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 individual an assessment relating to taxes owed by a business, it is important that you understand your rights and obligations. As tax attorneys in Columbus, Ohio, Nardone Limited routinely advises taxpayers about their potential personal liability relating to liabilities owed by a business as part of our tax controversy work. See our prior article, Trust Fund Liability: The IRS and Ohio Department of Taxation May Hold Business Owners Personally Responsible. 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 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.
Certain Employees and Officers May be Personally Responsible
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. The Ohio Department of Taxation determines whether a person has control and supervision by examining a number of factors, so it is advisable that you consult with a professional in determining potential personal liability relating to a business’s failure to properly collect and pay the necessary Ohio sales tax.
Ohio Supreme Court Case Holds that an Individual Must have Specific Connection to Filing Sales Tax Returns and Making Sales Tax Payments
Simply being an employee or an officer of a business is not enough. Rather, there must be a connection between the individual and the business’s sales tax filings and payments. In Weiss v. Porterfield, Virginia Weiss (“Weiss”) was an attorney who filed the articles of incorporation for Mel-Deb Furniture Co. on November 14, 1966. 27 Ohio St.2d 117, 271 N.E.2d 792 (1971). Weiss was then elected as a director and secretary of the corporation. The corporation ultimately failed to file any sales tax returns or make any sales tax payments from the time it was incorporated until it filed bankruptcy. See Weiss at 117. The Ohio Tax Commissioner ultimately issued sales tax assessments against all of the corporation’s officers based upon R.C. 5739.33. Further, the Tax Commissioner denied Weiss’s request for reassessment and Weiss ultimately appealed the Tax Commissioner’s decision. The Ohio Board of Tax Appeals then reversed the Tax Commissioner’s decision, finding that Weiss was not a member of the class of officers to which R.C. 5739.33 applied. The case then went to the Ohio Supreme Court. See Weiss at 117.
The Ohio Supreme Court held that officers and employees are personally liable when they have control or supervision of, or are charged with, the responsibility of filing tax returns and making payments. See Weiss at 118. The Court found that Weiss was an individual who was director and secretary of corporation, however, Weiss’s duties were in no way connected with the preparation and filing of returns, and the payment of Ohio sales taxes. See Weiss at 121. As a result, Weiss was not subject to a personal assessment for the corporation’s failure to file Ohio sales tax returns and make the necessary Ohio sales tax payments. See Weiss at 121.
Factors to Determine if an Individual’s Duties Are Connected to Sales Tax Filings and Payments
To determine whether an individual’s duties are connected to sales tax filings and payments, the Ohio Department of Taxation will look at various factors. The factors include whether the individual: (i) prepared sales tax returns; (ii) signed sales tax returns; (iii) filed sales tax returns; (iv) worked with external accountants to prepare and file sales tax returns; (v) had check writing authority; and (vi) had control over the business’s finances, including authorizing payments to creditors. Ultimately, the determination of whether an individual is personally liable for a business’s Ohio sales tax liabilities will be based upon the specific facts and circumstances of each case.
An individual must clearly present the necessary facts to the Department to show that the individual was not involved, in any way, with a business’s sales tax filings and payments, to ultimately avoid a personal assessment for a business’ failure to pay Ohio sales tax. Further, an individual should provide detail regarding the individual’s specific role, if any, in the business’s finances, including what type of authority the individual had when it came to business financial decisions.
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.