September 2, 2016
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you request correction of the converted retail sales and use tax assessments and the converted withholding tax assessments issued to the Taxpayer for the periods May 2013 through August 2014. I apologize for the delay in responding to your request.
FACTS
The officers of (the “Corporation”) consisted of a president, secretary and treasurer. The Taxpayer was the Corporation's secretary, vice president and 22% co-owner. The Corporation was issued assessments for unpaid sales and withholding taxes. When the Corporation failed to pay these assessments, the Department converted the assessments to the Taxpayer pursuant to Va. Code § 58.1-1813.
The Taxpayer contests the converted assessments and maintains that there is no “corporate officer” responsibility under Va. Code § 58.1-1813. The Taxpayer contends that he had no duty to collect and remit the sales tax or to report and remit the employer withholding tax. The Taxpayer further contends that he had no knowledge of the tax delinquencies prior to February 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. Prior to such time, 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.
The Taxpayer was unable to furnish any of the business tax returns and balance sheets of the Corporation. The Taxpayer indicates that the treasurer has control over the Corporation's financial documents, including W-2 forms, bank statements, etc., and has refused to provide them to a CPA that would prepare the tax returns and financial statements.
The documents presented provide support for the Taxpayer's claim that personal funds were used to pay for some, but not all of, the Corporation's rent, food, beverages, state taxes, and other operating expenses in the final months of operation.
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. Notwithstanding, based on a review of the payments remitted by the Corporation during the periods of its operation, the Department found no evidence that the Taxpayer used the funds of the Corporation to pay any of the state sales or withholding tax debts owed. As such, I conclude that the Taxpayer was not regularly engaged in sales and withholding tax reporting and/or payment duties on behalf of the Corporation.
While the Taxpayer may not have had knowledge of the initial tax delinquencies, the Taxpayer became aware of the tax delinquencies of the Corporation when a representative of the Department informed the Taxpayer about them. From that moment on, the Taxpayer had actual knowledge of the past state tax debts, as well as current state tax debts. The Taxpayer demonstrated this knowledge by using personal funds to pay the state tax liabilities. Further, tax delinquency knowledge was acquired by the Taxpayer from attending meetings with Department personnel, as well as, contacts with the Treasurer. As such, I find that the Taxpayer had actual knowledge of the tax delinquencies well before the close of business.
As to the Taxpayer's authority to prevent a failure by the Corporation to pay the past or current state tax liabilities, the available facts do not support a conclusion that the Taxpayer had such authority. While the Taxpayer confronted the Treasurer about the tax deficiencies on one or more occasions, there is insufficient evidence that the Taxpayer was delegated the authority, or acted on his own initiative, to take over the Treasurer's duties to report and pay the taxes in question. The facts do not sufficiently support a conclusion that the Taxpayer provided oversight of the Treasurer's state tax duties. Accordingly, I find that the Taxpayer lacked sufficient authority to prevent the tax deficiencies.
As to whether the Taxpayer acted willfully to avoid the Corporation's payment of the taxes in question, there is a general lack of financial information because the Treasurer has not cooperated with the Taxpayer to provide such information. Despite this fact and the fact that the Taxpayer played an active role in the Corporation's tax matters in 2014, I understand that the Corporation was not financially viable to satisfy all of the state tax debts as of February 2014. In this regard, I recognize that the Taxpayer was a minority stockholder using only personal funds to enable the Corporation to stay in business until August 2014. The Taxpayer's personal funds were used by the Treasurer to pay debts of the Corporation but the Taxpayer does not know which debts. However, personal funds were used by the Taxpayer to directly pay for tax delinquencies incurred by the Corporation. Based on these facts, I find insufficient basis to conclude that the Taxpayer acted willfully to avoid the Corporation's payment of the state taxes in question.
Based on all of the foregoing, I find that the Taxpayer does not satisfy all of the conditions set out in Angelson and therefore cannot be held liable as a responsible officer pursuant to Va. Code § 58.1-1813.
CONCLUSION
The converted assessments will be abated in accordance with this determination.
The Code of Virginia section cited is 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 Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-6018187165.R