Limited Liability?

Many individual taxpayers who invest in a closely held business, including one organized as a corporation, fail to appreciate there are circumstances in which they may be held personally liable by a state or local taxing authority for the sales tax collected or required to be collected by the business.

In other words, if certain criteria are satisfied, the limited liability protection that an individual shareholder would normally enjoy as a matter of state corporate law, and which they may have assumed – not unreasonably – would shield them from personal responsibility for any and all liabilities of the corporation, including taxes, will be of no avail even where the shareholder has respected the separate legal status of the corporation.[i]

In order to understand how the state may hold an individual shareholder liable for sales taxes “owed” by the corporation, a quick review of the sales tax may be helpful.

Collecting Sales Tax

In general, the sales tax is a transaction tax; meaning the liability for the tax arises at the time of the taxable transaction. In general, the tax is imposed upon the retail sale of tangible personal property or of certain kinds of services.[ii]

The seller of the property or service is required to collect the tax from the buyer when collecting the sales price for the transaction to which the tax applies.

The tax is collected for and on account of the state taxing authority. The seller then holds the amount collected “in trust” until it is remitted to the taxing authority.

All sales are deemed taxable until the contrary is established. The burden of proving that a particular sale is not taxable is upon the seller and the buyer.

In all cases, the parties to the sale transaction must maintain records sufficient to verify all sales tax-related aspects of the transaction.

Responsible Person Liability

In the case where the seller is a corporation, New York’s Tax Law imposes personal responsibility for payment of the sales tax on certain shareholders, officers, directors, or employees (“responsible persons”) of the corporation.[iii]  More than one person may be treated as a responsible person.

A responsible person is jointly and severally liable for the tax owed, along with the seller-corporation and any other responsible persons.  This means that the responsible person’s personal assets may be taken by the State to satisfy the corporation’s sales tax liability.

Personal liability attaches to a responsible person whether or not the sales tax was collected by the corporation – it is not limited to tax that has been collected but has not been remitted.[iv] Thus, it will apply where a business might have had a sales tax collection obligation but was unaware of it. Moreover, the personal liability applies even where the individual’s failure to take responsibility for collecting and/or remitting the sales tax was not willful.

Significantly, the personal liability of a responsible person for sales tax is separate and distinct from that of the business – it extends beyond the corporation.   For example, a corporate bankruptcy does not affect the responsible person’s liability for the tax because the latter involves a separate claim than the one that is asserted against the corporation.[v]

“Responsible”: Under Duty to Act

So, who are these shareholders, officers, directors, or employees upon whom New York bestows this distinction?

One’s status as a shareholder, officer, etc., at or around the time of the transaction in question or the due date for the payment of the related sales tax does not, by itself, warrant the imposition of personal liability for such sales tax. Rather, only those who were “under a duty to act” on behalf of the corporation during that time may be assessed the tax as responsible persons.

The main inquiry is whether the individual in question had sufficient authority and control over the affairs of the corporation. In every case, this is determined on the basis of the particular facts involved. What’s more, it is actual, rather than titular, control that counts.

Thus, every officer or employee of a corporation whose job description includes the duty to act for the corporation in complying with any requirement of the New York sales tax law is a responsible person who is required to collect, truthfully account for, and pay over the sales tax. Generally, a person who is authorized to sign a corporation’s tax returns, or who is responsible for maintaining the corporate books, or who is responsible for the corporation’s management is under a duty to act.

However, a shareholder who does not hold any “official” position in the corporation but who exercises de facto control over the corporation’s finances may likewise be treated as a responsible person. This is often the case in a closely held business that does not abide strictly with corporate formalities or record-keeping.

An Easy Case

In a recent decision,[vi] New York’s Division of Tax Appeals (the “DTA”)[vii] considered whether an individual who was both an officer and the sole shareholder of a corporation may be held personally responsible for the corporation’s sales tax liability.[viii]

The Division of Taxation conducted a sales and use tax audit of the corporation, which owned and operated a used car dealership and auto repair shop (the “Business”).


