How fair is Wayfair?
It depends on who you ask.
To some, the U.S. Supreme Court’s decision to strike down a 1992 ruling that established a physical presence threshold for when states could tax remote sales is a way of leveling the sales-tax playing field for retailers.
Others see it as a threat to small businesses.
Still others see implications that reach far beyond the sales tax realm.
Regardless, one thing is certain: CPAs must be vigilant — sometimes cautious, sometimes less so — in how they provide tax services and advise clients.
That’s according to the folks at Aon, which partners with the AICPA to provide insurance to meet the personal and business needs of today’s CPAs.
Aon has released a new report that warns CPAs to “understand the professional liability implications of this decision” — and there are many.
I’m quoting here from the Aon report:
“Physical presence is no longer the nexus standard when evaluating whether or not a client should collect and remit sales tax to a specific state, and clients should understand this important concept.
“A client who is not timely informed of the change in nexus standard may assert that they did not have sufficient time to understand and prepare for additional filing and reporting responsibilities in a cost-effective manner. This may result in claims against the CPA firm, seeking to recover the additional costs incurred by the client to quickly implement the required changes.
“If a CPA fails to inform a client about its responsibility to collect and remit sales tax in a particular state and this is uncovered by the state, the client may contend that the CPA firm failed to advise them of the change, and should be responsible for not only the penalties and interest assessed by the state, but also for the uncollected taxes. Notably, taxes are not typically part of recoverable damages in a professional liability claim.
“From an income tax perspective, clients who fail to file tax returns in economic nexus states may claim that their CPAs failed to advise them of their filing obligations or failed to update them regarding the impact of the Wayfair decision, seeking to recover their costs for penalties and interest. If the client is subject to double taxation due to the inability to amend returns in their home state, they may also seek recovery of the additional taxes.”
So what should CPAs do?
According to Aon, to mitigate the risk of a claim related to the Wayfair decision, CPA firms should:
- “Review the U.S. Supreme Court decision and guidance issued by the AICPA and others to determine how the ruling affects a CPA firm’s clients.”
- “Research the nexus standards for sales, use and income tax laws in other states and its application to the CPA firm’s clients.”
- “Review engagement letter templates. Templates should include (a) a detailed scope of service; and (b) a provision stating that tax services do not include tax planning or tax consulting, but those services can be provided by the firm pursuant to a separate engagement letter.
- “Proactively inform all clients about the change in nexus standards for sales, use and income tax purposes.”
- “If the CPA believes that the Wayfair decision may apply to a specific client’s tax situation, contact the client directly to share these thoughts and advise the client to engage your CPA firm or another qualified professional for further evaluation.”
- “The Wayfair decision may require clients to register, collect and remit sales tax in additional states, or to modify their notifications to online purchasers regarding use tax reporting obligations. Some clients may have computer software applications that can be updated to comply with these obligations, but most will need to use third parties to modify their online sales platform, and may seek recommendations from their CPA. However, vicarious liability may arise for the CPA firm should the third party referral make an error.”
- “Review client files to identify potential state income tax filing obligations. If it appears that the client should file in additional jurisdictions, recommend in a written communication that the client do so for the upcoming tax year. If the client refuses, consider the additional risks in rendering services to a client that disregards its filing obligations.”
- “Some CPA firms may not have the experience to consult about sales and use tax filing obligations. If so, consider referring the client to a tax attorney or another CPA firm to provide assistance. Follow the same guidelines for referrals as outlined above.”
Read Aon’s report in its entirety. Study it … and make sure you’re not placing yourself at risk as you advise your clients in regard to this important ruling.
Learn more here
- MACPA Practitioners Conference, Oct. 25, Baltimore
- MACPA Advanced Tax Institute, Nov. 12-15, Baltimore
- The state tax and accounting impacts of Wayfair (from PwC)
- How to advise clients after Wayfair ruling (from AccountingWEB)
- Wayfair to cause ‘explosion’ of accounting challenges (from Bloomberg)
- Accounting and financial reporting considerations in Wayfair decision (from Grant Thornton)
- Wayfair decision: Potential financial reporting implications (from Deloitte)