The Limits of Limited Liability.

Earlier this year I began writing a column for the Wisconsin Law Journal to address various tax issues that affect other areas of the law. In my most recent column, I discuss a sometimes unexpected result when a business fails to pay its employment or sales taxes.

When anyone that is responsible for making sure that employment or sales taxes are paid fails to do so, that person can be held personally liable for the tax. This is true whether that person is an owner, officer or employee. To learn more you can check out the article. “Limited Liability? Not So Fast”

Wisconsin Tax Appeals Commission Gets Busy

There is no question that the current state of the economy is financially difficult on individuals and businesses. The same is true for the State of Wisconsin. A bad economy means that people are spending less. When people spend less, the government collects less in sales tax. Everyone is looking for more revenue and looking to spend less. As a result, there is an up tick in the amount of cases that are being challenged by taxpayers in the Wisconsin Tax Appeals Commission.

Jane Pribek of the Wisconsin Law Journal recently reported that the Tax Appeals Commission expects the number of cases continue to grow through 2010 (Tax appeals expected to increase, Dec. 7, 2009). Ms. Pribek also notes that the complexity of these cases continues to increase.

The increase in cases tells me that the Wisconsin Department of Revenue is looking to increase revenues by broadening the interpretation of the tax statutes. It also tells me that people are more likely to fight to hang onto their money as their audits move through the system.

The Wisconsin tax system works like this:

(1) a taxpayer is audited,

(2) if the taxpayer is dissatisfied with the result of the audit, he/she can appeal to the Resolution Unit of the Department of Revenue,

(3) if dissatisfied with the result of the appeal, the case can be challenged in the Tax Appeals Commission,

(4) after the Tax Appeals Commission a case can be further contested in the local circuit court, and

(5) after the circuit court, a case can go to the Wisconsin Court of Appeals and then potentially the Wisconsin Supreme Court.

Going through this whole procedure takes years. As a result, I expect that the next thing we’ll is going to be an increase in the number of tax cases jamming up an already crowded circuit court system. Over the next few years we’ll see cases moving through the appellate courts too. Because these cases are more complex, perhaps we can expect to see more and more significant tax caselaw development over the next 5 years.

Why? Because of the bad economy today.

Think the Interest on Unpaid Wisconsin Tax Liabilities is too High?

Many clients with outstanding Wisconsin tax liabilities understand that they owe the tax but ask “is there anything that we can do about the interest?” The reason for this question is that Wisconsin is permitted to charge interest of 18% on delinquent tax liabilities.

The statutory language in Wisconsin Statutes Section 77.60(2) provides the relevant language for sales taxes -- “delinquent sales and use taxes shall bear interest at the rate of 1.5% per month until paid.” Unfortunately, no statute provides for the waiver or abatement of the applicable interest charges, and the courts do not have jurisdiction to review the interest charged on delinquent taxes. Thus, the interest charges included in an assessment are required by statute and there is nothing that can directly be done about the interest on a Wisconsin tax liability.

The way to attack an interest charge is to contest the underlying tax liability. If the tax liability can be reduced, the related statutory interest goes down. But trying to argue for a reduction in interest because there was a reasonable cause for the tax liability having gone unpaid will not be successful. Rather, any argument that there was reasonable cause for the unpaid tax liability is best reserved in an argument for the abatement of penalties or collection fees (which can be done).

Sales Tax- Challenging Successor Liability

If successor liability is asserted against the successor business, the challenges are similar to those of dealing with an initial tax liability. There will likely be a determination of the amount for which the buyer could be liable. This provides an opportunity to resolve the issue before the Department determines that a successor should be responsible for the tax. The analysis will include a consideration of the amount of the purchase price that was paid, the amount of the tax due by the predecessor and possibly whether statutory requirements for a Sales Tax Clearance Certificate were satisfied. If the opportunity to resolve the matter with the Auditor is unsuccessful or missed, the same or similar issues can be addressed at the Resolution/Appeals Unit of the Department of Revenue.

