September 2, 2016
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter requesting waiver of the converted retail sales and use tax assessments and a withholding tax assessment issued to ***** (the “Taxpayer”) for the periods December 2012 through January 2014 and August 2014, respectively. I apologize for the delay in responding to your appeal.
FACTS
The officers of ***** (the “Corporation”) consisted of a president, secretary and treasurer. The Taxpayer was the Corporation's secretary and 22% co-owner. Another co-owner was the Corporation's treasurer. The Corporation was issued assessments for unpaid sales and withholding taxes. When the Corporation failed to pay the tax, interest, and penalty assessments, the Department converted the assessments to the Taxpayer pursuant to Va. Code § 58.1-1813.
The Taxpayer contests these converted assessments, claiming he was not a “corporate officer” under Va. Code § 58.1-1813 because he had no duty to collect and remit the sales tax and report and remit the employer withholding tax and had no knowledge of the tax delinquencies prior to March 2014. On February 6, 2014, the Corporation was visited by a representative of the Department. At that time, I understand that the Taxpayer learned of the existence of the delinquent taxes. Previously, the Taxpayer contends that the treasurer misinformed the Taxpayer and other members of the Corporation that all required tax returns were being filed and paid timely.
On March 19, 2014, a padlock hearing was held at the Department with the treasurer and resulted in a part pay agreement for the payment of the unpaid debts owed by the Corporation. The padlocking process was suspended.
I understand that the Department conducted field visits to the Corporation's place of business that included two field visits on April 9, 2014 and August 6, 2014. In a letter to you dated January 8, 2015, the Department's senior field agent states that the Taxpayer was present at the business during both visits and signed “Padlock Hearing Failure to Comply Letters” as owner. On April 16, 2014, the Taxpayer signed two company checks: Check #***** paid for sales tax owed by the Corporation for February and March 2014; and check #**** paid for withholding tax owed by the Corporation for January and February 2014. I understand that the Corporation continued in business through August 2014 and additional payments were made with cashier's checks and other checks (designated as “official” checks) for sales and withholding taxes owed for 2014 that the Taxpayer claims to be remitted from personal funds. According to the Department's records, no sales tax payments were made in connection with any 2013 sales tax returns filed by the Corporation.
The Taxpayer indicates that his business responsibilities were limited to joint responsibilities for bill payments, signing checks, and hiring and firing employees. The Taxpayer maintains that his duties did not include preparing, reviewing, signing or filing returns, authorizing or making tax deposits, opening or closing bank accounts, or authorizing payroll. Rather, according to the Taxpayer, those duties were assigned to the treasurer, including the duty of remitting the applicable sales taxes to the Department. In owner meetings, the Taxpayer indicates that the treasurer assured all owners that sales tax returns were being filed on time with all sales tax payments.
The Taxpayer contends that the treasurer was solely responsible for reporting the taxes of the Corporation and was responsible for the Corporation's failure to remit the taxes at issue. The Corporation sold all its fixtures, furniture and equipment on August 29, 2014. The contract for sale of the Corporation's assets states that such assets are subject to delinquent Virginia sales tax and is signed by the Taxpayer. Accordingly, all proceeds received from this asset sale went to pay delinquent state tax liabilities owed by the Corporation. The Corporation ceased operations on September 1, 2014. According to the Taxpayer, the Corporation had no other means to pay the remaining unpaid taxes in question because it was behind on rent payments and other financial obligations.
DETERMINATION
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 pointed out that four conditions of Va. Code § 58.1-1813 must be met before a person can be held individually liable for taxes assessed against a corporation. “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 (actual) 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.” [Insert added.] The court stated that the absence of any one of these conditions prohibits the Department from collecting corporate taxes from an individual.
In this case, the Taxpayer was an officer of the corporation. While the information presented indicates that the Taxpayer was not specifically responsible for preparing and filing sales tax returns, the By-Laws of the Corporation do not prohibit the Taxpayer from signing checks for the payment of taxes or becoming involved in the tax matters of the Corporation. In this case, a number of notices of assessment were issued to the Corporation requesting payment of delinquent sales and withholding taxes. As part of his duties, the Taxpayer was obligated to pay bills. Because the tax assessments in question were bills issued to the Corporation, the Taxpayer could be obligated to pay them as he did on at least two occasions. The Taxpayer also directed the payment from the sale of the assets to be sent directly to the Department to pay the tax delinquencies. In addition, the Taxpayer discussed the tax delinquencies with the treasurer for the purpose of payment of such tax delinquencies. Furthermore, the Taxpayer used personal funds to pay the tax delinquencies of the Corporation. These actions strongly suggest that the Taxpayer took on the duty of overseeing the payment of delinquent state sales and withholding taxes on behalf of the Corporation.