The auditor sent several information document requests (“IDR”) to the Business in which the auditor asked for copies of the Business’s books and records for the taxable periods in question,[ix] including: (i) sales tax returns, worksheets, and canceled checks showing taxes paid; (ii) federal income tax returns;[x] (iii) New York State corporate tax returns; (iv) general ledger; (v) general journal and closing entries; (vi) sales invoices; (vii) all exemption documentation supporting non-taxable sales;[xi] (viii) chart of accounts; (ix) fixed asset purchase and sales invoices; (x) expense purchase invoices; (xi) merchandise purchase invoices; (xii) bank statements, canceled checks and deposit slips for all accounts; (xiii) cash receipts journal including sales journal; (xiv) cash disbursement journal including purchase journal; (xv) the corporate book, including minutes, board of directors and articles of incorporation; (xvi) depreciation schedules; (xvii) lease/rental agreements; (xviii) waste tire management fee returns; (xix) NYS motor vehicle MV-50 forms; (xx) books of registry; (xxi) dealer financial statements; (xxii) “car jackets” (basically, customer files); (xxiii) dealer floor plan; (xxiv) service vehicle replacement report; (xxv) demo/loaner/rental vehicle log; (xxvi) wage reporting tax returns; and (xxvii) manufacturer parts statements.[xii]

Division’s Findings

The auditor subsequently visited the Business’s location several times to meet with Shareholder, discuss the audit, and collect some of the materials requested. At one such meeting, in response to the auditor’s inquiry about bills of sale, Shareholder informed the auditor that the Business only maintained the MV-50 forms, Retail Certificate of Sale (or the “Dealer’s Bill of Sale”), for its sales of used vehicles.[xiii]

The auditor also learned that the Business had filed New York State sales tax returns for only two of the periods in question; it failed to file sales tax returns for the remaining periods under audit. Moreover, the auditor determined that the books and records provided by the Business in response to the IDRs were inadequate.

The Division issued a notice of determination to Shareholder as a responsible person of the Business assessing tax due, plus interest and penalties.

Shareholder filed a petition with the Division of Tax Appeals, in which it protested the notice and asserted that they were not a responsible person of the Business.

A hearing was held at which Shareholder and the auditor testified.[xiv]

The DTA Hearing

At the hearing, the auditor testified as to the conduct of the audit and the assessment of Shareholder as a responsible person of the Business.

The auditor explained that the Business did not maintain a general ledger or all the invoices for the repair shop sales; it also failed to provide the contracts of sale or finance documents for the used car sales which the auditor requested in order to verify sales. The auditor reviewed the repair invoices provided to estimate the Business’s auto repair sales and used the MV-50 forms to calculate the Business’s used car sales for the audit period.

The auditor assessed penalties after determining that the Business was collecting sales tax on some sales but not remitting the tax to the State.

Finally, the auditor assessed Shareholder as a responsible person of the Business on the basis of the following information, which was collected during the course of the audit:

  • Shareholder had access to, and oversaw, the books and records of the Business
  • Shareholder was able to explain the Business’s operations
  • Shareholder identified themselves as the owner of the Business
  • Shareholder was the registered agent for the business
  • Shareholder was listed as the responsible person and president on the Business’s Application to Register for a Sales Tax Certificate of Authority, form DTF-17
  • Shareholder executed a consent on behalf of the Business extending the statute of limitations for the audit
  • Shareholder signed a form entitled Communication with the Tax Department during your Audit on which they identified themselves as president for the Business
  • Shareholder signed, as the Business’s president, the State general business corporation franchise tax returns, form CT-3, for the taxable years that included the periods under audit
  • The audit report includes business checks signed by Shareholder
  • Shareholder’s name appeared in the “submitted by” line of the two sales tax returns filed by the Business during the audit period
  • Shareholder filed a petition for revision of a determination, or for refund of sales and use taxes, for the periods under audit.

Shareholder’s Testimony

Most of the foregoing information was confirmed when Shareholder testified at the DTA hearing. For example, Shareholder testified that they were at the business daily, signed checks on behalf of the Business, submitted New York corporate tax and sales tax returns for the Business, and had access to the books and records of the Business. Shareholder also admitted that the Business did not keep adequate business records (such as a general ledger, invoice of sales or other accounting records) and only maintained the MV-50 forms for used car sales.

Inexplicably, Shareholder testified they did not know the Business was required to collect and remit sales tax to the State, while also testifying that the Business was collecting sales tax on transactions but was not remitting the tax proceeds to the State; rather it was using these proceeds to pay operating expenses to keep the business going.

Finally, Shareholder argued the Business was closed shortly after the last period under audit, and neither the Business nor Shareholder had enough money to pay the tax and, therefore, it should be reduced or cancelled.[xv]

The DTA’s Opinion

Before considering whether Shareholder was personally liable for the sales taxes due on behalf of the Business, as a person required to collect and pay such taxes under the Tax Law, the DTA addressed the Division’s methodology for calculating the asserted tax deficiency.

