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)
UPDATE: Business Court grants parts of defendants motion for summary judgement but allows case to proceed. The North Carolina Business Court has released an opinion granting parts of the defendants’ motion for summary judgment in the case Vista Horticultural Inc. v. Johnson Price Sprinkle PA. The defendants, Johnson Price Sprinkle PA (JPS) argued that many of the claims Vista brought were not founded and should be dismissed. The Court denied and granted portions of the motion.
The first claim the Court considered in this motion was about breach of contract related to JPS not updating tax guidance given to Vista after the Wayfair decision was released in 2018. Vista claimed JPS had given them tax advice at the beginning of the relationship, in 2017, which JPS was obligated to update once Wayfair became the law of the land. Vista also received a notice from the Arizona Department of Revenue relating to possible sales tax exposure which they claim JPS did not give meaningful advice on. JPS’s position is that the terms of the contract they entered were clear and did not mention sales tax as an area of responsibility, further noting they had mentioned it and were told that Vista was not interested at that time. The Court agreed that Vista had not offered evidence of failure to fulfil written contractual obligations, highlighting that both parties agree JPS did advise on the areas in the contract, such as North Carolina state income, local government property and year end informational reports. However, the Court denied this portion of the defendant’s motion in the decision. The Court determined a reasonable factfinder would conclude JPS should have advised Vista since JPS had advised Vista on sales tax in the beginning stage of their relationship, the breadth of services covered by the contract (including monthly sales tax filings in NC, Accounts Payable, revenue reconciliation, and preparing other tax returns), that JPS had provided various services beyond the scope of the contract, and the fact that JPS thought of itself as Vista’s CFO. Additionally, at the beginning of the relationship, it was communicated to JPS that Vista shipped products to other states and that they would, at some point, need to review any sales tax implications related to out of state sales.
The second claim JPS wanted the Court to dismiss was the claim for professional negligence, malpractice, and common law negligence, which JPS argued should be dismissed based on Vista’s contributory negligence. Since Vista owner, Sabine Randon, did not send sales by state data after it was requested, JPS claimed that Vista was not diligent in tending to business affairs. However, the Court found that JPS did not fully explain why the sales by state information was needed, nor did they include the request in a follow up email or include it in a list of documents requested by JPS from Vista. Additionally, evidence was provided that a memo related to the AZ notice was prepared and never reviewed or provided to Vista. Vista requested advise on other states’ sales tax in March of 2021 and no advice was ever provided by JPS. The Court highlighted that under North Carolina law; to prove contributory negligence, the defendant must show the plaintiffs had a want of due care and a specific connection between the plaintiff’s negligence and the injury they suffered. In this case, the Court could not conclude Vista was contributorily negligent due to not knowing about the Wayfair decision until 2021. Beyond this lack of contributory negligence, when attempting to establish professional negligence in North Carolina, accountants can be held responsible for damages if they fail to use their professional knowledge, skill, or judgement, which the Court also reiterated in dismissing this portion of the motion.
The third claim JPS included in the motion to dismiss was the claim related to breach of fiduciary duty, which JPS claimed Vista has not provided evidence to back up. In this claim, the Court granted the motion. North Carolina has two different types of fiduciaries, a de jure (which is imposed by operation of law) and de facto (which arise due to specifics of the relationship and circumstances). De jure relationships are not recognized in North Carolina between accountants and clients, meaning the failure of an accountant to properly advise a client is insufficient as evidence to this claim, and the plaintiff must prove a de facto fiduciary duty exists. In order to prove this de factor fiduciary responsibility, one party must be completely in control of the information at hand. In this case, though Vista did look to JPS for accounting and financial services, those services were performed based on a contract which was governed by North Carolina’s laws related to the standard of care owed by accountants to clients and which was actively reviewed by Vista’s owner, Ms. Randon. Though JPS may have been in charge of accounts payable and considered itself Vista’s CFO, invoices were only paid after Vista specifically approved, and Ms. Randon carefully scrutinized the work JPS had been doing. These actions mean that a reasonable factfinder could not conclude JPS was acting with sole responsibility, and thus did not owe de facto fiduciary duty to Vista, which lead to this dismissal being granted.
The final area in the motion to dismiss is related to Vista’s claims for gross negligence and punitive damages, which again JPS claims Vista has not proven. The Court defined “gross negligence” as “wanton conduct done with conscious or reckless disregard,” further noting that more than simple carelessness was needed to prove this level of negligence—the act (or acts) must be done purposefully and with a conscious disregard, and plaintiffs must show each element of that, including duty, causation, proximate cause, and damages. JPS argues that Vista has offered no evidence of these elements, insisting the evidence Vista has presented shows defendants did nothing to advise or follow up may show simple negligence but falls well short of the wanton and willful conduct required to prove gross negligence. The Court agreed with JPS, noting that the Court cannot conclude from the evidence at hand that JPS had any reason to suspect their actions would lead to the damage Vista claims in this suit. The Court also was not able to find either the high level of disregard of Vista’s rights or the repeated conduct required by JPS to substantiate the gross negligence claim. Even holding Vista in the most favorable position, the decision states the Court can only find that JPS failed to tell Vista about Wayfair and failed to see the implications to Vista’s sales tax liability related to the decision, which a jury may find to be negligent, but is not sufficient to allege gross negligence, and thus the portion on the motion was granted.
As noted in the original write up for this tip, keeping up with compliance is complex and challenging, even for specialists. This order highlights that it’s very important to not only be aware of the sales tax laws, but the laws and regulations surrounding contracts. It is important to know what each side in an agreement expects, and to be aware that over the course of a professional relationship, it is critical to assess whether natural changes in the relationship have affected the contractual responsibilities. JPS did not contractually agree to manage the sales tax for Vista, but since they had such a wide breadth of control, and because they had provided services outside the scope of the contract, there is still room to argue if they were negligent in not managing the sales tax provisions. However, because Vista was not fully handing over responsibility and did continue to treat the relationship like a contractual arrangement, they were unable to establish their claims that JPS owed them a fiduciary duty due to their out-of-scope work. Parties on both sides of contracts need to be aware of what effect their actions will have on existing contracts and be aware if they are opening themselves up to additional responsibilities by their actions. (Order dated September 17, 2024, signed by Bledsoe, III, Louis A., Chief Business Court Judge Vista Horticultural Inc. v. Johnson Price Sprinkle PA, case number 2023CVS1594, in the North Carolina Business Court.)