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Minnesota Sales Tax Responsible Person Legal Standard | Audit Tax Lawyer

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In this article, I would like to discuss the legal definition of Responsible Person under Minn. Stat. § 270C.56 – I will refer to this term as Minnesota sales tax responsible person legal standard.

Minnesota Sales Tax Responsible Person: Background Information

Minnesota imposes a sales tax “on the gross receipts from retail sales.” Minn. Stat. § 297A.62, subd. 1 (2014). “The sales … tax required to be collected by the retailer under chapter 297A constitutes a debt owed by the retailer to Minnesota, and the sums collected must be held as a special fund in trust for the state of Minnesota.” Minn. Stat. § 289A.31, subd. 7(a) (2014).

If the sales tax is not collected or remitted to the Minnesota Department of Revenue (“DOR”) by the company, then Minnesota law imposes personal liability upon a person who “has the control of, supervision of, or responsibility for filing returns or reports, paying taxes, or collecting or withholding and remitting taxes and who fails to do so.” Minn. Stat. § 270C.56, subd. 1 (2014). In other words, the State of Minnesota will collect the sales tax liability incurred by a company from whoever is defined as a “responsible person” – this is what I mean by Minnesota Sales Tax Responsible Person.

Minnesota Sales Tax Responsible Person: Legal Test

In order for a person to be assessed with the personal liability for non-payment of a sales tax, Minnesota courts follow a two-prong analysis under the Legal Test that establishes whether a person is a Minnesota Sales Tax Responsible Person. The first prong is definitional and the second one is substantive. Yik C. Lo v. Comm’r of Revenue, 2016 Minn. Tax LEXIS 17, *24 (Minn. T.C. April 7, 2016).

Let’s deal with the definitional prong first. “The threshold definitional question is whether the assessed person qualifies as a ‘person’ for purposes of the personal liability statute.” Id.; also see Igel v. Comm’r of Revenue, 566 N.W.2d 706, 709 (Minn. 1997). For the purposes of this statute, the word “person” is defined broadly to include an officer of a company, a member of a partnership and even an employee. Minn. Stat. § 270C.56, subd. 2 (2014). Pretty much any stakeholder, officer or employee would be considered a “person”.

If the first question is answered positively, then, the second issue is whether the “person” was also a “responsible person” – i.e. whether the “person” had the requisite control over financial matters to be found personally liable for the company’s tax liabilities. Stevens v. Comm’r of Revenue, 822 N.W.2d 646, 652 (Minn. 2012).

The Minnesota Supreme Court adopted a five-factor test to determine who is a responsible person. Benoit v. Commissioner of Revenue, 453 N.W.2d 336, 344 (Minn. 1990). This test is “informative” while the statutory language of 270C.56 controls. Larson v. Comm’r of Revenue, 581 N.W.2d 25, 28-29 (Minn. 1998). In other words, the courts may and actually at other factors besides those listed in the test.

The five factors are:

“(1) The identity of the officers, directors and stockholders of the corporation and their duties;
(2) The ability to sign checks on behalf of the corporation;
(3) The identity of the individuals who hired and fired employees;
(4) The identity of the individuals who were in control of the financial affairs of the corporation; and
(5) The identity of those who had an entrepreneurial stake in the corporation.” Benoit, 453 N.W.2d at 344.

The idea behind the test is to focus on “those persons who have the power and responsibility to see that the taxes are paid.” Id. Writing for a unanimous court, Judge Wahl also stated: “Control and influence over the ‘disbursement of funds and priority of payments to creditors’ are the most important elements.” Id. at 342.

Contact Sherayzen Law Office for Professional Help With Minnesota Statute § 270C.56

If the DOR found you personally responsible for a company’s sales tax liability under Minn. Stat. § 270C.56, contact Sherayzen Law Office for professional tax help.

Internet Sales and Use Taxes: A Growing Concern for Small Businesses and Consumers

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Are you a small business owner who frequently sells goods or services over the Internet, or a consumer who purchases expensive products online? Then you may be responsible for charging sales taxes as a seller, or reporting unpaid use taxes as a consumer under new laws that have been passed by various states. As states look for ways to reduce budget deficits, merchants and consumers should expect to see collection of sales and use taxes become a top priority, and this may require sound tax advice.

