Category

Tax Audit

Feb 10
0

SEC Imposes $200,000 Fine for Inadequate Sales Tax Controls

By | Tax Audit

On January 10, 2011, the Securities and Exchange Commission imposed a $200,000 fine against Hudson Highland Group for failing to have adequate internal controls around its sales and use tax collection and remittance procedure.  This is the first time I have every heard of the SEC weighing in on any type of sales tax matter.

In its ruling, File No. 3-14182, the SEC stated that Hudson violated Section 13(b)(2)(A)  and (B) of the Exchange Act which requires that reporting companies make and keep books, records, and accounts which accurately and fairly reflect their transactions and dispositions of assets and have adequate internal controls.  Because Hudson did not put systems or procedures into place which would have prevented a material sales tax liability, it was in violation of these provisions.

This ruling has great significance for any company that makes filings with the SEC.  If you are a CPA who has clients that are publicly traded or have any type of SEC filing responsibilities, you should address these issues immediately.

Ned Lenhart

Jan 16
0

Why Wholesalers Need to be Registered for Sales Tax

By | Retail, Tax Audit

Over the past 20 years my position on the need for wholesalers to be registered has changed. My original position was based on the assumption (which I know is now false) that wholesalers have valid exemption certificates for all the sales they make.  Over the past several years, I have been shocked by the failure of multistate wholesalers to have the exemption certificates they need to have. Over the years, this failure has cost these businesses a huge amount of sales tax, interest, and penalties that was paid on audit. As states continue to be short of revenue, they are looking for the easiest source of audit assessments.  They have zeroed in on wholesalers who they know are missing exemption certificates for the sales they make.  Why?

One of the pillars of the state sales tax system is the presumption that all sales of tangible personal property are taxable until the seller has documented proof that the sale is exempt.  One of the largest exemptions is the “sale for resale” exemption.  When wholesalers sell to retailers, the transaction is not taxable as long as the retailer provides the wholesaler the proper exemption certificate.  How hard could this be?  Apparently it is much harder than I had originally believed.  Wholesalers, in their effort to make the sale, are quick let their customer promise to give them an exemption certificate after the fact.  This often times never occurs which leaves the wholesaler fully exposed for any tax that was not charged.  In the eyes of an auditor, it may make no difference that the retailer sold the merchandise and collected tax on the final retail sales.  The point is, that the wholesale transaction was not properly documented which makes it a potentially taxable transaction.

So how does this align with the need to be registered.  In short, “statute of limitations”.  Many wholesalers have been operating for years in states without being registered for sales tax.  No tax was ever due on their sales and they didn’t feel any obligation to register just so they could file “Zero Returns”.  The states have wised up to this strategy and are now auditing these wholesalers.  If nexus can be established, the states are going back 5 to 10 years and asking for exemption certificates for the untaxed sales.  In many cases, the wholesalers cannot provide them and are assessed back tax, penalty, and interest.

I’m encouraging wholesalers to get registered and to file returns just so they can limit the audit look back to 3 or 4 years.  This is also forcing them to collect and maintain exemption certificates.  I’m also encouraging wholesalers to consider a voluntary disclosure even when no tax is due.  A VDA could limit the look back for potential liability to just a few years.  This could be a huge saving for the company.

If you are a multistate wholesaler and have nexus in several states, make sure you have all the resale exemption certificates you need to support your non-taxed sales.  If you don’t and your customers are out of business, you may want to evaluate ways to come into compliance.

Ned Lenhart
President

Wholesaler sales tax registration

Dec 02
0

State Revenue Looking Bad for 2011

By | Legislative, Tax Audit

If the states thought they were facing difficult revenue and budget issues in 2010, they may not have seen anything yet.  Based on a report issued by the National Association of State Budget Offices (NASBO), the 2011 fiscal condition for many states may be much worse than the 2010 position.  This revenue shortfall has direct implications for tax policy and tax enforcement, including changes to sales tax collections and audits.

According to NASBO, the slow organic revenue growth combined with decreased funding from the 2009 “Stimulus” program combined with increased Medicare payments will lead to a dramatic need for budget cuts and increased revenue. 11 states are reporting budget gaps of nearly $10 billion which must be closed through revenue and budget cuts.   Because so many of the new governors were elected on an anti-tax campaign, it is unlikely that taxes will be changed much and that most of the shortfall will be made up by budget cuts.  The full report can be found at http://www.nasbo.org/LinkClick.aspx?fileticket=C6q1M3kxaEY%3d&tabid=38

Finally, with the revenue shortfall comes greater enforcement.  States have already ramped up enforcement but I suspect more is to come in 2011.  For businesses that have not carefully assessed their multistate obligations, now is the time to do so.  Each week I talk with companies that are getting notices for audits, nexus questionnaires, and sales tax complaints from customers.  These are strong signals that there is a problem and a possible sales tax exposure.

