Possible Defenses For Notice of Lien Judgment for Unpaid Sales and Use Tax in Maryland

Oct 23, 2012, 14:20 ET from Silverman, Thompson, Slutkin & White

BALTIMORE, Oct. 23, 2012 /PRNewswire/ -- Steven D. Silverman, Managing Partner and prominent trial attorney with one of Maryland's leading law firms Silverman, Thompson, Slutkin & White, says one of the common issues the firm encounters involves the failure to pay Maryland sales and use tax.

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Mr. Silverman is the managing partner of the firm with over twenty years of litigation experience in federal and state courts throughout the region.  Mr. Silverman is recognized as one of the most able trial lawyers in Maryland, and has enjoyed an extraordinary record of success.  His principal areas of practice include all types of complex civil litigation and appeals, as well as high-profile criminal litigation. He has been recognized as one of the top 100 trial lawyers in Maryland for 7 consecutive years by the The American Association of Trial Lawyers and was named in December 2010 as one of the top 10 criminal defense attorneys in the Northeast. In November of 2011 he was named one of the top 100 lawyers in the Northeast United States.

Since 1991, Mr. Silverman has represented thousands of criminal clients in courts throughout Maryland and the mid-Atlantic region.  He has not lost a jury trial in any criminal matter in over a decade. 

Although he established himself as a criminal defense attorney early in his career, Mr. Silverman has also served as lead counsel in scores of complex civil jury trials in state and federal courts. His skills and success in the civil courtroom led to him being named a Maryland "Super Lawyer" for civil litigation since 2007. He is also National Litigation Coordinating Counsel for a national risk management group.

Mr. Silverman outlines applicable statutes and case law as well as possible defenses for unpaid sales and use tax in Maryland.

I. Applicable Statutes and Case Law

Section 11-102(a) of the Tax-General Article, Annotated Code of Maryland, imposes a sales and use tax on a retail sale in Maryland, or a use of tangible personal property or a taxable service in Maryland, unless otherwise provided. See MD. CODE ANN., TAX-GEN. Section 11-102(a)(1)-(2). Section 11-601 of the Tax-General Article, Annotated Code of Maryland, provides for the payment of sale and use tax to the Comptroller of Maryland by buyers or vendors. See MD. CODE ANN., TAX-GEN., Section 11-601(b)-(c) (West 2010).

If a vendor that is liable for the payment of sales and use tax, including interest and penalties, is a limited liability company (hereinafter, "LLC"), then personal liability for the same extends to all members of the LLC if there is no operating agreement, or to those individual who manage the business and affairs of the LLC if there is an operating agreement. Id. at Section 11-601(d)(2). Under Tax-Gen. Section 11-601(e), a member of an LLC is not considered to be managing the business and affairs of the company solely by doing one or more of the following: (a) consulting with or advising the individuals who manage the business and affairs of the company; (b) directing the management of the company in the same manner as a director of a corporation directs the management of a corporation; or (c) voting on any matter required to be voted on by the members of the company. See id. at Section 11-601(e).

Pursuant to Section 13-805(a), any "[u]npaid tax, interest, and penalties constitute a lien, in favor of the State, extending to all property and rights to property belonging to: . . . the person required to pay the tax . . . ." Id. at Section 13-805(a). Under Section 13-807(a), "[a] tax collector may file a notice of tax lien with the clerk of the circuit court for the county where the property that is subject to the lien is located." Id. at Section 13-807(a). Further, under Section 13-810(a), "[i]f a tax lien is not satisfied or released on or before the 15th day after the notice of the lien is filed, recorded, and indexed under Section 13-807 of [the Tax-General Article], a qualified attorney . . . of the Comptroller . . . may bring an action in a court of the State to enforce the lien." Id. at Section 13-810(a). If the claim for the lien is established by the State, "the court may order: (1) a sale of the property or rights to property; and (2) a distribution of any proceeds of any proceeds of sale in accordance with the interest of the parties and the State." Id. at Section 13-810(d).

In Rucker v. Comptroller of the Treasury, the Court of Appeals of Maryland held that delinquent corporate taxes were properly assessed against the Petitioner as officer of the corporation. 315 Md. 559, 555 A.2d 1060 (1989). The Court of Appeals noted that the legislature's intent in enacting Article 81 Sections 331 and 383, the predecessors of Section 11-601(d), was "to increase the revenues which the state receives from sales and use taxes [which is] increased when liability for payment of the taxes is extended to the individuals who are in the most efficacious position to control the corporation's fiscal management." Id. at 556, 555 A.2d at 1063 (citations omitted).

