Under Pennsylvania law, there are important exceptions to the general rule that officers, employees and owners of a corporation or limited liability company have no personal liability for the business’s unpaid tax liabilities.  The Pennsylvania Department of Revenue has statutory authority to collect unremitted sales tax, employer withholding tax and fuel tax from “responsible parties” when those taxes have been collected from customers or withheld from the compensation of employees.  See 72 P.S. § 7225; 72 P.S. § 7320; 75 Pa. C.S. § 9014.   The basis for this type of assessment is that the collected taxes constitute a “trust fund” in favor of the Commonwealth.  That is, in each of these situations, the business has collected taxes from third parties on behalf of the Commonwealth.

The applicable statutes generally provide that the collected, but unpaid, taxes are enforceable against “representatives” of the business that collected the taxes.  In a case involving an unpaid “trust fund” liability, the Department of Revenue is likely to issue a responsible party assessment against the chief operating and financial officers of the business and possibly against owners and other employees who have been identified on tax filings or registration documents as having responsibility for the reporting of these taxes. 

In recent years, the Department of Revenue (the “Department”) has begun to more actively pursue “responsible parties” for unpaid trust fund liabilities. Individuals who were, in fact, actively engaged in the management and control of the business do generally have personal responsibility for unpaid trust fund taxes.  Therefore, it is imperative for persons in control of a business to make sure that all trust fund taxes are paid when due, even when a business is struggling.  The volume of responsible party assessments issued by the Department reflects how common it is for businesses with financial problems to use trust fund taxes to pay other financial obligations.  Persons who control the general operations and finances of a business should keep in mind that lack of intent to “defraud” the Commonwealth is no defense to a responsible party assessment.  Similarly, the fact that a “responsible party” may have received no financial benefit from the failure to remit trust fund taxes does not shield him or her from personal liability for the unpaid taxes.  

Since the Department often has limited information as to which individuals were actually in control of a business’s operations and/or responsible for the remittance of trust fund taxes, assessments may be issued against some individuals who were not actually “responsible parties,” as that term has been construed by the Pennsylvania courts.  For example, the courts have generally restricted personal liability for unpaid trust fund taxes to individuals who actively control the operations of a business.  See, e.g., Brown v. Commonwealth, 670 A.2d 1222 (Pa. Cmwlth. 1996).  That being said, it would be quite difficult for a person serving as the president of a corporation to assert that he or she had no “control” over the corporation’s operations due to the scope of duties which accompany the office of “president.”    

It has been our experience that it is sometimes possible for an individual to obtain relief from a responsible party assessment at the Board of Appeals or the Board of Finance and Revenue (the “Board”), but only if the individual can adequately demonstrate that he or she was not responsible for the operations of the business during the period when the trust fund taxes were collected.  This proof requires more than a mere assertion by a person that he or she was not “responsible” for the corporation’s affairs.  As reflected in the “responsible party” decisions recently published by the Board of Finance and Revenue (as summarized in this edition of PA Tax Law News), persons with legal authority to exercise control over the financial affairs of a business may be deemed to have responsibility for unpaid trust fund taxes even where they do not view themselves as having control over the business. 

The Board decisions also show the importance of making sure that the appropriate forms are filed to have a person’s name removed from the records maintained by the Department of Revenue when they are no longer an officer or owner of the business or otherwise no longer have responsibility for the operation of the business or for tax filings.  Otherwise, a person who no longer is affiliated with a business, or otherwise no longer is a “responsible party,” may receive an assessment for a period after which they no longer exercised any control over a business with unpaid trust fund liabilities.

Even individuals who were “active and controlling” agents of a business may have grounds to appeal certain portions of a responsible party assessment, such as interest and penalties, or taxes assessed for periods after which they were no longer in control of the business.  We have also seen cases where a “responsible party” was erroneously assessed for tax liabilities of a business which did not constitute “trust fund” taxes because they were not taxes that had been collected from customers.  Even when there is an obvious basis for challenging a responsible party assessment, a person who receives such an assessment should file a timely Petition for Reassessment with the Department’s Board of Appeals to preserve their appeal rights.  They should also ask the Department to provide the basis for issuance of the responsible party assessment.