax from customers but has no intention of sending it in to the state. It’s probably not some long-running criminal scheme. It just figures nobody is going to notice.
If you’re held liable for a company’s tax problems, the pain can be real. The responsible individual may have to pay all the tax collected but never paid, plus any penalties and interest accrued. Add that to potential criminal penalties. These can lead to fines and even jail time.
Most states have laws or regulations on personal liability for tax violations. Employees who make financial decisions for the company can also get swept into trouble depending on the circumstances.
States’ facts-and-circumstances tests can consider whether an individual had access to the company’s bank accounts, whether he or she made or managed business decisions and even signed returns, signed company checks and had or exercised any control or authority over the company’s financial matters.
A common theme emerges when companies get into trouble with sales and use tax: “I didn’t know I had to send it in.” Pleading ignorance of the law is seldom an effective defense for owners, corporate officers or anyone else in charge of financial decisions for the business.
Tax agents rarely levy charges for one slip-up. It usually takes several missed notices to stack up before they’ll close the lid. But by then, the lid can close on employees, or someone who was sure an LLC would cover it.
Controls for Knowledge, Transparency and Security
Start by walking through the sales tax compliance process in place at your business. Then add controls for knowledge, transparency and security. Write a sales tax policy that includes details on personal liability that must be read and signed by every employee.
Likewise, think of ways to keep the sales tax you collect separate. A holding account for taxes that clearly separates the money from general revenue can help protect you from even making the mistake in the first place.
The most important step of all may be to have several people in every step of the compliance process, so a single error can’t tank the business.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
