CS-Responsible Parties-2 - How Individuals Become Responsible for a Business’s Taxes (Personal)

Under Tennessee law, an individual who is required to collect, account for, or pay over certain “trust fund taxes,” may be personally responsible for those taxes.

Trust fund taxes are those such as sales and use tax and liquor by the drink tax, which are collected by a retailer on behalf of the State of Tennessee. This term reflects that these taxes are collected from customers and held in trust for the State until they are remitted. When a person involved in the collection or remission of trust fund taxes fails to ensure that collected taxes are remitted to the State, the State may pursue that person individually for the liability.

Under Tenn. Code Ann. § 67-1-1443, an individual may be held responsible for the tax debt of a business when the person is required to collect, truthfully account for, and pay over any tax collected from customers, and the person willfully fails to truthfully account for and pay over any such tax collected, or willfully attempts in any manner to evade or defeat any such tax or the payment of those taxes. The person could be an officer or employee of the business. A person who acts willfully is someone who has material and informed participation in the diversion of collected funds to a source other than to the State. Acting “willfully” does not mean that a person acts with a bad intent or motive, but instead refers to voluntary, conscious or intentional acts. For example, a person acts willfully when he or she pays other creditors while being aware that taxes remain unpaid.

Factors that could be looked at to determine if someone is responsible person include: the ability to sign checks; the duties of the officer as outlined by corporate by-laws; the identity as officer, director, or shareholder of entity; the hiring/firing authority; and the control of business’ financial affairs.

Under the law, personal liability is joint and several, meaning that the Department can collect the full amount of unpaid tax liabilities from any responsible party. The Department may pursue and collect unpaid tax liabilities from multiple responsible parties contemporaneously. Thus, the involvement of another party does not limit the Department’s ability to collect the debt from additional parties.

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