Hudson Highland Group Settles Sales Tax Issues with SEC, Pays Penalties

by Stewart Weintraub and Jennifer Weidler

During January, the Securities & Exchange Commission (“SEC”) fined Hudson Highland Group, Inc. (“Hudson”) – a staffing company – for failing to implement the requisite internal controls to correctly collect and remit approximately $3.9 million in sales taxes.

From 2003 through 2007, Hudson’s North America segment (“HNA”) failed to correctly and consistently collect and remit sales tax from its customers to the appropriate taxing jurisdictions. The error was due to the accounting software utilized by the company, which was incapable of performing an automated analysis of the correct taxes owed.

Because HNA failed to collect and remit the taxes as required, it became liable for its customers’ tax liabilities, plus interest and penalties. Hudson executives learned of the accounting issue during 2003, however they did not fully implement a system for accurately calculating and invoicing sales taxes until January 2007. As such, from 2003 through 2007, Hudson’s books and records failed to accurately reflect its sales tax liabilities. In order to correct the error in its customers’ unpaid sales tax liabilities, Hudson ultimately paid approximately $3.9 million to various jurisdictions.

Notwithstanding, the SEC found that Hudson violated Exchange Act Section 13(b)(2)(A) and 13(b)(2)(B). According to the SEC, the violations were due to its failure to “devise and maintain a system of internal accounting controls for sales taxes that were sufficient to provide reasonable assurances that the company’s transactions were recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles” and its failure to accurately reflect its tax liabilities on its books and records.

Without admitting or denying the SEC findings and claims, Hudson agreed to the entry of an Order of the Commission requiring it to cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and (13)(b)(2)(B) and to pay a $200,000 penalty.

As this case demonstrates, it is imperative that companies consistently review their internal accounting systems and ensure their compliance with all tax laws. Furthermore, upon discovering a tax error it is crucial to expeditiously address the problem in order to halt any further exacerbation of the issue and potential interest and penalties. For a publically traded company, this case demonstrates that, to avoid the risk of an additional layer of penalty being imposed above and beyond that which the taxing authorities impose, an SEC registrant must act diligently to correct tax problems as discovered.

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