New York—Sales & Use Tax: Department Restates, Includes Additional Information Regarding New Policy Relating to Responsible Person Liability

The New York Department of Taxation and Finance has issued a sales and use tax memorandum that restates and includes additional information regarding the department's new policy relating to responsible personal liability under Tax Law §§1131(1) and 1133 for persons who are limited partners of a limited partnership or members of a limited liability company (LLC), as previously explained in TSB-M-11(6)S. Accordingly, TSB-M-11(6)S is obsolete.

Eligibility for Relief

Under the department's new policy, which took effect March 9, 2011, the following limited partners and LLC members who are responsible persons under Tax Law §1131(1) may be eligible for relief:

·         limited partners (of a limited partnership) may be approved for relief if they demonstrate that they were not under a duty to act in complying with the Tax Law on behalf of the partnership; and

·         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 demonstrate that they were not under a duty to act on behalf of the company in complying with the Tax Law.

In addition to meeting one of these conditions, the limited partner or member must also agree to the terms and conditions that the department sets forth in a written agreement for limiting a responsible person’s liability, which shall include, but not be limited to:

·         having the amount of their responsible person liability computed in the manner described under "Available Relief" discussed below; and

·         cooperating with the department in providing substantiated information regarding the identities of other potentially responsible persons, particularly in identifying those persons who were involved in the day-to-day affairs of the business. In addition, in the case of tiered entities (i.e., a partnership that is a partner in another partnership) the department will expect the limited partner’s or member’s assistance in detailing the overall ownership structure, including information regarding out-of-state entities. This requirement will be applied reasonably, with the recognition that certain partners or members, especially passive investors with only small ownership interests or distributive shares, may not know or have access to the information the department is seeking. The pending expiration of any statute of limitations in which to assess the sales and use tax due will also be taken into consideration in granting relief.

The following partners and members do not qualify for relief:

·         any general partners of a partnership (including general partners of a limited partnership);

·         any partners of a limited liability partnership (LLP); and

·         any LLC member holding a 50% or more ownership interest in the LLC, or entitled to a distributive share of 50% or more of the profits and losses of the LLC.

Available Relief

The eligible persons described above will qualify for the following relief: no penalty owed by the business or other responsible persons will be due from the eligible person, and the sales tax liability of the eligible person will be reduced to an amount determined by using the following steps:

·         Step 1: Add the amount of the business’s original sales and use tax liability that has been assessed against the eligible person and the amount of accrued interest due on that liability. Interest will be computed using the minimum statutory (i.e., non-penalty) interest rate and will be computed from the date the original tax was due through the date that the eligible person intends to pay his or her liability;

·         Step 2: Reduce the amount computed in Step 1 by the sum of any payments made by (a) the business, (b) any responsible persons not eligible for relief, and (c) any responsible persons who were eligible for relief but did not request relief at the time the payment was made; and

·         Step 3: Multiply the amount determined in Step 2 by the higher of the eligible person’s percentage of ownership in the business or the person’s percentage share of the profits and losses of the business. This amount (or the amount of the business’s remaining tax liability, if less) is the amount owed by the eligible responsible person.

In the case of tiered entities (e.g., a partnership that is a partner in another partnership), where the lower-tier entity is eligible for relief, the above steps would also be used to determine the lower-tier entity’s reduced liability. Furthermore, if any members or partners of the lower-tier entity are also eligible for relief, their reduced liability would then be determined by multiplying the lower-tier entity’s reduced liability by the higher of the member’s or the partner’s percentage of ownership in, or percentage share of the profits or losses of, the lower-tier entity.

Treatment of Payments

Payments made by responsible persons will be applied as follows:

·         payments made by responsible persons who are eligible for the relief described in this memorandum will not be credited against the liability of other responsible persons who are also eligible for relief. That is, those other eligible responsible persons must calculate their responsible person liability by applying their applicable percentage to the full value of their assessment, without any credit for payments made by other responsible persons under this policy. The amount owed by those eligible responsible persons would be the amount so calculated or the business’s remaining sales or use tax liability, whichever is less. Also, any payments made by eligible responsible persons subject to this new policy will be credited to the business entity’s liability. Penalties (if applicable) and interest at the full statutory rate will continue to accrue for liabilities owed by the business entity and by responsible persons other than as part of this new policy; and

·         payments made by responsible persons other than as part of the new policy would continue to be applied to the liability of the business and other responsible persons as they are currently.