Much attention has been paid to the centerpieces of Governor Kasich’s tax reform efforts including the reduction in personal income tax rates and the expansion of the sales tax to all services. Lost in the shuffle, however, is another provision that should be of interest to all business owners. That is a provision that extends liability for unpaid taxes of an organization to the individual owners, regardless of any culpability on their part.
In most cases under current law, if an organization such as a corporation, partnership, or limited liability company fails to pay its taxes, the Department of Taxation may only pursue the entity for the unpaid taxes. If the entity goes out of business or divests itself of all its assets, there is no recourse for the unpaid taxes.
There are two exceptions to this rule. If an employer has withheld personal income taxes from its employees and failed to pay it to the state, or if a company has collected sales or use taxes from a customer and failed to pay it to the state (so-called “trust fund taxes” because they are collected on behalf of the state), officers or employees who are responsible for the tax functions of the entity may be personally liable for those unpaid taxes. The dissolution of the entity, or its participation in bankruptcy, does not release that personal liability.
H.B. 59 proposes to expand personal liability for all unpaid taxes of an entity to any partner of a partnership; or a director, shareholder, or officer of a corporation that that has had its articles of incorporation canceled for nonpayment of taxes; or any other person liable under any other tax provision.
The only prerequisite for the assessment is that any tax remains unpaid after the date it is due. There is no requirement that the assessment first be issued against the entity, or that the entity has failed to contest or pay the assessment.
Nor is there a requirement of any culpability, such as the intentional failure to pay taxes, or to divert the taxes for the purposes of the individual or the entity, on the part of the individual. Ohio’s sales tax is largely a self-reporting tax with a myriad of exemptions and exclusions that are not always obvious. Under this provision, an individual may face liability simply because the entity guessed wrongly that a transaction was exempt from tax.
The provision is silent as to the rights of the individual to contest the assessment. Under existing law, a person who receives a responsible party assessment may contest whether they are a member of the class of individuals who may be assessed, but may not contest the underlying liability. Often, the assessments against the entity or the individual are issued long after the individual has terminated the relationship with the entity, such that the individual has no ability to control whether the entity contests or pays the assessment. In other cases, the individual may be assessed before the entity is assessed and has the opportunity to contest it.
Ten years ago, a provision to expand responsible party liability to officers and employees of holders of direct payment permits was tucked into a previous budget bill at the eleventh hour. The impact of this provision is only now becoming apparent as many officers and employees are being assessed in situations where their employer mistakenly believed transactions were not taxable. The scope of individuals who may be unwittingly caught in this net will expand greatly if this provision is enacted into law.