The Responsible Person

Many taxpayers fail to appreciate that a member of a partnership or LLC may be held personally liable for the sales tax collected or required to be collected by the entity.

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”).

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 an 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 entity’s unpaid sales tax passes through to the responsible person.


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 State’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.

However, in 2011 New York provided partial relief to the per se personal liability for certain limited partners and LLC members. Under this policy, set forth in a Technical Memorandum, certain limited partners and LLC members who would be considered responsible persons under the Tax Law may be eligible for relief from personal liability for the entity’s failure to remit 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 the member’s liability for sales tax will be limited to his pro rata share of the tax.

An LLC member who can document that his ownership interest and distributive share of the profits and losses of the LLC is less than 50% may qualify for relief, if he can also demonstrate that he was not “under a duty to act” on behalf of the LLC in complying with the Tax Law.

Another One Bites the Dust

A recent ALJ decision considered whether an individual taxpayer (“Taxpayer”) was personally liable for the sales taxes due from an LLC of which he was a member.

NW LLC purchased Hotel in early 2005. Taxpayer executed the purchase agreement on behalf of NW LLC as a member of the LLC. NSP LLC was created by NW LLC to operate Hotel.

NSP LLC entered into a management agreement with Manager. Taxpayer signed the agreement on behalf of NSP LLC. Under the agreement, Manager had the right to hire, fire and supervise Hotel employees. NSP LLC was accorded the right to review Hotel’s books and records.

Taxpayer executed and filed a sales tax registration form, and an application for a liquor license, on behalf of NSP LLC, in his capacity as a manager of the business. Taxpayer subsequently signed sales tax returns on behalf of NSP LLC.

In 2007, NSP LLC refinanced its loan with Lender, and Taxpayer executed the document on behalf of NSP LLC. Among other things, the loan agreement provided Lender with a first priority security interest in all monies deposited into NSP LLC’s bank accounts. The agreement with Manager was also collaterally assigned to Lender as security for the loan.

NSP LLC fell into arrears in property taxes for the years 2007 and 2008. It also fell behind in its sales tax obligations for three quarters of 2008.

In 2008, NSP LLC was declared to be in default of the mortgage because it had failed to remain current in satisfying its sales and real property tax obligations. Lender advised NSP LLC that the failure to pay the taxes was an event of default.

As a result of this default, Lender stopped releasing funds to NSP LLC from the lockbox to the operating account and, together with Manager, assumed complete control over the operations and operating revenue of Hotel. Manager determined who would be paid and that decision was conveyed to NSP LLC and Lender. The people who collected, counted and delivered the money to the bank were all Manager employees. Lender would release money into a bank account that only Manager had access to and then Manager would write the checks. NSP LLC reminded Lender of its obligation to pay sales taxes, but Lender chose not to release the funds.

In 2009, the Supreme Court appointed a receiver for the revenues of NSP LLC. The receiver was ordered to pay only current taxes and not the taxes due from the time of Hotel’s seizure by Lender.

The State then assessed the sales taxes owing by NSP LLC against Taxpayer as a responsible person.

Taxpayer argued that he should not be held liable for the failure to collect and remit sales tax since he was precluded from being involved in Hotel once Lender seized control of Hotel in 2008. Taxpayer maintained that he could not be derivatively liable as a minority owner in NSP LLC because NSP LLC itself was not liable since it was “cut out of the financial decisions of the Hotel once [Lender] seized the Hotel.” He also stated that the sales tax arrearage did not arise until after Lender took over Hotel.

The State responded that, during the period in issue, Taxpayer was a member of NSP LLC and was, therefore, subject to per se liability for the taxes due from the LLC; that Taxpayer participated in the management of the business; and that Taxpayer had the burden of showing that he was not a responsible person.

The ALJ’s Opinion

The ALJ stated that, under the Tax Law, “every person required to collect [sales tax] shall be personally liable for the tax imposed, collected or required to be collected…”

The Tax Law defines a “person required to collect [sales tax]” to include:

“any employee of a partnership, any employee or manager of a limited liability company, . . . who as such . . . employee or manager is under a duty to act for such . . . partnership, limited liability company . . . in complying with any requirement of [the sales tax]; and any member of a partnership or limited liability company.”