The Petitioner in Rucker, argued that since he had no "active involvement in the corporation's financial affairs," the responsibility of the payment of taxes should be imposed on an individual in the corporation who was actually assigned this responsibility. Id. at 566, 555 A.2d at 1063. However, the Court of Appeals rejected this argument, stating "[w]hen [Petitioner] consented to and accepted election to one of the statutorily designated [corporate] offices, he simultaneously became responsible for the payment of the corporation's sale and use taxes. Accordingly, the Comptroller properly assessed [Petitioner] for the full amount of the delinquent taxes." Id. at 566, 555 A.2d at 1063-64.

The Court of Appeals further held that Article 81 Sections 331 and 383, the predecessors of Section 11-601(d), did not violate the Petitioner's individual due process rights under either the Maryland or United States Constitution. Id. at 566-67, 555 A.2d at 1064. The Court of Appeals stated that "guarantees of substantive due process" were satisfied as there was a rational basis for the enactment of the statute – "the collection of taxes due and owing which might otherwise go unpaid." Id. at 567, 555 A.2d at 1064.

In a more recent case, Fox v. Comptroller of the Treasury, the Court of Special Appeals of Maryland held that the vice-president of a corporation was personally liable under Section 11-601(d) for unpaid sales and use taxes, even though he was not personally responsible for the collection of those taxes under corporate by-laws. 126 Md. App. 279, 281, 728 A.2d 776, 777 (1999). In analyzing Section 11-601(d), the Court of Special Appeals stated "[t]he statutory language of Section 11-601(d) is unambiguous; it clearly imposes liability on certain specified officers without regard to their ability to control the fiscal management of the corporation." Id. at 286, 728 A.2d at 779.

There are no reported opinions in Maryland relating to personal liability for unpaid sales and use taxes in the context of LLCs. However, based on a review of Section 11-601(d) and the case-law noted above relating to personal liability in the context of corporations, the same standard is likely to apply.

II. Defenses

Title 13 of the Tax-General Article, charges the Comptroller with the duty to make assessments for the payment of taxes, including sales and use taxes. See MD. CODE ANN., TAX-GEN. Section 13-101, et seq. Upon making such an assessment, "[a] tax collector shall mail a notice of assessment . . . to the person or governmental unit against which an assessment is made." Id. at Section 13-410. One defense may be to challenge the amount of sales and use tax that was assessed to the LLC and/or the individual owner. However, pursuant to Section 13-411, "[a]n assessment of tax under [the Tax-General Article] is prima facie correct." Id. at Section 13-411; see also Classics Chicago, Inc. v. Comptroller of Treasury, 189 Md. App. 695, 985 A.2d 593 (2010). Additionally, an assessment becomes final when a party fails to submit an application for revision of the assessment within 30 days of the date of the assessment notice. See MD. CODE ANN., TAX-GEN. Section 13-508(b).

While sales and use taxes are imposed under Section 11-102(a) of the Tax-General Article, Annotated Code of Maryland, there are various enumerated exemptions. See Md. Code Ann., Tax-Gen. Section 12-201, et seq. These exceptions include, but are not limited to, certain enumerated items for an agricultural purpose ; sales to certain organizations ; distribution or transfer of tangible personal property ; sale of machinery and equipment ; sale of printing use and publications ; and taxation by other law . Another possible defense may be that the amount of sales and use tax assessed for the applicable period fell within an exception, and as such should be reduced or eliminated entirely.

For further information on Maryland tax matters, please contact Silverman, Thompson, Slutkin & White by calling 410-385-2225 for more information.

About Silverman, Thompson, Slutkin & White

Maryland based law firm Silverman Thompson Slutkin & White, an AV rated law firm by Martindale-Hubbell, is widely regarded as one of the premier litigation firms in the mid-Atlantic region. The firm has achieved extraordinary success for their clients across Maryland and throughout the United States.

Each of our thirty seasoned attorneys spends hundreds, if not thousands of hours in the courtroom each year. Our clients uniquely benefit from representation by lawyers who practice law on the front lines not the sidelines. For more information, please visit our website at www.mdattorney.com or call 410-385-2225.


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