Many taxpayers fail to appreciate that any officer, director or employee of a corporation, and any employee or manager of a partnership or LLC, who has a duty to act for such entity in complying with any requirements of the sales tax law, may be held personally liable for the sales tax collected or required to be collected by the entity. They often also do not realize that any member of a partnership or LLC may also be personally liable for such sales tax. 

The Sales Tax

In general, the sales tax is a transaction tax, with the liability for the tax arising at the time of the transaction. It is also a “consumer tax” in that the person required to collect tax, the seller, must collect it from the buyer when collecting the sales price for the transaction to which the tax applies. 

The seller collects the tax as trustee for and on account of the State. The tax is imposed on the purchase of a taxable good or service, but it is collected from the purchaser by the vendor, and then held by the vendor in trust for the State, until the vendor remits the tax to the State.

All sales of property are deemed taxable until the contrary is established. The burden of proving that any 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.

The Responsible Person

New York State Tax Law (the “Tax Law”) imposes personal responsibility for payment of sales tax on certain owners, officers, directors, employees, managers, partners, or members (“responsible persons”).  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 business entity and any of the business’s other responsible persons.  This means that the responsible person’s personal assets could be taken by the State to satisfy the sales tax liability of the business. An owner can be held personally responsible even though the business is a corporation or LLC. 

Personal liability attaches whether or not the tax imposed was collected.  In other words, it is not limited to tax that has been collected but has not been remitted.  Thus, it will also apply where a business might have had a sales tax collection obligation, but was unaware of it.  Along the same lines, the personal liability applies even where the individual’s failure to take responsibility for collecting and/or remitting the sales tax was not willful.  In addition, the penalties and interest on the corporation’s unpaid sales tax passes through to the responsible person.


Every officer or employee of a corporation who is under a duty to act for such corporation in complying with any requirement of the Tax Law is a responsible person required to collect, truthfully account for, and pay over the sales or use taxes.  Whether such officer or employee is a responsible person is to be determined in every case on the particular facts involved. 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.

In other words, holding a corporate office or being a shareholder does not, in and of itself, warrant the imposition of liability. Only those who were “under a duty to act” on behalf of the business may be assessed the penalty, with the main inquiry being whether the individual had sufficient authority and control over the affairs of the corporation.  Typically, owners are assessed personally, but ownership is not required in order to be found responsible.


Under the Tax Law, every person who is a member of a partnership is a person required to collect tax.  A strict reading of this provision concludes that any member of a partnership or of an LLC is per se liable for unpaid sales tax, plus interest and penalties, and this was, in fact, the Tax Dept.’s position for years.  One can imagine the surprise of a minority partner upon learning that he was being held responsible for taxes far in excess of his investment in the business.

Special Relief for Certain Partners

Although the Tax Law remains unchanged, beginning in 2011, New York provided partial relief to the per se personal liability for certain limited partners and LLC members.  Under the new policy, certain limited partners and LLC members who would be considered responsible persons under the statute may be eligible for relief from personal liability for the entity’s failure to remit taxes.  With regard to sales taxes specifically, a qualifying partner or member will not be personally liable for any penalties due from the business entity relating to its unpaid sales taxes, and his or her liability for sales tax will be limited to his or her pro rata share of the tax.

Limited partners may qualify if they demonstrate that they were not under a duty to act in complying with the Tax Law on behalf of the limited partnership, and LLC members who can document that their ownership interest and distributive share of the profits and losses of the LLC are less than 50% may qualify if they can demonstrate that they were not “under a duty to act” on behalf of the LLC in complying with the Tax Law.

In addition, in order to qualify for the relief, the limited partner or member must also agree to the terms and conditions that the State sets forth in a written agreement for limiting the limited partner’s liability, including cooperating with the State in providing information regarding the identities of other potentially responsible persons—particularly those persons who are involved in the day-to-day affairs of the business. 

It is important to note that a general partner of a general or limited partnership will not qualify for this relief, regardless of the partner’s ownership interest, nor will any member of an LLC that holds a 50% or more ownership interest in the LLC, or that is entitled to a distributive share of 50% or more of the profits and losses of the LLC.

Choice of Entity

The foregoing raises some interesting choice of entity issues. Notwithstanding the relief described above for members of partnerships and LLCs, the fact remains that those qualifying for the relief are nevertheless personally liable for their share of the unpaid tax, and those who do not qualify for the relief are per se liable for the tax, regardless of the level or quality of their activities.

The corporate form should be considered for a passive investor.  An investor who wants to limit his exposure may want to interpose a corporation between himself and the partnership or LLC.  However, this of course may present other tax issues (including income tax concerns).

Alternatively, the investor may want to encourage the incorporation of the partnership or LLC.  In reality, however, the investor may not have sufficient clout to compel such a change in business structure. And, of course, there are other tax considerations, including the aforementioned income taxes.  Where an incorporation is feasible, non-controlling shareholders should take steps to avoid personal liability.

In our next post, we will review the factors that are considered in determining one’s status as a responsible person. We will also discuss some planning options.