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Overview

A Virginia based company is a hands-on professional training institution for a wide variety of management and technology professionals. The company was founded in 1970’s and, since inception, has provided training throughout the continental United States. The company maintains learning centers in eleven states and performs on-site training at client locations as needed.

 

 

Challenge

During the course of a Georgia State Sales & Use Tax Audit, it was brought to the company’s attention that they were not properly accruing use tax or paying sales tax on their purchase of course catalogs. These catalogs are mailed to recipients all over the country.

In producing the catalogs, the company purchases paper from a print broker based out of Georgia which is shipped directly to the printing company located in Lincoln, Nebraska. The printer then produces the catalogs in Nebraska. The printer mailed them to a direct mail house company located in California.  Neither of these vendors charged sales tax on the purchases because the Company issued a direct-mail exemption certificate to both the print broker and printer. The catalogs were then mailed directly from the mail house location in California to potential customers located throughout the country. 

The company assumed that the purchase of these catalogs was not subject to sales and/or use tax, because the State of California does not impose such a tax on direct mail advertising. Because of the Georgia audit findings, the company engaged Altus Group to determine if Georgia’s imposition of tax was appropriate and, if direct mail was in fact subject to sales & use tax, to perform an analysis of the direct mail purchases to determine their sales tax liability throughout the country.

 

Solution

While California, and several other states, do exempt direct mail advertising from sales & use tax, many states (including Georgia) impose the tax on the value of such mailings to recipients within their borders.  Altus reviewed all direct mail purchasing activities and prepared a matrix of costs that needed to be included in the taxable cost base under state laws. We then obtained information from the client including, but not limited to, vendor contracts, mailing lists, breakdown of course catalog costs, total revenue, and training days by state breakdown. To determine the cost basis per jurisdiction, we utilized the catalog mailing lists to allocate a portion of the catalog costs to each corresponding state jurisdiction.  We then calculated state-by-state sales & use tax liability estimates based on our allocations. Due to the materiality of the tax exposures in several jurisdictions, we initiated voluntary disclosures in fifteen states.  Under the voluntary disclosures, we were able to limit the exposure to the most recent three or four years, depending on each jurisdiction’s disclosure requirements. This eliminated tax exposures for the company that, in some instances, went back twenty years.

One additional consideration was the materiality of the exposures for financial reporting purposes.  The turn around time was extremely tight, as the client was required to accrue a liability by the end of their fiscal year (9/30) and engaged Altus in mid-August. Through a diligent review of the client’s data, we were able to reasonably estimate exposure within each jurisdiction in a timely manner in order for the client to accrue the liability for year-end reporting.

 

 

Result

As a result of the voluntary disclosures, between tax savings realized via the limited lookback periods and the penalty savings included in such disclosures, Altus was able to remove over $300K in tax and penalty exposure that was legally due in the absence of the disclosures. The Company was extremely pleased with the overall outcome of the engagement, as well as, the review process.  While the out-of-pocket costs were a drain on the immediate financial results, the resolution of the outstanding matter set them up for prospective compliance and eliminated the risk of adverse future audit findings in all states where disclosures were completed.

Services provided

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