A ticking time bomb. That phrase is occasionally used to add a dash of hyperbole to an otherwise dry article. However, the phrase is particularly relevant to the disasters potentially faced by many members of Limited Liability Companies (LLCs) in New York. By reason of what appears to be a simple mistake in legislative drafting years ago, under current law all members of LLCs are personally liable for the entire amount of unpaid sales tax of the LLC regardless of how small an interest in the LLC owned by the investor and despite the fact that the investor had no involvement in the operations of the LLC. In other words, the protections against unlimited personal liability for members of LLCs have largely been eliminated.
For the last several years, many tax practitioners have been aware of this trap for the unwary but have tried to convince themselves that the provision was “too bad to be true” and that, one way or another, the New York State Department of Taxation and Finance (the Tax Department) would not be able to enforce such a rule. Practitioners also took some solace from an administrative law judge (ALJ) determination last year that, without discussion, refused to enforce personal liability against a non-controlling member of an LLC.
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