June 6, 2018
Re: § 58.1-1321 Reconsideration: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which you request the reconsideration of my May 31, 2016 determination regarding the conversion of retail sales and use tax assessments to ***** (the “Taxpayer”) as a responsible officer of ****** (the “Corporation”). I apologize for the delay in this response.
FACTS
The Corporation was assessed retail sales taxes, penalties and interest for reporting periods from July 2009 through June 2014. In accordance with Virginia Code § 58.1-1813, the Corporation's delinquent sales and use tax assessments were converted to the Taxpayer as a responsible officer of the Corporation. The Taxpayer filed an appeal pursuant to Virginia Code § 58.1-1821 to contest the conversion of the assessments.
In Angelson v. Commonwealth of Virginia, 25 Va. Cir. 319 (City of Richmond, 1991), the court ruled that four conditions must be satisfied before the Department could assess a taxpayer under Virginia Code § 58.1-1813. The basis of the Taxpayer's appeal was that three of the four conditions set out by the court were not satisfied. Thus, the conversion of the Corporation's assessments to the Taxpayer as a responsible officer was erroneous.
The appeal determination was issued May 31, 2016 and upheld the conversion of the Corporation's assessments to the Taxpayer. In this reconsideration, the Taxpayer contends that the appeal determination misinterpreted the definition of a “corporate, partnership or limited liability officer” as set out in Virginia Code § 58.1-1813 B. An individual must meet this definition for the Department to convert business assessments to that individual. Specifically, the Taxpayer disputes the determination's findings that he was under a duty to file the Corporation's sales and use taxes and that he had knowledge of the Corporation's failure to file returns and pay the sales and use tax liabilities at issue. The definition of a corporate or limited liability officer requires the presence of both knowledge of the failure and a duty to perform the act in respect of which the violation occurred.
DETERMINATION
Corporate Officer
My May 31, 2016 determination concluded that the Taxpayer had a duty to report and pay the sales and use taxes owed the Department. This conclusion was based, in part, on the powers granted to the managers under the Corporation's operating agreement. The Taxpayer disagrees with this conclusion on the basis that the general powers set out in the operating agreement do not create a duty to file and pay taxes.
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.
Pursuant to Virginia Code § 58.1-1813 A, an individual must be a corporate, partnership or limited liability officer as defined above in order for the Department to convert an outstanding business assessment to that individual.
The Taxpayer was one of two active managers of the Corporation that were charged with managing the business and affairs of the Corporation. The operating agreement grants to the managers certain general powers, such as opening bank accounts, drawing checks and paying the debts and obligations of the company. The Taxpayer asserts that the general powers conferred in the operating agreement cannot be construed as specific duties assigned to each manager. Further, the Taxpayer
states that the powers granted to the managers provide the authority to fulfill any duty delegated to the manager but the powers themselves do not delegate duties.
The Corporation's operating agreement is clear that the powers granted to the managers included oversight of the financial and tax reporting aspects of the business. The Taxpayer has not provided evidence that the duty of filing and paying the Corporation's sales and use taxes was delegated to a specific individual. In addition, the Taxpayer has failed to demonstrate that he was not the party responsible for the Corporation's sales and use tax reporting. The managers, through the powers granted under the operating agreement, were ultimately responsible for reporting and paying the sales and use taxes of the Corporation. Whether this duty was assigned to a specific individual or performed by a manager, the Taxpayer had the power and the duty to insure that the Corporation's sales and use taxes were filed and paid.
The Taxpayer admits that he was responsible for filing and paying the Corporation's payroll taxes. The evidence is also clear that the Taxpayer paid various bills and expenses of the Corporation on a regular basis. However, it does not appear that these duties were specifically assigned to the Taxpayer. Yet, the Taxpayer performed these duties, in addition to others.
Although the general powers granted to the managers by the Corporation's operating agreement do not set out the specific duties of the managers, the managers were ultimately responsible for the business and affairs of the Corporation. It is reasonable to expect the managers had the duty to either file sales and use taxes or delegate the duty to another individual. As such, I do not find the Taxpayer's contention that he did not have the duty to file and pay the Corporation's sales and use taxes to be persuasive.
Specific Duty to Perform
The Taxpayer asserts that the court's decision in Angelson requires that the specific duty of reporting and paying taxes be present for an individual to meet the definition of a corporate officer under Virginia Code § 58.1-1813 B. The Taxpayer claims that he is not a corporate officer of the Corporation pursuant to Virginia Code § 58.1-1813 B because he did not have the specific duty to file sales and use taxes. Thus, the provisions of Virginia Code § 58.1-1813 A do not apply to the Taxpayer because he is not a corporate officer for purposes of assessing the delinquent taxes.