The DTA explained that every person required to collect sales tax was also required to keep records of every sale, including of all amounts paid, charged or due thereon and of the tax payable. Among the sales records required to be maintained were sales slips, invoices, receipts, statements, any other original sales documents.[xvi]

If a sales tax return was not filed, the DTA continued, or if a filed return was incorrect or insufficient, the Division must determine the amount of tax due from such information as was available.[xvii] In that case, the Division is required to select a method reasonably calculated to reflect the tax due, though “exactness in the outcome of the audit method is not required.” Instead, the taxpayer bears the burden of proving with clear and convincing evidence that the Division’s assessment was erroneous or that the audit methodology was unreasonable.

In the case at hand, the DTA explained, the record showed that the Division made several written requests for the Business’s books and records. Shareholder maintained almost no business records and very little was provided in response to the Division’s requests. As a result, the Division used the Business’s own MV-50 forms and auto repair invoices to determine the tax due. Because the Shareholder failed to establish that the Division acted unreasonably, the DTA sustained the Division’s use of the Business’s own MV-50s and invoices.

Responsible Person

The DTA next turned to the question of Shareholder’s personal liability. The DTA stated that Shareholder had the burden of proof to show, by clear and convincing evidence, that they were not a person required to collect the sales tax of the Business.[xviii]

According to the DTA, whether a person is responsible for collecting and remitting sales tax for a corporation so that the person would have personal liability for the taxes not collected or paid depends on the facts of each case.

It explained that various factors were considered in making this determination. The holding of corporate office was one such factor, but personal liability was not limited to individuals holding official titles. Other relevant factors, identified by the DTA, included the individual’s authority to sign corporate checks, the individual’s economic interest in the corporation, and the individual’s knowledge of and control over the financial affairs of the corporation. The relevant consideration was an individual’s “authority and responsibility to exercise control over the corporation, not [their] actual assertion of such authority.”

The DTA recited many of the factors identified by the auditor, above, together with Shareholder’s failure to rebut the Division’s assertion, to sustain the Division’s conclusion that Shareholder was a responsible person who was required to collect sales tax on behalf of the Business.

The DTA then rejected Shareholder’s argument that the tax be reduced or cancelled because neither the Business nor Shareholder had the resources to pay the assessment, stating that it was a well-settled principle that economic hardship does not relieve a taxpayer of their duty to pay over taxes collected on behalf of the State.

Decisions, Decisions

Was the DTA’s decision unexpected? Hardly.

However, it is instructive because it highlights several important factors of which any prospective investor in a corporation must be aware.


The investor has to weigh their desire to have some continuing control over their investment against the sales tax exposure that such involvement may entail.[xix] If the investor wants to be involved in the business or wants to have at least some input with respect to certain business decisions, they must be prepared to act responsibly, which may include examining business and corporate records, inquiring about taxes, and making sure taxes are paid.

It is not acceptable for such an investor to say they merely wanted the title of an officer, or they wanted to receive a salary from the business, or they wanted a seat on the board only to monitor their investment, but that they were not responsible for the sales tax.[xx]

Struggling Business

The decision also highlights the very difficult choice that confronts the responsible person in a struggling business: either pay the sales tax and risk the failure of the business, or use the tax proceeds collected from customers to pay operating expenses and thereby risk personal liability for the tax.

This is more than a theoretical issue. Unpaid sales taxes rarely occur in a vacuum.  Rather, they are only one of many signs that a business is in dire economic straits. They are often accompanied by unpaid employment taxes.[xxi] Together, these can turn into an expensive proposition.

Unfortunately for the business and its responsible persons, economic difficulties do not excuse an individual from their responsibility to collect and remit sales tax on behalf of a taxing authority. If I’ve heard it once, . . .  “the government is not in the business of making loans to struggling businesses”; the tax must be collected and remitted.

Professional Guidance

Finally, it is noteworthy that neither Shareholder nor the Business was represented by a tax professional at any point during the audit or the appeal to the DTA. Query why? Was Shareholder concerned about the cost of retaining a tax professional?

Did Shareholder even use a qualified tax return preparer to assist the Business with identifying its tax obligations and to advise it on how they may be satisfied? Based upon the record described above,[xxii] I would guess not. Consequently, it paid the price.

Before starting a business, the owners of the business should consult their tax advisers to help them understand their sales tax and other tax obligations, including record-keeping requirements.

Once a sales tax problem is discovered, the business should act quickly to address it. Ignoring it will not make the liability go away; indeed, it is amazing how quickly and how substantially these liabilities can grow if left unattended.

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The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.

[i] Thereby preventing an argument along the lines of piercing the corporate veil or treating the corporation as a sham or as the alter ego of its shareholder.

[ii] Thus, a wholesale transaction – one in which the buyer (a retailer) is acquiring the property for resale to the public is not subject to the sales tax. Many other kinds of transactions are exempted from the tax, as are certain taxpayers.

[iii] A similar rule applies with respect to limited liability companies.

