Notice of Lien Judgment for Unpaid Sales and Use Tax in Maryland; Possible Defenses
As tax defense attorneys and former IRS prosecutors, we are very experienced in resolving Maryland and federal tax problems. One of the common issues we encounter involve the failure to pay Maryland sales and use tax.
I. Applicable Statutes and Case-Law
Section 11-102(a) of the Tax-General Article, Annotated Code of Maryland, imposes a sales and use tax on a retail sale in Maryland, or a use of tangible personal property or a taxable service in Maryland, unless otherwise provided. See MD. CODE ANN., TAX-GEN. § 11-102(a)(1)-(2). Section 11-601 of the Tax-General Article, Annotated Code of Maryland, provides for the payment of sale and use tax to the Comptroller of Maryland by buyers or vendors. See MD. CODE ANN., TAX-GEN., § 11-601(b)-(c) (West 2010).
If a vendor that is liable for the payment of sales and use tax, including interest and penalties, is a limited liability company (hereinafter, “LLC”), then personal liability for the same extends to all members of the LLC if there is no operating agreement, or to those individual who manage the business and affairs of the LLC if there is an operating agreement. Id. at § 11-601(d)(2). Under Tax-Gen. § 11-601(e), a member of an LLC is not considered to be managing the business and affairs of the company solely by doing one or more of the following: (a) consulting with or advising the individuals who manage the business and affairs of the company; (b) directing the management of the company in the same manner as a director of a corporation directs the management of a corporation; or (c) voting on any matter required to be voted on by the members of the company. See id. at § 11-601(e).
Pursuant to § 13-805(a), any “[u]npaid tax, interest, and penalties constitute a lien, in favor of the State, extending to all property and rights to property belonging to: . . . the person required to pay the tax . . . .” Id. at § 13-805(a). Under § 13-807(a), “[a] tax collector may file a notice of tax lien with the clerk of the circuit court for the county where the property that is subject to the lien is located.” Id. at § 13-807(a). Further, under § 13-810(a), “[i]f a tax lien is not satisfied or released on or before the 15th day after the notice of the lien is filed, recorded, and indexed under § 13-807 of [the Tax-General Article], a qualified attorney . . . of the Comptroller . . . may bring an action in a court of the State to enforce the lien.” Id. at § 13-810(a). If the claim for the lien is established by the State, “the court may order: (1) a sale of the property or rights to property; and (2) a distribution of any proceeds of any proceeds of sale in accordance with the interest of the parties and the State.” Id. at § 13-810(d).
In Rucker v. Comptroller of the Treasury, the Court of Appeals of Maryland held that delinquent corporate taxes were properly assessed against the Petitioner as officer of the corporation. 315 Md. 559, 555 A.2d 1060 (1989). The Court of Appeals noted that the legislature’s intent in enacting Article 81 §§ 331 and 383, the predecessors of § 11-601(d), was “to increase the revenues which the state receives from sales and use taxes [which is] increased when liability for payment of the taxes is extended to the individuals who are in the most efficacious position to control the corporation’s fiscal management.” Id. at 556, 555 A.2d at 1063 (citations omitted).
The Petitioner in Rucker, argued that since he had no “active involvement in the corporation’s financial affairs,” the responsibility of the payment of taxes should be imposed on an individual in the corporation who was actually assigned this responsibility. Id. at 566, 555 A.2d at 1063. However, the Court of Appeals rejected this argument, stating “[w]hen [Petitioner] consented to and accepted election to one of the statutorily designated [corporate] offices, he simultaneously became responsible for the payment of the corporation’s sale and use taxes. Accordingly, the Comptroller properly assessed [Petitioner] for the full amount of the delinquent taxes.” Id. at 566, 555 A.2d at 1063-64.
The Court of Appeals further held that Article 81 §§ 331 and 383, the predecessors of § 11-601(d), did not violate the Petitioner’s individual due process rights under either the Maryland or United States Constitution. Id. at 566-67, 555 A.2d at 1064. The Court of Appeals stated that “guarantees of substantive due process” were satisfied as there was a rational basis for the enactment of the statute – “the collection of taxes due and owing which might otherwise go unpaid.” Id. at 567, 555 A.2d at 1064.
In a more recent case, Fox v. Comptroller of the Treasury, the Court of Special Appeals of Maryland held that the vice-president of a corporation was personally liable under § 11-601(d) for unpaid sales and use taxes, even though he was not personally responsible for the collection of those taxes under corporate by-laws. 126 Md. App. 279, 281, 728 A.2d 776, 777 (1999). In analyzing § 11-601(d), the Court of Special Appeals stated “[t]he statutory language of § 11-601(d) is unambiguous; it clearly imposes liability on certain specified officers without regard to their ability to control the fiscal management of the corporation.” Id. at 286, 728 A.2d at 779.
There are no reported opinions in Maryland relating to personal liability for unpaid sales and use taxes in the context of LLCs. However, based on a review of § 11-601(d) and the case-law noted above relating to personal liability in the context of corporations, the same standard is likely to apply.
Title 13 of the Tax-General Article, charges the Comptroller with the duty to make assessments for the payment of taxes, including sales and use taxes. See MD. CODE ANN., TAX-GEN. § 13-101, et seq. Upon making such an assessment, “[a] tax collector shall mail a notice of assessment . . . to the person or governmental unit against which an assessment is made.” Id. at § 13-410. One defense may be to challenge the amount of sales and use tax that was assessed to the LLC and/or the individual owner. However, pursuant to § 13-411, “[a]n assessment of tax under [the Tax-General Article] is prima facie correct.” Id. at § 13-411; see also Classics Chicago, Inc. v. Comptroller of Treasury, 189 Md. App. 695, 985 A.2d 593 (2010). Additionally, an assessment becomes final when a party fails to submit an application for revision of the assessment within 30 days of the date of the assessment notice. See MD. CODE ANN., TAX-GEN. § 13-508(b).
While sales and use taxes are imposed under § 11-102(a) of the Tax-General Article, Annotated Code of Maryland, there are various enumerated exemptions. See Md. Code Ann., Tax-Gen. § 12-201, et seq. These exceptions include, but are not limited to, certain enumerated items for an agricultural purpose ; sales to certain organizations ; distribution or transfer of tangible personal property ; sale of machinery and equipment ; sale of printing use and publications ; and taxation by other law . Another possible defense may be that the amount of sales and use tax assessed for the applicable period fell within an exception, and as such should be reduced or eliminated entirely.
For further information on Maryland tax matters, please contact us for more information.