In July, North Carolina-based online retailer Vista Horticultural, operating as Eden Brothers, lodged a complaint in North Carolina Business Court against their tax advisory firm, Johnson Price Sprinkle PA, DMJPS PLLC. The dispute revolves around alleged professional negligence, with Eden Brothers claiming damages due to their accounting firm’s failure to provide critical guidance about sales tax filing obligations. The firm was initially retained in 2017 for tax return preparation but also offered bookkeeping, business consulting, and sales tax assistance services. The firm helped the company set up its sales tax system to collect sales tax in North Carolina in 2017 and filed sales tax returns on the company’s behalf.
In 2018, the Wayfair vs. South Dakota Supreme Court decision fundamentally changed the state’s ability to tax out-of-state vendors. The complaint alleges that the firm did not advise the taxpayer that their sales tax obligations may have changed after the 2018 Wayfair decision, and did not advise the company that their large volume of online sales may have created sales tax obligations in other states. The complaint says that after the taxpayer received a notice from the state of Arizona about potential sales tax obligations, they forwarded it to the tax advisory firm. The firm then billed the taxpayer for research into their sales tax obligations but never provided guidance on their possible filing obligations in Arizona or in any other state.
The company hired an external CFO in July 2021, who advised them that their large volume of online sales likely meant they had unpaid sales tax liabilities. The company was then referred by its tax advisors to an outside accountant who specialized in sales taxes, and the company applied for and was granted voluntary disclosure agreements to pay back taxes. The company ultimately paid $2 million in unpaid tax liabilities under various disclosures to 39 states.
The complaint requests relief under multiple claims, including breach of contract and violations of professional standards under the AICPA Code, professional negligence for failing to exercise reasonable care, and breach of fiduciary duty. The defendant’s response in part brings attention to sections of the engagement letters for the professional services provided where it is said that evaluation of any additional filing requirements would be provided to the taxpayer upon request, and the taxpayer’s own obligation to comply with state tax laws while operating their business. The case is currently moving through the pre-trial process in North Carolina Business Court.
Remaining in compliance with sales tax laws in the 45 states with a statewide sales tax, local sales taxes in states without statewide sales tax, the District of Columbia, and Puerto Rico can be incredibly complex and difficult to keep up with, especially for online retailers. For accountants and advisory firms, especially those without a dedicated sales tax practice, it can often fall outside of their scope of expertise. Due to the constantly changing sales tax landscape of the last few years, keeping up with both the laws of these jurisdictions and the business practices of clients can be a massive undertaking even for specialists. When providing any kind of professional advice, but especially about state and local taxes, defining where the obligations of the advisors end and the obligations of the taxpayer begin is critical to keeping taxpayers aware of their legal obligations. (Vista Horticultural Inc. v. Johnson Price Sprinkle PA, 2023-CVS-1594, North Carolina Business Court)