On April 21, 2020, the Arizona Court of Appeals upheld a decision of the state tax court which found the chief executive officer (CEO) of a limited liability company (LLC) liable for transaction privilege tax that was collected from customers but not remitted to the state. The Arizona Department of Revenue determined that the taxpayer had failed to remit $353,652 in transaction privilege tax. The department sued to recover the taxes from the LLC’s member-manager and CEO, asserting that the CEO was liable for the entire tax under Arizona’s personal liability statues for failure to remit the tax.
The Arizona Tax Court found that the LLC had collected the taxes from its customers and failed to remit to the state. The court also determined that the CEO was liable for $49,769 in taxes collected by the LLC between May 2008 and September 2009, the period in which the CEO served. The appeals court held that the CEO was personally liable for the tax for the period in question for several reasons. First, the CEO had a ‘duty to remit’ under the statute because he was an officer who maintained control over and had responsibility for the tax collected. The CEO argued that he had no knowledge that the tax was collected from customers and not remitted to the state. However, the Tax Court had found that the department informed the CEO in person of the unremitted tax liability in 2008. Second, the court noted that the CEO had complete control over all payments by the LLC. The appellate court rejected the CEO’s argument that he was not liable because he delegated all tax responsibilities to the company’s chief financial officer.
This appellate decision is one in a long line of responsible officer cases across the country. Businesses must remit sales taxes collected from customers to the proper taxing authority. Failure to remit sales tax is a serious matter. Not only is the business liable for the tax but, as in this case, officers and directors can be personally liable. Corporate officers, owners and responsible parties of businesses with sales tax collections should be aware of consequences for failing to timely remit the tax.
Sales and use tax liability for responsible parties
Sales tax is considered a ‘trust tax’ collected on behalf of the state. Even during times of economic downturn, sales tax charged and collected must be properly and timely remitted to the tax authority. Businesses cannot retain amounts charged for sales tax no matter the economic conditions. While some states have provided sales tax payment or filing extensions due to the COVID-19 pandemic, no state has waived remittance. Failure to remit these taxes could result in substantial monetary penalties and interest, and even business closures. Personal liability for unremitted taxes could also extend to responsible parties with potential exposure to criminal penalties.
As a general rule, officers, members and owners, and anyone with any responsibility for financial decisions could be personally liable for unpaid sales tax. Most states have specific statutory provisions for personal liability. While officers and owners can almost always be held personally liable for failure to remit sales and use taxes, employees with responsibility for financial decisions can also be liable under facts and circumstances tests. These tests look to whether the individuals had access to bank accounts, made management decisions, signed or filed tax returns, signed checks, or had any control over any financial matters or financial-related oversight, or authority to exert that oversight.
Ignorance of the sales tax compliance function is rarely a successful defense if the individual was an owner of the business, a corporate officer or a party with any responsibility for financial decisions. Businesses that have never reviewed their sales and use tax compliance processes and controls should consider a process review to identify inefficiencies and opportunities in all stages of sales and use tax compliance.