The tax attorneys at Nardone Limited in Columbus, Ohio, routinely advise taxpayers about their potential personal liability relating to liabilities owed by a business, as part of our tax controversy work. The Ohio Department of Taxation has several tools available to collect delinquent taxes, including conducting a trust fund investigation of responsible persons. When the Ohio Department of Taxation issues an assessment to an individual relating to taxes owed by a business, it is important that you understand your rights and obligations. See our prior articles: Trust Fund Liability at the State and Federal levels and Personal Liability for a Business’s Failure to Pay Ohio Sales Tax.

     Most companies operate as a business entity that shields owners from personal liability for the company’s obligations. But, a major exception exists to this rule, commonly referred to as trust fund liability. If an employer fails to pay certain taxes on behalf of their employees, or fails to collect and pay Ohio sales tax, then under Ohio law, the Ohio Department of Taxation has the right to collect monies due from certain individual’s personal assets. The Ohio Department of Taxation will send a Notice of Personal Assessment to the individual for the amounts owed by the business. The individual then has the opportunity file a petition for reassessment and ultimately present their case as to why they are not a responsible person, under Ohio law.

Who May be a Responsible Party for Sales Tax Liabilities Owed on Behalf of a Business?

     Under R.C. 5739.33, if a business fails to collect and pay the necessary Ohio sales tax, then any of its employees having control or supervision of, or charged with the responsibility of filing returns and making payments, or any of its officers, members, managers, or trustees who are responsible for the execution of the corporation’s, limited liability company’s, or business trust’s fiscal responsibilities, may be personally liable for the failure. Generally, the Ohio Department of Taxation will assess the individual business owners for monies owed by the business. But, simply because an individual has an ownership interest in a business does not necessarily mean they will be considered a responsible party under Ohio law.

Ohio Board of Tax Appeals Finds Minority Shareholder is Not a Responsible Party under R.C.  5739.33.

     In Peggy E. Gerard v. Roger W. Tray, Tax Commissioner of Ohio, the business’s majority shareholder had control over practically every aspect of the business. The petitioner in the case, Peggy Gerard (“Peggy”), a minority shareholder, would prepare the business’s sales tax returns. Then, Peggy would provide the sales tax returns to the majority shareholder for signature.

     On a few occasions, Peggy mailed the sales tax return, with payment, and the majority shareholder became very upset that she had mailed the sales tax return with payment. The majority shareholder then sent a check to another creditor, which caused the check relating to the sales tax liabilities to bounce. When Peggy confronted the majority shareholder regarding the bounced check, the majority shareholder advised that the majority shareholder had full authority over the business’s payments to creditors. Thus, since the business was no longer meeting its sales tax payment requirements, Peggy advised that she no longer would sign checks. As a result, the majority shareholder fired Peggy.

     Ultimately, the Ohio Board of Tax Appeals found that an individual who is at best, a de facto officer, who had no control over filing and paying the business’s sales tax, and whose check writing authority was limited to a second signature with another officer’s signature as primary, is not responsible for the business’s sales tax obligation. Thus, even when a minority shareholder has check signing authority and periodically filed Ohio sales tax returns, the Ohio Board of Tax Appeals determined that the minority shareholder was not personally responsible for unpaid sales tax when the majority shareholder had authority over the business’s payments to creditors.

     At the end of the day, whether the Ohio Department of Taxation will hold an individual personally responsible for a business’s sales tax liabilities will depend upon the specific facts and circumstances of each individual’s involvement with the business’s finances and the business’s sales tax preparation and filing. But, simply because an individual has an ownership interest in a business does not necessary mean that the Ohio Department of Taxation will determine that the individual is a responsible person under Ohio law.

Conclusion

     Nardone Limited frequently represents individuals and businesses in federal, state, and local civil tax matters, including appeals. If you or your business have been contacted by the Ohio Department of Taxation, or are struggling with tax liabilities, you should contact one of our tax attorneys today. We will thoroughly review your case to determine your potential personal liability, as well as what options and alternatives are available to you.