U.S. Supreme Ct. Wayfair Nexus Decision and Responsible Person Rules – Employees Can be Personally Liable for their Company’s Uncollected Sales Tax on Interstate Sales
If you are a business owner who has interstate sales (sales to customers outside of your base state of operations), you need to be intimately familiar with the U.S. Supreme Court’s June 21, 2018 finding in S. Dakota v. Wayfair. To become familiar with Wayfair, we suggest you read our July 24, 2018 posting as to how this court case dramatically impacted how states will use its nexus rules to tax out-of-state vendors.
As we predicted, this case “will likely have very significant tax consequences affecting both business owners and consumers.” We stated that the “short-term impact of the decision is that states will likely act quickly to amend their sales tax statutes to reflect the holding of the Court and begin levying sales and use tax on any interstate commerce that has substantial nexus.”
States are using Wayfair’s economic benefit standard to expand its application beyond sales tax. Some states are using this case to find out-of-state companies with enough economic nexus to be subject to those states’ income taxes. We discussed in our November 7, 2019 blog how Pennsylvania updated its nexus standard with respect to PA’s corporate income taxes.
What are Trust Fund Taxes?
“Trust fund taxes” are taxes that the collector holds “in trust” for the state until remittance. The two most widely known trust fund taxes are payroll and sales and use (S&U) taxes. With respect to S&U taxes, these are imposed not on the seller, but on the purchaser or user. As such, the laws passed in the wake of Wayfair do not increase tax liability for sellers but allow states to shift the collection and remittance obligation from the customer to the seller.
States with S&U taxes usually have rules that impose responsibility for tax liabilities on certain parties when their associated businesses cannot satisfy their obligations. Many of the rules expressly allow the respective state to file a demand for payment against any responsible person.
Who Is a Responsible Person?
The answer to that question will be determined on a state-by-state basis. S&U tax obligations, however, do not necessarily stop at the entity level, so even conducting business as a corporation does not necessarily protect owners from liability. Business owners who formed corporations or limited liability companies (LLCs) specifically to shield themselves from personal liability for business debts are often unaware of this exposure.
Responsible parties might include owners, officers, directors, controllers, tax managers, or other employees with tax filing responsibilities. The definition of a “responsible person” can be very broad and far-reaching. It could conceivably include any person who is under a duty to act for such corporation, partnership, limited liability company or individual proprietorship in complying with any requirement of the S&U taxes.
Why Is This Blog of Importance to You?
If you are a business owner who isn’t concerned about nexus, you need to be very concerned! Chris Hopkins, in his article published in the Journal of Accountancy, stated that “it is not only sellers of tangible property and their employees who could get caught up in the expanding web of economic nexus and tax liability. Sellers of services and digital products — including cloud computing, information services, data processing, audio and video content, and various online subscriptions — are now more vulnerable than ever, leaving individuals who are responsible persons for those companies at a greater personal risk.”
Tax Planning Tip #1:
States are implementing new registration requirements. If you are required to register in any state, the rules for collecting and reporting your sales (and tax obligations) will very likely differ by state and you will need to implement proper procedures to ensure compliance.
Tax Planning Tip #2:
Business owners with interstate sales need to have a tax professional evaluate their company’s and personal exposure. States may not have been interested in your sales activities in prior years because you did not have a physical presence in their states, but those states may now realize you have an economic nexus and will be “knocking on your door”. It is better to be proactive when it comes to identifying your tax liability exposure.
Tax Planning Tip #3:
If your business has material prior-years tax exposure, you should consider pursuing voluntary disclosure agreements to mitigate your tax audit and assessment risks. Some states “reward” those who come forth by reducing the number of past years for which taxes are due and some will abate penalties and reduce interest assessments.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.
About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.