Tax Type
Retail Sales and Use Tax
Description
Construction
Topic
Taxability of Persons and Transactions
Date Issued
09-09-1996
September 9, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax/Withholding Tax
Dear********
This will reply to your letter in which you seek correction of converted assessments against (the "Taxpayers"). The assessments were converted from ******* (the "Corporation"). I apologize for the delay in responding to your request.
FACTS
The Taxpayers were sole shareholders and corporate officers of a small business. In 1988, the Taxpayers hired an onsite bookkeeper/office manager. This individual's primary duty was the preparation of payroll, including the filing and payment of taxes. During the period from September 1988 through January 1990, it was alleged that this employee falsified corporate records and misappropriated funds by diverting the funds for personal use. This employee was subsequently convicted of embezzlement.
As a result of the diversion of funds, income tax withholding was not paid by the Corporation. The department issued assessments for the unpaid taxes, with the exception of one bill, after the bookkeeper's termination. The Corporation failed to pay the assessments and was contacted by the department through correspondence, telephone conversations, and visits to the business location. Padlock proceedings were initiated in accordance with Code of Virginia § 58.1-1805 on July 16, 1990, but after several meetings an installment agreement was negotiated and the padlock order was rescinded. The Corporation made only three payments and subsequently filed Chapter 7 bankruptcy on January 31, 1991.
During this period, the department conducted a sales and use tax field audit of the Corporation. This audit resulted in the assessment of additional sales and use tax. The Corporation indicated that they intended to protest the audit findings but provided no new evidence to refute the validity of the assessment.
Unable to collect the assessments owed by the Corporation, the department converted the assessments to the Taxpayers pursuant to Code of Virginia § 58.1-1813. You protest this action, claiming that the Taxpayers do not meet the definition of "corporate officers" within the meaning of the statute, and that they had no knowledge of the failure to pay taxes due by the Corporation.
DETERMINATION
Code of Virginia § 58.1-1813 provides in pertinent part:
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- Any corporate or partnership officer who willfully fails to pay, collect or truthfully account for and pay over any state tax...or willfully attempts in any manner to evade or defeat any such tax or the payment thereof... shall be liable for a penalty of the amount of the tax evaded, or not paid, collected or accounted far and paid over....
Code of Virginia § 58.1-1813 requires that the failure to pay over the taxes be willful, and that the corporate officer had (i) knowledge of the failure and (ii) the authority to prevent it. 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. 377F.2d 921,924 (C.A. Tex). In other words, it need only be shown that the Corporation was aware of the outstanding liability, and knowingly and intentionally paid operating expenses or other debts of the corporation.
The evidence presented indicates that the Taxpayers had full knowledge of the tax liability owed by the Corporation. One of the Taxpayers signed the 1989 VA-6 as "Secretary." The VA-6 clearly indicated that income taxes had been withheld by the Corporation, and that there had been no corresponding payments to the department. The Taxpayers were aware of the assessment resulting from the sales and use tax audit because, in correspondence to the department, they questioned the methodology of the audit and indicated an intent to protest. The Taxpayers, through various meetings, letters, and telephone calls, referenced attempts to obtain a bank loan to pay the liability. The department also communicated to the Taxpayers the nature and amount of the unpaid liabilities in assessment notices, letters, memorandum of liens, phone calls, and meetings. In addition, the Taxpayers, in a meeting with the department and attended by their attorney, agreed to an installment payment plan. These facts eliminate any question as to the Taxpayers' knowledge that the liabilities remained unpaid.
The evidence is also clear with respect to the Taxpayers' authority to pay the taxes which it owed. The Taxpayers, either jointly or individually, were the sole shareholders, directors, and officers of the Corporation. As such, the Taxpayers had the exclusive authority to direct the affairs of the Corporation, which included the payment of corporate liabilities. This authority is derived from statute (for example, see Code of Virginia §§ 13.1--669, 13.1-673 and 13.1-694) and from the articles of incorporation and the bylaws. The fact that the Corporation, through the Taxpayers, agreed to an installment plan to pay the outstanding tax liability and subsequently made three payments is irrefutable evidence that the Taxpayers possessed the authority to direct the Corporation to pay its tax obligations.
With respect to whether the Taxpayers' acts were willful, the failure to pay the taxes upon repeated demands by the department is sufficient to support such a determination. As noted above, the Taxpayers voluntarily, consciously, and intentionally caused the Corporation to suspend its payments pursuant to the installment payment plan. This action constitutes a willful failure to pay.
The Taxpayers' argument is based primarily on the fact that since filing and payment of withholding taxes was delegated to the bookkeeper, and the Taxpayers were unaware that the taxes were unpaid at the time they became due, then they are not responsible corporate officers under Code of Virginia § 58.1-1813. The department rejected a similar argument in Public Document (P.D.) 95-145, (6/6/95), copy enclosed. In P.D. 95-145, the president of a corporation believed that he should not have been held personally liable for the payment of corporate income taxes since those duties were delegated to a bookkeeper. The elements of knowledge, authority, and willfulness required to impose personal liability pursuant to Code of Virginia § 58.1-1813 are not limited to only the time when the taxes become due. They are applicable to any time a corporate officer becomes aware of an outstanding tax liability.
The Taxpayers also contend, with respect to the assessment for consumer use tax, that they cannot be held liable as responsible officers because the tax was erroneously assessed. The Taxpayers state that the Corporation, as a flooring subcontracting firm, maintained no inventory of materials because all materials were ordered on a job-by-job basis and were installed on each respective job. The Taxpayers claim that the Corporation paid sales tax on all materials which were purchased.
As provided in Code of Virginia § 58.1-610, a contractor who performs real estate contracts is a consumer of all tangible personal property used in conducting that contract. If the supplier, from which the contractor purchases tangible personal property, is not registered to collect the sales and use tax or if he inadvertently does not collect the sales and use tax, the contractor must report and pay the tax directly to the department on a Consumer Use Tax Return, Form ST-7. A review of the Corporation's Virginia sales and use tax audit for the period September 1, 1985, through September 31, 1990, indicates that certain supplies, materials, and fixed assets were purchased from Virginia and out-of--state suppliers without the payment of sales and use tax. Since the Corporation did not file the appropriate Consumer Use Tax returns, the sales and use tax audit was conducted and an assessment was issued.
Pursuant to Code of Virginia § 58.1-205, any assessment of tax by the department is deemed correct. The burden of proof, therefore, is on the Taxpayers to provide documentation which proves that an assessment is erroneous. As of this date, the Taxpayers have submitted no evidence to substantiate their claim, other than to state that the assessment is erroneous There is no basis, therefore, to abate the assessment for consumer use tax.
Based on the facts presented and the determination herein, the Taxpayers had knowledge of the Corporation's failure to pay its tax obligations, had the ability to prevent that failure, and willfully failed to pay those obligations. Accordingly, the conversion of the assessments from the Corporation to the Taxpayers must be upheld.
Due to the extenuating circumstances in this case, the department is prepared to waive the penalty attributable to the original assessment and additional interest after the appeal date if the balance due of is paid within sixty days from the date of this letter. If full payment is not received by then, the department will reinstate billing and collection actions for the full amount of the assessment.
The Taxpayers' payment should be remitted to****** in the Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880. If you should have any further questions, please contact ***** at*******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7069G
Rulings of the Tax Commissioner