A New York State Administrative Law Judge has upheld the New York State Tax Department’s policy 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 & 824937 (N.Y.S. Div. of Tax App., Sept. 25, 2014).
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 (“Department”) performed a sales tax audit of the LLC, but neither individual participated in the audit or knew the basis of how the sales tax was computed.
The Department assessed sales tax, plus interest, against the company for the period June 1, 2004 through May 31, 2009. It appears that the LLC had ceased operations. The Department 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, 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 based on their status as members.” LLC Law § 609(a).
Messrs. Boissiere and Krystal challenged the assessments imposing personal liability for a percentage of the LLC’s sales tax. They argued that the contradiction between the LLC Law, which limited an LLC member’s liability, and the Tax Law, which provided for “unlimited” liability for LLC members, violated their due process rights.
The ALJ upheld the Department’s assessments against the LLC members. As an initial matter, the ALJ found that the taxpayers’ argument was inconsistent with the facts of the case, because the Department had limited the taxpayers’ liability to their percentage of ownership interests in the LLC. This limitation of liability was consistent with Department policy as set forth in Technical Memorandum, TSB-M-11(17) (N.Y.S. Dep’t of Taxation & Fin., Sept. 19, 2011), which provides that LLC members who have less than a 50% ownership interest, and who were not under a “duty to act” on behalf of the LLC in complying with the Tax Law, may have their personal liability for sales tax limited by their percentage of ownership in the LLC.
The ALJ also rejected the members’ due process argument on the grounds that they chose to proceed as members of an LLC, and were therefore bound to accept the consequences of that choice of business organization.
The ALJ’s decision upholding an LLC member’s strict liability for the LLC’s sales tax obligation is in keeping with the New York State Tax Appeals Tribunal decision in Matter of Santo, DTA No. 821797 (N.Y.S. Tax App. Trib., Dec. 23, 2009). That decision upheld the imposition of strict liability on a member of an LLC for the full amount of the LLC’s sales tax liability. After Matter of Santo was decided, and in the face of public concern over the decision’s implications, the Department issued Technical Memorandum, TSB-M-11(17)S, in recognition of the fact that the application of strict liability might work a hardship to certain LLC members who, as in this case, were not involved in the financial aspects of the business. Many had believed that the controversy over strict liability for LLC members had dissipated after the Department limited the liability in most cases to the members’ ownership percentage in the LLC. However, with this new legal challenge to the imposition of any strict liability, it seems likely that the Tribunal, and possibly the courts, will be asked to revisit this issue.
Taxpayers should be aware that TSB-M-11(17)S conditions limited liability on the LLC members’ cooperation with the Department — including, among other things, identifying to the Department other potentially responsible persons. Moreover, the relief is limited to LLC members who hold less than a 50% interest in the LLC. It does not apply to partners in a limited liability partnership or to general partners in a partnership.