New York State Tax Law and Policy Changes Enacted in 2011Regarding Tax Collection Activities
Two very important memorandums were issued this year by the New York State Department of Taxation and Finance (the “Department”) changing the way the Department does business. The first memorandum, TSB-M-11 titled, 20-Year Statute of Limitations to Collect Tax Liabilities, was issued on September 9th and revises the Department’s former 20-year statute of limitations on the Department’s ability to collect tax liabilities. The second memorandum, TSB-M-11(17)S titled, New Policy Relating to Responsible Person Liability Under the Sales Tax Law, issued on September 19th restates the Department’s new policy relating to responsible person liability under Sections 1131 (1) and 1133 of the Sales Tax Law for persons who are limited partners of a limited partnership or members of a limited liability company.
Changes in the 20 Year Collection Statute
The recent legislation amending the 20-year statute of limitations to collect tax liabilities that have been assessed and for which a notice of determination has been issued, limits the Department’s collection powers by limiting the availability of statute extensions. It provides for a definite time for the termination of a liability thereby replacing the uncertainty that existed under the prior law. The new provisions are applicable to all taxes and any special assessments, fees, interest, and penalties.
Under the old law, the 20 –year period did not begin to run until a tax warrant was actually filed and allowed the Department to extend the 20-year collection statute each time a taxpayer acknowledged the debt in writing or made a payment, including an involuntary payment (i.e. levy of a bank account). In order to fully understand this law change it is important to understand what a tax warrant is. A tax warrant is the equivalent of a legal judgment and creates a lien against realty and personal property. It becomes a public record remaining on file with the County Clerk and Secretary of State until the tax liability is satisfied or the warrant expires. Having a warrant issued makes it difficult for a taxpayer to obtain a loan as the filing adversely affects a person’s credit rating. In the past the Department often delayed the issuance of a notice of determination for tactical or administrative reasons. This lead to inconsistent treatment of taxpayers and invariably extended the collection statute.
The new law provides that the 20-year statute of limitations on collections begins from the first date a warrant could be filed for a tax liability, regardless of when the tax liability is assessed or the liability is extinguished. The law also provides that if a tax warrant could have been issued prior to August 17, 2011 (the effective date of the change) the liability is not enforceable and is to be extinguished after 20 years from the time the warrant could have been filed.
Changes in the Department’s Sales Tax Policy Regarding Responsible Persons of Limited Partnerships or Limited Liability Companies
Section 1133 of the Sales Tax Law (the “Law”) allows the Department to hold responsible persons personally liable for any and all sales and use tax that may be owed by a business entity. Generally, a responsible person is anyone who is under a duty to act for a business in complying with the Law. This means that the responsible person’s personal assets could be seized by the Department to satisfy the sales and use tax liability of a business. Responsible persons may include owners, officers, directors, employees, and managers. In rare cases the State may also deem an external accountant or attorney a responsible person.
Responsible persons can be held personally liable for 100% of a business’ sales and use tax liability. The Department recognizes that this can be a harsh consequence for certain responsible persons, such as limited partners in a limited partnership or members of a limited liability company (“LLC”). As a result, the Department’s new policy provides relief for certain limited partners and members of a limited liability company.
Under the new policy, the following limited partners and LLC members deemed to be responsible persons may be eligible for relief:
- Limited partners may be approved for relief if they can demonstrate they were not under a duty to act in complying with the Law on behalf of the partnership.
- LLC members who can document that their ownership interest and percentage distributive share of the profits and losses of the LLC are each less than 50% may be approved for relief if they can show they were not under a duty to act on behalf of the company in complying with the Law.
In addition to meeting one of the above conditions, the limited partner or member must agree to the Department’s procedures for determining the limited partner’s or member’s liability and they must assist the Department providing information to identify other responsible persons of the business.
Where all the conditions are met the sales tax liability of an eligible responsible person will be reduced to an amount calculated using the following principles:
- The Department will compute the business’ original sales and use tax liability that has been assessed against the eligible person and the amount of accrued interest due on that amount assessed against the eligible responsible person. The interest will be recomputed using the minimum statutory (i.e. non-penalty) interest rate from the date the original tax was due until the eligible person pays his or her liability.
- A reduction will be allowed for any payments made by (a) the business, (b) any responsible person not eligible for relief, and (c) any responsible persons who were eligible for relief but did not request such at the time the payment was made.
- The adjusted amount will then be multiplied by the higher of the eligible person’s percentage of ownership in the business or their percentage share of profits and losses.
Collectively these changes will make it easier for New York taxpayers to resolve their tax liabilities. The 20-year statute now provides greater certainty as to the life of a tax debt. The changes in Sales Tax Law Sections 1133 and 1131 (1) will provide meaningful relief to qualifying responsible persons thereby allowing a more proportional sharing of the tax burden. If you have an existing tax debt or want to know how these changes may affect you contact Marcum’s State and Local Tax Group.