When dealing with successor liability for Wisconsin sales or use taxes, the best method for resolving an issue is to avoid having it in the first place. Where that is not possible, it is important to respond and react to the Department of Revenue’s actions to provide the broadest variety of resolutions possible. There are, however, several opportunities to try and resolve the debt before it becomes final and it is always a good idea to take advantage of the procedures in place to solve existing or potential problems.

SALES TAX - Successor Liability - Collecting the Unpaid Tax of a Predecessor Business

When the purchaser of a business faces the prospect of successor liability for Wisconsin Sales taxes, he or she (or it) may complain that the business first owing the tax should first be liable for the unpaid debt. This certainly seems like a reasonable complaint that is addressed in the Wisconsin Administrative Code.

The Administrative Code provides that the Department of Revenue should direct its collection efforts against the party that originally owes the tax. Case law has determined, however, that the party that originally owes the tax means the business that charged the sales tax in the first instance. It is this business that is the predecessor. Predecessor does not include any individuals that could have been personally responsible for the payment of the tax under the personal liability provisions of the sales tax statutes. That is, the Department of Revenue does not have to pursue the prior owners, officers or employees of a business that could be or are personally responsible for the predecessor’s taxes. While they must go after the predecessor business before seeking to collect the tax from the successor, the Department is under no obligation to pursue personal liability from the owners of the predecessor before seeking to recover from the successor business.

A practical reality is that the selling business is often no longer in business and therefore has no cash or assets available to pay the tax. Therefore, often the only real resort is ultimately to collect the unpaid sales tax from the successor.

SALES TAX – Obtaining a Sales Tax Clearance Certificate

When someone buys a business, he or she (or it) faces the prospect of becoming liable for any unpaid sales tax liability of the predecessor business. The Wisconsin Statutes provide a procedure to obtain a Sales Tax Clearance Certificate which will limit the successor liability for sales taxes to that amount determined by the Wisconsin Department of Revenue. The procedure requires that a portion of the purchase price be withheld to pay any potential sales tax liability and that certain disclosures be made to the Department. Doing so sets in motion a fixed timeframe in which the Department may make the determination as to the amount of any additional sales tax owed by the seller.

The Sales Tax Clearance Certificate can only be requested or received following the sale of the business. This is because the Department of Revenue is looking for a final end date as to when any sales tax obligations of the seller would cease.

To obtain a Sales Tax Clearance Certificate, the buyer of the business should make a written request for the certificate and provide the following information:

1. The name of the seller

2. The seller’s permit number of the seller

3. The current mailing address of the seller

4. The name of the buyer

5. The seller’s permit number of the buyer

6. The mailing address of the buyer

7. The date of the sale

8. The sale price

Furthermore, it is prudent to include information concerning the amount of the purchase price that has been withheld to cover any additional sales tax due.

Once the request for a Sales Tax Clearance Certificate is made, the Department of Revenue has 90 days to determine whether additional sales tax is due. If the Department does not act within that 90 day time period, the buyer is relieved of any successor liability.

After receiving notice from the Department of Revenue of the amount of sales tax that the seller owed, any amounts that are escrowed may be paid to the Department and the balance to the seller of the business. No further successor liability will arise. Absent a Sales Tax Clearance Certificate, however, no such procedural guaranty will apply to relieve the buyer of a business from potential successor liability.

SALES TAX - Avoiding Successor Liability

Determining whether the successor liability rules could subject the buyer of a business to its existing Wisconsin sales tax liability may require some legwork. Unfortunately, because the amount of a seller’s tax liability is usually not public information, it can be difficult to determine the exact exposure for the successor liability of sales taxes when buying a business or its assets.

The best way to avoid a successor liability problem is to conduct adequate due diligence. The purchaser of a business should request copies of all sales tax returns for a period of time sufficient to establish a degree of comfort with the amount of sales taxes that were owed. Additionally, seek information establishing that the amounts owed were, in fact, paid. If the seller is too resistant in providing this information, it could be a warning sign that the business should not be purchased.

