Update: The NYSDTF administrative policy of granting responsible person relief to certain minority members of LLCs has been codified into law by the New York State 2018-2019 budget signed 4/12/18.
Part X of the NYS executive budget is the piece of the legislation that more or less codified NYSDTF administrative policy published in TSB-M-11(17)S.
The NYS Department of Taxation and Finance website now reads: TSB-M-11(17)S is obsolete and new guidance will be issued shortly.
I read the provision which sets the stage for a more formal application process in which eligible individuals may request tax relief as previously described in TSB-M-(17)S to not be held jointly and several liable for the entire sales tax liability of the LLC but only for their pro rata share of liability determined by their ownership percentage in the LLC at issues.
The most noticeable difference between the new law and the old tax department administrative policy:
I. There will be a formal application form to file to request relief. The information provided in such application must be true and complete in all material respects. Providing material false or fraudulent information on such application shall disqualify taxpayer for requested tax relief, and shall void any agreement with the commissioner with respect to such relief, and shall result in taxpayer bearing strict liability for the total amount of tax, interest, and penalty owed by the LLC. Under the old policy in order to be granted relief eligible taxpayer needed to be willing to cooperate with the Department by providing information to help identify other potentially responsible persons. I believe the new “application” will inquire about other possible responsible persons.
II. The commissioner must approve the application and may deny an application for relief if the commissioner finds:
(1) Individual acted on behalf of the LLC in complying with sales tax obligations of the LLC.
(2) Individual has been convicted of a crime.
(3) Individual has a past-due liability as described in section 171(v).
*Past-Due Liability as described in section 171(v) means any tax liability or liabilities which have become fixed and final such that the taxpayer no longer has any right to administrative or judicial review.
All restaurants in New York will have the responsibility to collect and remit state sales tax. Regardless of the type of entity of the restaurant (Corporation or LLC), certain individuals who are active in the management of the restaurant may be deemed “Responsible Persons” and can be held personally liable for any outstanding sales tax liability of the restaurant.
If you ever have an opportunity to invest in a restaurant located in New York the first inquiry should be is the restaurant an LLC. The reason it is important to ascertain the type of entity of the restaurant is because all members of LLCs are “Responsible Persons” with regards to sales tax under the current New York Tax Law. This means a passive investor of an LLC would be held jointly and severally liable for any outstanding sales tax liability of the restaurant.
An individual decides to invest $25,000 in Restaurant LLC for a 10% interest in the LLC. The restaurant is losing money and after a couple years cannot pay the rent and shuts down. The investor figures he has lost his entire $25,000 investment. Then 6 months later, the investor is notified that no sales tax returns have been filed and no sales tax deposits have been made by the restaurant for the last year of operations. There is $180,000 sales tax liability which needs to be paid and the investor along with the other members of the LLC are all jointly and severally liable for the entire balance.
The Unfortunate Scenario above would have been prevented if the restaurant was setup as a Corporation instead of an LLC. If the restaurant was a Corporation, then none of the passive investors would be considered “Responsible Persons” and therefore would not be personally liable for any outstanding sales tax liability of the restaurant.
New York Response to the Unfortunate Scenario Above:
The New York State Department of Taxation and Finance recognizes the unfortunate consequences to individuals who have no involvement or control of the business. The Department has developed a policy to provide relief to these individuals. To be eligible for relief an individual must:
(1) own less than 50% of LLC;
(2) have no duty to comply with the Tax Law on behalf of the LLC;
(3) be willing to cooperate with the Department by providing information to help identify other potentially responsible persons.
If you are granted relief, you may only be personally liable for your share (based on ownership % or profit and losses %) of the outstanding sales tax liability. In the scenario above, if the passive investor was granted relief, he would only be personally liable for about $18,000 ($180,000 X 10%) instead of being jointly and severally liable for the entire $180,000 balance.
This policy is a gift from the New York State Department of Taxation and Finance and is not recognized by law. In other words, this relief would not be granted by a court of law.
In conclusion, the type of entity of the restaurant is an issue to be considered by the investor. Investors investing in a New York restaurant are better protected with regards to outstanding sales tax liability by investing in a Corporation versus an LLC.
If you would like further and more detailed information, please read
Disclaimer: This article is offered for general information and educational purposes and not intended to be tax or legal advice.
Peter Alizio is a CPA and Tax Attorney. When he is not solving IRS and NYS tax problems he likes football and playing amateur chef. He also enjoys meeting new people, preferably over coffee, whiskey or cigars.