Insight Personal Liability Under the Idaho Sales Tax Act

Business owners and managers in Idaho should be aware of the personal liability imposed for failure to remit Idaho sales/use tax. Idaho Code Section 63-3627 (I.C. § 63-3627) imposes personal liability on any individual with a “duty to account for and pay over” any sales/use tax imposed upon an entity of which the individual is “an officer, member, or employee.”[1] This is true even if these individuals otherwise enjoy limited liability.

Idaho law provides little guidance regarding who has this “duty” under I.C. § 63-3627. It is, however, helpful to look to determinations regarding “responsible persons” under Section 6672 of the Internal Revenue Code (Section 6672). Section 6672 concerns federal payroll taxes and withholdings, but like I.C. § 63-3627, it assigns personal liability to those individuals required to “account for, and pay over” these taxes–i.e. responsible persons.[2] Accordingly, the analysis under Section 6672 can be applied to I.C. § 63-3627. Looking to decisions under Section 6672, individuals with a controlling interest and officers or executives with discretion concerning payment to creditors generally will be regarded as responsible persons.[3] This term can also extend to others with authority to determine which creditors get paid and which do not. Factors relevant to this determination include an individual’s (i) duties as outlined in the corporate bylaws or other documents, (ii) status as a corporate officer, director or general partner, (iii) ability to sign checks on behalf of the business, and (iv) ability to hire and fire employees.[4]

The Idaho State Tax Commission (Commission) has addressed the scope of liability under I.C. § 63-3627 in only a few instances. In one decision, the Commission found a non-member employee of a limited liability company personally liable under I.C. § 63-3627 after concluding she had discretion to determine which creditors would be paid.[5] In another decision, the Commission found an individual personally liable for the Idaho sales/use tax owed by an out-of-state business.[6] The Commission noted the individual was (i) president of the business, (ii) present in Idaho during the applicable activities, and (iii) the director of the business’s Idaho operations.[7] In one other decision, the Commission found an individual personally liable under I.C. § 63-3627 on the basis of his name being (i) listed as an officer and contact person on the business’s sales and withholding tax application and (ii) listed as an officer on information filed with the Idaho Secretary of State.[8]

Any owner or manager who receives a notice of deficiency determination from the Commission for unpaid sales/use tax should promptly contact a tax attorney. Failure to protest a notice of deficiency within 63 days will cause the entire deficiency to be assessed and become due.[9] The Idaho Supreme Court, in the only appellate decision citing I.C. § 63-3627, found three officers of a corporation personally liable solely due to their failure to timely protest their respective notices of deficiency.[10]

In addition to the unremitted sales/use tax, individuals who “willfully” violate I.C. § 63-3627 must also pay a penalty equal to 100% of this amount. Idaho law does not define willfully in this context, but in connection with Section 6672 the term means any “voluntary, conscious and intentional act to prefer other creditors over the [government].”[11] Accordingly, most individuals found to have violated I.C. § 63-3627 will be subject to this penalty. An individual with a reasonable (but mistaken) belief that taxes were paid, however, may be personally liable for the unpaid tax but lack the willfulness required for this significant penalty. For instance, looking again to Section 6672 for guidance, a retired business owner was determined to be a responsible person due to his 20% ownership in the business and influence over its affairs.[12] But the court ultimately found that he did not willfully cause the business’s failure to remit the tax and withholdings at issue–citing his belief that the business’s taxes were being paid as due.[13] Note that violators of I.C. § 63-3627 can be subject to additional penalties, and the final penalty can exceed the full amount of unpaid tax.

For more information regarding sales/use tax liability or other tax matters, please contact a member of our tax group or call us at 208.344.6000.

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[1] See also Idaho State Tax Comm’n Rule 35.01.02.118 (imposing personal liability on “[i]ndividuals including corporate officers and employees with the duty to cause a corporation or a limited liability company to file a sales tax return or to pay sales tax when due”).

[2] E.g., United States v. Jones, 33 F.3d 1137, 1140 (9th Cir. 1994).

[3] See id; see also Idaho State Tax Comm’n Decision No. 10356 (Feb. 1, 1997) (“Any corporate officer or employee with the power and authority to ‘avoid the default’ or to direct the payment of the taxes is a responsible person within the meaning of section 6672.”).

[4] Jones, 33 F.3d at 1140.

[5] Idaho State Tax Comm’n Decision No. 19641 (Apr. 3, 2007).

[6] Idaho State Tax Comm’n Decision No. 14799 (Jan. 1, 2001).

[7] Id.

[8] Idaho State Tax Comm’n Decision No. 13277 (Jan. 1, 1999).

[9] Idaho Code §§ 63-3045 and 63-3631.

[10] State Tax Comm’n v. Western Elecs., 99 Idaho 226, 227-28 (Idaho 1978).

[11] See, e.g., Davis v. United States, 961 F.2d 867, 871 (9th Cir. 1992).

[12] Pitts v. United States, 2001 U.S. Dist. LEXIS 6334, 5-8 (D. Ariz. 2001).

[13] Id.at 8.