Nutrition Corporation Case Memo

Posted: August 26th, 2021

Research: Memo

Name

Institutional Affiliation

Research: Memo

To: Audit partner

From: Accountant

Date: 16.4.2020

Subject: Nutrition Corporation Case Memo

Executive summary

Nutrition Corporation has operated in Virginia for the last five years and has neither collected nor remitted the value-added tax to Virginia County. The company operates mainly online and does not have a physical store. The company has total sales tax payable amounting to $50 million,$6 million in interest, and $4 million in penalties accumulated for the past five years. The company volunteered on the tax amnesty program established by Virginia’s Governor Janson on March 15,2020. The amnesty program avers that any unregistered taxpayer who voluntarily registers to collect Value added tax (VAT) will be forgiven if he makes payment of fifty percent of all pending sales tax and also clears all the interest and penalties. Nutrition Corporation would have made $25 million for the fifty percent and $10 million for the pending interest and penalty. On June 15, 2020, the company registered in the amnesty program and paid Virginia $25 million to settle its obligation through December 31, 2019. Hence, the company should make arrangements to clear the debt of $10 million for the pending interest and penalties.

Analysis

Accounting Treatment for the Unpaid Sales Tax

It is the company’s responsibility to collect Value added tax from a consumer on behalf of the tax authorities or government. However, Nutrition Corporation has failed to make its financial obligations in the last five years. As a result, it has an accumulation of the tax liability of $50 million, $6 million in interest, and $4 million in penalties. A company also pays tax regarding the purchases of its products from other suppliers. A company can recover tax paid on suppliers from the tax authorities.  The corporation is supposed to file the difference between value-added tax collected from consumers (output tax) and value-added tax paid to its purchases (input tax)(ASC 450 Contingencies, 2020). When the output tax is more than the input tax, a corporation will remit the tax differences to tax authorities. Equally, when the input taxes are more than the output taxes, it can recover the tax differences from the government. The settlement of value-added tax is administered through the periodical submission of tax returns by a corporation (Hendrawan et al., 2018). All registered suppliers with the tax authorities pass the value-added tax to their consumers until the product obtained by the final customers. The consumers cannot recover value-added tax paid on purchases thus they are the ultimate sales taxpayers. Companies can also offer the final consumers’ certain products for consumption. In such cases, they should bear the sales tax on such purchases. A corporation should collect the value-added tax on behalf of tax authorities(ASC 740, 2020). The output tax is disclosed as part of income in the company’s books of accounts, and the sales revenue is only recorded after withholding the value-added tax from the customers. Therefore, the sales tax accounts are credited with a similar amount, which is the tax payable to tax authorities.

Accounting Treatment for Nutrition’s Decision to participate in the Tax Amnesty Program

Tax Amnesty program make taxpayers more compliant to report tax obligations, and tax authorities take advantage of this moment for the process to collect more taxes(ASC 450 Contingencies, 2020). The company participated in a tax amnesty program that was announced on March 15, 2020, by registering and remitting $25 million on June 15, 2020, as part of the accumulated tax (Hendrawan et al., 2018). The tax authorities did not specify the end of the amnesty period; thus, the payment should be treated as an expense to the company by debiting the books of accounts.

Accounting Treatment for the $25 Million Payment

Nutrition Corporation made a payment of $25 million on June 15, 2020, to participate in amnesty. The amount is treated as a payment of the accrued tax arrears for the past five years. Virginia’s Governor Janson established an amnesty on March 15, 2020, stating that 50% of the accumulated tax should be cleared together with the accrued penalties and interest fees. The payment made should be debited from the financial records of Nutrition Corporation and credited to the tax collection on the government accounts (ASC 450 Contingencies, 2020). The company should also negotiate with the tax authorities on the payment of the remaining $10 million for the tax penalties and the interest.

Conclusion

Having Nutrition Corporation participate in the amnesty program by registering and remitting the $25 million to tax authorities, they showed they are compliant taxpayers. They should start recording VAT on their books of accounts and passing the same to the customers. They should fully disclose their tax obligations to the government to avoid any legal implications in the future. Nutrition Corporation should add the tax rate on its products, pass the sales tax to the customers, and submit the tax obligation to the tax authorities and disclose the correct amounts. 

References

ASC 450 Contingencies. (2020). 450 Contingencies | DART – Deloitte Accounting Research Tool.          Retrieved April 17, 2020, from https://dart.deloitte.com/USDART/home/codification/liabilities/asc450

ASC 740. (2020). ASC 740. Retrieved April 17, 2020, from            https://asc.fasb.org/imageRoot/50/6844350.pdf

Hendrawan, A., Hapsari, M. K., & Setyowati, M. S. (2018). ANALYSIS OF ASSETS AND LIABILITIES             RECOGNITION RELATED TO TAX AMNESTY PROGRAM: COMPARATIVE OF ACCOUNTING AND TAX REGULATIONS. International Journal of Accounting, 3(16), 58-69.