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.
The Taxpayer also protests the responsible officer conversion of an assessment issued for the period January through December 2004.
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 three 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 it did not willfully fail to pay the sales taxes due the Commonwealth and had no actual knowledge of the Corporation’s failure to collect, account for and pay the sales taxes owed to the Commonwealth.
Duty to Perform
The Taxpayer maintains that it was primarily responsible for managing the onsite installation of the electronic entertainment packages sold and installed by the Corporation. In addition, the Taxpayer prepared sales quotes and was responsible for the Corporation’s payroll. The payroll was prepared through the use of Quickbooks software and the withholding taxes were filed using an online service. The Taxpayer contends that the preparation of the payroll was the only financial duty performed for the Corporation and that it did not have the specific duty to file and pay the Corporation’s sales taxes. The Taxpayer believed that the Corporation’s bookkeeper was using the Quickbooks software to enter monthly sales data and that sales taxes were filed and paid to the Department online in the same manner as the payroll.
The Department’s records indicate that the Taxpayer signed some sales tax returns and check payments on behalf of the Corporation prior to the periods under appeal. 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. While the Taxpayer’s involvement with the actual filing and payment of sales taxes was somewhat limited, the Taxpayer did file and pay Virginia sales and use taxes.
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 (the “Partner”) were the only managers authorized to manage the business of the Corporation. The Taxpayer states that a third partner was to take responsibility for the financial affairs of the business when the Corporation was formed. However, the third partner never assumed these duties due to personal reasons. The Department has confirmed that a bookkeeper filed and signed sales and use tax returns for the Corporation. However, the bookkeeper did not file any returns for monthly periods between July 2009 and October 2010 before her employment with the Corporation ended in November 2010. The Taxpayer has not provided evidence that another person was responsible for the filing and payment of sales and use taxes prior to or subsequent to the departure of the bookkeeper. There has been no explanation provided why the Taxpayer, the Partner or another employee did not file the Corporation’s sales tax returns for this extensive period of time. The Department’s records reveal that there were no sales tax returns filed for 51 straight monthly periods.
The Taxpayer maintains that it did not have the specific duty of filing and paying sales and use taxes for the Corporation. I do not find this argument to be persuasive. The statutory language of Virginia Code § 58.1-1813 B does not require that an officer be under a specific duty to perform the act in which the violation occurs. It merely requires the officer to be under a duty to perform the act. As one of two active managers of the Corporation, the Taxpayer was responsible for insuring that Virginia sales and use taxes were filed and paid, particularly after the bookkeeper that performed the duty was no longer employed by the Corporation. While the Taxpayer may not have been responsible for filing sales taxes on a day-to-day basis, the Taxpayer was responsible for managing the daily affairs of the Corporation, which included the filing of tax returns and the payment of tax liabilities.
Under the terms of the Corporation’s operating agreement, the Taxpayer was charged with the duties of paying the debts and obligations of the Corporation and with drawing checks or orders to pay those debts and obligations. Based on a review of the Corporation’s bank records, the Taxpayer signed numerous checks to pay utilities, suppliers, rent and other expenses of the Corporation. As an active managing partner of the Corporation and based on clear evidence that demonstrates the Taxpayer paid the Corporation’s bills and expenses during the periods at issue, the Taxpayer was also under a duty to file Virginia sales and use tax returns and pay the tax liabilities incurred by the Corporation.
Willful Failure to Pay
The Taxpayer states that there was no willful failure to collect, account for or pay the Corporation’s sales taxes since he believed that the tax was being paid through the use of Quickbooks and the online filing service. The interpretation of the standard of willfulness requires that it 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.
Based on information provided by the Partner to the Department, the Taxpayer was aware of the unpaid sales taxes. A review of the Corporation’s bank records demonstrates that the Taxpayer paid the bills and expenses of the Corporation on a regular basis in lieu of the unpaid sales tax liabilities. Regardless of the Taxpayer’s assumption that the sales taxes were paid online, the Taxpayer should have recognized that tax payments were not being made because the Taxpayer regularly used the Quickbooks software. The software would have provided access to the Corporation’s financial information and checking account records. These records would have reflected that there were no sales tax payments made to the Department. As such, there was a willful failure by the Taxpayer to pay the delinquent sales tax liabilities.
Knowledge
The Department’s records indicate that, on April 1, 2014, the Corporation’s outside accountant contacted a collections representative at the request of the Taxpayer. The Department’s representative documented the phone call with a statement that the accountant called to discuss a lien that was issued by the Department. The representative stated that the accountant was advised of the lien by the Taxpayer. On April 6, 2014, the Partner 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 Partner has disclosed that the Taxpayer admitted to him that he was aware of the tax liabilities and the Department’s lien when advised that the debit card transaction was denied.
During the time the Corporation’s sales and use tax audit was in progress, the Department’s auditor contacted the business office several times between November 2013 and February 2014. The auditor left messages with an employee at the office of the Corporation, requesting that the Taxpayer contact her regarding the audit that was in progress. The Department’s records indicate that numerous delinquent and assessment notices were mailed to the Corporation’s business address. While it may be true that the Taxpayer performed installation duties outside the office, the Taxpayer worked out of 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.
The Corporation’s sales invoices reveal that Virginia retail sales tax was charged to customers during the periods under appeal. The Taxpayer was responsible for preparing sales quotes for the Corporation. Sales quotes typically include any applicable sales taxes. As such, the Taxpayer had knowledge 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.
The Taxpayer contests the conversion of a penalty assessment for the period January 2004 through December 2004 on the basis that the Corporation was not in business during this time. However, this converted assessment originated from a business assessment issued to a different entity, *****. This entity is no longer in business. The entity was assessed a penalty on May 3, 2007 due to a delinquent pass through entity tax return. The business assessment was converted to the Taxpayer as a responsible officer on July 12, 2007. The Department’s records indicate that bill is now paid in full. Based on the assessment date, the statute of limitations for filing an appeal of this assessment has expired pursuant to Va. Code § 58.1-1821.
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.
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 Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5892875166.S