Company Principals Can be Personally Liable for Collected but Unremitted TPT Taxes
AZDOR v. Tunberg, the Arizona Court of Appeals held a company’s member-manager and CEO personally liable for collected but unremitted Transaction Privilege Taxes (TPT).
Following a tax audit, the Arizona Department of Revenue
(ADOR) found Sanctuary Design LLC (Sanctuary) had failed to pay $353,652 in TPT.
ADOR sued Sanctuary and its member-manager/CEO Tunberg under
42-5028 for failing to remit tax payments that Sanctuary collected from its
The court noted that TPT is an excise tax on the
privilege and right to engage in business in Arizona. A taxpayer who makes sales
to a customer may choose to bill the customer for the TPT the taxpayer owes on
the sale. The taxes collected from the customer do not belong to the company.
Accordingly, A.R.S. § 42-5028 and prior case law provide that, when a business
collects taxes from a customer, personal liability is imposed upon any officer
or director of that business who has "assumed a duty to remit" to the government
the taxes paid by a customer.
The test is whether the officers or directors assume
that duty when they hold, maintain control over, or have responsibility for the
money collected separately for the tax. To determine control over,
responsibility, or supervision of the money to pay the taxes, courts should
consider whether the individual had the final word on what bills should or
should not be paid, because that person had the authority required to exercise
significant control over the corporation's financial affairs, regardless of
whether the person exercised such control in fact.
Tunberg claimed that an outside CPA prepared Sanctuary's
tax returns and the company’s CFO was responsible for financial operations.
Tunberg further claimed that, as CEO, he was responsible for strategic vision,
negotiating loans, and dealing with large customers of Sanctuary.
The tax court and the Court of Appeals disagreed,
finding that Tunberg, as CEO of Sanctuary, "had the final word as to what bills
should or should not be paid," and Tunberg cannot evade personal liability
simply by failing to delegate a person at Sanctuary responsible to pay TPT. In
the absence of someone who has TPT responsibility, it must be the person (in
this case, Tunberg) with ultimate responsibility for the entity.
Principals of construction companies who collect TPT
from customers need to ensure the taxes are remitted to the ADOR to avoid
personal responsibility for collecting, but not remitting, the TPT taxes. For
questions, call a Sacks Tierney