York State Sales Tax and the Choice of Business Entity
Robert S. Barnett
- Protection from personal liability is often a large factor
in the choice of business entity. Asset protection plays a
large role in structuring financial and business affairs.
The risks associated with sales tax liabilities are often
overlooked, but such liabilities can be avoided.
York Tax Law section 1133(a) imposes personal liability
for unpaid sales and use taxes upon “persons required
to collect tax.” In a corporate context, the persons
required to collect and remit sales and use taxes include
any employed officers, directors, or managers who are under
a duty to act for the corporation [see section 1131(1)].
matters before the New York State Tax Commission involving
personal liability for sales and use taxes, the result often
turns on an analysis of whether such a person was under
a duty to act for the corporation. Merely holding a corporate
office does not automatically result in strict liability
[see Chevlowe v. Koerner, 407 N.Y.S 2d 427 (1978)].
The inquiry as to whether a person is responsible for collecting
and paying sales and use taxes involves a thorough investigation
of all the relevant facts and circumstances. The central
inquiry is whether the individual had sufficient authority
and control over the affairs of the corporation. In such
an instance, the person will be considered an officer or
employee responsible for payment of the taxes assessed [Matter
of Constantino (Tax Appeals Tribune, September 27,
1990)]. The notice of determination issued by the New York
State Tax Department is accorded a presumption of correctness
[Petition of John P. Bartolomei (NYS Tax Appeals
Tribunal TSB-D-96(28S), April 3, 1997)]. Therefore, the
burden of proof rests heavily upon taxpayers to present
sufficient support and confirmation regarding their responsibilities.
New York State Tax Commission considers various factors
in making the determination as to whether an individual
should be held personally liable for the sales and use tax
imposed. They include:
The individual’s corporate status as a director
The individual’s status as a shareholder, and the
percentage of shares owned;
The individual’s participation in formal or informal
shareholders’ meetings, directors’ meetings,
and other corporate formalities;
The individual’s participation in corporate accounting
and bookkeeping functions;
individual’s knowledge of, and control over, the
financial affairs of the corporation;
The individual’s authorization within the corporation
to perform management functions, such as employee hiring
Whether the individual controlled the actions of others
or was controlled by others;
Whether the individual signed tax returns and met with
Prior assessments against the corporation, and its history
Involvement in the day-to-day business operations; and
Whether the individual was authorized as a check signatory.
is important for legal counsel to develop a detailed working
knowledge of how the corporate affairs were handled and
how any other factors might assist in the evaluation. Because
the burden of proof to overcome a sales tax assessment rests
with the taxpayer, it is important to obtain third-party
confirmation of the factual results. Such evidence must
show that the individual did not possess sufficient knowledge,
control, or discretion over business affairs.
importance of the above analysis is to show that a corporate
officer, shareholder, or director is not per se personally
liable under Tax Law section 1131(1). The tax law does,
however, impose per se or strict personal liability on “any
member of a partnership or limited liability company.”
This personal liability is imposed regardless of such partner’s
or member’s percentage of ownership and involvement
in the operation and management of the organization. The
statute will include any member of a partnership or limited
liability company (LLC), even if the member has no involvement
in the management of the company. Regarding Bartolomei,
the Tax Appeals Tribunal affirmed the statutory imposition
of strict liability on a limited partner or LLC member.
A New York State Conciliation Conference Hearing Officer,
in a recent conversation with this author regarding the
statute and Albany’s current position regarding enforcement,
stated that her instructions are to interpret the statute
according to its plain language and to apply strict liability.
It is unclear whether interposing an inactive S corporation
as a partner or member (instead of individual membership)
would absolve a nonactive member from liability through
the corporate analysis previously described.
the Form of Business Carefully
advisors should consider sales tax implications when evaluating
business entity considerations. The corporate form of organization
should be considered to protect a minority or inactive shareholder.
Noncontrolling shareholders should take steps to avoid personal
sales tax liability. As long as a shareholder lacks the
requisite discretion and authority over corporate transactions,
he will not incur personal liability.
the level of corporate control and discretion possessed
by an individual shareholder is often difficult. The inquiry
is often raised by the New York State Tax Department at
a time when shareholders are on unfriendly terms and documents
are not readily available. A copy of bank records can prove
that an individual is not an authorized account signatory.
Additionally, the shareholder agreement can confirm the
degree of responsibility levels and authority for corporate
officers. Indemnity agreements may also be useful to more
fully protect inactive shareholders or investors.
S. Barnett, CPA, JD, MST, is a partner in
Capell Barnett Matalon & Schoenfeld LLP, Jericho, N.Y.