The Tax Appeals Tribunal has upheld an Administrative Law Judge decision that an officer of a defunct car dealership was personally liable for the corporation’s New York sales tax liabilities, despite his claim that the corporation’s “sweep arrangement” with its largest creditor precluded him from exercising his responsible officer authority. Matter of Patrick Kieran, DTA No. 823608 (N.Y.S. Tax App. Trib., Nov. 13, 2014).

Facts. Patrick Kieran was the president and part-owner of Bay Chevrolet, Inc., a now-defunct General Motors (“GM”) car dealership that previously operated in Douglaston, Queens. Mr. Kieran had acquired the franchise from GM, in part through funding that was financed by General Motors Acceptance Corporation (“GMAC”). GMAC also provided the financing for the dealership’s car inventory purchases. As was typical for GM authorized dealerships, as a condition for the financing, GMAC required a “sweep arrangement,” under which it had access to the company’s bank accounts that were used to, among other things, deposit customer payments, including sales tax collected from customers.

After Bay Chevrolet encountered financial difficulties, GMAC exercised its rights under the sweep arrangement and collected amounts due from the company directly from the dealership’s bank accounts, which included the sales tax collected from customers. Bay Chevrolet failed to timely file four consecutive quarterly New York State sales tax returns and to remit to the Department sales tax that the dealership had collected. Bay Chevrolet eventually filed for bankruptcy, and the Department issued estimated notices of determination both to the corporation and to Mr. Kieran as a responsible person.

As president of Bay Chevrolet, Mr. Kieran was responsible for day-to-day operations and had full authority to, among other things, sign checks, tax returns, and bank documents. He dealt with GM and GMAC on all significant business matters, ordered inventory, and hired and fired employees. Faced with the statutory notices subjecting him to personal liability for sales tax collected but not remitted, Mr. Kieran claimed that he was not “under a duty to act” for the corporation, allegedly because he did not have control over the payment of the corporation’s taxes as a result of GMAC’s sweep arrangement. The Department argued that he “voluntarily” agreed to GMAC’s seizure of the corporation’s funds and therefore should be held personally liable. Mr. Kieran did not submit into evidence the dealership’s financing agreement with GMAC, despite having been given the opportunity to do so even after the hearing concluded.

The law. Personal liability for unpaid sales tax is imposed on any person required to collect and pay over the sales and use tax. Tax Law § 1133(a). This includes a corporate officer, director, or employee who is “under a duty to act” for the corporation in complying with its sales tax obligations. Tax Law § 1131(1). A person who is authorized to sign a corporation’s tax returns, or who is responsible for maintaining the corporate books or for corporate management, is considered to be “under a duty to act” and can be personally liable for the corporation’s unpaid sales tax obligations. 20 NYCRR 526.11.

ALJ determination. An ALJ had held that Mr. Kieran was “under a duty to act,” finding that he displayed all of the necessary indicia of being a person responsible to collect the sales tax. The ALJ rejected his claim that he did not have sufficient authority to pay over the taxes collected. (See New York Tax Insights, Oct. 2013, for a discussion of the case before the ALJ.)

In his appeal to the Tribunal, Mr. Kieran continued to argue that he lacked the requisite control over the business after GMAC invoked the sweep arrangement. He maintained that his case was distinguishable from other unfavorable Tribunal precedent because the sweep arrangement took effect before the subject sales taxes accrued.

Tribunal decision. The Tribunal found that the facts “strongly support” the conclusion that Mr. Kieran was a responsible person, and affirmed the ALJ decision. According to the Tribunal, Bay Chevrolet’s economic difficulties were the root cause of its failure to remit sales tax collected, which in turn caused GMAC to sweep the dealership’s bank accounts, thereby diverting the collected sales tax to other purposes. The Tribunal concluded that “neither of these related causes . . . relieve petitioner from his duty as a responsible person to see that sales tax collected by the dealership was turned over to the Division.”

The Tribunal noted several times in its decision that the sweep arrangement was “voluntarily” entered into with GMAC. Mr. Kieran sought to distinguish the case from the Tribunal decision in Matter of Button, DTA No. 817034 (N.Y.S. Tax App. Trib., Jan. 28, 2002), where the Tribunal held that two corporate officers were personally liable for sales tax, but where the taxes in issue accrued before the creditor seized the corporate bank account. The Tribunal disagreed, finding the underlying principles in Matter of Button—that voluntarily giving a creditor access to a corporate bank account resulting in the nonpayment of the corporation’s sales tax obligations was a “dereliction of duty” by the corporate officer—were equally applicable here. The Tribunal also noted that the record did not contain any evidence of affirmative steps taken by Mr. Kieran to make sure that the sales tax, a “trust fund tax” collected by the dealership, was paid over to the State.

Additional Insights

Although the officer’s circumstances in light of the financial pressures placed on the dealership may be worthy of sympathy, the Tribunal’s decision upholding personal liability is not surprising, particularly since the decision involved sales tax actually collected from customers by the dealership—that is, “trust fund” taxes that Mr. Kieran was obligated to make sure was remitted to the State, notwithstanding the sweep arrangement with GMAC. The Tribunal decision leaves open what the outcome would have been if Mr. Kieran had been forced to surrender all control over the business to GMAC, and thus truly had no ability to pay over the sales taxes collected. Needless to say, when it comes to liability for sales tax actually collected from customers, a responsible corporate officer has an almost insurmountable burden to escape personal liability for those trust fund taxes.