[iv] Though this happens often enough in the case of a struggling business, which will often use the tax proceeds to satisfy business expenses in the hope of eventually turning the proverbial corner and later making good on its unpaid tax liability.

[v] It is not a purely derivative liability. Indeed, because the responsible person’s liability is distinct from that of the corporation, it has its own statute of limitations for assessment purposes. Thus, the extension of the corporation’s limitation period does not automatically extend the limitation period for assessing tax against the responsible person.

[vi] In the Matter of The Petition of Rajni T. Mohnani, DTA No. 828964 (April 21, 2022).

[vii] It appears that the taxpayer decided to forego a conciliation conference. This is an informal hearing through the Bureau of Conciliation and Mediation Services. It gives the taxpayer and the Division an opportunity to discuss the case before a conferee who is employed by the State but purports to be independent. In my experience, however, there is reason to doubt this “independence” and the efficacy of the process, generally. That said, a good conferee is capable of mediating a resolution.

[viii] It also considered whether the audit methodology utilized by the Division in its audit of the corporation had a rational basis and was reasonably calculated to reflect the taxes due.

[ix] Different taxpayers have different filing and payment requirements. For example, sellers with large annual sales tax liabilities may have to participate in the so-called PrompTax program, which provides for monthly electronic filings and payments.

[x] Federal income tax returns provide a wealth of information if one knows where to look. This not only includes information relating to the business but to the roles played by individual shareholders and employees, which may be helpful in identifying responsible persons. For example, IRS Form 1125-E, Compensation of Officers, contains information regarding the identity of officers, their percentage ownership of the business, the amount of compensation, and the time devoted to the business.

[xi] For example, the Resale Certificate on Form ST-120.

[xii] Basically, the kitchen sink. Yes, there’s a lot of redundancy in there, but also potential for conflicting information, which may raise a flag for the auditor.

[xiii] The proof of ownership for a used vehicle is the title certificate that the previous owner signs to transfer the ownership to the dealer and a form MV-50 that the dealer signs to transfer ownership to its buyer. MV-50 forms are records provided by the State Department of Motor Vehicles to car dealers to record car sales. Each time a car dealer sells a car, the dealer is required to complete a MV-50 form, which requests several items of information to be completed by the dealer for each transaction including, for example, the type of sale (wholesale or retail, new or used); the vehicle’s year, make, model, vehicle identification number, inspection certificate number, license plate number; the selling price; the dealer’s and purchaser’s information; the date of sale; odometer reading; a dealer certification that the sale occurred and that “[a]ll New York State and local taxes due as a result of this sale have been collected from the purchaser;” the dealer’s and purchaser’s signatures and date; and the dealer’s sales tax number.

[xiv] After the hearing, the record was kept open for a few weeks to enable Shareholder to submit additional documentation in support of her position.

[xv] In a letter filed with the DTA after the hearing, Shareholder asserted most of the Business’ sales were non-taxable wholesale transactions (i.e., not “retail sales” to which the sales tax applied).

Shareholder also argued that many of the invoices the Division used in its calculations were invoices for a different auto dealership, one owned by Shareholder’s brother, which was operating next door to the Business.

Unfortunately for Shareholder, no documentation was offered to support these assertions.

[xvi] 20 NYCRR 533.2 [b] [1].

[xvii] N.Y. Tax Law Sec. 1138 (a) (1).

According to the DTA, the standard for reviewing a sales tax audit where external indices or estimates are employed was as follows:

“To determine the adequacy of a taxpayer’s records, the Division must first request and thoroughly examine the taxpayer’s books and records for the entire period of the proposed assessment. The purpose of the examination is to determine, through verification drawn independently from within these records, that they are, in fact, so insufficient that it is ‘virtually impossible [for the Division of Taxation] to verify taxable sales receipts and conduct a complete audit’, ‘from which the exact amount of tax due can be determined’.”

[xviii]  N.Y. Tax Law Sec. 1131(1) and 1133(a).

[xix] Feel free to substitute any other tax for which the business acts as a fiduciary in collecting tax from a third party on behalf of the government.

[xx] Prospective investors and existing shareholders should review the assignment of duties and decision-making authority within the business.

Additionally, passive shareholders should consider an indemnity or contribution agreement to protect themselves from the expense of responsible person liability. They may also want to consider corporate resolutions confirming their lack of authority.

It is also critical that each shareholder report consistently for all tax purposes. If a shareholder is not active in the business, their federal return should not describe their income or losses from the business as nonpassive.

[xxi] And more risk of personal liability for the employee’s share of such taxes that was not remitted to the government.

[xxii] For example, the failure to collect, to file, to keep records.