State v. Tunberg
| Decision Date | 21 April 2020 |
| Docket Number | No. 1 CA-TX 18-0008,1 CA-TX 18-0008 |
| Citation | 464 P.3d 688,249 Ariz. 5 |
| Parties | STATE of Arizona, EX REL., ARIZONA DEPARTMENT OF REVENUE, Plaintiff/Appellee, v. Karl TUNBERG, et al., Defendants/Appellants. |
| Court | Arizona Court of Appeals |
¶1 Under the Arizona tax code, an officer of a company that must pay transaction privilege tax may be personally liable for failing to remit tax payments the company has charged and collected from its customers. In this appeal, we affirm the tax court's judgment against a member-manager and chief executive officer of a limited liability company for those payments. We also affirm the tax court's denial of the officer's request for attorney's fees.
¶2 After an audit, the Arizona Department of Revenue determined that Sanctuary Design, L.L.C. had failed to pay $353,652 in transaction privilege tax. Sanctuary did not protest the audit, and it became final. The Department then sued to recover the taxes, naming Sanctuary and its member-manager and CEO, Karl Tunberg, as defendants. After the Department obtained a default judgment against Sanctuary, the parties filed cross-motions for summary judgment on the claim against Tunberg, which alleged he was personally liable under Arizona Revised Statutes ("A.R.S.") section 42-5028 (2020) for failing to remit tax payments Sanctuary had collected from its customers.2
¶3 The tax court concluded that "uncontested evidence" established that Tunberg was responsible for the taxes Sanctuary had collected and therefore was personally liable under the statute. After a trial to establish the amount due, the court ruled Tunberg and his spouse were liable for $49,769.65 in taxes Sanctuary collected between May 2008 and September 2009 but failed to remit.3 The court later denied Tunberg's motion for attorney's fees and entered final judgment. Tunberg filed a timely appeal. We have jurisdiction pursuant to Article 6, Section 9, of the Arizona Constitution, and A.R.S. §§ 12-120.21(A)(1) (2020) and -2101(A)(1) (2020).
¶4 "The court shall grant summary judgment if the moving party shows that there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law." Ariz. R. Civ. P. 56(a). Summary judgment is appropriate when "the facts produced in support of the claim or defense have so little probative value, given the quantum of evidence required, that reasonable people could not agree with the conclusion advanced by the proponent." Orme School v. Reeves , 166 Ariz. 301, 309, 802 P.2d 1000 (1990). We review the tax court's summary-judgment ruling de novo . Sw. Airlines Co. v. Ariz. Dep't of Revenue , 217 Ariz. 451, 452, ¶¶ 5-6, 175 P.3d 700 (App. 2008). We likewise review the interpretation of statutes de novo . Id. at ¶ 6.
¶5 "The transaction privilege tax is an excise tax on the privilege or right to engage in an occupation or business in the State of Arizona." Ariz. Dep't of Revenue v. Action Marine, Inc. , 218 Ariz. 141, 142, ¶ 6, 181 P.3d 188 (2008) (citation omitted). Although it "is a tax on the gross receipts of a person or entity engaged in business activities," liability for the tax "falls on the taxpayer, not on the taxpayer's customers." Id. at ¶¶ 6-7 ; see A.R.S. §§ 42-5008 (2020), -5024 (2020). The default judgment the Department obtained against Sanctuary for $340,644 in tax owing on its sales receipts is not at issue in this appeal.
¶6 A taxpayer that makes a sale to a customer may choose to bill the customer for the transaction privilege tax the taxpayer will owe on the proceeds of that sale. When the taxpayer does so, it must remit to the Department whatever tax it collects from the customer, "even if it collects more than the taxpayer owes." Action Marine , 218 Ariz. at 142, ¶ 7, 181 P.3d 188 ; see also A.R.S. § 42-5002(A)(1) (2020). The logic is that tax payments the taxpayer collects from customers "do not belong to and are not for the use of the taxpayer." Action Marine , 218 Ariz. at 142, ¶ 8, 181 P.3d 188.
¶7 Here, the Department sued Tunberg pursuant to § 42-5028, under which an officer or director of a taxpayer may be "personally liable" for transaction privilege taxes the taxpayer bills and collects from its customers. See Action Marine , 218 Ariz. at 145, ¶ 21, 181 P.3d 188. Action Marine held that when a business collects the tax from a customer, § 42-5028 imposes personal liability upon any officer or director of that business who has "assumed a duty to remit" to the government what the customer has paid. Id. Officers and directors assume that duty when they "hold[ ], maintain[ ] control over, or [have] responsibility for the money collected separately" for the tax. Id.
