Responsible person rules in the wake of Wayfair

Help clients avoid becoming personally liable for their company’s uncollected sales taxes.
By Chris Hopkins, CPA

Responsible person rules in the wake of Wayfair
Image by filograph/iStock

The U.S. Supreme Court's June 2018 landmark ruling in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), has led to greatly increased exposure to sales tax for businesses with interstate sales. Because of the responsible person rules existing in many states, the increased exposure to sales taxes on interstate sales caused by the decision also could lead to a substantial increase in exposure to personal liabilities for a wide range of unsuspecting individuals working for these businesses — from corporate officers to tax and finance managers.

And it is not only sellers of tangible property and their employees who could get caught up in the expanding web of economic nexus and tax liability. Sellers of services and digital products — including cloud computing, information services, data processing, audio and video content, and various online subscriptions — are now more vulnerable than ever, leaving individuals who are responsible persons for those companies at a greater personal risk.


Tax nexus is the amount of contact a business must have with a jurisdiction before the jurisdiction can subject the business to a tax. The Supreme Court's Wayfair decision overruled nexus precedent for sales and use taxes dating to 1967. That year, in National Bellas Hess, Inc. v. Department of Rev. of Ill., 386 U.S. 753 (1967), the Court heard the appeal of an Illinois Supreme Court decision that required an out-of-state retailer to collect and remit tax on sales made to consumers who purchased goods for use within the state.

The U.S. Supreme Court ruled that a mail-order company with no connection to customers in Illinois other than by "common carrier" or the U.S. mail lacked the requisite minimum contacts with the state that the Due Process and Commerce clauses of the U.S. Constitution require to impose taxes. The Court held that a state could require a retailer to collect a use tax only if the retailer maintained a physical presence, such as retail outlets, solicitors, or property, in the jurisdiction.

Twenty-five years later, in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the Supreme Court reexamined the physical presence requirement in a similar case involving mail-order sales. Although the Court overruled its earlier holding regarding due process, it upheld the Commerce Clause ruling, based on the principle that the clause prohibits state taxes on activities that lack a "substantial nexus" with the state.

The physical presence rule established in Bellas Hess and affirmed in Quill generated much criticism in recent years, as brick-and-mortar stores have faltered and online sellers assumed a prominent role in the marketplace. In 2018, online retail sales were estimated at $513.6 billion and represented almost 9.7% of total U.S. retail sales. That is a lot of potential tax revenue for states to forgo. (For more about the Supreme Court's ruling in Wayfair and the need for heightened sales tax compliance, see "Sales Tax Compliance Post-Wayfair," JofA, Aug. 2019.)

Contrary to the expectations of many, the Supreme Court found that the facts in Wayfair satisfied the substantial nexus requirement. According to the Court, nexus is established when the taxpayer "avails itself of the substantial privilege of carrying on business" in the jurisdiction. The amount of business the state requires to trigger the tax could not occur unless a seller has so availed itself.

Since the ruling, the District of Columbia and all 45 states with sales and use taxes have enacted or are expected to enact nexus rules similar to those of South Dakota, albeit some with different nexus thresholds and effective dates.


Sales and use taxes are "trust fund taxes," or taxes that the collector holds "in trust" for the state until remittance. These taxes are imposed not on the seller but on the purchaser or user. As such, the laws passed in the wake of Wayfair do not increase tax liability for sellers but allow states to shift the collection and remittance obligation from the customer to the seller.

Sales-and-use-tax obligations, however, do not necessarily stop at the entity level, so even conducting business as a corporation does not necessarily protect owners from liability. This realization can come as a shock to those who find themselves saddled with the liability, particularly business owners who formed corporations or limited liability companies (LLCs) specifically to shield themselves from personal liability for business debts. It is a rude awakening when they become ensnared by responsible person rules.

All states with sales and use taxes have rules that impose responsibility for tax liabilities on certain parties when their associated businesses cannot satisfy their obligations. Many of the rules expressly allow the respective state to file a demand for payment against any responsible person if the business files for bankruptcy — although bankruptcy is not a prerequisite for personal liability.