If a sales tax liability is uncovered or expected, the parties to a business sale can agree to withhold (in escrow) a portion of the purchase price for payment to the Department of Revenue. Doing so is part of the process of obtaining a Sales Tax Clearance Certificate that provides a legal safeguard against the successor liability rules. If the escrow exceeds the actual sales tax liability the balance can be paid to the seller.

SALES TAX - Extent of Successor Liability for Sales Taxes

Under the Wisconsin sales tax laws, the purchaser of a business can be subject to the predecessor business’ unpaid sales tax liability. The extent of successor liability for sales taxes, however, is limited to the amount of the purchase price paid for the business. Therefore, if someone pays a half-million dollars for a business that has a million dollar sales tax liability, the purchaser’s exposure for the unpaid tax will be limited to a half-million.

It follows, therefore, that if there is no purchase price, there is no successor liability. Further, the successor liability is tied to the location of the business purchased. If only one location of an existing chain of businesses is purchased, successor liability is limited to the sales tax liability attributable to that one location.

It is important to note, however, that while the successor liability is limited to the amount of the purchase price, the “purchase price” consists of any value that is paid for the business. This purchase price includes not only cash or installment payments but also value of any property transferred in exchange for the business and the assumption or payment of any debt on behalf of the purchased business. Using the above example, even if the entire half-million dollar purchase price is paid to secured creditors of the business, the purchaser can still face successor liability to the extent of that half-million dollars.

SALES TAX - What is Successor Liability for Wisconsin Sales Taxes?

The buyer of a business should be aware that if the seller has an outstanding liability for Wisconsin sales or use taxes, the buyer can become personally liable for the unpaid tax of the seller if the proper steps are not taken. With careful planning, however, the buyer can avoid the successor liability problem.

The successor liability rule, found in Wisconsin Statute Section 77.52(18), is:

“If a retailer liable for any sales or use tax sells his business or inventory or otherwise quits business, the retailer’s successors or assigns are required to withhold a sufficient amount of the purchase price to cover the tax obligations until the seller produces either (i) a receipt showing that the tax was paid or (ii) a certificate stating that no tax is due.”

This means that the buyer of a business or a stock of goods, including furniture, fixtures, equipment, and inventory must withhold purchase price money from the seller until the buyer receives a:

1) Receipt from the seller showing the tax was paid, or
2) Certificate stating that no tax is due.

If the buyer does not withhold purchase money until one of the two above is received, the buyer will be personally liable for unpaid tax to the extent of the purchase price.

This provision puts the burden of making sure that tax gets paid on the buyer of the business. The buyer must make sure that the taxes are paid or become liable for the debts. The buyer and seller cannot get rid of successor liability by contract. Successor liability is determined by law and no agreement between buyers and sellers can change this. Of course, a buyer and seller can agree that if the buyer ends up having to pay the seller’s tax, the seller will indemnify the buyer. This indemnification, however, gives the buyer recourse against the seller. It does not do anything to protect a buyer from liability to the Department of Revenue.

SALES TAX - From Personal Liability for Wisconsin Sales Taxes to Successor Liability.

I have written many posts on the issue of how the Wisconsin Department of Revenue can collect a business' sales tax liability from the individuals owning or operating that business. I also explained that the personal liability of any responsible person will survive the dissolution of a business. Liability for unpaid sales taxes will also survive the sale of a business.

For example, if a business owner sells the assets or the stock of his corporation (or other business form) but the business has not paid all of its sales taxes, that owner could still be personally responsible for the payment of the sales tax. Unfortunately, however, the buyer of the stock or assets of the business can also be responsible for the unpaid sales tax if he/she/it is unaware of the liability or does not take the right steps to avoid this “Successor Liability.”

In a series of posts that will follow, I will address successor liability for Wisconsin Sales Taxes and the procedures for avoiding this potentially costly obligation.

SALES TAX - What can be Done if the Wisconsin Department of Revenue Asserts Personal Liability for Sales Taxes?

Under the rule imposing personal liability for Wisconsin Sales Taxes, a person must be required to collect, account for or pay the amount of sales tax due and willfully fail to make that payment. Further, before an individual can be held personally liable for the sales taxes, the business itself must be established not to be able to pay the amount to the Department.