In regard to whether the Taxpayer was actually aware of the tax deficiencies, the Taxpayer contends he was not aware of the initial tax delinquencies until about February 2014, i.e., the seventeenth month of business. From that moment on, the Taxpayer gained actual knowledge of the past debts, as well as, current debts. The Taxpayer acquired such knowledge from attending two other meetings with Department personnel. After the Corporation closed its business, the Taxpayer demonstrated an awareness of the tax deficiencies by directing the proceeds of the Corporation's asset sale to be remitted directly to the Department by the purchaser of such assets. Clearly, the Taxpayer knew of the tax deficiencies prior to the close of business.
As to the Taxpayer's authority to prevent a failure to pay the past or current tax liabilities, the first action taken by the Taxpayer was to confront the treasurer and request him to contact the Department to arrange for a payment plan for the sales tax and withholding tax delinquencies of the Corporation. The Taxpayer continued to apply other actions by remitting company and personal funds or directing the payment to the Department for tax delinquencies incurred by the Corporation. While the Taxpayer's duties do not include preparing, reviewing, signing or filing returns, the Taxpayer's actions demonstrate an exercise of authority to prevent a failure to pay the taxes in question.
As to whether the Taxpayer willfully failed to pay, collect, or truthfully account for and pay over a state tax, or willfully attempted to evade or defeat such tax or its payment, I must recognize that the minutes of the owner's meetings are missing. As such, there is no record that the treasurer had assured the owners that sales tax returns were being filed on time. Furthermore, the information presented does not address all of the Taxpayer's executive actions after becoming aware of the Corporation's state tax debts. For instance, the information presented suggests that the treasurer retained his position with the Corporation after the tax deficiency situation came to light. However, it is not known what action was taken by the owners after the treasurer's admission or whether any restrictions were placed upon the treasurer's tax duties to the Corporation. It is also not completely known how the treasurer's and the Taxpayer's role in the Corporation changed after the admission.
For instance, Article 3 of Section 5 of the By-Laws presented in support of the Taxpayer's appeal specifically states that “[t]he Secretary shall keep the minutes of the meeting of the Stockholders” and Article 1 of Section 10 of such By-Laws specifically states that “(alt all meetings of Stockholders, the order of business shall be . . . (d) Reading of minutes of preceding meeting.” Because the Taxpayer was the secretary of the Corporation, the Taxpayer was obligated to record the minutes of each owner meeting. In fact, the Taxpayer's letter of November 20, 2014 to the Department's senior field agent states that a function of the corporate secretary and vice president (i.e., the offices held by the Taxpayer) is ‘keeping the minutes of the shareholders meetings.” Accordingly, I find it troubling that the Taxpayer now claims that he does not know if such minutes were ever created especially in light of the facts that the By-Laws mandate the reading of minutes from the prior owner meeting by the corporate secretary and the Taxpayer's correspondence admits that the minutes of owners meetings were kept by the Taxpayer.
According to the facts presented, the Taxpayer was in charge of operating the day-to-day business and would be clearly aware that the Corporation was generating revenue because of sales activities. In this regard, a review of the sales tax returns filed since the Corporation's beginning liability date of its sales tax collection account indicates gross sales in excess of *****. Such revenues were more than sufficient to pay the state tax and withholding tax deficiencies. Moreover, as the gross sales were likely all taxable, the sales tax collected in trust for the Commonwealth but not remitted should have been sufficient to pay all of the sales tax owed. Because of these revenues and absent evidence to the contrary, I would conclude that the Corporation paid other debts with such monies.
Unlike the Taxpayer in Public Document 12-100 (6/15/12), the Taxpayer in the instant case had joint discretion over the Corporation's funds for paying its bills and expenses. For instance, the Taxpayer states in the appeal letter that he was jointly responsible for paying bills and for signing checks. As such, the Taxpayer had discretionary authority over paying bills of the Corporation. For example, the Taxpayer exercised authority over company funds by signing company checks to pay for past due state taxes. I note that the company checks used by the Taxpayer are from a different checking account than the checking account used by the treasurer. I also note that the two company checks written by the Taxpayer are not consecutive. Thus, while exercising this authority to pay some of the tax deficiencies, these facts provide a strong indication that the Taxpayer paid other bills (i.e., bills other than state tax bills) owed by the Corporation but voluntarily failed to fully exercise such authority to satisfy all of the state tax deficiencies.
Starting in February 2014, the Taxpayer as a corporate officer acted with a duty to pay past and current tax liabilities owed by the Corporation. While the status of the treasurer's role in the Corporation from March 2014 through the close of business in September 2014 is not fully disclosed in the appeal and although oversight over the tax obligations of the Corporation may not have been a part of the Taxpayer's initial duties, it is evident that the Taxpayer took over some, if not all responsibility, for payment of the tax obligations of the Corporation. In the absence of complete financial information and the fact that the Taxpayer played an active and regular role in the Corporation's tax matters in 2014, I must conclude that the Taxpayer acted willfully to avoid payment of the taxes in question.
CONCLUSION
Based on all of the foregoing, I find that the Taxpayer satisfies the four conditions set out in Angelson. Accordingly, the converted assessments in this case are upheld.
The Code of Virginia sections and public document cited 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 about this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5976251188.R