Personal Liability for Texas Sales Tax: When Owners Are on the Hook

Companies that sell taxable goods and services in Texas are required to collect and remit sales tax in compliance with the Texas Tax Code. Those who fail to comply with their state sales tax obligations can face liability for back taxes, interest, and penalties. For companies that have failed to collect sales tax from their customers (or that have spent or disbursed the funds they were required to remit to the Texas Comptroller’s Office), this can pose a substantial financial challenge—and, if they cannot afford to pay, they can face liens, levies, asset seizures, and other means of enforcement.

But, delinquent companies are not necessarily the only parties that can face liability for unpaid Texas sales tax. In some cases, companies’ owners, executives, directors, and other personnel can face personal liability as well. While the Texas Comptroller will pursue collection from delinquent companies when possible, it will also pursue collection from owners and other individuals when necessary.

Personal Liability Exposure for Delinquent Sales Tax Under the Texas Tax Code

With regard to state sales tax, owners’ and other individuals’ exposure to personal liability is addressed in Section 111.016 of the Texas Tax Code. Specifically, under Section 111.016(b):

“[A]n individual who controls or supervises the collection of tax or money from another person, or an individual who controls or supervises the accounting for and paying over of the tax or money, and who wilfully fails to pay or cause to be paid the tax or money is liable as a responsible individual for an amount equal to the tax or money not paid or caused to be paid. The liability imposed by this subsection is in addition to any other penalty provided by law.

There are a few key aspects to Section 111.016(b). The first is the use of the term “responsible individual.” Under Section 111.016(d), this term includes, “an[y] officer, manager, director, or employee of a corporation, association, or limited liability company or a member of a partnership who, as an officer, manager, director, employee, or member, is under a duty to perform an act with respect to the collection, accounting, or payment of a tax.” As this makes clear, corporate shareholders, limited liability company (LLC) members, and partners (among others) can be held personally liable for Texas sales tax when personal liability is warranted. In this context, “tax” includes not only delinquent sales tax, but also applicable interest and penalties.

When is personal liability warranted? There are two elements that the Texas Comptroller’s Office must prove in order to pursue personal liability under Section 111.016(b):

• The individual must control or supervise the collection, accounting or paying over of Texas state sales tax. This is in addition to meeting the definition of a “responsible person” under Section 111.106(d).
• The individual must have willfully failed to pay (or “cause to be paid”) sales taxes collected and owed to the Texas Comptroller’s Office. In this context, the courts have defined acting “willfully” to require “both knowledge and reckless disregard.”

Willful failure to satisfy a company’s obligation to remit collected sales taxes can involve either dereliction of an individual’s responsibilities or embezzlement of funds for personal use. In both scenarios, the Texas Comptroller’s Office has the burden of proof.

While proving that a company has underpaid its Texas state sales tax liability can be a relatively straightforward process in some cases (though determining a company’s state tax liability can also be a highly complex process that involves administrative and judicial appeals), proving the requirements for personal liability presents challenges for the Texas Comptroller’s Office in all scenarios. This is particularly true with regard to proving willfulness. With that said, the Texas Comptroller’s Office may be able to establish personal liability through various means, and owners (and other individuals) who are facing personal liability must be prepared to defend themselves effectively.

It is also important to note that owners (and other individuals) can face personal liability for Texas state sales tax in addition to facing “any other penalty provided by law.” Failure to pay tax in excess of $20,000 is a felony offense in Texas, and, depending on the amount owed, potential prison terms can range from two years to an effective life sentence.

Responding to Potential Personal Liability for Texas Sales Tax

With these risks in mind, company owners (and other individuals) who are concerned about personal liability for Texas sales tax should prioritize protecting themselves by all available means. Depending on the circumstances, this may start with disputing the company’s Texas sales tax liability at the entity level. If, for example, a company is facing additional liability following a Texas sales tax audit, it may be possible to challenge the auditors’ conclusions through an administrative or judicial appeal.

If disputing the company’s sales tax liability is not an option, determining what options are available will require a thorough assessment of the circumstances. Will the Texas Comptroller’s Office be able to prove that you are a “responsible individual?” Will it be able to prove that you controlled or supervised the company’s sales tax operations? Will it be able to prove that you acted willfully (as defined by the Texas courts)? Is satisfying your company’s Texas sales tax debt at the entity level an option? Is targeting a settlement the best option under the circumstances?

These are all questions that require careful consideration. To ensure they make informed decisions, company owners (and other individuals) who have concerns about potential personal liability should consult with experienced tax counsel promptly.

Request a Call with a Texas Sales Tax Attorney at Brown PC

Brown PC is a Texas tax law firm that represents corporate and individual clients in high-stakes tax controversies. If you need more information about defending against personal liability for your company’s outstanding Texas sales tax obligations, call 888-870-0025 or contact us confidentially online to request a call with an experienced Texas sales tax attorney.