Recognizing the "unfortunate consequences" for certain owners of businesses, on April 14, 2011, the New York State Department of Taxation and Finance (the "Tax Department") announced its new policy for enforcing liability for unpaid sales taxes of limited liability companies ("LLCs") and limited partnerships. The new policy brings limited relief for individual investors who, although they have virtually no involvement in a business, could have found themselves being pursued for unpaid sales tax of the LLC. The new policy is particularly relevant for individuals that invest in businesses that are sales tax intensive, such as a bar or restaurant.
Existing Policy
New York State's Tax Law imposes personal liability for the payment of sales taxes on certain owners of businesses that have outstanding sales tax liabilities. This means that certain owners of businesses may personally have to pay the sales tax liability of the business even though the business is operated through a legal entity, such as a corporation or an LLC, which otherwise protects the owner's personal assets. Under federal tax law, so-called "trust fund" taxes (such as income and employment tax withholdings) only potentially become the personal liability of those owners of corporations or LLCs who are involved in the actual business operations of the legal entity. Under New York State's Tax Law, however, any owner of a limited partnership or an LLC has personal liability for unpaid sales taxes (which are similar in nature to trust fund taxes), regardless of whether that owner is involved in the actual business operations of the legal entity. The result of this provision of New York State's Tax Law is that any owner of a limited partnership or an LLC may be held personally liable for 100% of the unpaid sales taxes of the business.
Relying on a strict interpretation of New York State's Tax Law, the Tax Department had routinely pursued owners of limited partnerships and LLCs for the unpaid sales taxes of the business entity- even owners which did not have control over the financial operations of the business. New York courts have consistently rejected challenges to the Tax Department's actions on the justification that New York State's Tax Law is written in a way that imposes strict liability on the owners of a limited partnership or an LLC.
New Policy
Under the Tax Department's new policy (which took effect March 9, 2011), any limited partner of a limited partnership or any member of an LLC owning less than 50% of the LLC who can prove he or she was not involved in the actual business operations of the legal entity may be eligible for limited relief from the strict liability imposed under New York State's Tax Law for the unpaid sales taxes of the business.
The limited relief offered under the new policy means that eligible owners would:
- not be personally liable for any penalty owed by the business or other owners who were involved in the actual business operations of the legal entity; and
- only be liable for their proportionate share (based on percentage ownership) of the unpaid sales taxes of the business.
For example, a 10% owner (and who otherwise meets the relief eligibility requirements) of an LLC which has $50,000 of unpaid sales taxes would only be expected to pay $5,000 to satisfy his or her personal liability under the Tax Department's new policy.
In addition to meeting the requirements described above concerning ownership percentage and level of involvement in the actual business operations of the limited partnership or LLC, a limited partner or member must cooperate with the Tax Department by providing information about the identity of others who were involved in the actual business operations, as well as information reasonably obtainable which details the ownership of more complicated business structures.
If you are in need of additional information concerning the Tax Department's new policy on pursuing unpaid sales taxes of a business, please contact any of the members of the Practice Area.