It happens far too often that states like New York conduct sales and use tax audits of large companies and at the end of the audit, in addition to issuing an assessment of additional tax due to the company, they issue a mirror assessment to a so-called responsible person, who the state asserts is personally liable for the amount of the assessment should the state not be able to collect the amount asserted as due from the company. In many instances, the purported responsible person ends up being an unlucky mid-level employee in the tax department of a large company. Clearly, this should not be how responsible person statutes operate and cannot be what state legislatures intended to happen when enacting such statutes. However, there are occasionally cases that should serve to remind everyone of the actual reason for the existence of responsible person statutes and, by comparison, highlight the absurdity of applying these statutes in the case of large or even mid-sized companies.
In a recent decision by the New York State Tax Appeals Tribunal, the Tribunal upheld a responsible person assessment against the president of a small, closely held used car dealership and auto repair shop. Petition of Rajni T. Mohnani, DTA No. 828964 (Sep. 14, 2023). New York audited the business for sales and use tax and it was determined that the books and records of the company were inadequate, so New York estimated the sales and use tax liability for the business from the books and records that were available. At the hearing before the Administrative Law Judge, the president of the business testified that the business had collected sales tax on taxable transactions but failed to remit the amounts to New York and instead used the amounts to pay business expenses.
The Tribunal found that the Administrative Law Judge had properly determined that the president was a responsible person personally liable for the tax at issue. The Tribunal noted that the president had access to and oversaw the business’ books and records, identified herself as the president of the business in correspondence with the Department, signed consents for the business extending the period of limitations for assessment, signed corporate tax returns and corporate checks for the business as the president, submitted sales tax returns for the business, and was listed as the responsible person and president of the business in the business’ application for a certificate of authority to collect New York sales tax. According to the Tribunal, all these facts taken together were “compelling evidence that petitioner had or could have had sufficient authority and control over the affairs of the business such that she was a responsible person for sales tax purposes.”
The president’s only argument against the responsible person assessment was that it was, in fact, her brother who was the responsible person for the business. However, the Tribunal quickly dispensed with this argument explaining that “it is well established that more than one person can be held liable as a responsible officer.” This case is a reminder that responsible person assessments properly issued to the owners of small closely held businesses running totally afoul of the sales tax law stand in stark contrast to the responsible person assessments nonsensically issued to employees of large companies simply for them having been put in charge of managing the audit.
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