A cigarette sales tax assessment was converted from my company to me personally as its officer. I signed the paperwork setting up the company, but claim my former employer tricked me into it and ran the fraudulent purchases -- am I still personally liable?

Plain-English summary

This is a companion case to a similar cigarette-purchase, business-fraud dispute issued the very same day (P.D. 21-90), sharing the same underlying compliance program and citing the same three precedent rulings on business identity theft -- but with an added wrinkle: here, the sales tax assessment was ultimately converted from the corporate taxpayer to an individual corporate officer personally.

A company was assessed sales tax on cigarettes purchased tax-exempt for resale from a distributor, flagged through the Department's compliance program cross-checking distributor records against reported sales. The company didn't respond to a document request within its 14-day window, so the assessment was issued -- and then converted to the individual who was the company's corporate officer, since she was legally responsible for the corporation's tax compliance.

The officer appealed, telling a specific story: a former employer offered her a manager position at a new store location, on the condition that she let her personal information be used to formally set up the company (she personally attended meetings and signed a lease, a federal ID number application, and paperwork opening a wholesale club account). She said she never actually made purchases for the new location, and when she noticed cigarette purchases being made in the company's name that never arrived at the store, she confronted the former employer, who repeatedly assured her he was handling it -- but never did.

Why the personal conversion held up. Virginia law makes a corporate, partnership, or LLC officer personally liable when they willfully fail to pay, collect, or remit tax, or willfully attempt to evade it. The Tax Commissioner focused on the fact that the officer personally signed the actual documents that legally FORMED the business -- the lease, the ID number, the distributor account -- making her, as a factual and legal matter, the purchaser of record on the distributor's own sales documentation, regardless of what she says she believed was happening behind the scenes. As with the companion case, the Department reiterated that it has no authority to arbitrate the underlying dispute between the officer and her alleged former employer -- that's a civil (or criminal) matter for the courts or law enforcement, not something the tax appeal process can resolve. Because the taxpayer never produced documentation contradicting the distributor's records showing her business as the purchaser, and a Department assessment is presumed correct, the assessment (and its conversion to her personally) was upheld.

What this means for you

Anyone asked to sign business-formation paperwork (leases, EIN applications, vendor/distributor accounts) on someone else's behalf or at their request

Understand that signing these documents can make YOU the legally responsible purchaser of record for tax purposes, even if you never intended to personally operate the business or believed someone else was actually running it -- get any such arrangement in writing, and think carefully before lending your name and signature to a business you don't control.

Corporate officers facing a personal conversion of a corporate tax assessment

Virginia's officer-liability statute can make you personally responsible for a corporate tax debt where your own actions (like personally signing formation documents that resulted in the failure to remit tax) tie you directly to the underlying transactions -- a claim that someone else was the one actually running the fraud doesn't automatically shield you if the paper trail shows you as the purchaser or responsible party.

Anyone who suspects their name or signature is being used in a business arrangement gone wrong

Act immediately when you notice suspicious activity (like purchases you didn't authorize) -- confronting the other party and getting a verbal assurance it will be "handled" is not a substitute for documenting the issue, reporting it, and disengaging from the account before a tax assessment results.

Common questions

Q: I signed the paperwork to help a former employer set up a business, but I claim I was tricked and never actually ran it -- can I still be held personally liable for its unpaid sales tax?
A: Potentially yes, if your own signature appears on the formation documents (lease, ID number, vendor accounts) tying you to the business as the purchaser of record -- the Department will look at that documentary trail, and a claim that someone else defrauded you doesn't automatically override it without supporting evidence.

Q: Can the Virginia Department of Taxation resolve a dispute between me and a business partner or employer who I claim committed fraud?
A: No -- the Department has no authority to investigate, arbitrate, or settle civil or criminal disputes between private parties. It can only apply the tax records and documentation actually available to determine liability.

Q: What makes a corporate officer personally liable for a company's unpaid sales tax in Virginia?
A: Under Va. Code § 58.1-1813 A, an officer who willfully fails to pay, collect, or remit tax administered by the Department, or willfully attempts to evade it, can be held personally liable for the amount not paid or collected.

Citations and references

• Public Document 18-184 (10/30/2018), P.D. 20-140 (8/18/2020), and P.D. 20-172 (9/29/2020) -- prior Department determinations addressing the same business-identity-theft defense in similar cigarette-purchase assessment disputes, all reaching the same result
• P.D. 21-90 (7/13/2021) -- a companion ruling issued the very same day involving the same compliance program and a nearly identical business-identity-theft defense, though without an officer-liability conversion

Subject

Purchases/ Sales of Cigarettes - Business Fraud ID Theft

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-82

Original ruling text

July 13, 2021

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment converted from * (the “Company”) to *** (the “Taxpayer”) for the period of July 2016 through August 2016. I apologize for the delay in responding to your letter.

FACTS

The Company is a retailer of cigarettes. The Department utilizes a compliance program that verifies retail sales and use tax compliance regarding cigarettes purchased for resale and sales of cigarettes by a retailer or wholesale dealer. As a result of the compliance program, the Company was issued an assessment for tax and interest on untaxed cigarettes purchased from * (the “Distributor”). The assessment is based on sales information provided by the Distributor, identifying the Company’s purchase of cigarettes exempt of the tax for resale.

It is the Department’s position that the cigarettes purchased by the Company for resale would have been sold to the Company’s customers and, therefore, the sales tax should have been collected and remitted to the Department on such sales. Based on the sales information provided by the Distributor, it was determined that the Company underreported sales of cigarettes, by the amount of the cigarettes purchased from the Distributor for resale.

