What Business Owners Must Know About Responsible Person Liability for NYS Taxes

Understanding tax law is vital for any business owner, especially when it comes to the concept of “responsible person” liability for NYS taxes. Ordinarily, a business pays its own taxes. However, in some cases, if a business fails to pay its withholding, sales, or use tax, certain responsible persons may be held personally liable for the unpaid taxes, penalties, and interest. If you own or are involved with a business as discussed below, it is important to talk with a tax attorney to learn if or when you might be liable for the business’s tax debts.

Impact of Personal Liability for a Business’s NYS Taxes

Under New York law, someone deemed a responsible person is personally liable for a business’s tax debts. This means that NYS can go after the individual’s assets and income to collect on the debt using liens, levies, income execution, and other means. If the debt is $10,000 or more, the individual’s driver’s license may also be suspended.

Also, note that NYS may collect the full amount of the liability from any responsible person even if there are other entities or persons involved who may be similarly assessed.

Responsible Person for NYS Withholding Tax

There are several factors used by NYS in determining whether someone is a responsible person, including whether the individual:

• Is actively involved in operating the business on a regular basis;
• Is involved in deciding which financial obligations are paid;
• Is involved in personnel activity (such as hiring or firing employees);
• Has check signing authority;
• Prepares tax returns;
• Has authority over business decisions;
• Is a tax manager or general manager; or
• Is a corporate officer.

Generally, you are deemed a responsible person “if you are an officer, director, or employee of a corporation or dissolved corporation, or employee of a partnership or sole proprietorship who was under a duty to act for the business to comply with the relevant provisions of the Tax Law.”

However, you are only liable for the company’s withholding tax debts if you had a duty to act for the business AND acted willfully in failing to collect or pay the tax.

Responsible persons should be aware they are personally liable for 100% of the unpaid withholding tax, regardless of their percentage of ownership. In addition, they cannot discharge the debt in personal bankruptcy.

Note that a responsible person is not liable for any penalties assessed against the company for the unpaid withholding tax. Further, a responsible person can challenge the liability amount and their status as a responsible person even if the company does not protest its liability.

Responsible Persons for NYS Sales and Use Tax

The rules are somewhat different for responsible persons for sales and use tax. New York can collect a business’s unpaid sales and use tax from a person with the duty to collect the tax. However, unlike with withholding tax, there is no willfulness requirement.

Further, general partners and LLC members are strictly liable for the sales and use taxes regardless of whether they had a “duty” to collect the tax, although there is an exception for qualified limited liability company (LLC) members as discussed below.

The responsible person is personally liable for 100% of the unpaid sales tax, regardless of their percentage of ownership. If NYS acts within the statute of limitations, the individual is liable for the entire tax liability, including accrued interest and penalties.

Note that each responsible person must be assessed separately for the business’s tax liabilities.

As with liability for withholding taxes, a responsible person can challenge both the amount of the tax liability and the individual’s status as a responsible person regardless of whether the company protests its tax liability.

Responsible Person Assessments Against Members of a NY LLC for Sales Tax

As noted above, generally, every member of an LLC is 100% personally liable for sales tax, including interest and penalties. This is true regardless of the member’s involvement with the business’s affairs.

However, there is a limited exception for LLC members. An LLC member may be relieved of sales tax liability if (1) their ownership interest and percentage share of the profits and losses of the LLC are less than 50%, and (2) they were not under a duty to act on behalf of the LLC in complying with the sales tax law.

If they are granted relief under the exception, their liability is limited to the greater of their ownership interest or percentage share of profits and losses in the business. Further, they are not liable for any penalties owed by the business.

NYS will ask members seeking relief to cooperate by identifying those individuals who were involved in the day-to-day business affairs, to the extent reasonably possible.

Next Steps for a Potential or Actual Responsible Person

To minimize the risk of personal liability, individuals who own or are involved with the business’s operations and/or taxes should consult a tax attorney to determine whether they are responsible persons. If so, they should stay informed about tax laws applicable to the business and ensure that all tasks related to tax compliance are handled appropriately and in a timely manner.

If the business or individual receives any tax notices contact a tax lawyer as soon as possible to preserve options for appeal and settlement.

Contact us if you or your business has a tax problem. We have extensive experience resolving NYS tax matters for individuals and businesses.