Provides that for the purposes of sales and use tax collection, "persons required to collect tax" shall include a member of a limited liability company

Summary of provisions

This bill would:

o remove the unlimited, strict liability currently imposed on limited partners and LLC members; o make the smallest changes possible to existing law by retaining the current "duty to act" standard and simply extending it to the only two groups of persons currently left out of that standard (limited partners and LLC members); o authorize the Commissioner to require sales tax vendors to provide information regarding persons who play an important role in the entity (by either owning 20% of more of the entity or having been designated to serve as an officer, manager, or as the person responsible for the entity's tax matters); o enable the Department to determine who is under a duty to act; the providing of this information would not create liability on those persons identified; o provide that there would be no penalty or other punishment for a failure to provide the requested information other than an extension of the collections period that the State would otherwise have to collect unpaid sales tax.

Existing law

The current law 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 limited partner had an active role or significant involvement in the financial affairs or management of the business.

Justification

The current 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 section 6672, as evidenced by its large body of case law. The absolute liability

imposed by current state law is also in direct contrast to other provisions of New York law intended to encourage investment in LLCs and limited partnerships (See Limited Liability Company Law section 609(a) and New York Partnership law section 121-303).

The existing language of the state law that creates personal liability in passive investors is not just grossly unfair, it could deter investment in New York State businesses. This legislation would result in better tax administration and tax compliance. Requesting information as provided under this bill would be an appropriate function of a tax administrator. The penalty for not complying is mild and is the only aspect of the law that encourages compliance with the information reporting. The collections-period extension would not impose a new liability on any person, it would only extend the collections period for a person already obligated to pay the unpaid sales taxes and who was not identified in a timely information filing.

The penalty of an extended limitations period applies only to individuals who are under a duty to act and fail to see to it that the proper sales taxes are collected and paid over and also fail to see to it that they are properly identified to the state (as a 20% owner, officer, manager or tax-responsible person). This would be fair and appropriate in cases where there has been a failure to pay the sales taxes.

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

Legislative history

The law sought to be amended was enacted as part of the creation of New York's Limited Liability Company Law.

Fiscal implications

Unknown.

Effective date

This act shall take effect on the first day of the quarterly period, as described in subdivision (b) of section 1136 of the tax law, next commencing at least ninety days after the date this act shall have become a law and shall apply to quarterly periods beginning on or after such date.