May 31, 2016
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you seek the correction of assessments converted to ***** (the “Taxpayer”) as a responsible officer of (the “Corporation”). The converted assessments are for unpaid sales and use tax assessments owed by the Corporation to the Department. I apologize for the delay in this response.
FACTS
The Corporation was assessed retail sales taxes, plus applicable penalties and interest, for reporting periods from July 2009 through June 2014. The Corporation’s assessments include two audit assessments and three assessments for delinquent sales tax returns. In accordance with Va. Code § 58.1-1813, the Corporation’s delinquent sales tax assessments were converted to the Taxpayer as a responsible officer of the Corporation. The Taxpayer and two partners each owned a one-third interest in the Corporation.
DETERMINATION
Responsible Officer
Virginia Code § 58.1-1813 A states:
Any corporate, partnership or limited liability officer who willfully fails to pay, collect, or truthfully account for and pay over any tax administered by the Department of Taxation, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall in addition to other penalties provided by law, be liable to a penalty of the amount of the tax evaded, or not paid, collected or accounted for and paid over, to be assessed and collected in the same manner as such taxes are assessed and collected.
Virginia Code § 58.1-1813 B defines the term “corporate, partnership or limited liability officer” as:
an officer or employee of a corporation, or a member, manager or employee of a partnership or limited liability company, who as such officer, employee, member or manager is under a duty to perform on behalf of the corporation, partnership or limited liability company the act in respect of which the violation occurs and who (1) had knowledge of the failure or attempt as set forth herein and (2) had the authority to prevent such failure or attempt.
In Angelson v. Commonwealth of Virginia, 25 Va. Cir. 319 (City of Richmond, 1991), the court determined that four conditions in Va. Code § 58.1-1813 must be met before a person can be held individually liable for taxes assessed against a corporation. The court stated:
First, the person must willfully fail to pay, collect, or truthfully account for and pay over a state tax, or willfully attempt in any manner to evade or defeat such tax or its payment. Second, the person must be an officer or employee of the corporation and have a duty to perform the act in respect of which the violation occurs. Third, the person must have knowledge of the failure or attempt as set out in the statute. And fourth, the person must have authority to prevent such failure or attempt.
The court stated that the absence of any one of these conditions prohibits the Department from collecting corporate taxes from an individual. Under the standard of willfulness applied by the courts, all that needs to be shown is that the act was “voluntary, conscious, and intentional.” Hewitt v . U.S., 377 F.2d 921, 924 (C.A. Tex.) In other words, it need only be shown that the corporate officer was aware of the outstanding liability and knowingly and intentionally paid operating expenses or other debts of the Corporation.
The Taxpayer states that it should not be held personally liable for the unpaid sales tax assessments issued to the Corporation because two of the four conditions in Angelson v. Commonwealth of Virginia are not met. The Taxpayer asserts that it did not have a duty to account for and pay the sales and use tax liabilities of the Corporation. The Taxpayer further asserts that there was no actual knowledge of the Corporation’s failure to collect, account for and pay the sales taxes owed the Commonwealth.
Duty to Perform
The Taxpayer maintains that it was primarily responsible for sales and marketing and did not have the specific duty to file and pay the Corporation’s sales taxes. The Taxpayer provided documentation with this appeal that demonstrates the Corporation’s bookkeeper was responsible for reporting and filing sales taxes. The Department has also confirmed that the bookkeeper signed and filed various sales tax returns and signed some of the checks that were remitted to pay the Corporation’s reported sales tax liabilities. It is important to note, however, that the bookkeeper did not file any sales tax returns for monthly periods between July 2009 and October 2010 before her employment with the Corporation ended in November 2010. The Taxpayer also suggests that the Corporation’s accounting firm was responsible for filing the Corporation’s sales and use tax returns. However, the accounting firm indicates that the Corporation was responsible for the preparation and filing of sales tax returns.
Based on a review of the Department’s records, the Taxpayer signed Forms ST-9, Retail Sales and Use Tax Return, that were filed on March 4, 2010 for the taxable periods of October, November and December 2009. Prior to this time, the Taxpayer signed an offer in compromise request that was filed with the Department on June 8, 2009. The request related to a sales tax assessment issued for the Corporation’s delinquent October 2008 return. The Taxpayer signed a Virginia Form PAR 101 dated 3/24/14 to designate an outside accountant with a power of attorney to act on behalf of the Corporation with regard to sales and use taxes for the period January 2006 through December 2014. The Department’s records further indicate that there were phone contacts between the Taxpayer and the Department’s collection representatives to discuss the delinquent sales tax liabilities.
The Corporation’s operating agreement sets out the terms and conditions for conducting the management, business and financial affairs of the Corporation. The operating agreement states that the business and affairs of the Corporation are to be managed by one or more managers and that the managers are to exercise various powers. Those powers include: (1) entering into contracts and agreements; (2) opening and maintaining bank accounts and investment accounts; (3) drawing checks and other orders for the payment of money; (4) designating individuals the authority to sign or give instructions with respect to those accounts and arrangements; and (5) payment of the debts and obligations of the company.