In Angelson, the plaintiff was an officer of a corporation that operated a restaurant. Caddell was the president of the business and responsible for managing the daily affairs of the business, which included the filing of tax returns and the payment of tax liabilities. The plaintiff was assessed under Virginia Code § 58.1-1813 for delinquent sales and use taxes and withholding taxes owed by the business. The court ruled that the Department's conversion of the business assessments to the plaintiff was erroneous. The court stated in its opinion that “[s]uch duty, along with all of the other day-to-day functions of the corporation, were specifically allocated to Caddell.” [Emphasis added.]
The Taxpayer interprets the court's statement to mean that an individual must have a specific duty to report and pay taxes to be considered a corporate or limited liability officer. I disagree with the Taxpayer's interpretation. This was a statement of fact based on evidence presented to the court that demonstrated Caddell was specifically charged with the tax reporting duties for the business. As such, this fact made it clear to the court that the plaintiff did not have a duty to file and report the taxes at issue and was not a corporate officer because Caddell was specifically responsible for filing and paying the taxes at issue. The court's opinion does not state that a taxpayer must have a specific duty to file and pay taxes to be considered a corporate officer under Virginia Code § 58.1-1813 B.
The original determination issued to the Taxpayer further supports the Department's position. The determination stated that the statutory language in Virginia Code § 58.1-1813 B does not stipulate that a specific duty must exist for an individual to be a corporate officer. The statute merely states the individual must have a duty to perform the act in respect of which the violation occurs. As a manager of the Corporation, the Taxpayer was granted certain powers by the operating agreement. The powers provided the Taxpayer with the authority to perform the duty of reporting and paying the sales and use taxes owed by the Corporation.
In the reconsideration request, the Taxpayer states that the specific duty of filing sales and use taxes is a matter for an express delegation in the operating agreement or an agreement among the managers. Unlike the facts in Angelson, there has been no such information provided to the Department regarding the delegation of duties among the managers and employees. Consequently, there is no basis to conclude that the Taxpayer did not have a duty to file and pay the Corporation's sales and use taxes.
Knowledge
Another determining factor for being a corporate or limited liability officer pursuant to Virginia Code § 58.1-1813 B is that the individual must have had knowledge of the failure to pay or evade the payment of taxes. The Taxpayer disagrees with the finding in the May 31, 2016 determination that he had knowledge of the failure to file and pay the sales and use taxes owed by the Corporation. The Taxpayer personally denies that he had the requisite knowledge to be considered a corporate or limited liability officer and disputes a statement made by the other manager that the Taxpayer was aware of the liabilities. The Taxpayer states that he was unaware of the failure to pay the sales and use taxes collected from customers until the Corporation's other manager brought the matter to his attention.
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. Based on this and other evidence, it is unlikely the Taxpayer had no knowledge that sales taxes were billed to customers and that the taxes collected were not being remitted to the Department. Further, the Taxpayer disputes the claim in the determination that the Taxpayer informed the other manager that he was aware of the Corporation's failure to pay the sales and use taxes. This is a factual dispute that can only be resolved through evidence that proves the Taxpayer had no knowledge of the Corporation's liability prior to or at the time the other manager claims.
Burden of Proof
Pursuant to Virginia Code § 58.1-205 1, an assessment issued by the Department of Taxation is deemed prima facie correct. Accordingly, the burden of proof is upon any taxpayer so assessed to establish that an assessment is erroneous. There was no convincing evidence presented with the filing of the appeal or this redetermination request that establishes the Taxpayer was not a corporate officer as defined in Virginia Code § 58.1-1813 B. The Taxpayer has not shown that another manager, officer or employee was responsible for filing and reporting the Corporation's sales and use taxes. In addition, the Taxpayer has not proven that he had no knowledge of the failure to pay over the assessed sales and use taxes. In this instance, the Taxpayer has not met its burden of proving that the converted assessments are erroneous.
CONCLUSION
Every corporation has a person or persons responsible for the ultimate authority over the financial affairs of a corporation. There has been no evidence presented that proves the Taxpayer was not that person. Based on this response and my prior determination, the Taxpayer is a corporate officer pursuant to Virginia Code § 58.1-1813 B and the Corporation's delinquent sales and use tax liabilities were properly assessed to the Taxpayer as a responsible officer. 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 response, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/823.S