Wisconsin Lawyers Blog » Robert B. Teuber

Sales Tax - Personal Liability - Does Dissolving the Business Prevent Personal Liability?

Robert B. Teuber — Mon, 16 Mar 2009 01:20:20 +0000

Most businesses are formed as corporations or LLCs. This is done to provide liability protection to the owner of the business from the risks, debts and obligations of the business. Absent special circumstances (for example, “piercing the corporate veil” or personal guaranties of debts) creditors cannot look past the corporate entity to recover unpaid obligations. These entity based liability shields, however, mean nothing when dealing with Wisconsin Sales and Use taxes. Because of Wisconsin Statue Section 77.60(9), the Wisconsin Department of Revenue can look past the liability protection of a business and directly pursue business owners or employees for unpaid sales taxes.

Dissolving a business does not absolve the owners of their personal liability for the sales tax due. In fact, the statute allowing for personal liability for Wisconsin Sales Taxes specifically provides that the personal liability will survive the dissolution of the business. Moreover, dissolving a business may speed up the Department’s collection efforts against the potentially liable persons because there is no longer the ability for the business to pay the debts.

So, business owners should keep in mind that closing the doors on their business may not do anything to avoid liability for sales tax. Rather, because the company is no longer around to work out a payment arrangement themselves, it may forclose certain techniques that could help prevent a business owner from having to pay the tax them self.

Rob Teuber is a tax attorney located in Milwaukee, Wisconsin. His practice includes Wisconsin state and local tax matters and federal tax problem resolution nationwide. For more information on Rob Teuber’s federal tax law practice, see www.federaltaxlawforum.com.

Sales Tax - How does personal liability for Wisconsin Sales taxes happen?

Robert B. Teuber — Mon, 02 Mar 2009 02:26:19 +0000

In prior posts I have discussed situations in which the Wisconsin Department of Revenue asserts that an individual is personally liable for a business’ sales taxes. This post gives some generic examples as to how this can happen.

While the circumstances leading to the non-payment of sales taxes often come from entirely different directions, the consistent part among all of these situations is that the Department of Revenue believes that sales taxes that are owed and have not been paid. This could be the result of an audit that increased the amount of sales tax owed, a start-up business whose busy owner was unable to keep up with his sales tax obligation or a struggling business decides to use the sales tax collected to pay suppliers rather than the State.

In tougher economic times, a business that is struggling to maintain its operations may make the decision to use the collected sales tax to pay its suppliers instead of to pay the tax. This may be understandable, after all, if the business does not pay its supplier, it will not be able to continue operating and, therefore, could not pay the sales tax that is owed. The business owner’s belief is that if he buys additional supplies, he will generate enough sales to pay off the past due sales tax and any sales tax that arises. Unfortunately, most often the sales are insufficient and the sales taxes cannot be paid again. This problem often cascades into an unwieldy amount of tax, interest and penalty that can become the probelm of the business owner.

As the Department of Revenue gets wind of the problem, they will take action to collect the liability from the business. When those efforts prove unsuccessful, they will look to any person who could possibly be responsible for the liability.

The above scenarios are not the result of good business decisions. Regardless of whether it seems like a good source for a bridge loan, using sales taxes to operate a business is not, and cannot come to good. The taxing authorities have collection powers that are the envy of all creditors. Unlike many creditors, the Wisconsin Department of Revenue can (by virtue of a specific statute) look right through any corporate or LLC liability shield to collect sales tax from individuals.

The point is, if you want to avoid having to hire someone like me to keep the Department of Revenue out of your personal lives, make sure that the sales taxes you or your business collect get turned over to the state. If it is too late for that, there can be several options for resolving the problem, but it is best to avoid the issue in the first place.

SALES TAX – Who can be Liable Under the Rule Imposing Personal Liability for the Wisconsin Sales Tax?

Robert B. Teuber — Mon, 15 Dec 2008 14:40:45 +0000

The Wisconsin Statutes impose a personal liability for sales and use taxes if a business fails to pay the taxes itself. Under the rule imposing personal liability for Wisconsin Sales Taxes, a potentially liable person includes an owner, officer, employee or other responsible person of a business that has responsibility for collecting, accounting for or paying over sales taxes.