Pursuant to the operating agreement, the Taxpayer and one other partner were the only managers authorized to manage the business of the Corporation. Although the bookkeeper was mainly responsible for filing the Corporation’s sales and use tax returns, it is apparent that the Taxpayer performed this duty at various times prior to and during the reporting periods at issue in this appeal. Virginia Code § 58.1-1813 B does not limit the number of persons that can be deemed to be under a duty to perform the reporting and payment of taxes, nor does it require that the duty be the primary responsibility of the corporate, partnership or limited liability officer. The fact that one of the bookkeeper's duties was the filing of sales and use tax returns does not mean that the Taxpayer did not have the duty of filing sales tax returns and paying the Corporation’s sales tax liabilities, as well.
In addition, the Taxpayer has not provided evidence that the other manager or some other party assumed responsibility for the filing and payment of sales and use taxes prior to or subsequent to the departure of the bookkeeper. Based on the available information, as an active managing partner, the Taxpayer was under a duty to file the Virginia sales and use tax returns and pay the Corporation’s tax liabilities for the reporting periods at issue.
Knowledge
On April 6, 2014, the Taxpayer attempted to use a Corporation debit card while on company business. The transaction was declined because there were no funds available in the Corporation’s bank account. The Taxpayer contacted the bank and found that the account had been liened by the Department and the funds in the account used to pay outstanding sales and use tax assessments. The Taxpayer states it assumed that the lien collection of funds from the bank account had satisfied all the outstanding tax debts owed the Department. The Taxpayer maintains that it did not have actual knowledge of any remaining tax debts owed the Department until August 2014.
As previously noted, the Taxpayer signed a Virginia Form PAR 101 dated March 24, 2014, to designate an outside accountant with a power of attorney for the Corporation’s sales tax liabilities. The sales tax filing periods covered by the Form PAR 101 are January 2006 through December 2014. As of March 24, 2014, the Department’s records indicate that the Corporation had outstanding sales tax assessments for the filing periods November 2008 through January 2009 and October 2009 through December 2009. The Department’s sales tax audit for the period of July 2009 through February 2014 was in progress at this time, and the Department had already placed a lien on the Corporation’s bank account. The signing of the Form PAR 101 occurred before the date on which the debit card transaction was declined. The filing period information and the signature date on the Form PAR 101 suggests the Taxpayer had knowledge of existing or potential sales tax liabilities for the Corporation prior to the date the debit card was declined, which is when the Taxpayer claims it first had knowledge of any outstanding tax liabilities with the Department.
The Department’s sales and use tax audit was in progress at the time the Form PAR 101 was signed. The Department’s auditor contacted the Taxpayer’s office several times between November 2013 and February 2014. The auditor left messages with an employee at the Corporation’s business office, requesting that the Taxpayer contact her regarding the audit. The Department’s records indicate that numerous delinquent notices and assessments were issued and mailed to the Corporation’s business address. The Taxpayer worked at the Corporation’s office address and a substantial number of contacts were made by the Department with this location by mail, telephone and in person. It is improbable that the Taxpayer had no knowledge of the Corporation’s sales tax liabilities.
Finally, the Corporation’s sales invoices confirm that the Virginia retail sales tax was charged to customers during the periods under appeal. The Taxpayer was primarily responsible for the Corporation’s sales activities. As such, the Taxpayer was aware that sales taxes were billed to customers and that the taxes collected were required to be remitted to the Department. Based on the evidence set out above, I find that the Taxpayer had knowledge of the Corporation's liabilities and failure to pay the retail sales and use taxes owed to the Department.
CONCLUSION
Based on this determination, the Taxpayer meets all of the criteria set out in Angelson v. Commonwealth of Virginia. The conversion of the Corporation’s assessments to the Taxpayer as a responsible officer is correct and the converted assessments are now due and payable. The Taxpayer will be issued updated bills with interest accrued to date. The bills should be paid within 30 days to avoid the accrual of additional interest.
Financial Hardship
The Taxpayer indicates that it has filed for personal bankruptcy. Virginia Code § 58.1-105 authorizes the Tax Commissioner to compromise and settle a tax liability when the collection of that liability is doubtful due to a taxpayer’s financial condition. For an offer based on doubtful collectability to be considered by the Tax Commissioner, evidence of doubtful collectability must be presented to support the claim. If the Taxpayer wishes to pursue an offer in compromise based on doubtful collectability, please complete and return the enclosed “Offer in Compromise Individual Request For Settlement” and “Financial Information Statement” forms. The information provided on these forms will allow the Department to review and analyze the Taxpayer’s financial situation. Upon the completion of this review, the Department will issue a response based on the information presented.
The completed forms supporting the Taxpayer’s claim of doubtful collectability should be sent to: Offer in Compromise Team, Collections Section, Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880. For assistance, please contact a member of this team at (804) 786-2101. If the Department does not receive the completed forms within 45 days from the date of this letter, it will be presumed that the Taxpayer does not wish to submit an offer in compromise based on doubtful collectability. Any appropriate collection action will resume on the outstanding assessments.
The Code of Virginia sections cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions concerning this determination, please contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5892875146.S