The ALJ indicated that the foregoing language has generally been interpreted to impose strict liability upon members of an LLC for the failure to collect and remit sales tax.

Accordingly, as a member of NSP LLC, Taxpayer was personally liable for the sales taxes due from NSP LLC.

The ALJ considered Taxpayer’s contention that the foregoing analysis did not apply to him because Lender had seized Hotel and, as a result, neither NSP LLC nor its members could be held liable for the sales taxes due from Hotel. It contrasted Taxpayer’s position with the State’s contention that Hotel was not seized but, rather, that NSP LLC voluntarily yielded control to Lender.

In general, according to the ALJ, where a taxpayer’s lack of control over the financial affairs of a business entity arises from a choice not to exercise that authority, liability for sales taxes is imposed. However, where a person is precluded from acting on behalf of the business through no fault of his own, the obligations of a responsible person have not been imposed.

The ALJ acknowledged Taxpayer’s position that Taxpayer lacked control over the financial affairs of Hotel once Lender had taken over. It then considered Taxpayer’s position that NSP LLC did not willfully fail to pay and, therefore, could not be liable for the unpaid taxes. However, the question presented was whether this situation arose because of decisions made by Taxpayer.

Prior to the assumption of control by Lender, Taxpayer was clearly involved in the management and financial affairs of NSP LLC. For example, Taxpayer signed the management agreement that gave Manager the authority to manage Hotel. Significantly, NSP LLC retained the right to review Hotel’s books and records.

The ALJ determined that NSP LLC voluntarily entered into an arrangement that ultimately led to its inability to pay sales tax. There was an act that permitted Lender to exercise rights that directly resulted in the nonpayment of taxes. The inability to act was Taxpayer’s own creation and was foreseeable in the event of financial difficulties.

Accordingly, the arrangement with Lender amounted to a dereliction of Taxpayer’s duty under the Tax Law, as a responsible person, to properly safeguard the interests of the State with regard to sales taxes. Since the inability of NSP LLC to determine the disposition of funds after Lender assumed control was a situation of NSP LLC’s own making, it could not be relied upon, the ALJ said, to absolve NSP LLC of liability. It followed that Taxpayer’s argument, that he could not be held responsible since NSP LLC could not collect and remit sales tax, was without merit.

Finally, the ALJ explained that the policy set forth in the Technical Memorandum, to alleviate some of the harsh consequences of being found to be a responsible officer pursuant to the Tax Law, did not apply to Taxpayer. Specifically, the memorandum provided:

“In the case of a partnership or LLC, [the Tax Law] provides that each partner or member is a responsible person regardless of whether the partner or member is under a duty to act on behalf of the partnership or company. This means that these persons can be held responsible for 100% of the sales and use tax liability of a business. The department recognizes that this provision can result in harsh consequences for certain partners and members who have no involvement in or control of the business’s affairs.”

On its face, the ALJ stated, the policy did not apply to a member of an LLC who had substantial involvement in the financial affairs and management of the business. Here, Taxpayer exercised substantial authority over the business and financial affairs of NSP LLC until there was an event of default, which led to Lender’s utilization of the lockbox.


Was the ALJ’s decision unexpected? No. It certainly highlights the very difficult choice that confronts the responsible person in a struggling business: either pay the sales tax and give up the business, or continue to operate and risk personal liability.

Economic difficulties do not excuse an individual from his responsibility to collect and remit sales tax on behalf of a business entity. The Courts have often stated that individuals may not continue to operate a business “at the expense of ensuring that sales tax was paid.”

The ALJ noted that Taxpayer voluntarily entered into the arrangement on behalf of the LLC and thereby created the scenario which led to LLC’s inability to pay sales tax. In other words, Taxpayer, on behalf of the LLC, gave Lender the authority to determine which liabilities would be paid. Such a grant of authority was in direct contravention of Taxpayer’s duty as a trustee to “properly safeguard the interests of the State with regard to such taxes.” He voluntarily acceded to the terms of the agreement, notwithstanding his knowledge that, under the arrangement, sales taxes were not being paid.