In the past, Liability Lessons has examined the teamwork required when multiple professions and disciplines interact with a single client.1
In this column, the focus is on team play at a very specific moment in the life of a business: the moment of conception. This is a particularly sensitive moment from the standpoint of professional risk.
In Pennsylvania, new entities are required to file an enterprise registration known as a Form PA-100. This form must be completed to register for certain taxes and services administered by the Pennsylvania Department of Revenue (DOR) and the Pennsylvania Department of Labor & Industry. The form is also designed so that previously logged enterprises can register for additional taxes and services, reactivate a tax or service, or notify both departments that additional locations have been added. The form itself is 13 pages, accompanied by an equal number of pages of instructions. A business owner must sign the form, and the signature is affixed under the penalties of perjury.
The areas covered in the PA-100 are wide-ranging. Among the topics are taxes and services, found in Section 3. The new business entity must make elections as to the state taxes to which it is subject. There are many categories, and among these is sales tax.
There is no place for a CPA to sign off on a PA-100; no requirement that a CPA be registered with a new business entity or otherwise be identified as a preparer. Yet, when a new entity prepares and files its PA-100, wouldn’t you expect that it has been run by a CPA? It only makes sense that a PA-100 is, at the very least, professionally eyeballed prior to filing.
Here’s where it gets interesting. Initially the PA-100 is prepared by the entity, or perhaps by the entity’s outside legal counsel or business adviser. Only then is it shared with a CPA for review. Now, bear in mind a few things. First, much of the content is entity-specific, and can only be vouched for by ownership. This includes, for example, business structure; owners, partners, shareholders, and officers; business activity information; and corporation information. But tax elections might also have been completed on the form by the time it’s shared with the CPA for review. Or it may have been left blank. In either case, an alert and cautious practitioner will take due care to set aside assumptions and to consider the document anew.
First, consider how the form came to be. Who prepared it? Was it prepared entirely by the client or by its legal counsel? And what is the client’s level of sophistication with regard to the business? Is this a new iteration of an existing business, or a new venture altogether? In other words, how much original thought is behind the entity registration form, and what judgments had to be made to achieve compliance with state law?
Let us assume that the new entity is a mobile curbside pet grooming business. Payroll tax? Check. Sales tax? Uh … wait a minute. Is pet grooming subject to sales tax? Do you happen to know offhand? More fundamentally, who researched this question and figured out whether a pet grooming service is subject to sales tax? Rarely will a newly established small business expressly engage a CPA to determine whether it is subject to sales tax.
More likely, the client assumes that the accountant will just know the answer. Even more likely, the accountant will assume that the client or the client’s counsel knew the answer when the PA-100 was prepared. There may be a legitimate “jump ball” between attentive legal counsel, the business adviser, or the registrant on the one hand and the CPA on the other as to who is responsible for the accuracy of the tax registration. But if the parties are inattentive, what happens?
Trouble, that’s what. If sales tax is not elected, you can be sure that it is not being collected. And if sales tax is owed but is not collected, things get ugly. The client will be audited by the DOR; and when it is, it will be shocked and stressed to learn of the heretofore invisible liability that has been silently growing. The client will invariably blame its tax preparer for having either given it bad advice or for having missed the issue entirely. A liability claim will follow.
In an alternate nightmare, the client changes CPAs after some period of time, and the new CPA assumes that the business is not subject to sales tax because of the entity’s tax return history. Perhaps the new CPA even asks to see the PA-100 as due diligence for this new client acceptance, notes that there has been no sales tax registration, and accepts it. Trouble will soon follow here too.
State tax registration for an entity will always be thought of as the purview of the practitioner. While this is hardly an absolute statement in the academic realm of the law, it is an absolute statement in the practical realm of client expectations. Practitioners, therefore, are well advised to not only review the PA-100 carefully, but also to think about it independently, free from inferences, assumptions, and anecdotes. You never know what will turn up. Your client will deeply appreciate your professionalism, thoroughness, and concern for their well-being.
1 “When Teaming with Other Professionals, Play Your Position,”
Pennsylvania CPA Journal, summer 2014, pp. 12-13.
Jonathan S. Ziss, JD, is a partner with Goldberg Segalla LLP in Philadelphia. He can be reached at firstname.lastname@example.org.