A recent Administrative Law Judge decision evaluated a provision of New York tax law that treats all members of a limited liability company (LLC) as responsible officers liable to collect and remit New York sales taxes based on the LLC’s transactions. The ALJ decision found that the New York tax provision overrides the general purpose of the limited liability company law – to provide limited liability to the members from acts of the company. In Boissier, two members of an LLC with less than 15 percent membership interests were assessed sales tax, interest and penalties owed by the LLC. Neither member had managerial responsibility, the ability to hire or fire employees, knowledge of or control over the LLC’s financial affairs, or authority to sign the LLC’s tax returns. The provisions of New York’s tax laws are clear: having chosen to act as members of an LLC, the members must accept the consequences of their choice of business organization.
Pursuant to applicable provisions, the administrative law judge reduced the LLC members’ tax liabilities according to their proportionate interest in the LLC. As we previously reported, the policy recognizes that the law can result in a harsh result for a member of an LLC or a limited partner who has no involvement in or control over the LLC/LP’s business affairs. Under the policy, limited partners and minority members in an LLC are eligible for relief if they demonstrate that they were not under a duty to act in complying with New York tax laws on behalf of the business and cooperate with New York authorities to identify other potentially responsible persons (particularly those involved in the day-to-day affairs of the business). Courts may also consider the pending expiration of any statute of limitations on assessment of the New York sales tax when granting relief. Relief would limit an LLC member’s tax liability to his pro rata share of the business’s liability for the New York sales tax and related interest, based on his ownership interest in the business or his share of the profits and losses of the business, whichever is higher. No penalty will be due from the eligible person.