South Carolina employers are required to withhold income taxes from employee wages, and to pay these withheld taxes to the South Carolina Department of Revenue (DOR). South Carolina businesses are also required to pay sales taxes to DOR on sales of goods to their customers, and the business can collect the sales tax from the customer. When an employer or business fails to pay employee tax withholdings or collected sales taxes to DOR, individual(s) associated with the business may be held personally liable for these unpaid taxes as a “responsible party”. These responsible party taxes are similar to the federal trust fund penalty, imposed on responsible parties where the business fails to pay its federal employee income and employment tax withholdings.
On March 25, 2015 the South Carolina Administrative Law Court (ALC) issued its decision in Beltram v. South Carolina Department of Revenue, Docket No. 13-ALJ-17-0244-CC, 13-ALJ-17-0244-CC (J. Lenski). This case follows two other ALC decisions addressing responsible party taxes, Rowland v. South Carolina Department of Revenue, Docket No. 07-ALJ-17-0285-CC, July 24, 2008 (J. Geathers), and Philip Roddey v. South Carolina Department of Revenue, Docket No. 14-ALJ-17-0125-CC, July 28, 2014, (J. Robinson). Together these case decisions answer many outstanding questions related to South Carolina responsible party liability, and also highlight the similarities and differences between South Carolina responsible party liability and the federal trust fund penalty.
Responsible Party Defined
To be considered a responsible party for South Carolina income tax withholding purposes, a person must be a “withholding agent” for an employer. A withholding agent is “an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.” S.C. Code Ann. § 12-8-2010(D). For state sales taxes, a “’responsible person’ includes any officer, partner, or employee of the taxpayer who has a duty to pay to the department any state or local sales tax due by the taxpayer or use tax required or authorized to be collected by the retailer…” S.C. Code Ann. § 12-54-195.
Beltram is the first South Carolina court case to substantively address whether a taxpayer was a responsible party. Citing the Vermont case of Rock v. Dep’t of Taxes, 170 Vt. 1, 742 A.2d 1211 (1999), the ALC identified the following factors to be considered in determining liability: (1) the person’s position within the power structure of the corporation; (2) the authority of the officer or employee as established by the articles of incorporation, bylaws, or employment contract; and (3) whether the person actually exercised control over the finances of the business.
In Beltram the ALC found that the taxpayer was personally liable for unpaid withholding taxes even though he didn’t participate in the day-to-day operations of the business because his responsibilities and duties within the business included the authority to sign checks, the power to hire and fire employees, the ability to sign contracts, and the authority to resolve outstanding tax liabilities with DOR. These factors are similar to those found in federal tax cases for determining responsible person liability under the federal trust fund penalty.
Time Period for Assessment of Responsible Party Liability
Tax assessments against individuals must generally be made within three years from the date a return is filed (federal – 26 U.S.C. § 6501(a)), or three years from the date the return was filed, or due to be filed, whichever is later (South Carolina – S.C. Code Ann. § 12-54-85(A)). The IRS has a special rule for assessing federal trust fund taxes against an individual where the IRS must issue a proposed assessment to the individual within three years of April 15th of the following calendar year. 26 U.S.C. §§ 6672(b)(3), 6501(b)(2).
DOR has taken the position that timely notice to a business of an outstanding South Carolina income tax withholding liability also serves as timely notice to individuals who may be held personally liable for withholding taxes as a responsible party. DOR would presumably take the same position in a case involving uncollected sales taxes. This is markedly different from IRS procedures for assessing trust fund taxes under IRC 6672, where the IRS must directly notify individuals that they may be held liable as a responsible party.
The first ALC decision addressing the timeliness of a responsible party assessment was Rowland. The ALC found that a separate assessment to a responsible party is not required, and that a timely assessment of withholding taxes against a business also serves as a timely assessment against a responsible party. In Roddey, and now most recently in Beltram, the ALC has ruled that a separate assessment to a responsible party is not required, and that a timely assessment of withholding taxes against the business serves as a timely assessment against the responsible party. In each of these cases the parties sought to be held liable as a responsible party by DOR unquestionably received notice of the business assessment. Notice of the assessment against the business is an important factor in whether DOR may assess the responsible party for the unpaid taxes of the business.