Failing to act does not make the problem go away.

Ned Lenhart
President
2011 state revenue outlook

Sep 30
0

Pre-Audit Reviews Can Spot Sales Tax Problems Early

By | Tax Audit

States have set lose an army of sales tax auditors who’s job it is to collect as much revenue as possible. Their target is virtually any business operating in their state. For many of these businesses, this may be their first audit by that state.  For others, it may be a repeat audit with a new auditor.  In either situation, the deck is stacked in favor of the state and against the taxpayer. Businesses that are unprepared for an audit will not have a good experience.

I recently met with a company that is about to be audited.  It is their first audit and they were feeling rather confident that there would not be any problem.  I encouraged them to sit down with me to review some high level reports and discuss the processes they use.  In short, this exercise was eye-opening to them.  Not only did I spot significant process issues with how tax was being collected but there were serious use tax issues that had been completely missed.  There were missed refunds and missing exemption certificates. Having found these issues, we could then develop and approach to manage the audit to minimize exposure and to ensure the auditor understood the actual scope of some of these small problems.

Without this review, the company would have been playing defense from the minute the auditor walked through the door.  Now they know where problems exist and have already started to gather support to fill in the gaps in their processes and documentation. The best defense is a good offense.

Every company should have and independent pre-audit review once they are notified of an audit.  Company personnel are too close to the situation to be objective at spotting problems and understanding the consequences of these problems.  Further, many companies may be overpaid on tax and need to take actions to file refund claims before the auditor arrives.  Auditors are not hired to look for over payments!!

If your company has been notified of an audit, pick up the phone and call me at 404-403-6540.  DO NOT try to manage sales tax audits alone.  Invest a little time and money in a pre-audit review so that you will know the problems before the auditor arrives.  Only then, can you fully manage the audit process and minimize your liability.

Ned Lenhart
President
Pre-Audit Reviews

Jun 21
0

Huge Sales Tax Overpayment-How did this get through?

By | Tax Audit

A company recently overpaid its New York state and Suffolk County New York sales tax in one month by $10,000,000!!!!  How do you do this?

Apparently company paid over $10 million in use tax when it should have only paid $1,000.  The company reported out- of-state purchases of $116,000,000 which was taxed at 8.625% for a total tax of $10,005,000.   The county is having to refund over $5 million and the State is having to refund over $4.6 million.

What type of company would just pay $10 million in tax without some deeper investigation?  Who would prepare a sales tax return and not understand that this is not right?

Ned Lenhart
President
New York Tax Overpayment

Jun 16
0

Corporate Officer Escapes Liability-This Time!!

By | Tax Audit

Most states have a very powerful tool to collect unpaid transaction and withholding taxes.  It’s called “officer liability”.  The statutes vary widely between the states.  Regardless of how they may apply, the end game is the same…hold one or more officers of the organization personally liable for unpaid taxes.  If they can’t pay, put a lien on their property and force them to a judicial sale to satisfy the tax.

Virginia recently issued a letter ruling that determined that the CEO of the company was not personally liable for unpaid use tax and some withholding tax because he didn’t have day to day control of these activities and didn’t have any actual knowledge that the taxes were not getting paid.  Even though his name was on the account as a responsible party, the company used a check writing machine to apply his signature to the checks and he didn’t pay any attention to what was being paid and what was not being paid. In some states, this fact pattern would not have been beneficial to the CEO.

The application of officer liability rules vary by state.  Some states apply this only to taxes that are collected but not remitted.  Some states apply this to all taxes, whether collected or not.  Some states apply the standard to an “responsible party” whether they are an officer or not.  You get the idea. There is no uniform standard as to when this rule will apply.  The part that is uniform, is that states have the ability to enforce these provisions when they need to and are not afraid to do so.

If your company has unpaid sales or use tax and your officers are not adequately protected or at least informed of this potential liability, then there could be serious issues to deal with if taxes are not being paid.

Ned Lenhart
President
Voluntary Disclosure Negotiations