Provides that for the purposes of sales and use tax collection, "persons required to collect tax" shall not include a member of a partnership or llc

1 Co-sponsor

• James S. Alesi

BILL NUMBER:S2409B

Title of bill

An act to amend the tax law, in relation to the definition of "persons required to collect tax" and "person required to collect any tax imposed by this article" for the purposes of the collection of sales and compen- sating use taxes

Purpose

To amend section 1131 (1) of the New York State Tax Law so that a passive member of a partnership or limited liability company be relieved of personal liability for any unpaid sales taxes so that this section of law will conform to the liability provisions of Tax Law 685(g).

Summary of provisions

Section 1 of the bill amends subdivision 1 of section 1131 of the Tax Law by removing a portion of the existing language and replacing it with language that is analogous to the personal liability provisions found in Tax Law 685 (g).

Existing law

Section 1131 (1) appears on its face to impose absolute liability for unpaid sales taxes on all members of an LLC and on all limited partners of a limited partnership, without regard to whether the member or limit- ed partner had an active role or significant involvement in the finan- cial affairs or management of the business.

Justification

As set forth above, Section 1131 (1) of the Tax Law imposes absolute liability for unpaid sales taxes on all members of an LLC and on all limited partners of a limited partnership, without regard to whether the member or limited partner had an active role or significant involvement in the financial affairs or management of the business. This result is contrary to the "responsible person" concept that has been followed by state and federal taxing authorities for many years under New York State Tax law section 685(g) and federal Internal Revenue Code 6672 as evidenced by its large body of case law. The absolute liability imposed by section 1131 (1) is also in direct contrast to other provisions of New York law intended to encourage investment in LLC's and limited part- nerships (See Limited Liability Company Law section 609(a) and New York Partnership law section 121-303).

The existing language of Tax Law 1131 (1) that creates personal liabil- ity in passive investors is not just grossly unfair, it could deter investment in New York State businesses. By enacting this legislation, Section 1131 (1) will conform to the trust fund liability provisions of New York State Tax Law section 685(g) and Internal Revenue Code section 6672 and the "responsible person" rule will apply.

This legislation is being introduced at the request of the New York State Bar Association Tax law Section.

Legislative history

Section 1131 (1) of the Tax Law was made as part of the creation of New York's Limited Liability Company Law.

Fiscal implications

Unknown.

Local fiscal implications

Unknown.

Effective date

This act shall take effect immediately.