Question

Nutrition Corporation manufactures and sells healthy foods products online to consumers and delivers the products ordered online by shipping the goods directly to customers in all 50 states. Nutrition does not have a brick-and-mortar store presence in any state, but does operate distribution centers in various states across the country, including Virginia. Consistent with its practice in all 50 states, Nutrition does not collect or remit sales tax to Virginia. In recent court rulings, the state of Virginia has taken the position that operating a distribution center within a state constitutes nexus and this would subject that company to collect and remit sales tax on all sales within that state.
As of December 31, 2019, Nutrition has operated its distribution center in Virginia for five years and has never collected or remitted sales tax to Virginia. Although the company considers the risk of detection to not be probable, Nutrition 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, 2020, Governor Janson, the governor of Virginia, 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. Nutrition management decides to take advantage of this program.
On June 15, 2020, Nutrition completes the necessary paperwork and other actions to participate in the program and pays Virginia $25 million to settle its obligation through December 31, 2019.

Required:
You are a staff accountant working on the audit of Nutrition Corp. You have been asked by the audit partner to write a memo on the appropriate accounting treatment for Virginia sales tax.
Your analysis should include (1) the accounting treatment for the unpaid sales tax included in the financial statements for the year-ended December 31, 2019 (assume the 2019 financial statements were issued on February 28, 2020), (2) the accounting treatment for Nutrition’s decision to participate in the tax amnesty program announced on March 15, 2020, and (3) the accounting treatment for the $25 million payment made on June 15, 2020.

When discussing any of the accounting treatments, you should reference the appropriate FASB guidance which dictates the treatment (see case instructions). Journal entries can be included to assist with your description of the appropriate treatment.

Answer 1

AUDIT MEMO

Subject: Accounting treatment for Virginia sales tax

Nutritionn corporation operate distribution centre in Virginia. Nutrition corporation dose not collect and remit sales tax to Virginia state.

Virginia as per their sales tax rules need collect sales tax when

1. If company have nexes in Virginia
2. When company selling taxable goods and services.
3. Are buyer required to pay sales tax

If answer is yes for all three required to registration in Virginia. Here Nutrition required to to register with Virginia state. If failures liable for penalties and interest.

Nutrition operates for 5years in Virginia with tax treatment. Nutrition has sales tax liability $50 million, plus interest $6 million, and penalty $4 million. Virginia state established tax amnesty that forgives Nutrition corporation 50 %tax liability and interest and penalty.

When sale made to customer account treatment we make is that

Receivable a/c dr

To Sales a/c

To Sales tax liability.

Sales tax liability is the receivable from customer therefore company is not bear tax expenses but liability to taxes to state.

Non payment from customer required to issue credit memo that reduce tax liability of the company.

Virginia corporation meet the criteria of sales tax rules but not get registered company liable for intrest and penalties. The record Nutrition corporation have unpaid taxes for 5 years. And not compiled with sales tax rules , therefore Virginia liable for penalties and interest. And longer the way file tax return and pay taxes then longer will be taxes , interest and penalties. Sales tax liability is shown as Current liability in balance sheet. Journal entry is

Sales tax liability dr

To sales tax liability payable

As per Virginia state amnesty unregistered tax payer voluntarily pays taxes, state will forgive penalty and interest and 50% sales tax liability. Nutrition should participate in amnesty program that gives tax and interest, penalties relief. Therefore Nutrition corporation liable for 50 % of unpaid sales tax liability. Nutrition required to show assets and liability on financial statement on applicability of amnesty program. Apply recognition criteria. And measures , present, disclose relevant information as per standard. On June 2020 $25million tax paid by Nutrition on participation in amnesty program.

Journal entry

Tax liability a/c_ dr

To cash a/c cr

To sales tax amnesty cr

Company should apply appropriate general appraoch and criterion to finanancial statement.

.