What this definition of a “person” essentially boils down to is that it is not only the owner of a business that can be personally responsible…but any person, including employees, can be caught up in the personal liability net if their name appears on the bank signature card, if they write checks to pay bills for the company or they sign the company’s tax returns. These things don’t necessarily mean the person will ultimately liable for unpaid taxes, but it does mean that they may be put in a position to have to prove to the Wisconsin Department of Revenue that they should not be liable.

Therefore, if your husband, wife or children provide nominal services to your family-run business, if they are authorized to make payments on behalf of the company or sign any checks, handle bookkeeping functions or sign tax returns, they can be caught up in a Wisconsin Department of Revenue personal liability problem even though, from a practical family perspective, they never had any power to make sure that sales taxes got paid.

The point is that if you have apparent authority to make sure that sales taxes get paid, you should work to make certain that the taxes are paid. If the taxes are not paid, it could mean a big headache to prove that you were not responsible for the taxes.

Sales & Use Tax - Snowplowing, Sanding and Salting Services

Robert B. Teuber — Wed, 03 Dec 2008 05:49:45 +0000

The Wisconsin Department of Revenue has just issued its December 2008 Sales and Use Tax Report. In the report, the WDOR reminds providers of snowplowing, sanding and salting services that theses services are not subject to sales tax. This means that while sales tax need not be charged on these services, the provider of the services must pay sales tax on the sand or salt when purchased.

The bulletin gives the following examples:

Example 1: A person contracts with Company A to have its driveways and parking lots plowed and sanded during the winter months. Company A charges the person by the hour. The charge by Company A is not subject to sales tax. Company A must pay Wisconsin sales or use tax on its purchase of the sand used in providing the service.

Example 2: A person contracts with Company B to have its driveways and parking lots plowed and sanded during the winter months. company B charges the person based on the amount of salt used. The charge by Company B is not subject to sales tax. Company B must pay Wisconsin sales or use tax on its purchase of the salt used in providing the service.

This means that the service of snowplowing, sanding or salting is not subject to sales or use tax, but at some point sales tax is in fact paid on the sand or salt used. It is just a question of who is paying the tax. In these cases, it is the service provider that directly pays the tax on the sand and salt, not the customer receiving the services.

Are we about to see a more inflexible Department of Revenue?

Robert B. Teuber — Fri, 28 Nov 2008 03:38:09 +0000

Recently, the New York Times reported that “Facing Deficits, States Get Out Sharper Knives.” Will these deficits encourage Departments of Revenue throughout the county to take harder lines in resolving tax audits, appeals and collections? The article, which includes an informative map highlighting the numerous state deficits, also discusses what the governments of those states are considering doing to address their deficits.

The Milwaukee Journal Sentinel has reported on Wisconsin’s budget deficit and Governor Jim Doyle’s plans plans to make spending cuts state wide (see article). The paper reports that currently one of every nine positions in the Wisconsin Department of Revenue is vacant. Part of Doyle’s plan to cut spending is to allow additional employment vacancies to arise in state government through retirements and attrition. This means that the vacancy rate at the Department of Revenue is only likely to grow.

The current vacancies and the prospect of a growing vacancy rate begs the question as to how the Department will be able to effectively administer the tax laws. Will this mean that Wisconsin residents will be able to get away with more? Maybe, but probably not. It is more likely that those Department of Revenue employees that remain, will be overworked and simply less able to spend the time necessary on each case. This probably means less flexibility in reaching resolutions.

An over-worked and under-staffed Department of Revenue could mean a harder line during audits, through the appeal/court process and in the collection of tax. We can be confident that the Department will still conduct audits and collect tax, but they’ll likely just have to do more with less. This could mean more money out of the pocketbook of those under the microscope. While perhaps a bit coutner-intuitive, a funded and effectively operated Department of Revenue is good for those that are facing tax related scrutiny.

Sales Tax - Challenging Personal Liability for Sales Tax

Robert B. Teuber — Tue, 25 Nov 2008 06:24:02 +0000

In my previous posts on Wisconsin Sales Taxes, I have written about how a person responsible for making sure that Wisconsin Sales Taxes are paid can become personally liable for the taxes.

Wisconsin Statute Section 77.60(9) imposes personal liability through the following language:

“any person who is required to collect, account for or pay the amount of sales tax imposed and who willfully fails to collect, account for or pay to the Department, shall be personally liable for such amounts, including interest and penalties thereon, if that person’s principal is unable to pay such amounts to the Department.”

