In: Accounting
vveVade, an online retailer, fulfills its online orders by
shipping its products directly to customers in all 50 states. eVade
does not have a brick-and-mortar store presence in any state, but
does operate distribution centers in various states across the
country, including State X. Consistent with its practice in all 50
states, eVade does not collect or remit sales tax to State X.
In recent court rulings, State X has taken the position that
operating a distribution center within a state constitutes nexus
and thus would subject that company to collect and remit sales tax
on all sales within that state.
As of December 31, 20X1, eVade has operated its distribution center
in State X for five years and has never collected or remitted sales
tax to State X. Although the Company considers the risk of
detection to not be probable, eVade has estimated the total amount
of sales tax payable to the state for the past five years to be $50
million plus $6 million in interest and $4 million in
penalties.
On March 15, 20X2, Mr. Needmoney, the governor of State X,
established a tax amnesty program. The program provides that any
unregistered taxpayer who voluntarily registers to collect sales
tax on a prospective basis will be forgiven (1) 50 percent of all
unpaid sales tax and (2) all interest and penalties on unpaid
taxes. eVade management decides to take advantage of this
program.
On June 15, 20X2, eVade completes the necessary paperwork and other
actions to participate in the program and pays State X $25 million
to settle its obligation through December 31, 20X1.
Required:
A) As of December 31, 20X1, what amount, if any, of sales taxes due
should be recognized in eVade’s financial statements?
B) What effect, if any, does eVade’s decision to participate in the
tax amnesty program have on the amount recognized as of March 31,
20X2?
C) What amounts should be recognized in the financial statements
for the $25 million payment on June 15, 20X2?