Many states impose personal liability for unpaid sales taxes and income tax withholdings on LLC managers and employees who are responsible for paying the taxes. For example, in an Oregon Tax Court case I recently blogged about, here, a 10% LLC member and non-manager who occasionally signed checks for the LLC was assessed liability for the LLC’s unpaid income tax withholdings by the Department of Revenue. Because he had authority to sign checks only under the direction of the 90% owner and manager, the Tax Court held that he was not personally liable.
New York has long taken a far different, nay draconian, approach.
Like many other states, New York imposes personal liability for payment of unpaid sales taxes on corporate and LLC employees and managers having a duty to the entity to act for it in complying with the sales tax. N.Y. Tax Law §§ 1133, 1131(1). But the New York statute goes further and imposes personal liability on “any member of a partnership or limited liability company” for the LLC’s sales tax obligations. N.Y. Tax Law § 1131(1). It is irrelevant whether the LLC member is a manager or employee – even passive investors are jointly and severally liable for 100% of the LLC’s New York sales tax obligations. (There is no comparable rule for shareholders of a corporation.)
The rule applies to any LLC that is obligated to collect New York sales taxes – it is not limited to LLCs formed under New York law. For example, the members of a Delaware LLC making retail sales in New York would be subject to personal liability for the LLC’s unpaid sales taxes. The New York Department of Taxation has not hesitated to pursue LLC members for sales taxes under the rule, even passive investors.
The Tax Department’s new policy provides partial relief for minority members, i.e., those whose ownership interest and distributive share of the LLC’s profits and losses are less than 50%. Technical Memorandum TSB-M-11(6)S (Apr. 14, 2011). A minority member will now be liable only for its pro rata share of the taxes, i.e., the product of the LLC’s sales tax liability multiplied by the greater of the member’s percentage of ownership interest or its percentage share of the profits and losses of the LLC.
The policy imposes several conditions before a minority member is eligible for relief. The member must document its ownership interest and percentage share of the LLC’s profits and losses, demonstrate that it was not under a duty to act for the LLC in complying with the LLC’s sales tax obligations, and cooperate with the Tax Department in providing information about other potentially responsible persons and about the structure and ownership of tiered entities, including out-of-state entities.
The new policy provides no relief for LLC members owning 50% or more of the LLC, who will each continue to be personally liable for all LLC sales tax obligations. But by reducing the personal liability of minority members to a pro rata share of the LLC’s tax obligations it can dramatically limit a minority member’s exposure.