When an individual receives a notice from the Department of Revenue that it intends to pursue collection of a business’s sales tax liability from the person himself or herself, the first analysis that takes place is whether the Department of Revenue can, in fact, collect the sales tax from that person under the law.

In conducting the analysis, we will look to the specific facts and circumstances surrounding that person and their involvement with the business. We will look to the relationships of the parties, any governing documents and other circumstances that may have led to the assertion of the sales tax against that individual. Based on the specific facts and circumstances of a case, a variety of information may be useful in demonstrating that a person should not be liable for the sales tax, including documentation, explanations and sworn affidavits.

If this information is unavailable, another option may exist. The Statute imposing personal liability requires that the principal (i.e. the business) is unable to pay the amounts due. Therefore, if an arrangement for payment between the business and Department of Revenue is made (possibly an installment agreement), the Department of Revenue will withhold from collecting the Sales Tax from an individual pending the business’s payment of the tax.

This may mean that the person who could be liable for the Sales Taxes needs to allow the Department additional time to consider the personal liability issue. In most instances where this is required, the extension of time does not prejudice the person and prevents the personal liability from being assessed. Without an assessment of the tax, there should be no liens, levies, garnishments or other collection action taken against that person unless the business fails to pay the tax.

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.

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.

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.

Legal Podcast - Forcing Out Minority Shareholders in Wisconsin.

It is not uncommon for attorneys to get involved in matters where a majority shareholder (or a group of shareholders constituting a majority) is looking to force out minority shareholders from the corporate ownership. Whether you are looking to get rid of a troublesome minority shareholder or dealing with an oppressive majority, there is plenty to know about how to force someone out and how to respond to such strategies.

Attorney Jim Swiderski has recorded a series of podcasts on these situations. The first provides a general overview of information for shareholders on either side of the issue. The second and third podcasts outline the issues specific to one side or the other. The podcasts can be listened to by clicking below.

Forcing Out Minority Shareholders in Wisconsin: An Overview.

The goal of this podcast is to provide an overview of techniques utilized by majority shareholders to force out minority shareholders in a Wisconsin corporation and possible responses by minority shareholders to those majority shareholder squeeze-out efforts. Examples of the techniques and responses are provided and include mergers, reverse stock splits, lawsuits for breach of fiduciary duty and petitions for judicial dissolution. (Click here to listen.)

Forcing Out Minority Shareholders in Wisconsin: Majority Shareholder Squeeze-Out Techniques.
This podcast introduces the listener to various techniques utilized by majority shareholders to force out troublesome minority shareholders in Wisconsin corporations. The techniques covered by Jim Swiderski include mergers (statutory, short-form, and triangular and reverse triangular), reverse stock splits, and voluntary corporate dissolutions. (Click here to listen.)

Forcing Out Minority Shareholders in Wisconsin: Minority Shareholder Rights.
This podcast introduces the listener to possible responses by minority shareholders to majority shareholder efforts to force minority shareholders out of a Wisconsin corporation. The responses discussed include asserting dissenter's rights, filing a lawsuit alleging breach of fiduciary duty and petitioning the court to judicially dissolve the corporation. (Click here to listen.)

Jim Swiderski is an attorney with the law firm Weiss Berzowski Brady LLP. His professional biography can be found by clicking here.

“Business Solutions with Diane Chamness”

On a monthly basis, attorney Barry White and others from the law firm Weiss Berzowski Brady LLP talk with Diane Chamness on her radio program. The show, called "Business Solutions with Diane Chamness" is broadcast on WISN 1130AM from 1:00-2:00 CST.

On Saturday, May 3, 2008, I will be talking with Diane about personal and successor liability for Wisconsin sales taxes. We will also take calls concerning tax audits, appeals and collection matters. We hope you can listen in.

If you are outside of the listening area, you can tune in and listen live by visiting her website at http://www.dianeonbusiness.com/. Diane's show runs on a weekly basis at the same time and addresses various issue relevant to business owners.