Could You Be Held Personally Liable for Unpaid Sales Tax?
- August 2, 2015 | Stephanie Faris
When you opened a business, you knew it would come with long hours and years of hard work. You were prepared to forego a guaranteed salary and put every dime you earned back into the business in the early years. You knew it would be one of the biggest challenges you ever tackled, but you soldiered on, determined to make your dream of owning a small business a reality.
One thing you may not have counted on is the toll your business could take on your personal life. Your home, your belongings, and the money in your bank account could all be at risk if you don’t properly prepare yourself. While structuring your business properly can help you avoid some of these risks, those protections won’t help unless you’re running your business in accordance with the law.
Sales Tax Responsibility
One way business owners get into trouble is by failing to pay sales tax as stipulated by local laws. As with every other law, ignorance of the requirements is no excuse for non-compliance. A business owner is responsible for proactively determining what he is required to pay and paying it as scheduled.
When a business fails to collect and remit the proper tax on its sales, eventually its owner will be forced to pay. If there are insufficient funds, the payment may be taken by collecting the business’s assets, including its supplies, inventory, and real estate. If that proves insufficient to cover the debt, the government may venture into a business owner’s personal assets.
The Responsible Person Law
New York’s “Responsible Person Law” holds business leaders responsible for sales tax collection and payment. A precedent was set in the decision by the New York Tax Appeal Tribunal that a CEO was personally responsible for the uncollected sales tax on his business. Although the CEO believed his CFO and outside accountants were handling everything, the tribunal ruled that he was ultimately responsible for the things that happened under his leadership. The court ruled that his failure to properly pay sales tax could lead to seizure of his personal assets, including homes and investments.
While the law varies from state to state, many businesses work with customers in multiple states, which makes it important to know the laws in each state.
Leaders aren’t the only ones in a business who need to worry about collecting sales tax. Many states have corporate officer liability laws that can be applied to professionals at all levels of an organization. The finance managers, administrative assistants, and others within an organization could be held personally responsible for unreported sales taxes, even over multiple years.
It’s important to note that these statutes are rarely enforced. Employees don’t have to live in fear of losing their homes. But realizing that these laws exist should be enough to incentivize businesses to remain compliant with sales tax laws as they apply to every state where they do business.