Magazine article Business Credit

Federal Government Imposes Penalties for Non-Compliance with State Sales Tax Laws

Magazine article Business Credit

Federal Government Imposes Penalties for Non-Compliance with State Sales Tax Laws

Article excerpt

Everyone has heard the horror stories of a state audit resulting in a company being fined several thousand dollars for improper reporting of sales tax or even non-compliance in their collection and storage of sales tax exemption certificates. Earlier this year a new standard was set when the Securities and Exchange Commission (SEC) ordered a cease-and-desist proceeding against a company due to its improper dealings with the sales tax process.

SEC release No. 63688 from January 10, 2011 shows how one company had a difficult time dealing with sales tax issues. The company "failed to consistently comply with tax laws that required it to collect sales taxes from its customers, and to remit them to the taxing jurisdictions as their fiduciary." The company operated for four years without an adequate method for tracking what tax should be charged, if any, on the services it provided.

The key statement in the SEC filing, which everyone should be aware of, is that sales tax laws impose an agency relationship upon the selling company. If the seller fails to present invoices with sales tax on them, and the buyer did not otherwise pay the proper taxes due, then the seller becomes liable for the outstanding sales taxes, plus potential interest and penalties.

Credit and sales departments are the frontline personnel and should be aware of the possible complications of non-compliance with sales tax laws. The company in SEC No. 63688 paid approximately $3.9 million to various state and local agencies to clear its past deficiencies. Past sales tax due along with penalties and interest is commonplace. What sets this situation apart from other cases is that the enforcement arm of the federal government had to step in and issue additional fines for noncompliance with local regulations. Settlement of the cease-and-desist order involved a payment of $200,000 to the US. Treasury Department after all local governments had received their payments.

The Case

It is not as difficult as you may think to get off course in your tax administrative process. The company involved in this case was Hudson Highland Group, Inc. a spinoff company that began operations in 2003. Hudson was at the core a staffing agency, but did provide other functions. At the time of the spinoff it did not have adequate resources devoted to sales tax issues.

Hudson did not possess any software system that integrated into their invoicing system that would advise them of tax rates or even if the items being invoiced were taxable. Hudson provided services in several different taxing jurisdictions. The end result was that until early 2008 when a larger ERP platform was installed, all invoices should have been manually checked against local regulations, nexus charts and then tax rate charts to calculate what tax was due, if any.

After invoicing customers from 2003 to 2005, the company received its first knock on the door from a state audit agency. The company's sales tax expert was unable to provide an estimate of what the company's exposure level was at that time. Records had to be manually reviewed and taxes calculated for them to come up with an idea of what might be owed. The next problem was then determining if the customers of Hudson had gone ahead and paid the use tax on the amounts due, or if customers possessed direct pay permits issued by the state or if the customers had other reasons that they may be exempt from sales tax.

The management of Hudson acknowledged the problem and devoted resources to fixing the problem. From 2006 to 2008 Hudson discovered and paid off its various liabilities to the taxing authorities. During this time Hudson paid approximately $3.9 million in base sales tax charges, penalties and interest on the amounts due.

Sales taxes are supposed to be a pass-thru entry. The tax is charged to a customer and collected by the seller and remitted to the state or local jurisdiction. Hudson attempted to connect with its customer base and re-bill them for the past taxes due. …

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