Recently, California Administrative Law Judge Josh Aldrich of the California Office of Tax Appeals (OTA), confirmed a California Department of Tax and Fee Administration (CFTDA) decision against the Appellant of AutoCouture LLC (AutoCouture), a now nonexistent company, as a “responsible person” for the unpaid sales and use tax liabilities of the company.
Although the Appellant LLC member argued that his partner was the person who was actually responsible for the unpaid tax, the OTA determined there was sufficient evidence to prove the individual knowingly withheld tax from the state while still receiving sales tax from customers.
“Although the sales tax is imposed on the retailer, there are situations when other persons may also be held personally liable for unpaid taxes. ”
The Complaint
As set forth in California law, a “responsible person” means any officer, member, manager, employee, director, shareholder, partner, or other person having control or supervision of filing returns and paying tax, or who has a duty to act for the LLC in complying with the Sales and Use Tax Law.” Of note, “personal liability may only be imposed if appellant was a responsible person at the time the LLC sold tangible personal property, collected sales tax reimbursement, and failed to remit it to CDTFA.”
Facing the Elements
As stated in California law, “a person is personally liable for the unpaid tax, penalties, and interest owed by a business entity, such as a LLC, if all of the following four elements are met: (1) the LLC’s business has been terminated, dissolved, or abandoned; (2) the LLC collected sales tax reimbursement on its sales of tangible personal property and failed to remit such tax when due; (3) the person had control or supervision of, or was charged with the responsibility for, the filing of returns or the payment of tax, or had a duty to act for the LLC in complying with the Sales and Use Tax Law; and (4) the person willfully failed to pay taxes due from the LLC or willfully failed to cause such taxes to be paid.”
Although the member claimed his partner was responsible for the day-to-day operations of the business including remitting sales tax to the state, the OTA referenced the CDTFA’s acknowledgements, “appellant signed AutoCouture’s Articles of Organization and he was listed as the agent for service of process thereon.”
In reaching its decision, the OTA agreed that the LLC had ceased operations, was receiving sales tax from customers, had control of the paying of sales tax, and was able to pay or cause the payment of the tax, thereby holding that the member was liable for the unpaid sales tax.
Next Steps
Having Libertas conduct a sales and use tax compliance process review can minimize the potential individual tax liability you may otherwise be exposed to as a result of your company’s current controls and processes. Remember, the best defense is an even better offense.