Collection of Responsible Party Liability
DOR ordinarily has ten years from the date a tax is assessed to collect the tax, including using enforced collection measures such as bank account seizures and wage levies. This 10-year period is referred to as the collection statute of limitations. In addition, if DOR files a tax lien within the ten-year period, the tax lien may continue to be valid for a period of ten years from the date notice of the tax lien is filed. Thus, the tax lien can apparently survive past the collection statute of limitations period.
Even though DOR argues that the timely assessment of tax against a business also serves as a timely assessment against a responsible party, DOR has taken perhaps the anomalous position that the collection statute of limitations does not begin until a separate assessment is issued to the responsible party. In Beltram the tax assessments against the business and tax liens for certain periods were made and filed more than ten years prior to the date of the department’s decision. DOR argued that the expiration of the liens against the business did not apply to the responsible party because DOR had not yet filed tax liens against the responsible party. The ALC ruled that South Carolina tax liens expire after ten years and that the associated taxes, interest, penalties, and DOR collection costs can no longer be collected after the lien expires. The ALC then rejected DOR’s argument relating to the responsible party lien period in the case, and ruled that the South Carolina employee withholding and sales taxes could not be collected from a responsible party once the tax lien filed against the business expired.
Delays by DOR in seeking to separately assess responsible party taxes have led taxpayers to argue that DOR has violated their South Carolina constitutional due process rights. For example, in Beltram the proposed responsible party assessment was issued almost ten years after the first tax period at issue.
The ALC determined in Beltram that due process requires a responsible party to have notice, an opportunity to be heard in a meaningful way, and judicial review. The responsible party in Beltram received notice, however, and the ALC ruled that his due process rights were not violated. The ALC was nevertheless concerned with DOR’s lengthy delay in making its assessments in the case. The ALC chose not ignore this long delay and, as a remedy, accepted the responsible party’s testimony concerning facts in the case and that he was not liable for the penalties assessed against him by DOR.
Attorney fees normally cannot be recovered in a tax dispute. In Beltram, however, the ALC ruled that the taxes found to be due should be offset by additional attorney fees the responsible party had to incur because of DOR’s failure to timely provide subpoenaed documents in the case before trial. Certain documents were subpoenaed for the hearing by the taxpayer, but the documents were apparently left in an automobile of one of DOR’s employees. The ALC had to recess the hearing to allow the responsible party to review the documents. As a remedy, the ALC reduced the taxes due by the additional attorney’s fees paid because of the delay caused by DOR.
Taxpayers and DOR continue to disagree on many aspects of the South Carolina responsible party provisions. The recent ALC decisions in the area have helped provide some guidance, but open issues remain. The responsible party provisions will likely continue to be a developing and contentious area of the law, and an appeal of the Beltram decision by DOR seems likely.
Taxpayers facing a responsible party assessment from DOR need to understand all potential defenses in order to avoid being held personally liable for unpaid taxes of a business. The ALC has provided factors to consider in evaluating whether a person is a responsible party, but application of these factors to the specific facts of each case must be done. The time period for assessing responsible party taxes may now be settled with the recent ALC decisions, with the assessment against a business serving as a de facto assessment against the responsible party, but apparently only where the individual has knowledge of the business assessment (taxpayers who do not have knowledge of a business assessment may still be able to raise a due process or other defense if an assessment is not made within three years of the business assessment). The collection statute of limitations period for collecting responsible party taxes also may be decided under Beltran, with the collection period for the responsible party being the same collection period for the associated business, not a longer period. Finally, the ALC has shown an inclination to remedy long delays by DOR in collecting taxes and taxpayers may be entitled to offset taxes owed if DOR takes actions which cause a taxpayer to unnecessarily incur attorney fees. These remedies could play a significant role when formulating a defense to responsible party liability.