A New York State Administrative Law Judge has upheld the imposition of personal liability for sales and use tax on an employee of a corporation, but held that the Department’s imposition of fraud penalties—on which the Department bore the burden of proof—was not supported by the evidence. Matter of Peter Sidote, DTA Nos. 825772, 825899, 825964, and 825965 (N.Y.S. Div. of Tax App., Aug. 13, 2015).

Background. Peter Sidote was an employee of Party Time Beverages (“POP”), a retail and wholesale beverage distributor. Mr. Sidote, POP, and certain other parties were charged by the Suffolk County District Attorney with grand larceny, falsifying business records, and scheming to defraud by knowingly purchasing previously redeemed bottles and cans and then redeeming them a second time to third parties. On June 30, 2011, Mr. Sidote entered into a plea agreement with the District Attorney’s office and signed a Settlement Agreement and Consent to Forfeiture with Order individually and on behalf of POP. In the plea agreement, Mr. Sidote pled guilty to grand larceny and scheming to defraud, and admitted the factual elements of the charges.

The Department conducted sales tax audits of POP for the periods June 1, 2008 through February 28, 2010 and June 1, 2010 through May 31, 2013. In connection with those audits, the Department issued Notices of Determination to POP and also to Mr. Sidote as a responsible person. Fraud penalties were not asserted in the Notices, but were later asserted by the Department in its Answers to Mr. Sidote’s Petitions for Redetermination.

During the periods at issue, Mr. Sidote had signed a resale certificate on behalf of POP as vice president, exercised control over POP’s funds, commingled POP’s funds with the funds of other business ventures he owned, was the only employee of POP who had undergone the tobacco sales training required by New York State to allow POP to sell cigarettes, was the only POP employee who had a commercial driver’s license, and was listed as an officer on POP’s balance sheets.

Law. Tax Law § 1133(a) provides that “every person required to collect [the sales] tax imposed by this article shall be personally liable for the tax imposed, collected or required to be collected under this article.” A person required to collect the tax is defined to include, among others, every vendor of tangible personal property of services, and corporate officers, directors, and employees who are under a duty to act for such corporation in complying with the requirements of the sales tax. Tax Law § 1131(1).

Tax Law § 1145(a)(2) provides that an additional fraud penalty may be imposed where the failure to pay tax within the time required is due to fraud. “Fraud” is not defined in the Tax Law.

Responsible Person Liability. Although Mr. Sidote claimed that he was not an officer of POP and was not responsible for POP’s collection and remittance of sales tax, the ALJ found that Mr. Sidote was a “responsible person” within the meaning of the Tax Law. The ALJ held that the pivotal question in determining whether an individual can be held personally liable for the sales tax is not whether an individual is an officer, but “whether the individual had or could have had sufficient authority and control over the affairs of the corporation.” Based on facts in the case, including the fact that Mr. Sidote exercised control over POP’s financial affairs, commingled POP’s funds with those of his other companies, was the only employee of the company who underwent tobacco sales training, and was the only member of the company who could drive the company truck, the ALJ determined that Mr. Sidote did have the requisite authority and control required to be deemed a “responsible person.”

Fraud Penalties. While the ALJ found that Mr. Sidote was a responsible person, she declined to uphold the imposition of fraud penalties. Citing several Tribunal decisions, including Matter of Sona Appliances, DTA Nos. 815394 & 815395 (N.Y.S. Tax App. Trib., Mar. 16, 2000), the ALJ held that a finding of fraud requires the Department to provide “clear, definite and unmistakable evidence of every element of fraud, including willful, knowledgeable and intentional wrongful acts or omissions constituting false representation, resulting in deliberate nonpayment or underpayment of taxes due and owing.” The ALJ further noted that “mere suspicion of fraud from the surrounding circumstances is not enough.”

Accordingly, the ALJ rejected the Department’s attempt to assert fraud based on the fact that Mr. Sidote underreported sales tax by over 25%, finding that underreporting alone is not enough to establish fraud. The ALJ also rejected the Department’s claim that Mr. Sidote’s entire “course of conduct” was indicia of fraud, finding that although Mr. Sidote admitted to criminal conduct in his plea agreement, the conduct he admitted to did not rise to the level of criminal tax evasion.

Additional Insights

When the Department asserts fraud in a tax case, it bears the burden of proof by clear and convincing evidence. This burden is a high one and requires that the Department make more than general allegations of fraud. Instead, the Department must actually demonstrate clear and unmistakable evidence of fraud in relation to nonpayment or underpayment of taxes. The high standard of proof imposed on the Department in matters of fraud makes sense for several reasons, one of which is that the assertion of fraud by the Department can have ramifications beyond just enhanced penalties. Although not at issue in this case, an assertion of fraud may suspend the statute of limitations and allow the Department to assess tax long after the normal limitations period has expired.