On February 5, 2025, the New Jersey Appellate Division released a decision in the matter of Christopher Gill v. Director (Docket No. A-3116-22), affirming the tax court’s holding that the state is not subject to a separate four-year statute of limitations for sales tax assessments against responsible persons.1
What Is Responsible Person Liability?
Federal and state laws impose personal responsibility upon certain classes of individuals associated with a legal entity for the remittance of various taxes to taxing authorities. Whereas certain limited types of taxes (including income and property taxes) are generally the sole responsibility of the legal entity (such as a corporation) that incurs the economic incidence of the tax, the bulk of taxes (including employment, sales and use, certain excise and other consumption taxes, as well as unclaimed property remittances) require legal entities to act as collection agents of the government. It is these “trust” taxes for which both a legal entity AND certain individuals charged with personal collection responsibility (e.g., return preparers and signers, corporate officers and directors, sole shareholders, partners, and other persons designated as responsible) are liable.
What Happened in the Case?
The appellant in Gill was a vice president and sole shareholder of a flooring company who had responsibility for remitting employment and sales and use taxes to New Jersey. The appellant self-assessed but failed to remit a portion of the sales and use and employment taxes owed. The company encountered financial difficulties and sought bankruptcy protection, listing New Jersey as a priority creditor. After the company’s liquidation (and beyond the statute of limitations for assessments), the Division of Taxation issued a Responsible Person Notice against the appellant for collection of the self-assessed taxes. The Appellate Division upheld the division’s action, reasoning that such notice is a collection tool, which does not have a statute of limitations. The Appellate Division held that the appellant knew of the unpaid sales tax and conceded that he was a responsible person. Although the Appellate Division ruled against the appellant on the sales and use tax portion of the assessment, the appellant successfully defended against the employment tax liability. The key distinction was that employment tax personal liability was in the form of a penalty assessed against him (which constituted an actual tax assessment) and that, therefore, there was no “collection tool.”
Whom Does This Affect?
The holding in this case is very important for officers and directors, partners, sole shareholders, and tax professionals employed by companies, especially those that encounter financial distress. It removes what would otherwise be a strong procedural defense against the assessment of sales tax personally against these individuals. The decision does, however, affirm a statute of limitations defense against responsible person liability associated with employment tax withholding.
The case highlights the absolute necessity of strong sales tax and other trust fund tax compliance, without which individuals may be subject to personal liability for legal entities’ taxes, which could severely impact their personal finances or even result in their own bankruptcy.
The foregoing is a mere summary. Please contact us for additional information regarding responsible person liability and state tax compliance.
133 N.J.Tax 182 (Tax Ct. 2023).