Sales Tax Problems Cause SEC Fine!

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The Securities and Exchange Commission (SEC) recently ruled in an administrative proceeding that a corporation did not maintain appropriate internal controls and books and records relating to its sales tax liabilities.


The SEC ruled that the corporation failed to consistently comply with tax laws that required the company to collect sales taxes from its customers and to remit them to the taxing jurisdictions. According to the ruling, the reason for these failures is that the corporation did not have accounting software capable of calculating the amounts of sales taxes owed. The sales tax laws mandated that if the corporation failed to collect and remit the taxes as required, and if the corporation's customers did not otherwise pay the taxes, the corporation became liable for the outstanding sales taxes, plus potential interest and penalties.

In the ruling, the corporation's failures to consistently collect and remit the required taxes ultimately required it to pay substantially all of the uncollected taxes ($3.9 million) itself.

To add insult to injury, not only did the corporation have unpaid sales tax liabilities to deal with, but as a result of the SEC's administrative proceeding, the SEC imposed a penalty of $200,000.

What did the Corporation Do Wrong?

  1. Failed to collect sales tax from its customers and remit sales tax to the taxing jurisdictions for several years.
  2. Corporation's accounting software was inadequate to track sales tax rates and taxability of the corporation's goods and services.
  3. Corporation's software failed to source sales to the correct location or jurisdiction.
  4. Corporation's software did not track which customers had "direct pay permits" and other exemptions.
  5. Corporation's financial statement reserve for its sales tax liability was understated, and wasn't allocated to specific states.
  6. Corporation's records were incomplete and required manual reconstruction of sales data to calculate taxes owed.

So What?

If you are a public company governed by the SEC, it is imperative that you take action immediately to accurately manage and monitor your sales tax obligations and exposure. 

If you are a private company not governed by the SEC, it is still imperative that you take action immediately as well. 

Having outstanding sales tax liabilities can become a significant liability with interest and penalties, if neglected.  If sales tax returns are not filed, the statute of limitations never begin.  Meaning, if the state contacts you first, they can make you file sales tax returns for all prior years in which your company had a requirement to collect and remit sales and/or use tax.

Proactive measures can be taken to mitigate sales and use tax exposure, such as entering into a voluntary disclosure agreement (VDA).  A voluntary disclosure agreement is a process that allows a taxpayer to approach a state on an anonymous basis to "clean-up" past tax liabilities, and comply on a go forward basis.  A VDA allows a company to limit the look-back period (number of prior tax years a state requires returns to be filed), potentially reduce interest, and waive penalties. 

If your company is unsure whether it has sales or use tax exposure, or is unsure how to mitigate that exposure, please contact me for assistance.

For a copy of the SEC Administrative Proceeding, go to:


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