¶8 The supreme court directed the tax court in Action Marine to decide on remand whether the individual defendants were liable under § 42-5028. Id. at 147, ¶28, 181 P.3d 188. The court observed that facts relevant to that inquiry may include whether an individual "had control over, responsibility for, or supervision of the money collected to pay the tax" and whether, for example, the individual "had the final word as to what bills should or should not be paid" because he "had the authority required to exercise significant control over the corporation's financial affairs, regardless of whether he exercised such control in fact." Id. at ¶ 29 (citation omitted).
¶9 At issue in the Department's claim against Tunberg were taxes Sanctuary collected from customers between May 2008 and September 2009. Tunberg was CEO and managing member of the limited liability company throughout that period. He signed some of the customer contracts at issue as "owner" of Sanctuary. He also participated in the audit on behalf of the company.
¶10 On summary judgment, Tunberg offered evidence that, until 2008, Sanctuary's outside certified public accountant had prepared the company's tax returns. According to Tunberg, Sanctuary then hired a chief financial officer, who "was responsible for all financial operations and took over the transaction privilege tax reporting at the beginning of 2008." Tunberg asserted that as CEO, his own duties were limited to "overall strategic vision," negotiating loans and "dealing with large customers to either help land the business or smooth over any concerns that arose." He argued that although he signed proposals or letters of engagement with customers, he was not involved with any "sales tax, employee tax or other accounting functions." He contended he did not decide whether Sanctuary would separately bill customers for transaction privilege tax, did not know whether Sanctuary did bill the tax separately, was not responsible for any customer payments of taxes and never maintained control over monies customers paid in taxes. According to Tunberg, all these duties belonged to the CFO. That CFO, however, decided at some point to stop making the company's tax payments. Tunberg asserted he did not know Sanctuary had not been reporting and paying transaction privilege taxes until he learned the Department was auditing the company.
¶11 The Department offered evidence showing that Tunberg telephoned the Department about the company's tax returns on December 16, 2008. During that call, the Department informed Tunberg that Sanctuary had not filed transaction privilege tax returns since May 2008; according to the Department, Tunberg responded that he would make sure they were filed. The Department also offered evidence that, contrary to Tunberg's assertion that he did not know Sanctuary billed customers for transaction privilege tax, he had signed seven contracts containing line entries for tax to be paid by the customers.
¶12 We hold the tax court did not err by concluding that Tunberg assumed a duty under § 42-5028 to remit taxes Sanctuary had collected from its customers. As CEO of the company, Tunberg "had the final word as to what bills should or should not be paid." 218 Ariz. at 147, ¶ 29, 181 P.3d 188. In Action Marine , the supreme court observed that imposing personal liability under the statute on "corporate officers or directors assuages concerns that such persons might abuse the privilege of limited liability protection by collecting money from customers under the guise of a state-imposed tax, using such monies for other purposes, forcing the taxpayer into bankruptcy, and later claiming limited liability protection."
218 Ariz. at 144, ¶ 17, 181 P.3d 188. The supreme court's concern may be particularly apt in the context of an owner-managed company whose owner stands to benefit when the company collects tax monies from customers but fails to pay them over to the Department. Here, Tunberg was Sanctuary's managing member. He was the CEO and signed contracts as its "owner." And although the company had grown to some 20 employees heading into 2008, it went out of business in Arizona in late 2009, during the audit period.
¶13 We need not consider here whether officers and directors of owner-managed companies generally are liable under § 42-5028 and Action Marine . Tunberg argues he had delegated to the company's newly hired CFO the responsibility for processing and remitting customers' tax payments in 2008. The evidence, however, was that, as of December 2008, Tunberg knew the CFO had not been forwarding customers' tax payments to the Department. The tax court found Tunberg liable for payments made by customers on two contracts Sanctuary entered into and performed during the latter half of 2008 and on four contracts executed in 2009. As Sanctuary's managing member and CEO, after learning the CFO was not remitting taxes paid by customers during that time period, Tunberg had the power and the obligation to delegate that responsibility to someone else, but there is no evidence in the record showing he did so.
¶14 Under these circumstances, as the tax court reasoned, ...
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