The New York State Tax Appeals Tribunal has affirmed the determination of an Administrative Law Judge that a member of a limited liability company (“LLC”) holding a minority interest in the LLC is liable for a portion of a sales and use tax assessment against the LLC itself. Matter of Eugene Boissiere and Jason Krystal, DTA Nos. 824467, et al. (N.Y.S. Tax App. Trib., July 28, 2015).
Eugene Boissiere and Jason Krystal held 14% and 13% membership interests, respectively, in an LLC. Neither individual had managerial responsibility, knowledge or control over the LLC’s financial affairs, or authority to sign the LLC’s tax returns. The New York State Department of Taxation and Finance performed a sales tax audit of the LLC, and assessed sales tax, plus interest, against the company for the period June 1, 2004 through May 31, 2009. The Department also issued separate Notices of Determination to Mr. Boissiere and Mr. Krystal, each assessing the full amount of the sales tax, plus penalty and interest, for the period during which each held a membership interest in the LLC. After negotiations between the Department and the taxpayers, and in keeping with the Department’s policy as set forth in Technical Memorandum, TSB-M-11(17)S (N.Y.S. Dep’t of Taxation & Fin., Sept. 19, 2011), the Department reduced the individuals’ liability for the sales tax to reflect their percentage of ownership in the business, plus interest.
Tax Law § 1131(1) imposes strict personal liability for sales tax on “any member of a partnership or limited liability company,” regardless of whether that person is under a duty to act on behalf of the company. In contrast, the New York Limited Liability Company Law provides that a member of an LLC cannot be held personally responsible for an LLC’s liabilities “solely by reason of being such member.” LLC Law § 609(a).
Messrs. Boissiere and Krystal challenged the assessments imposing personal liability for a portion of the LLC’s sales tax. The ALJ upheld the Department’s assessments, noting that the definition of “persons responsible to collect sales tax” under the plain language of Tax Law § 1131(1) is unambiguous and includes any member of an LLC.
Messrs. Boissiere and Krystal appealed the ALJ’s decision to the Tribunal, arguing that the conflict between the Tax Law, which provides that LLC members are per se liable for an LLC’s sales tax obligations, and the LLC law, which provides that LLC members may not be held liable for an LLC’s obligations, was the result of a “mistake” by the drafters of the Tax Law. The Tribunal rejected the taxpayers’ contentions that the Legislature made a mistake as “speculative,” and affirmed the determination of the ALJ.
Like the ALJ, the Tribunal held that the plain and unambiguous language of the Tax Law provided for per se liability. In so holding, the Department noted that the Department’s policy, as set forth in TSB-M-11(17)S, of limiting a member’s liability to its percentage interest in the LLC, ameliorated any “harsh consequences” that might warrant a departure from the literal language of the statute. Moreover, the Tribunal did not find the Tax Law and the LLC Law to be inconsistent. Instead, the Tribunal found that the laws evidenced an intent by the Legislature that the limitation of liability for LLC members under the LLC Law should not extend to sales tax liability under the Tax Law.
The Tribunal’s decision upholding the LLC members’ strict liability for the LLC’s sales tax obligations is in keeping with its decision in Matter of Santo, DTA No. 821797 (N.Y.S. Tax App. Trib., Dec. 23, 2009). In Matter of Santo, the Tribunal upheld the imposition of strict liability on an LLC member for the full amount of the LLC’s sales tax liability. After Matter of Santo was decided, the Department issued TSB-M-11(17)S in response to public concern that the application of strict liability might work a hardship to LLC members that have little or no involvement in the actual business of the LLC. While generally beneficial to taxpayers, TSB-M-11(17)S conditions limited liability on the LLC members’ cooperation with the Department, including identifying to the Department other potentially responsible persons. In addition, the relief is limited to LLC members who hold less than a 50% interest in the LLC.
In this case, as in Matter of Santo, the Tribunal held that the Tax Law authorizes the Department to hold LLC members strictly liable for an LLC’s sales tax liabilities. However, the Tribunal also noted that it saw no “unjust or unreasonable result in the assertion of per se liability against [taxpayers] to warrant a departure from the literal interpretation of the words used in [the] Tax Law,” because the Department reduced the taxpayers’ liabilities to reflect their ownership interests in the LLC in accordance with TSB-M-11(17)S. While the Tribunal concluded that imposition of strict liability — limited to the members’ ownership interest percentages — did not produce an unjust or unreasonable result in this case, there may still be circumstances where the Tribunal would not uphold strict liability where the Department does not consent to limited liability if the member does not meet certain conditions under the TSB-M.