\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0While ourstate tax code is not nearly as byzantine and complex as the Internal Revenue Code, it does contain its share of pitfalls and traps for the unwary. The purpose of this article is to point out some of the more common problems, along with solutions (where such exist).
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Individual Liability for Unpaid Sales Taxes (Yikes)
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0As a young lawyer, two things are going to happen to you: (1) one or more clients are not going to pay you for services rendered; and (2) you are going to be pitched to invest in a bar or grill that is certainly going to go out of business without remitting all of the sales taxes it has collected from customers.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Most of us are aware of the IRS and DOR trust fund liability for responsible corporate officers, directors and employees who fail to pay employee withholdings over to the IRS and the state. Many of us are not aware that the S.C. General Assembly quietly imposed individual liability some 10 years ago for sales taxes that are collected but not remitted to the S.C. Department of Revenue.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Under S.C. Code Section 12-54-195, “responsible persons” can be held personally liable for failing to remit sales taxes to the Department of Revenue.1 A “responsible person” is defined to include officers and partners, but also names employees, with “a duty to pay to the department any state or local sales tax [owed] …”2
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA01. Don’t invest in any bar or restaurant. Enough said.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA02. Know where you stand. Make sure that, as an officer or director of a corporation or a LLC member, you know if you are, or could be, a “responsible party” when it comes to the collection and remittance of the company’s taxes to the Department. Even as a mere bookkeeper responsible for transmitting payments to the Department, you could be “under a duty to perform the act in respect of which the violation occurs”3 and, if your company has an outstanding tax liability, this could mean writing a personal check.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA03. [Don’t] sign on the dotted line. Know and understand the documents you sign as an employee, corporate officer or LLC member. If you sign tax returns and checks for tax payments, the Department could personally slam you with a bill for unpaid taxes because, by signing these documents, it can be shown that you knew, or should have known, that such returns should have been filed.4
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Hidden Tax Liens?
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Buyers beware. Code Section 12-54-124 lays out the ground rules for transferring assets that may bring a tax liability with them. Under the old statute, Code Section 12-36-530, repealed in 2006, any outstanding tax liens or liabilities owed by the seller before he sold the business to the purchaser constituted a lien on the inventory, fixtures and equipment in the hands of the innocent purchaser and not just the seller. What’s even more frustrating was that in many cases the unrecorded lien would remain in effect until all the taxes owed by the seller had been paid to the Department.5 When the innocent purchaser applied to the Department of Revenue for a retail license to continue or conduct the business after the sale, his request would be denied simply because of the outstanding tax liability attached to his purchased assets. Unfortunately and frustratingly, this means that the innocent purchaser is punished for the [tax] sins of the seller.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Fortunately, there is now hope (and new concerns). The new statute, Code Section 12-54-124, contains language that provides some help for purchasers that the old statute did not. This section provides that in the case of the transfer of a majority of the assets of a business, through sale, liquidation merger, corporate reorganization, lease or otherwise, any tax that was due on the date of transfer constitutes a liability of the transferee until the taxes are paid.6 The section further states that the DOR may not issue a retail sales tax license to the purchaser and may revoke any license issued before the outstanding taxes were discovered.7
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0In summary, the prior statute was generally construed as applying only to a sale of an entire business which owed sales taxes. The new statute applies to a sale or other transfer of a majority of the assets and applies if any state tax is owing.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The provisions of Code Section 12-54-124 do not apply to a purchaser that has obtained a Certificate of Compliance from the Department “within 30 days before the transfer.”8 A DOR Policy Document notes that the Certificate of Compliance serves as “prima facie evidence that a tax has been paid, that a return has been filed, or that information has been supplied as required.”9 This Certificate remains valid for 30 days from its issue date; if the assets are transferred within those 30 days, no lien will be created. If there are tax liabilities, the Department will pursue the seller and not assets in the hands of the purchaser.10
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA01. Before you buy, certify. The Department of Revenue strongly urges anyone interested in purchasing a business, or having a majority of a business’s assets transferred over to their name, to request a Certificate of Compliance from the seller. Valid for 30 days, it certifies that no lien will be placed against the assets if the purchaser receives assets from the seller with an outstanding liability. It also assures the purchaser that the Department will not come after the assets for any unpaid taxes associated with the seller.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Note that it may take several weeks to get a Certificate of Compliance—you can’t apply several days before the closing. (You also can’t apply too early, as the Certificate is only valid for 30 days.) Obviously, the purchaser may want to protect itself in the purchase transactional documents.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA02. You can’t game the system. Two owners of four different restaurants converted their partnership to a corporation after each of their four restaurants became delinquent in paying their sales and withholding taxes.11 Under Code Section 12-54-90, failure to pay such taxes would normally result in each operation’s sales tax license being revoked.12 However, in an effort to outsmart the Department of Revenue, the two owners used the existing corporate name to get a new sales tax license. The newly formed corporation also failed to pay its withholding taxes and the two owners formed two new corporations. After forming the corporations and falling behind in tax payments at least three different times—each time, trying to acquire a new sales tax license for the corporation—their final attempt at obtaining a license was thwarted. The Department saw that the two owners had other outstanding liabilities on their properties and, although the most recently formed corporation did not, that corporation was not issued a license. It was ultimately determined that, since the two owners were creating new corporations for the sole purpose of “avoiding outstanding tax liabilities, ” the owners had to pay off their existing debt, generated by the previously formed businesses, before they could be issued a new retail license.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0You Have to Withhold on Payments to Non-Resident Contractors?
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Every so often South Carolina is struck by a major hurricane or ice storm causing extensive damage, which will frequently be followed with a flood of out-of-state contractors. Some of us will impulse purchase a seemingly great deal from a contractor to repair our roof, driveway, etc. (and we don’t have a clue where the contractor is from). And some of us have good clients who engage in large construction projects.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0We all have a general notion that withholdings may be required in the above circumstances, but assume it applies only in very narrow circumstances involving large dollars. Alas, such is not the case.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0S.C. Code Section 12-8-550(A) mandates that “a person hiring or contracting with a nonresident conducting a business or performing personal services of a temporary nature within this State shall withhold two percent of each payment in which the South Carolina portion of the contract exceeds or could reasonably be expected to exceed $10, 000.”13 When the non-resident skips town without paying the DOR—or even where it pays the DOR—the DOR can exact payment of the two percent withholding tax from you.
\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Note that a very...