Update on a Tax Malpractice Suit that May Sound Too Familiar

Our readers may recall our column in this magazine last Fall involving a SALT malpractice suit filed against a North Carolina CPA firm by its former client, Vista Horticulture, Inc. d/b/a Eden Brothers. If you or your spouse are gardeners, you may know the company as an online seller of flower bulbs and seeds, etc. to customers all over the country.

The plaintiff sued the CPA firm and one of its partners individually for allegedly breaching their professional duty to warn the company that its practice of collecting sales tax from customers only where it had “physical presence nexus” (i.e., North Carolina) should have been scrapped in light of the U.S. Supreme Court’s landmark 2018 decision in South Dakota vs. Wayfair, Inc. There, the Court told us that from now on, a vendor should collect/ remit sales tax or seller’s use tax from customers in any state where the vendor has “economic nexus.” That is generally understood to include a state where your client has a certain number of sale transactions and/or dollar volume of sales annually – even if its employees never set foot in that state and even if all deliveries were by common carrier.

We covered these issues and offered some general cautionary advice in our recent sales/use/rental tax webinar for the Alabama Society of CPAs; the video can be downloaded from the ASCPA website. 

After the parties failed to settle their grievances through mediation, the North Carolina Business Court recently dismissed one claim against the CPAs on summary judgment, but ruled that the other two claims should be set for a jury trial. The Judge rejected the argument that the CPA firm owed a fiduciary (trustee-like) duty to the client, but concluded the claims involving professional negligence and breach of contract were viable. This is a classic case where the engagement letter was expressly limited in scope to income tax advice/return preparation and some property tax advice, but the CPA firm also apparently dabbled in the sales tax realm for the client and allegedly should have specifically warned the company about Wayfair. He ruled that “viewing the evidence in the light most favorable to [Eden Brothers], a factfinder could reasonably conclude that the [CPA firm and tax partner] agreed to provide services beyond the scope of the … engagement letter."

There is a lot of finger-pointing back and forth in this case, so this will make for an interesting jury trial if the parties don’t settle in the meantime. If you’d like a copy of the Business Court ruling or the complaint and answer, or would like to discuss the implications of this ruling on your firm [off-line and with the attorney-client privilege in place], please email one of us at bely@bradley.com or wthistle@bradley.com.

Republished with permission. This article, "Update on a Tax Malpractice Suit that May Sound Too Familiar," was published by ASCPA Connections on November 1, 2024.