Friday's Tax Quote

“America’s tax laws are similar to the writings of Karl Marx and the writings of Sigmund Freud in that many of the people who loudly proclaim opinions about these documents have never read a word of them.”

- Jeffery L. Yablon

SALES TAX – Personal Liability for Wisconsin Sales Taxes, What if a Business that first had the Tax Liability is Dissolved?

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. Because of Wisconsin Statue Section 77.60(9), the Wisconsin Department of Revenue can look past the liability protection of a business and 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. 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.

SALES TAX – Personal Liability for Wisconsin Sales Taxes, How Does it Happen?

This post continues prior writings in which I discuss the Wisconsin Department of Revenue’s assertion that an individual should be personally liable for 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 busy start-up business has a proprietor that simply was unable to keep up with his sales tax obligation due to a heavy workload 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. This may be understandable, after all, if it does not pay its supplier, it will not be able to continue operating and, therefore, could not pay the sales tax that is owed. Their belief is that if they buy additional supplies, they will generate sales great enough to pay off the now past due sales tax liability and any sales tax that arise from that weekend. Unfortunately, often the following weekend is not as successful as the business had hoped and now sales taxes cannot be paid again. This problem often cascades into an unwieldy amount of tax, interest and penalty due and the result is that the business cannot pay what is owed.

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.

I can say, in no uncertain terms, that 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 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.

Friday's Tax Quote

“No taxes can be devised which are not more or less inconvenient and unpleasant.”

- George Washington

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

Under the rule imposing personal liability for Wisconsin Sales Taxes, a potentially liable person includes an officer, employee or other responsible person of a business that is under the 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 Department of Revenue that they should not be liable.

Therefore, even if your husband or wife or even 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 TAX – Challenging an Assertion of Personal Liability for the Wisconsin Sales Tax.

In 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.

Friday's Tax Quote

“Pothinus: Is it possible that Caesar, the conqueror of the world, has time to occupy himself with such a trifle as our taxes?

Caesar: My friend, taxes are the chief business of a conqueror of the world.”

- George Bernard Shaw (“Caesar and Cleopatra”).

SALES TAX - Payment/Collection of the Sales Tax

In a previous post, I wrote about the imposition of the Wisconsin sales tax on retail sales of tangible personal property and certain services (click here). 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 retailers obligation to make sure the sales tax that is collected (or was supposed to be 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

"Business Solutions" with Diane Chamness: Avoid Personal Liability for Your Business Taxes

Back in May 2008, I was invited to talk with Diane Chamness on her radio program "Business Solutions" with Diane Chamness. The topic was potential personal liability for Wisconsin Sales Taxes. During the program, Diane and I also took calls concerning any tax issues about which listeners had questions. Many callers had questions concerning employee vs. independent contractor issues.

I have previously written on both of these topics on this blog. For personal liability for Wisconsin Sales Tax issues, click here. For employee vs. independent contractor issues, click here.

Diane Chamness has begun posting recordings of her program online as podcasts. Click the link below to listen to the May program and to hear a variety of other programs covering topics which may be of interest.

"Business Solutions" with Diane Chamness: Avoid Personal Liability for Your Business Taxes

SALES TAX – Wisconsin Sales Taxes are Imposed on Retail Sales of Tangible Personal Property and Certain Services.

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.