If I am not the owner of the company, could I still be held personally liable for non-payment of taxes owed by that company? The scary answer is yes! The New Jersey Division of Taxation (“Division”) can hold an individual personally liable for trust fund taxes if that person holds a position of significant responsibility. A responsible person can be an officer or key employee of a corporation or other type of business entity, such as a limited liability company. A responsible person is one who has a duty to collect and remit a company’s trust fund taxes to the State of New Jersey. The Division’s definition of “trust fund taxes” includes Sales and Use Tax, the withholdings portion of employee Gross Income Tax and Motor Fuels Tax.
In certain cases, a responsible person is described in an entity’s corporate formation documents or in an employment agreement. This type of responsible person appointment is contractual, as it only occurs if an officer or employee affirmatively agrees to become a responsible person. In most cases, the designation as a responsible person is a function of his or her corporate responsibilities.
The imposition of responsible person status is a highly fact-intensive analysis. To this end, Cooperstein v. Director, Division of Taxation, 13 N.J.Tax 68 (Tax 1993) is a key case that outlines nine factors that the Division analyzes in determining personal responsibility. The factors are as follows:
1. Contents of the corporate by-laws.
2. Status as an officer and/or stockholder.
3. Authority to sign checks and exercise of this authority.
4. Authority to hire and fire and exercise of this authority.
5. Responsibility to prepare and/or sign tax returns.
6. Day-to-day involvement in the business or responsibility for management.
7. Power to control payment of corporate creditors and taxes.
8. Knowledge of failure to remit taxes when due.
9. Derivation of substantial income or benefits from the corporation.
Knowledge is one factor in the analysis but a person can be held responsible even without possessing such knowledge. In Skaperdas v. Director, Division of Taxation, 14 N.J.Tax 103, 106 (Tax Ct. 1994), two officers of a company contended that the general manager of the company in which they were employed falsified records. Therefore, the employees claimed that they had no idea that the company was violating the tax laws. However, the Court held that because both officers were so closely involved in the day-to-day operations of the company, they had a duty to supervise the general manager and should have known about his actions. Ultimately, both officers were held personally liable for the outstanding taxes.
Michael Salad is an attorney in Cooper Levenson’s Business & Tax and Cyber Risk Management practice groups. He concentrates his practice on estate planning, business transactions, mergers and acquisitions, tax matters and cyber risk management. Michael holds an LL.M. in Estate Planning and Elder Law. Michael is licensed to practice law in New Jersey, Florida and the District of Columbia. Michael may be reached at 609.572.7616 or via e-mail at msalad@cooperlevenson.com.
Peter Fu is an attorney in Cooper Levenson’s Business & Tax and Cyber Risk Management practice groups. He concentrates his practice on sales and use tax, enterprise risk management, and commercial transactions. Peter is licensed to practice law in New Jersey and Florida. Peter can be reached at 609.572.7556 or via e-mail at pfu@cooperlevenson.com.