On November 1, 2016, the Department sent the Taxpayer a summary of the findings and the proposed tax liability. The Taxpayer was allowed 14 days to provide documentation to substantiate whether the Company’s purchases from the Distributor qualified for the resale exemption or whether the Taxpayer collected and remitted the sales tax on the sale of those purchases. The Taxpayer failed to respond to the Department’s request for documentation within the allotted time and the assessment was issued. The assessment was then converted from the Company to the Taxpayer as the Taxpayer is the Corporate Officer of the Company.

The Taxpayer contests the sales tax assessment and claims that it is not responsible for the purchases of cigarettes from the Distributor. The Taxpayer claims it is a victim of a scam perpetrated by a former employer in which the former employer offered the Taxpayer a position as manager in a newly opening location, as long as the Taxpayer allowed use of the Taxpayer’s personal information to set up the Company. The Taxpayer claims it never made purchases for the new location and when notified that cigarette purchases were being made in its name, but had not arrived at the new location, the former employer was confronted who assured the Taxpayer everything was being handled. After receiving the assessment from the Department, the Taxpayer contacted the former employer who, the Taxpayer claims, agreed to handle the matter, but never did.

DETERMINATION

Purchases/Sales

The resale exemption provided under the Virginia retail sales and use tax is found in Virginia Code § 58.1-602. This code section excludes a sale for resale from the definition of a “retail sale,” which is defined as “a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter.”

Virginia Code § 58.1-623 sets forth the requirements for the proper use of exemption certificates and, in section A, provides that “[a]ll sales or leases are subject to the tax until the contrary is established. The burden of proving that a sale, distribution, lease, or storage of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter.”

Title 23 of the Virginia Administrative Code (VAC) 10-210-280 provides further explanation of the proper use of exemption certificates. Subsection A states that a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.

Virginia Code § 58.1-633 A provides that every dealer required to make a return and collect sales tax "shall keep and preserve suitable records of the sales, leases, or purchases . . . taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner."

The record keeping requirement is further explained in Title 23 VAC 10-210-470 as follows:

Every person who is liable for collection of sales tax or remittance of use tax or both is required to keep and preserve for three years adequate and complete records necessary to determine the amount of tax liability. Such records must include…a daily record of all cash and credit sales, including sales under any type of financing or installment plan in use. A record of the amount of all merchandise purchased, including a bill of lading, invoice, purchase order or other evidence to substantiate each purchase...a record of all deductions and exemptions claimed in filing sales or use tax returns., including exemption and resale certificates, returned or repossessed goods, and bad debts…a record of all tangible property used or consumed in the conduct of the business… a true and complete inventory of the stock on hand and its value, taken at least once each year. Records must be open for inspection and examination at all reasonable hours of the business day by the Department of Taxation.

When a dealer fails to maintain adequate records, the Department is authorized by Virginia Code § 58.1-618 to use the best information available to reconstruct a dealer's sales or purchases to determine whether a tax liability exists.

In this instance, the documentation provided by the Distributor showed that the Company purchased cigarettes exempt of the tax for resale. The cigarette sales records provided by the Distributor shows that the Company made cigarette purchases totaling $* exempt of the tax that were not supported by any resale exemption or tax reporting documentation.

The assessment is calculated on the cost price of the cigarettes based on the sales documentation provided by the Distributor, as this was the best information available. The Taxpayer was provided the opportunity to provide documentation to substantiate the exempt purchase or exempt resale regarding the cigarettes at issue, and failed to do so. While the Taxpayer denies that it is responsible for the purchases of such cigarettes, the information provided by the Distributor shows that the Company purchased the contested cigarettes exempt of the tax for resale from the Distributor. Lacking supporting documentation that the contested cigarettes were purchased fraudulently, I find that the audit assessment is correct as issued. This treatment is consistent with previous determinations regarding business identity theft including Public Document 18-184 (10/30/2018), 20-140, (8/18/2020) and 20-172 (9/29/2020).

Officer’s Liability

Virginia Code § 58.1-1813 A states, “Any corporate, partnership or limited liability officer who willfully fails to pay, collect, or truthfully account for and pay over any tax administered by the Department of Taxation, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall in addition to other penalties provided by law, be liable to a penalty of the amount of the tax evaded, or not paid, collected or accounted for and paid over, to be assessed and collected in the same manner as such taxes are assessed and collected.”

According to the Taxpayer, she attended meetings at which she signed documents authorizing the initiation of the Company. This documents include a lease for building space, securing a federal identification number, and establishing an account at a wholesale club.

The Taxpayer now claims her personal information was used by the Taxpayer’s former employer to establish a fraudulent business. However, the Department is not authorized to address, arbitrate or settle civil or criminal disputes between parties. In this instance, the Taxpayer is the purchaser of record regarding the cigarettes at issue based on the Distributor’s sales documentation. Therefore, the Department properly converted the retail sales and use tax assessment to the Taxpayer on the cigarette purchases. Based on the facts of this case, the Taxpayer remains responsible for the assessment as issued by the Department.

CONCLUSION

Virginia Code § 58.1-205 sets out that any assessment of a tax by the Department is deemed prima facie correct. This means that the burden of proving the assessment is erroneous is upon the Taxpayer. Based on the foregoing, the Taxpayer has not met this burden.

Based on this determination, the assessments are upheld. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of this letter. If the Taxpayer has questions concerning payment of the assessment or bill, the Taxpayer may contact the Delinquent Collections Unit at *.

The Code of Virginia sections and regulations cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules, and Decisions section of the Department’s web site. If you have any questions about this determination, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1396L

Related Documents

18-184

20-140

20-172