If the Wisconsin Department of Revenue is asserting that a person should be personally liable for the sales tax, that person can look to this rule to determine how to challenge the potential liability. For purposes of challenging the assertion of personal liability for Wisconsin sales tax, this rule can be broken down into many parts.

1. Who is a person?

2. Is that person required to collect, account for or pay the amount of sales tax to the State?

3. If that person failed to collect, account for or pay the amount of sales tax to the State, did they do so willfully?

4. Is that person’s principal unable to pay the amount to the Department of Revenue?

Any one of these items can form the basis for challenging a personal liability assessment or at least provide an opportunity for a resolution short of the person dipping into their own pocketbook (although “who is a person” is less likely to be a viable argument). When constructing a challenge to personal liability, each of these factors should be analyzed and facts relating to each factor should be developed and documented.

Sales Tax - Pay the Tax Owed or Face Personal Liability.

Robert B. Teuber — Fri, 21 Nov 2008 13:06:41 +0000

In my last post, I wrote about the imposition of the Wisconsin sales tax on retail sales of tangible personal property and certain services. Generally, business owners are at least loosely familiar with the rules concerning the imposition of the sales tax and the fact that the sales tax exists. Further, they are aware that when the retailer charges the sales tax, the consumer is the one ultimately must pay the tax. Obviously, the tax is not paid by the consumer directly to the State of Wisconsin but is collected by the retailer at the time of the sale. Thereafter, it becomes the retailer’s obligation to make sure the sales tax that is collected (or that should have been collected) is paid over to the State of Wisconsin.

The trouble arises, however, when a retailer has, in fact, collected the sales tax, but has failed to pay that amount to the State. The sales tax collected can be considered to be held in trust by the retail business that collected the tax in the first instance. The funds in that trust belong to the State. If they are not paid to the State, the business will become responsible for making up those amounts plus corresponding penalties and interest when the payments are made, whether they are made following an audit or voluntarily. (The same problem arises where the business fails to collect sales tax.)

Liability for the Wisconsin sales tax, however, does not stop with the business. Wisconsin Statute §77.60(9) provides for personal liability for unpaid sales taxes by the owners, operators or employees of a business that are connected with the sales tax function. That is, if a business does not pay what it is supposed to pay, the people involved with the business that are responsible for making sure that the tax gets paid, can become personally liable for the debt.

The official rule is that “any person who is required to collect, account for or pay the amount of sales tax imposed and who willfully fails to collect, account for or pay to the Department, shall be personally liable for such amounts, including interest and penalties thereon, if that person’s principal is unable to pay such amounts to the Department.”

Therefore, if you are responsible for making payments of sales tax to the State of Wisconsin, do what you can to make sure that the tax gets paid. If not, the Department of Revenue may look directly to your pocket book if they can’t collect from the business.

Sales Tax - Wisconsin Sales Tax is Imposed on Retail Sales of Tangible Personal Property and Certain Services.

Robert B. Teuber — Tue, 18 Nov 2008 13:00:04 +0000

The State of Wisconsin, through Wisconsin Statute 77.52 imposes a sales tax on retail sales. The sales tax is imposed at a rate of 5% under the Statute. Certain local municipalities also impose additional sales taxes to create a variation among counties.

The tax applies to the sale of all tangible personal property (that is, anything that is not real property) unless there is a specific exemption that excludes the item of tangible personal property from the sales tax. Exemptions include items such as caskets and burial vaults, food products (unless specifically excluded from the exemption), newspapers, items falling under an occasional sales exemption and more. As a general rule if a business sells tangible personal property, sales tax should be charged unless the Wisconsin Statutes specifically provide otherwise.

Conversely, only certain services are subject to the Wisconsin. These services are specifically identified in the Wisconsin Statutes (in Chapter 77). Examples include cable TV services, landscaping, dry-cleaning or photography services. Therefore, a service business must only collect sales taxes on the services that it provides if that service is specifically identified as taxable in the Wisconsin Statutes.

Whether a business sells tangible personal property or provides a service, the business owners should always check the sales tax statutes to confirm whether the item or service is subject to the sales tax. Failing to do so can result in severe financial consequences (tax, penalty and interest) to the business and its owners, officers and employees if sales tax is due and not paid.

The complete chapter of the Wisconsin Statutes governing the sales tax can be found by clicking here.