Depending on the state's statutory rules, responsible parties might include owners, officers, directors, controllers, tax managers, or other employees with tax filing responsibilities, and nonemployee tax return preparers. In New York, for example, the responsible person statute applies to:

any officer, director or employee of a corporation or of a dissolved corporation, any employee of a partnership, any employee or manager of a limited liability company, or any employee of an individual proprietorship who as such officer, director, employee or manager is under a duty to act for such corporation, partnership, limited liability company or individual proprietorship in complying with any requirement of [the sales and use taxes]; and any member of a partnership or limited liability company. [N.Y. Tax Law §1131]

These individuals are personally liable in New York for sales and use taxes imposed, collected, or required to be collected (N.Y. Tax Law §1133). (Limited partners and LLC members with a less-than-50% interest in the partnership or LLC can apply for partial relief from this provision.)

In Georgia, responsible persons can be held liable for amounts willfully "evaded, not collected, not accounted for, or not paid over" (Ga. Code §48-2-52). North Carolina imposes personal liability on responsible persons for sales and use taxes that the business did not collect if the person knew or, in the exercise of reasonable care, should have known the tax was not being collected (N.C. Gen. Stat. §105-242.2(b)(2)). In other words, responsible persons in these and other states with those rules could end up on the hook for taxes the business did not actually collect.

In Texas, on the other hand, collection seems to be a prerequisite to responsible person liability:

[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 willfully 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. [Tex. Tax Code §111.016(b)]

In the case of a closely held corporation that has been suspended from doing business in the state, California similarly allows a responsible person who fails to pay or to cause to be paid any taxes to be held personally liable for any unpaid sales or use tax liability incurred during the suspension only if the taxes were collected (Cal. Code Regs. tit. 18, §1702.6).

Job title alone generally is not enough to impose liability in any state; in effect, the substance-over-form doctrine applies. Tax authorities consider whether an individual has the requisite authority or control over the business's affairs, including decisions about disbursements. For example, relevant factors when determining whether a specific individual is a responsible person for purposes of New York law include whether he or she (N.Y. Dep't of Tax and Fin., Publication 131, "Your Rights and Obligations Under the Tax Law" (May 2018)):

  • Is actively involved in operating the business on a regular basis;
  • Is involved in deciding which financial obligations are paid;
  • Is involved in personnel activity (such as hiring or firing employees);
  • Has check signing authority;
  • Prepares tax returns;
  • Has authority over business decisions;
  • Is a tax manager or general manager; and/or
  • Is a corporate officer.

Under certain circumstances, an individual could be held liable even if not under a duty to act for the business. For example, in New York, an individual could be held liable if he or she is a member of a partnership or LLC, regardless of whether the individual has a duty to act on behalf of the partnership or LLC (N.Y. Publication 131), or, in Maryland, if the individual is a president, vice president, or treasurer of a corporation, regardless of whether he or she oversees or manages financial or tax matters (Md. Code, Tax—Gen. §11-601(d)).

In some states, even those charged with collecting or filing taxes or comparable financial discretion can be held liable only if they "willfully fail" to perform as required. Wisconsin law, for example, states that:

Any person who is required to collect, account for or pay the amount of tax imposed under this subchapter and who willfully fails to collect, account for or pay to the department shall be personally liable for such amounts, including interest and penalties thereon, if that person's principal is unable to pay such amounts to the [state department of revenue]. [Wis. Stat. §77.60(9)]

Notably, where such willful failure is found, the responsible person could suffer especially steep penalties. In Florida, he or she could be liable for a penalty equal to twice the total amount of the tax willfully evaded, not accounted for, or remitted (in addition to other penalties) (Fla. Stat. §213.29). Every state assesses some level of penalties and interest.

A responsible person usually can contest liability in an administrative process, typically by showing lack of knowledge of the tax liability, authority to make the corporation pay the tax, or available corporate funds to make timely payment of the tax. These objections usually are an uphill battle, though, as states are determined to collect the tax.

The consequences of being found a responsible person can prove tougher than might be expected. In many states, tax authorities can pursue a responsible person for the full amount of the liability a business owes, even if other persons or entities also qualify as responsible persons (see, e.g., N.Y. Publication 131).

In Florida, a responsible person has to worry about more than the previously noted double civil tax penalty for willful failure to collect a tax. Failing, neglecting, or refusing to collect taxes constitutes a first-degree misdemeanor (Fla. Stat. §212.07(3)(a)). A willful failure to collect a tax less than $300 is a second-degree misdemeanor for the first offense and a first-degree misdemeanor for the second offense (Fla. Stat. §212.07(3)(b)). Three or more willful failures on amounts under $300 rise to the level of a third-degree felony, with the potential for prison time. Any willful failures on amounts of $300 or more also are felonies, with the degree climbing depending on the amount. Florida also imposes a penalty for failure to remit taxes, for which the felony threshold is $1,000 (Fla. Stat. §212.15(2)).


