Most states have a very powerful tool to collect unpaid transaction and withholding taxes. It’s called “officer liability”. The statutes vary widely between the states. Regardless of how they may apply, the end game is the same…hold one or more officers of the organization personally liable for unpaid taxes. If they can’t pay, put a lien on their property and force them to a judicial sale to satisfy the tax.
Virginia recently issued a letter ruling that determined that the CEO of the company was not personally liable for unpaid use tax and some withholding tax because he didn’t have day to day control of these activities and didn’t have any actual knowledge that the taxes were not getting paid. Even though his name was on the account as a responsible party, the company used a check writing machine to apply his signature to the checks and he didn’t pay any attention to what was being paid and what was not being paid. In some states, this fact pattern would not have been beneficial to the CEO.
The application of officer liability rules vary by state. Some states apply this only to taxes that are collected but not remitted. Some states apply this to all taxes, whether collected or not. Some states apply the standard to an “responsible party” whether they are an officer or not. You get the idea. There is no uniform standard as to when this rule will apply. The part that is uniform, is that states have the ability to enforce these provisions when they need to and are not afraid to do so.
If your company has unpaid sales or use tax and your officers are not adequately protected or at least informed of this potential liability, then there could be serious issues to deal with if taxes are not being paid.
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