Pub. 6 2011-2012 Issue 6

www.nebankers.org 14 Extraordinary Service for Extraordinary Members. Don’t Let Business Failures Affect Your Bank Understanding Nebraska Law Regarding Outstanding Tax Obligations George Kilpatrick , Attorney, Policy Section, Nebraska Department of Revenue Business failures are an all-too-common occurrence in the United States and in Nebraska specifically. When this happens, dreams are crushed, livelihoods placed at risk, and many people, institutions, and organizations are damaged. O NE OF THOSE AT RISK MAY BE A financial institution that has loaned funds to the business dependent on its success. Anothermay be the people of Nebraska, through their government institutions. The Nebraska Department of Rev- enue is responsible for the enforcement of the revenue laws of Nebraska and the administration and collection of more than 30 types of taxes. Often businesses faced with financial stress delay or stop paying taxes that are owed so they can pay other obligations. This outstanding tax liability may be unknown to other creditors of the business. When business failure occurs, the law requires certain actions be taken to satisfy any outstanding tax obliga- tions. These actions may be at odds with any plans developed by business owners and creditors to map a way out. Bankers should be familiar with the revenue laws of Nebraska in regard to tax obligations and the powers granted to the department to collect these taxes. Such knowledge will help minimize misunderstandings between the depart- ment and the banking community in situations when there is too littlemoney to go around. The Unique Status of Trust Fund Taxes The Department of Revenue ad- ministers and collects more than 30 different types of taxes. Nearly all are collected from business entities. These range from the obscure, like the litter fee, to the major taxes, like sales and income taxes. Even sales and individual income taxes paid by individuals are collected primarily through businesses. As most of us know, merchants collect state and local sales taxes frompurchas- ers along with the purchase price of the product purchased. Under Nebraska law, sales taxes collected “constitute a debt owed by the retailer to this state.” [Neb. Rev. Stat. § 77-2703(1)(a)] Similarly, the individual income tax is primarily collected by withholding the tax from employees or other persons providing personal services. Under Nebraska law, any amount deducted and withheld from the earnings of em- ployees “shall constitute a trust fund in the hands of the employer or payor and shall be owned by the state.” [Neb. Rev. Stat. § 77-2757] While the wording of these two statutes is different, both are considered money taken from the individual taxpayer that is rightfully owned by the people of Nebraska and not the business. We call both sales taxes collected and withholding “trust fund taxes” to reflect their unique status in the revenue laws of this state. This unique status also can be found in information the department provides businesses when they first become licensed to collect Nebraska taxes. The department’s information guide on