New York sales tax is an unavoidable financial obligation for businesses that sell taxable goods and services. In some cases, those sales tax obligations can extend beyond an LLC or corporation and become the personal liability of connected individuals such as owners, managers, executives, and other key employees. The New York Department of Taxation refers to these people as “responsible persons”.
While rules exist that limit the “responsible person” designation, the Department’s practice has been to generally assess anyone who could potentially qualify, regardless of their actual status. The unfortunate results of this practice include possibly incorrect sales tax assessments that you have the burden of defending against. Here, we discuss who the Department may consider a responsible person, discuss how to appeal sales tax liability as an alleged responsible person, and explain how our team of sales tax professionals can help you challenge incorrect assessments.
Who Is a Responsible Person Under New York’s Sales Tax Laws?
Your status as a responsible person for your business can vary depending on its organizational structure. In other words, the business contacts that may qualify as responsible persons are different for a limited liability company (LLC) compared to a corporation. However, you are likely a responsible person for your business if you do any of the following:
- You are active in the business’s daily operations.
- You participate in deciding which financial obligations the business pays (and in what order it pays them).
- You make choices over personnel (e.g., hiring or firing employees).
- You have the authority to sign checks.
- You prepare the business’s tax returns.
- You have authority over business decisions.
- You are a tax manager or general manager for the business entity.
Beyond your involvement in the listed business activities, you might have automatic responsible person status if you are an owner or officer of the business, and in some cases, if other conditions are met:
- Sole proprietor: The owner of the proprietorship is a responsible person.
- Partnerships: (1) All general partners are responsible persons and (2) limited partners who actively run the business or have a minimum 20% profit distribution percentage.
- LLCs: All members are responsible persons, as well as any appointed manager in the case of a manager-managed LLC.
- Corporations: Any shareholder with a 20% or more profit interest who either participates in the above-listed business activities or holds 50% of the voting stock. Additionally, officers who participate in the above-listed activities may also be responsible persons (e.g., a CEO, CFO, president, vice president, treasurer, or secretary).
You can find more information about who qualifies as a responsible person by reviewing Form DTF-17.1, which is the business contact information form that your business completes alongside the application for a New York Sales Tax Certificate of Authority.
What Is Your New York Sales Tax Liability as a Responsible Person?
The New York Department of Taxation and Finance can hold you personally liable for up to 100% of a business’s sales tax liability if you qualify as a responsible person. Unfortunately, the Department acknowledges that it issues responsible person assessments to individuals regardless of if they, in fact, qualify as one (See page 7 of Publication 131). This is usually a result of your simple connection to the business as a partner or member—even if you have no control over decision-making or input on paying sales tax obligations. In any case, New York places the burden on you to apply for relief and explain why you should not be personally liable after receiving a responsible person assessment notice.
Can I Be Personally Responsible for My Business’s New York Sales Tax Debt?
Yes, New York’s responsible person tax rules mean business owners, shareholders, and others with voting or profit interests can be personally liable for the tax debt of their company. However, applicable facts and circumstances may limit or reduce the amount of personal liability you have for the sales tax because of the personal liability of other responsible persons connected to the business. We discuss how a qualifying responsible person can appeal a tax liability notice in the next section.
How to Appeal New York Sales Tax Liability as a Responsible Person
You only have 90 days to appeal a responsible person assessment issued against you. Failure to timely appeal can result in the assessment becoming final, which may entitle the Department to available collection methods against your assets (e.g., garnishments, tax refund withholdings, property liens, other judgments, etc.). If you believe you have been mistakenly labeled as a responsible person for a business entity, you may consider contacting our tax professionals for immediate assistance on the next steps to avoid further action against you from the Department.
Even if you are a responsible person under New York’s sales tax law, you may be eligible for some relief from liability. If you are a responsible person who is also a limited partner or LLC member, then you can apply for relief so long as certain conditions are met. The benefits could include: (1) not being liable for any penalty owed by the business or other related responsible persons and (2) the Department reducing your personal liability for owed sales tax to your pro-rata share of the business’s original liability. Your pro-rata share is the greater of your ownership percentage or distributive share of profits and losses. To qualify, you submit Form DTF-8 and must show the following:
- You were not under a duty to act in complying with the sales tax law on behalf of the business entity.
- Your ownership interest or distributive share of profits and losses was less than 50%.
The Department will also likely require you to cooperate with its efforts to collect the business’s owed sales tax by providing available information about other potentially responsible persons if you have that knowledge.
For Help with Relief Options from New York’s Responsible Person Law
Defending against an unfair responsible person assessment from the Department can be a difficult process for passive investors, business owners, and employees. Refuting liability for the business’s sales tax may require certain evidence and various interactions with the Department via a conciliation conference or a tax appeal hearing. Our tax professionals are available to intervene during these administrative processes as a representative who keeps you informed and advocates on your behalf. Don’t wait for the Department to take further collection action against you after being issued a responsible person assessment. Contact our office and get the sales tax help you may need.
Schedule a free consultation with our office about your New York sales tax issues involving responsible person claims.