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

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.  

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.