State Tax Alert
SEC's Heightened Awareness of Sales and Use Tax Remittance Requires Taxpayer Diligence
On January 10, 2011, the Security and Exchange Commission ("SEC") fined the Hudson Highland Group Inc. ("HHGI") for lacking the internal controls to properly collect and remit $3.9 million in sales tax.1 The ruling states that a segment of HHGI "failed to consistently comply with tax laws that required it to collect sales taxes from its customers, and remit them to the taxing jurisdiction as their fiduciary" as is required by Section 13(b)(2)(B) of the Exchange Act.2 As a result, HHGI paid the uncollected sales taxes out of its own reserves, according to the ruling, as well as an SEC imposed fine of $200,000 for its noncompliance.3
The facts of the ruling indicate that in September 2003 HGHI's member's tax department began raising concerns to senior executives about the company's compliance with sales tax laws in various jurisdictions.4 Subsequently, the entity determined that it did not have adequate systems to accurately collect and remit sales taxes5 or record reserves for sales tax liabilities.6 Shortly thereafter, the company with the assistance of a "Big 4" accounting firm made a failed or aborted attempt to remedy the situation.7 The company finally installed new software and enhanced internal controls in 2007.8
Typically, corporate tax departments measure liabilities relating to the under collection of sales tax by calculating taxes, interest, and penalties potentially owed in accordance with governing state tax laws. However, in light of the above mentioned decision, taxpayers must be aware that the SEC may now become more vigilant in terms of levying fines and penalties for the under collection of sales and use tax. This is a concern as these SEC penalties may significantly and negatively impact financial statements. In this instance, HHGI may have been able to avoid the fines imposed by the SEC had an updated and comprehensive software solution been in place to ensure that the company was properly collecting and remitting sales and use tax.
Taxpayers identifying a reporting deficiency should consider pursuing voluntary disclosure agreements in order to minimize their underlying liability for taxes, interest, and penalties. Voluntary disclosure agreements are intended to encourage taxpayers to voluntarily correct overdue tax liabilities regardless of the reason for the taxpayer's current non-compliance. Generally, significant incentives are provided by such voluntary disclosure agreements to eligible taxpayers who participate in the program and comply with its requirements including, if applicable, the limitation of look back periods and the avoidance of civil penalties.
The voluntary disclosure agreements made under such programs are generally confidential. Most programs prohibit the state tax department from using the taxpayer's disclosure as evidence against the taxpayer or sharing them with another agency unless the taxpayer intentionally fails to comply with the compliance agreement made under the voluntary disclosure agreement.
If you have any questions about information in this article please contact Chris Vignone at (914) 798-9903 or cvignone@gmgconsulting.com.
1 SEC Release No. 3226, In the Matter of Hudson Highland Group, Inc., January 10, 2011 at http://www.sec.gov/litigation/admin/2011/34-63688.pdf.
2 Id.
3 Id.
4 Id.
5 For example HHGI's software system was unable to properly account for instances in which taxable services were performed for a single customer in multiple jurisdictions.
6 SEC Release No. 3226, In the Matter of Hudson Highland Group, Inc., January 10, 2011 at http://www.sec.gov/litigation/admin/2011/34-63688.pdf.
7 Id.
8 Id.