Research Case 1

eVade, an online retailer, fulfills its online orders by

shipping its products directly to customers in all 50

states. eVade does not have a brick-and-mortar store

presence in any state, but does operate distribution

centers in various states across the country, including

State X. Consistent with its practice in all 50 states,

eVade does not collect or remit sales tax to State X.

In recent court rulings, State X has taken the position that

operating a distribution center within a state constitutes

nexus and thus would subject that company to collect

and remit sales tax on all sales within that state.

As of December 31, 2011, eVade 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, eVade has estimated 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 in

penalties.

On March 15, 2012, Mr. Needmoney, the governor of

State X, established a tax amnesty program. The program

provides that any unregistered taxpayer who voluntarily

registers to collect sales tax on a prospective basis will

be forgiven (1) 50 percent of all unpaid sales tax and (2)

all interest and penalties on unpaid taxes. eVade

management decides to take advantage of this program.

On June 15, 2012, eVade completes the necessary

paperwork and other actions to participate in the

program and pays State X $25 million to settle its

obligation through December 31, 2011.

Requirement: Please support your answers using FASB Codification to cite standards relevant to your case.

1. As of December 31, 2011, what amount, if any, of sales

taxes due should be recognized in eVade's financial

statements?

2. What effect, if any, does eVade's decision to

participate in the tax amnesty program have on the

amount recognized as of March 31, 2012?

3. What amounts should be recognized in the financial

statements for the $25 million payment on June 15, 2012?