The Securities and Exchange Commission (SEC) has demonstrated an increased scrutiny of tax accounting by issuing two fines in the last seven months. Most recently, the SEC fined a taxpayer $200,000 for failure to have the proper controls in place to ensure accurate accounting related to compliance with states’ sales and use tax laws. As previously reported in the September 2010 issue of the SALT Shaker, the SEC fined a taxpayer for alleged improper accounting related to tax reserve manipulation.
The SEC found that Hudson Highland Group, Inc. (Hudson) lacked the proper internal controls to collect and remit $3.9 million of state and local sales tax. The SEC determined that the failure was due to the company lacking accounting software capable of properly calculating the amounts of sales tax owed. Although Hudson, a New York-based staffing services company, identified its sales and use tax issue on its own and took steps to correct the problem, the SEC fined the company for the periods during which the company’s books and records failed to accurately reflect Hudson’s sales tax liabilities.
With the expansion of many states’ sales and use taxes, this action should act as a wake-up call for companies that have little exposure to state and local sales taxes. Where historically taxpayers who identified sales and use tax liabilities on their own were able to approach a state and voluntarily comply with the tax laws (often with a penalty waiver), now those very same taxpayers could face an SEC action for their failure to proactively identify and manage their state and local sales and use tax liability.