The New York State Tax Department released new guidance last week in TSB-M-20(2)S addressing potential avenues for relief for those assessed as responsible persons for sales tax. This new TSB-M largely mirrors amendments to Tax Law § 1133(a) that were enacted as part of the budget legislation for fiscal 2018-2019 which we covered here and here. That legislation established statutory relief for certain limited partners and LLC members who were assessed and held jointly and severally liable for sales tax assessments solely by virtue of their interest in a partnership or LLC. To qualify for relief, eligible limited partners and LLC members must principally show that: (i) they were not under a duty to act for the LLC or partnership in complying with the requirements of the sales tax; and (ii) their ownership interest and the percentage of their distributive share of the profits and losses of the LLC or partnership are each less than 50%.
One notable aspect of TSB-M-20(2)S is that it establishes a procedure for seeking relief, whereas there previously was no stated procedure. Now, the applicant must submit two forms: (1) an Application for Relief from Responsible Person Liability Under the Sales Tax Law (Form DTF-8) and (2) a Request for Conciliation Conference (Form CMS-1-MN) and, according to the TSB-M, both of these forms “must be submitted before the liability at issue becomes fixed and final.” But this requirement regarding the timing for filing the application does not appear in the amendments to Tax Law § 1133(a) and it’s conceivable that this could be problematic in practice. As a result, it is likely that some taxpayers who would otherwise qualify for relief under the law will likely not receive that relief simply because of a timing issue. Thus, this new TSB-M is properly viewed as a restriction on the relief offered under the law to limited partners and LLC members. And it is important to keep this provision in context. New York’s treatment of limited partners and LLC members is particularly aggressive since such taxpayers are personally liable for the entity’s sales tax debts regardless of whether they were under a duty to act for the entity. This provision has caught many silent investors in LLCs and LPs off guard. Indeed, some limited partners and LLC members might actually be prohibited from participating in the day-to-day operation of the business, yet find themselves on the hook for the entity’s sales tax debts. The same is not true for corporate entities, including S corporations. For these entities, if the Tax Department wants to hold an individual personally liable for the business’s sales tax debt, it must first demonstrate that the individual was under a duty to act for the entity, or did, in fact, have a requisite level of control over the entity’s operations.
Another wrinkle, which does find support in the recent amendments to Tax Law § 1133(a), is that relief “may” be withheld in the case of a limited partner or LLC member who either (i) has been convicted of a tax crime or (ii) has a “past-due liability” as that term is defined in Tax Law § 171-v, i.e., one in excess of $10,000.