In December 2022, a significant legal development unfolded. A New York Administrative Law Judge (ALJ) issued a decision that could set a significant precedent for other states. The ALJ’s assertion was that a member of an LLC, even without involvement in day-to-day business operations, can be held personally accountable for the LLC’s sales tax deficit. How did it come to this?
Ben-Zion Suky was in US Suite Management LLC (the “LLC”), which didn’t file New York sales and use tax return from Dec 1, 2014, to Feb 28, 2015. The New York State Department of Taxation sent Mr. Suky a notice, holding him accountable for the LLC’s sales tax. Mr. Suky contended he wasn’t the managing member of the LLC. He argued he represented the LLC under Aura U-Trend’s authority.
However, the Division based its decision on Mr. Suky’s membership in the LLC and his signature on multiple documents on behalf of the LLC, including a check payable to the Division, the LLC’s partnership return, a consent to extension of time for the audit, and a power of attorney form for the LLC which listed Mr. Suky as the “Managing Member.”
New York: LLC Liability Protection Vs. Sales & Use Tax Collection
In New York, sales tax assumes the role of a “trust fund” tax. Consequently, the LLC acts as a trustee for collected sales tax, with LLC members serving as co-trustees. If the LLC doesn’t forward the tax to the state, the members can face personal liability for any shortfall.
The New York LLC Law provides that neither a member nor a manager is liable for any debts, obligations, or liabilities of the LLC “solely by reason of being” a member of manager (Section 609(a). However, the New York tax law provides that “every person required to collect any tax” is personally liable for the unpaid tax. The definition of a “person required to collect tax” includes any employee or manager of an LLC. In that capacity, they hold the responsibility to act on behalf of the LLC.
This means that LLC members in New York are generally not personally liable for the LLC’s debts or obligations. However, their involvement in tax collection aside, they bear strict liability for unpaid sales and use tax. This is because the NY tax law includes any LLC member within the definition of “a person required to collect tax.”
Does the State offer LLC Members a way out of this?
The state’s Department of Taxation and Finance offers some relief to LLC members who meet certain requirements. To qualify for relief, an LLC member had to:
- Apply for relief from the Department.
- Demonstrate that their percentage ownership interest and percentage distributive share of profits and losses in the LLC are each less than 50%.
- Demonstrate that they were not under a duty to act for the LLC in complying with the sales tax.
If the Department grants relief to a member, their liability for unpaid sales tax will be limited. It will reflect the higher value of the member’s ownership interest or distributive share in the LLC’s sales tax liability. Additionally, any accrued interest will also be considered. The LLC member will not incur liability for any penalties owed.
ALJ’s Decision Explained
The ALJ emphasized that the law specifically states that LLC members are personally liable for unpaid sales tax. Members‘ role in the LLC or their level of involvement in daily operations of the business doesn’t limit this liability. Because he was an LLC member during the relevant period, Mr. Suky incurred liability for the sales tax; the law then imposed strict liability on all LLC members. The ALJ found Mr. Suky had ample control, designating him a “person required to collect” sales tax.
Although amended in 2018 to aid minority LLC members not bound to act, this didn’t apply to Mr. Suky. It was not in effect during the period in question. Furthermore, had the amendment been active, Mr. Suky would still be liable. The ALJ ruled he was obliged to adhere to sales tax law.
