New York State Sales Tax Audits & Responsible Parties
When a business entity fails to remit its Sales or Use Tax, New York State will imposes personal liability for an entity’s unpaid taxes which attaches specifically to any officer, director and/or employee of a corporation. For partnerships, LLC’s or Sole Proprietors, liability’s attach to any general or limited partner and/or employee with such a duty (without regard to the entity’s operating status) who has been charged with the duty to assure compliance with the sales and use tax law. Authority is granted to NYS to assess a responsible person under Section 1131(1) of the Tax Law.
Ultimately, the issue of responsibility boils down to the factual issues which differ in each case (see Matter of Rosenblatt v New York State Tax Commn., supra, at 131). The most weighing factor is the extent of an individual's actual or prospective authority and influence over the affairs of the entity. New York State publishes this chart on Form DTF-17.1 to give general guidance on who can be held as the responsible person.
As you can see from the chart above, New York State has a great list of potential responsible persons, and if an entity does not remit its sales taxes on a timely basis, New York State can exercise its rights to go after all of the listed parties.
Often times, the assessment of a responsible person can be challenged. Court rulings identify an assortment of factors as indicia of responsibility. Such factors in making the determination include the authority to hire and fire employees, status as an officer, director or stockholder, authority to sign checks and prepare returns, responsibility for management and derivation of substantial income from the corporation (see, 20 NYCRR 526.11 [b] ;Matter of Blodnick v New York State Tax Commn.)
However, it should be noted that having the authority identified in the previous paragraph, but not exercising them does not absolve you of a responsible person assessment. In Matter of Cohen v. State Tax Comm., 128 AD2d 1022, 513 NYS2d 564 (3d Dept. 1987), Cohen met the Standard as a person required to collect such taxes pursuant to Tax Law § 1133 (a). The court recognized that Cohen demonstrated that he was not involved in his company’s day-to-day operations, performed no duties in his capacities as vice-president and secretary, never signed checks for Standard although authorized to do so and never prepared or signed Standard's tax returns. Cohen asserted that he could not be considered a person required to collect sales and use taxes. The court disagreed, and comented: “Petitioner was an officer and stockholder of the corporation and had the authority to sign checks on its behalf. The fact that he did not actually perform duties in this regard does not operate, in and of itself, to absolve petitioner of responsibility (cf., Matter of Blodnick v New York State Tax Commn., supra).
An assessment for personal liability is a major issue. Each case is different and contain its own unique facts that can influence your standing on a responsible person assessment. If you received a letter from NYS stating that you are being held as the responsible person for unpaid tax debts, give us a call at (201) 529-8024. We would be glad to help.
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