Responsible Officers and Employees Can Be Held Personally Liable for New Jersey Sales Tax Collection Obligations Even When the Seller Corporation is No Longer “On the Hook”
An Explanation of Responsible Person Liability:
The New Jersey Sales Tax is known as a “trust fund tax.” While sales tax is imposed upon the purchaser, it is the seller that has the obligation to collect and remit the tax to the New Jersey Division of Taxation (the Division). This obligation to collect, hold and later remit results in personal liability for those “required to collect the sales tax.”[1] While the seller is among those “required to collect the sales tax,” so is “any officer or employee of a corporation or dissolved corporation who is under a duty to act for the corporation in collecting and remitting the tax.”[2]
Not all officers and employees have a duty to act for the corporation in collecting and remitting sales tax. Generally, personal liability is limited to those who play an active role in the corporation’s affairs and management. Nine factors, first laid out in Cooperstein v. Director, 13 N.J. Tax 68 (1993), are considered in determining whether an officer or employee has played a sufficiently active role to be held personally liable. These factors include:
- the contents of the corporate bylaws,
- status as an officer or stockholder,
- authority to sign checks and actual exercise of that authority,
- authority to hire and fire and actual exercise of that authority,
- responsibility to prepare or sign tax returns,
- day-to-day involvement in the business or responsibility for management,
- power to control payment of corporate creditors and taxes,
- knowledge of failure to remit taxes when due, and
- receipt of substantial income or benefits from the corporation.
The main takeaway from the New Jersey Tax Court’s decision in Cooperstein and subsequent cases addressing the same issue,[3] is that authority alone is not sufficient to impose personal liability. In Cooperstein, the court determined that an attorney who was named corporate president and had authority to manage the business but did not actually exercise that authority, was not personally liable for the corporation’s unpaid sales taxes. This attorney was not involved in day-to-day operations or in management of the corporation’s affairs, was not a stockholder and did not receive income, salary or commissions from the corporation, and did not participate in the preparation of state or federal tax returns.
Officer and Employee Liability Extends Beyond Corporate Liability:
In the absence of the ability to pursue collection of sales tax from the seller corporation itself, such as when the seller corporation is illiquid or has been dissolved, the Division has long had a practice of turning to the seller corporation’s responsible employees and officers. A recent New Jersey Tax Court case, James Patyrak and N.Y. Thymes & Deli v. Division, 2025 WL 1336576 (N.J. Tax Ct. May 7, 2025), will likely have the effect of expanding this tendency.
In James Patyrak and N.Y. Thymes & Deli, the New Jersey Tax Court addressed the effect an affirmative agreement of the Division not to pursue sales tax collection against the seller corporation has on the personal liability of the responsible employees and officers for the same sales tax liability. As background, sales tax is generally not dischargeable in bankruptcy. Generally, corporations can enter either Chapter 7 or Chapter 11 bankruptcy. Under Chapter 7 bankruptcy, sales tax obligations are never dischargeable. However, under Chapter 11 bankruptcy, while sales tax is technically still not “dischargeable,” the Division may sign a Consent Order where the Division agrees to accept a fixed, “reduced” amount of tax due. In contrast, individuals can only enter Chapter 7 bankruptcy, under which sales tax is never dischargeable.
In James Patyrak and N.Y. Thymes & Deli, the corporation, through Chapter 11 bankruptcy proceedings, had entered a Consent Order with the Division under which the Division agreed to accept $167,000 in full satisfaction of any sales tax liability owed before September 27, 2012. However, the Division subsequently initiated an audit and assessed additional sales tax for the period before September 27, 2012. The Division, no longer having the ability to collect the additional tax from the seller corporation, sought to collect the tax from the owner of the corporation, Mr. Patyrak.
The court found that, despite the Consent Order, the initiation of the audit was allowed. The Division could assess the additional tax because it still had the ability to collect the tax from Mr. Patyrak. While the Consent Order with the corporation was binding, the Consent Order did not apply to Mr. Patyrak as a responsible person. The court also stated that even if Mr. Patyrak had filed for individual bankruptcy under Chapter 7, his personal liability for the sales tax owed by the corporation for the period covered by the Consent Order would not be dischargeable.
In summary, this recent decision has clarified that the Division has many avenues to collect sales tax liability. Even if the seller corporation is no longer liable for the sales tax due to bankruptcy or having ceased to exist, the Division always has another avenue for recovery—the employees and directors who were under a duty to act for the corporation. The Division will likely continue its pursuit of collecting sales tax from these employees and directors when collection from the seller corporation is either impossible or simply impractical. However, even in light of the court’s holding in James Patyrak and N.Y. Thymes & Deli, an argument that an employee or officer did not have a duty to act for the corporation based on the Cooperstein factors remains a presentable defense against responsible person liability.
[1] See N.J.S.A. 54:32B-14.
[2] N.J.S.A. 54:32B-2(w).
[3] See Skaperdas v. Director, 14 N.J. Tax 103 (1994) and Lorenzo v. Director, 14 N.J. Tax 577 (1995).