Saturday, January 15, 2011

Individual State Tax Liabilty for Corporate Officers

The reason that most corporations are formed are to provide limited liability to its shareholders, and to shield officers and directors of small businesses from many liabilities of those companies. However, there are some distinct areas where shareholders may have liability for the actions of the company.

One of the most common "veil piercing" comes up in situations where a company collects sales taxes as part of its operations. Many officers and directors of companies do not realize that they can be held individually liable for taxes collected and not paid to the state. An example of this, and a good discussion related thereto, can be found in the case State of Texas v. Crawford, a recent case out of the 3rd Court of Appeals in Texas.

The statute dealing with individual liability for tax collection is found in the Texas Tax Code Section 111.016 (emphasis added):

(a) Any person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable to the state for the full amount collected plus any accrued penalties and interest on the amount collected.

(b) With respect to tax or other money subject to the provisions of
Subsection (a), an individual who controls or supervises the collection of tax or money from another person, or an individual who controls or supervises the accounting for and paying over of the tax or money, and who wilfully fails to pay or cause to be paid the tax or money is liable as a responsible individual for an amount equal to the tax or money not paid or caused to be paid. The liability imposed by this subsection is in addition to any other penalty provided by law. The dissolution of a corporation, association, limited liability company, or partnership does not affect a responsible individual's liability under this subsection.

(c) The district courts of Travis County have exclusive,
original jurisdiction of a suit arising under this section.

The Crawford facts are probably not that uncommon; that is, a party fails to property designate a contract as taxable in the accounting, but taxes are invoiced and collected. After a tax audit shows the error, the state seeks collection against a company that cannot pay the liability, and bank accounts get frozen. The twist here is that the State tried to claim that the officers wilfully failed to pay the tax, therefore they sought payment from the officers responsible for the taxes not getting paid. Although here the court found that the business owners did not wilfully withold payment, but they do state that knowledge of the failure to pay is not required to find wilfullness.

But if you are an officer of a company, be aware that you may be held liable by the state for failure to pay state taxes (which would include payroll and sales tax collections) should the company fail to remit.