Personal Tax Liability for Corporate Officers – Sales Tax, Payroll Tax and Other Trust Fund Taxes

Where Compliance Becomes Personal

Risk is significant for finance leaders, and it’s important to distinguish trust fund taxes from ordinary business liabilities to properly assess accountability, oversight responsibilities, and personal risk. 

Fiduciary taxes such as sales taxes, payroll taxes, and other trust fund taxes are required to be collected by a company, held in trust, and remitted to taxing authorities. These funds do not legally belong to the company, and failures in collection or remittance can expose corporate officers and other responsible individuals to personal liability. Unlike traditional business liabilities, fiduciary tax obligations are subject to statutory personal liability provisions that override traditional corporate liability protections.

Paying vendors, lenders, or employees instead of satisfying fiduciary tax obligations can be sufficient to establish willfulness under both federal and state law.  

Exposure During Transactions and Restructuring

The risk does not disappear when a company enters a sale process, restructures, or ceases operations. In fact, exposure often becomes more visible during these transition points. Even in situations where a business sells or seeks relief through bankruptcy proceedings, personal liability for unpaid fiduciary taxes typically survives. In bankruptcy, trust fund tax debts are generally classified as non-dischargeable under the Bankruptcy Code, meaning corporate officers cannot eliminate them through personal bankruptcy filings. In many cases, bankruptcy shifts the financial burden from the business entity to its responsible officers rather than eliminating it altogether. 

Similarly, contractual agreements in which a purchaser assumes company liabilities generally do not shield responsible individuals from statutory personal assessment. For CFOs navigating transactions or wind-downs, this distinction is critical and understanding the Federal and State Law is pivotal for performance before liquidity or ownership transitions occur—not after.  

Federal and State Enforcement Frameworks

Both federal and state authorities actively enforce personal liability provisions, often focusing on individuals with functional authority over cash management and compliance. 

At the federal level, the Internal Revenue Code authorizes the Internal Revenue Service to impose personal liability through the Trust Fund Recovery Penalty (TFRP). Under Internal Revenue Code § 6672(a), any individual who is responsible for collecting, accounting for, and paying over trust fund taxes and who willfully fails to do so may be held personally liable for the unpaid tax. Some of these key considerations include:

• Responsibility under §6672 is based on authority—not title 
• Factors such as authority over financial decisions, the ability to direct payment of creditors, check-signing authority, and involvement in day-to-day management. 
• Applies to payroll trust fund taxes 
• Covers both failure to remit taxes collected and failure to collect them 
• For willfulness to occur, fraudulent intent is not required, only that a responsible person knows (or should know) of a tax obligation but pays another obligation instead  
• Financial distress, delegation, or reliance on third parties does not eliminate exposure 

The TFRP represents one of the IRS’s most powerful enforcement tools against finance leaders and operational decision-makers. 

State Law Personal Liability for Sales and Use Taxes: Key Considerations for Corporate Officers, Finance Leaders, and Tax Advisors

At the state level, most impose similar personal liability regimes for unpaid sales and use taxes. These statutes generally hold corporate officers, directors, and other responsible people who are personally liable for sales tax liabilities arising during periods in which they had authority or control over tax compliance. In many jurisdictions, liability extends to sales tax that was required to be collected, even if the business failed to charge the tax to customers. 

Because these statutes are broadly written and aggressively applied, finance leaders overseeing cash management and compliance cannot assume that unpaid sales tax remains solely a corporate obligation. Several states—including New York, California, and Illinois—have reinforced this position through enforcement actions that reach individual officers. 

Liability for Sales Tax Never Collected –New York

New York provides particularly clear authority on personal liability for sales tax that was never collected. Under New York Tax Law § 1133(a), any person under a duty to act for a corporation in collecting and remitting sales tax is personally liable for the tax imposed, regardless of whether the tax was collected from customers. From the state’s perspective, the duty to collect and remit sales tax are inseparable, and a breach of either obligation exposes responsible individuals to personal assessment. 

In D & W Auto Service Center, Inc. & Paul Wehr (DTA No. 801484), the New York State Tax Appeals Tribunal attributed personal liability for sales tax owed to a responsible person required to collect tax citing NY Tax L § 1133(a). The Tribunal treats requisite but unpaid sales tax as an obligation of the business that can be enforced against responsible individuals. 

Other states similarly impose personal liability on corporate officers for unpaid sales and use taxes though the statutory frameworks vary. 

Failure to Remit – California and Illinois 

California 

Revenue and Taxation Code §6829 authorizes personal liability against corporate officers and other responsible persons for unpaid sales and use taxes, interest and penalties when a business terminates, dissolves, or ceases operations and taxes remain unpaid. Responsible people include officers, members, managers, and others who had the duty to act on behalf of the business regarding tax compliance. California courts have upheld personal assessments against officers based on their authority and responsibility for tax compliance, regardless of whether the tax was separately charged to customers. 

The California Office of Tax Appeals (OTA) upheld a personal liability determination against a corporate officer, Dean Woerner, for his company’s unpaid California sales tax obligations. Despite the business having ceased operations and a contractual agreement for the buyer to assume the company’s liabilities, the OTA agreed with the California Department of Tax and Fee Administration (CDTFA) that Woerner was personally liable for the unpaid taxes for the period during which he was an officer responsible for tax compliance. The OTA found that Woerner was responsible for the company’s sales and use tax compliance during the liability period, was aware of the outstanding tax liabilities, and had the authority to cause the company to pay them. The OTA rejected arguments that the purchaser of the business should instead be liable, noting that contractual assumptions do not absolve a responsible person under tax law.  

Illinois 

35 ILCS 735/3-7 states that any officer or employee who has control, supervision, or responsibility for filing returns and making payment of sales and use tax can be held personally liable if they willfully fail to file or pay the tax. Illinois administrative hearing rulings do affirm personal liability for unpaid sales tax against individuals in officer roles when statutory elements are met. 

In an Illinois Department of Revenue administrative hearing, the Department issued a Notice of Penalty Liability (NPL) to an individual identified as a responsible officer or employee of Anywhere Tavern, Inc. for failure to pay sales taxes that were collected and due to the state. The hearing officer upheld the Department’s determination that “Mary Doe” had authority to sign checks and pay company bills, was involved in preparation of sales tax returns, and willfully failed to pay the sales taxes that were shown to be due, even though funds were available. As a result, she was held personally liable for the penalty under Section 3-7 of the Uniform Penalty and Interest Act. States can find that payments to vendors rather than the state can be construed as willful failure. 

Taken together, these state enforcement actions reflect a consistent theme: when trust fund taxes go unpaid, liability often shifts from the entity to the individuals with authority over financial decisions. 

Governance in Action: Protecting Performance and Personal Accountability

The consequences of noncompliance can be significant and personal. Responsible individuals may face personal assessments, wage garnishments, bank levies, and asset seizures, regardless of the company’s solvency or legal structure. Fiduciary tax liabilities are not protected by corporate liability shields and are generally not dischargeable in bankruptcy.  

Exposure is driven less by title and more by functional authority. Courts and taxing authorities determine who controlled cash, approved payments, signed returns, and had visibility into back accounts, or was aware of compliance gaps.  

For finance leaders, this is ultimately a governance issue. Strengthening the Office of the CFO requires embedding fiduciary tax oversight into core cash management processes, particularly when liquidity is constrained. Clear accountability, real-time visibility into tax status, and disciplined payment prioritization are not merely compliance safeguards—they are foundational to sustain performance while protecting leadership from avoidable risk.