E - Co, an online retailer, does not have brick-and-mortar store presence in any state. It fulfills its on-line orders by shipping its products directly to customers in all fifty states from its distribution center in State X. Consistent with its practice in all 50 states, E-Co does not collect or remit sales tax to State X.

On September 30, 2018, the State X supreme court ruled companies who have no brick-and-mortar stores but do have distribution centers in State X are required retroactively to collect and remit sales tax on all sales within State X.

As of December 31, 2018, E-Co has operated its distribution center in State X for five years and has never collected or remitted sales tax to State X. Although the company considers the risk of detection to not be probable, E-Co hasestimated the total amount

of sales tax payable to the state for the past five years to be $50 million plus $6 million in interest and $4 million inpenalties. E-Co has no plans to remit the sales taxes plus interest and penalties to State X.

Required - In connection with your audit of E-Cos 12/31/2018 financial statements, you need to answer the following questions related to sales taxes:

1. As of December 31 2018, does E-Co have a loss contingency related to sales taxes?

2. If yes, how should the sales tax matter be reflected in E-Cos December 31, 2018 financial statements?