Any retailer, even one operating in just one locality, knows that sales tax collection can quickly become complicated. Different goods and services may be subject to different rates or exempt from tax, and some purchasers may be exempt. Operating in multiple localities with different regimes only compounds the problem.

As if it were not enough to worry about audits by local tax authorities, companies that file reports with the Securities and Exchange Commission may also need to be concerned with the adequacy of their sales tax compliance controls.

In a recent cease-and-desist order, the SEC fined a company $200,000 for inadequate sales tax accounting controls. The company’s accounting software could not keep track of, among other things, rate differences and exemptions. The company, which started out as a spin-off, learned of the issue after several months of separate existence. It hired a Big Four accounting firm to help straighten things out, but the firm made little progress because of company turnover and because a difficult installation of a PeopleSoft accounting and management system was ongoing. Despite continuing efforts, the company’s books did not accurately reflect its sales tax liability until five years after the spin-off, when the PeopleSoft system was in place and the company was finally able to install a comprehensive sales tax software package.

The company ended up paying various jurisdictions $3.9 million in sales taxes that it had failed to collect. It was only able to recover $450,000 of this from customers, so its financials were misstated by about $3.5 million until corrected.

The SEC determined that the company had inadequate internal controls in violation of section 13(b)(2)(B) of the Securities Exchange Act of 1934. As a result, the company also violated section 13(b)(2)(A), which requires reporting companies to keep records that fairly reflect their transactions. The SEC required the company to cease and desist (which it apparently already had) and also imposed a $200,000 penalty.

Though the focus of the order was on sales tax, a subject of great interest to retailers, it could as easily have involved inadequate controls for use tax, property tax, income tax, or any other tax. The moral: tax compliance is not just a tax issue for SEC reporting retailers.

The text of the cease-and-desist order is available at

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