The combination of expansive responsible person rules and the multiplier effect of the Wayfair decision could add up to surprising — and quite costly — tax bills for certain individuals in the not-too-distant future.

Imagine, for example, someone who worked as a controller at a startup that sold some type of digital product or service but has since gone bankrupt or been acquired by a buyer that purchased the assets without assuming the legal obligations. He or she might face compounded liability, spread across 45 states and the District of Columbia, depending on his or her job responsibilities at the business. And responsible person tax debts are not dischargeable in personal bankruptcy.

It is critical, therefore, that companies with interstate sales evaluate their exposure to sales-and-use-tax liability. At a bare minimum, if the company satisfies the South Dakota thresholds (at least 200 sales or sales totaling at least $100,000 in the state, on an annual basis) in multiple states, it probably is subject to multijurisdictional registration and collection requirements for sales and use taxes.

A more thorough prospective and historical nexus review is advisable for every company that conducts interstate sales. These companies should determine their sales in every state that collects sales and use taxes.

They also should closely scrutinize each state's rules, staying cognizant of nontraditional products and services, the sales activity thresholds, and the fact that products that are not taxable in one state might be in other states.

South Dakota, for example, takes an aggressive stance toward digital goods and services, taxing all "products transferred electronically" and digital codes (S.D. Codified Laws §10-45-5). North Dakota, on the other hand, exempts items delivered electronically, including specified digital products, from sales tax (N.D. Cent. Code §57-39.2-04).

Moreover, taxability might depend on the rights of use or conditions for continued payment associated with the product. Indiana, for example, levies a sales and use tax only on electronic transfers of specified digital products when the right of permanent use is not conditioned on continued payment by the purchaser (Ind. Code §6-2.5-4-16.4(b)). By contrast, South Dakota imposes its sales and use tax on products transferred electronically and on digital codes regardless of whether the sale is to an end user, grants permanent or less than permanent use, or is conditioned on continued payment (S.D. Codified Laws §10-45-2.4).


In the wake of Wayfair, states across the country are moving to adopt economic nexus rules to impose sales-and-use-tax collection responsibilities on remote sellers. States also might conduct audits of companies that were not on their radar before Wayfair because those companies did not have a physical presence in the jurisdictions but, the states now realize, did have sufficient economic nexus.

These types of lookbacks undoubtedly will happen if an economic downturn occurs and states once again are scrambling to fill their coffers. The liability risks in these circumstances are particularly significant for companies with sales in states with broad responsible person rules.

As new nexus rules are adopted, states likely will be inundated with new taxpayer registrations, and harried state revenue department personnel will be kept busy processing an increased number of tax returns. This situation could limit state scrutiny of newly registered companies with ambiguous nexus histories. If material prior-year tax exposure exists, companies should be aware that state officials generally treat favorably companies that take advantage of voluntary disclosure programs. A business that goes this route can secure an agreement requiring payment of only a few years' worth of unremitted sales and use taxes, plus interest, with penalties often waived.

Companies without historical sales-and-use-tax reporting obligations are not in the clear. They need to understand the various economic nexus standards being adopted by states, along with applicable registration requirements. And, if registration is required, processes for collecting and reporting tax and evaluating the often disparate sales-and-use-tax rules must be established.


The collision of Wayfair's greatly expanded boundaries for imposing sales-and-use-tax ­collection and reporting obligations with statutory responsible person rules has the potential to burden unsuspecting individuals with hefty tax bills as well as civil and, in some cases, criminal penalties. Companies should act now to evaluate their sales-and-use-tax nexus profile, assure compliance going forward, and, if confronted with material historical liabilities, consider pursuing voluntary disclosure agreements to mitigate tax audit and assessment risks.

About the author

Chris Hopkins, CPA, is a tax partner at Crowe LLP in New York City.

To comment on this article or to suggest an idea for another article, contact Sally P. Schreiber, a JofA senior editor, at or 919-402-4828.

AICPA resources


CPE self-study

  • Multistate Taxation — Tax Staff Essentials (#157645, online access)
  • Nexus Update: Latest Developments in State Income, Franchise, and Sales Taxes (#164253, online access)

For more information or to make a purchase, go to or call the Institute at 888-777-7077.


  • South Dakota v. Wayfair information page,
  • Wayfair client notification letter, (member login required)

Webcast archive

  • "2018 State Tax Nexus Recap: Wayfair and Beyond,"

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