Sales and Use Tax Defined

Sales taxes

Sales taxes are state or local taxes based upon a set percentage of the sales price of a product or service. Almost all states have sales taxes, except Alaska, Delaware, Montana, New Hampshire and Oregon. Likewise, most states charge sales tax for Internet purchases made in the state. Certain types of products may be exempt from sales taxes, such as clothing, prescription drugs and some foods and beverages in Minnesota.

Where sales taxes are applicable, merchants who sell via the Internet charge the appropriate sales tax rate for the location of the buyer. For example, a California merchants selling a product to a Minnesota consumer online, would charge the appropriate Minnesota sales tax rate, and then remit the collected tax amount to the state of Minnesota. (Certain exemptions may be applicable in some states depending upon whether the buyer is a consumer or a reseller.)

Use taxes

Use taxes for Internet or mail order purchases, apply when consumers located in a state with a sales tax, purchase goods or services for use in their home state, but are not charged a sales tax (or are taxed at a lower rate than in their home state) by the merchant. In such transactions, the consumer still owes a tax to their home state. Use taxes, unlike sales taxes however, are paid by the consumer. Use taxes that were not paid at the time of sale may be reported on a taxpayer’s state income tax form. Nearly half the states, including California and New York, include a line on individual state income tax forms for taxpayers to voluntarily calculate their use tax liability amount.

Difficulties with Collection of Internet Sales and Use Taxes

A 1992 Supreme Court decision, Quill vs. North Dakota, held that mail order retailers do not need to collect sales taxes unless they have a physical presence in the state of the customer purchasing its product or service. Physical presence may include a store, office, warehouse, or similar facility.

This decision was subsequently applied to exempt Internet retailers that met the requirements. Even though sales taxes are still legally due in circumstances in which an online merchant does not have a physical presence in a customer’s state, such taxes however are rarely reported by customers. Because of the difficulties in tracking online purchases, states often resorted to attempting to collect online sales taxes for expensive items (often requiring licenses to use the good), such as an automobile. In Minnesota, for example, residents are required to pay sales taxes on any online purchases that total $770 over the course of a year.

As many individuals increasingly began using the Internet to purchase goods and services however, states looked for new ways to collect sales taxes. In 2002, 40 states and the District of Columbia joined together to create an initiative called the Streamlined Sales and Use Tax Agreement (SSUTA) to simplify sales tax collection efforts. Although compliance with SSUTA is non-binding, according to recent numbers, nearly 1,200 online retailers now voluntarily collect sales taxes.

Future of Sales and Use Taxes: Collections Likely to Increase

Sales taxes make up the second largest source of state revenue, following individual income taxes. Thus, with many states facing widening budget deficits, the trend is for states to increasingly pursue collection efforts for unpaid sales and use taxes. Recently, state legislatures in New York, North Carolina, and Rhode Island have enacted laws requiring online retailers to collect sales taxes if the retailer operates an ‘affiliate program’ with payments to individuals in return for customer referrals. Similar legislation has been proposed in at least fifteen other states. In Colorado, a new law requires online retailers that run affiliate programs to notify customers of applicable use taxes that must be paid.

The fate of state efforts to increase collection of online sales and use taxes may hinge in part on lawsuits brought by online retailer Amazon.com challenging some of these laws. In challenging the constitutionality of New York’s law, Amazon argued that sending referral payments to its customers through an affiliate program does not constitute a physical presence in a state. Amazon however lost a case in trial court, and has since appealed. Additionally, the company recently filed a lawsuit in federal court challenging North Carolina’s law. States have also filed lawsuits against certain online retailers in an effort to collect unpaid sales taxes and enforce existing state laws.

In addition to the various state laws and pending proposals, federal legislation has been proposed to require most online retailers to collect sales taxes in any states that have joined the Streamlined Sales Tax Project and have passed legislation complying with SSUTA. If the proposed federal legislation eventually becomes law, it would thus override the physical presence requirement. Twenty-three states are members or associate members of this project: Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming. The proposed law may also allow retailers to retain as an allowance, a small percentage of the sales tax collected, in order to cover reasonable expense for their sales tax collection efforts and tax return filings, as well as other associated costs.

Conclusion

All of the various state and federal legislative initiatives indicate that the states are stepping up their efforts to collect sales and use taxes. This will likely produce an increased complexity of the Internet tax laws with which both, Internet retailers and consumers, will have to comply. Remember, a tax-collection mistake may become very expensive for the involved partes since the unpaid taxes may be subject to penalties and interest.

Sherayzen Law Office can help you navigate this ever-changing tax landscape. Call NOW to discuss your case with an experienced tax attorney!