On September 1, 2012, the state of California started to collect sales tax from Amazon after a years-long argument over whether the Internet company should pay such a tax. In just the first four months of collection that tax amounted to $96.4 million. A good deal? Maybe, but you could argue that this apparent win for California was not so good, as the state agreed not to pursue Amazon for back taxes, penalties and interest that it may have been owed—a potentially huge sum given the number of years Amazon has been in business.
California is pursuing other out-of-state Internet business companies for sales tax on business performed in the state. It is not alone. Many states are realizing that out-of-state Internet companies with in-state sales are a huge potential source of income to themselves if they can somehow establish that the companies have a business presence, or nexus, in them.
The Internet businesses potentially affected include not only those selling tangible goods, like Amazon, but others that sell or license products such as software and social gaming—products that did not exist when states first established their sales tax rules. Not surprisingly, states are rushing through legislation to pursue these new forms of revenue. Unfortunately, this means that sales tax rules will vary from state to state, making compliance a nightmare.
The rules for determining nexus in each state can be complex and subtle and can involve relationships that you wouldn’t think would affect tax status but in fact do. Take a California-based Internet company that sells to New York-based consumers. If it advertises in New York via a fixed-fee advertising agreement with a New York-based company, it probably has not created nexus in New York under that state’s nexus rules. However, if the fee is found to be commission based, even in the remotest way, the company probably has created nexus, as the arrangement amounts to a reward-based referral. What seems like a minor variation in the terms of an advertising agreement can have very large tax liability consequences.
The size of the deal is irrelevant for determining nexus. Once you have nexus, you pay sales tax on all your sales to consumers in the state, not just those sales generated from the agreement. So the price of bad tax planning can be high.
Some sales tax rules remain straightforward. For example, if your company employs someone resident in another state—someone who assists in any way with the company’s sales process or sales cycle—you have nexus in that state. But with new sales-tax rulemaking afoot across the land, you will need to consider many other factors to determine your liability.
Internet businesses have choices. Good tax planning will pay off, but it’s not cheap. Some businesses pay third-party organizations to help them comply with ever-changing state tax rules. Unfortunately, many businesses choose to ignore the rules altogether and hope they don’t get caught. That’s not a smart choice, because when they are caught, the back taxes, penalties and interest will be considerable.
Not everyone can get the past eradicated like Amazon did.
RoseRyan in action: keeping an acquisition on track
When your company is growing and changing fast, fine-tuning financials can sometimes take a backseat to managing the business. But think about this: subpar accounting for rev rec, inventory, equity or other areas can affect overall business health and even derail efforts to position your company for a major transition.
Helping businesses with these challenges to keep M&As and other objectives within reach is second nature to us. Check out our latest project profile to see how we helped a high tech acquisition target reconcile long-neglected accounting in record time to keep the deal on track. We also ensured a smooth post-acquisition integration.
What do a post-earthquake rescue and a RoseRyan gig have in common?
Recently I was thinking about an event my son participated in called the Tech Challenge, a design competition hosted by the Tech Museum of Innovation in San Jose. The children were a part of a team that had to meet the challenge of rescuing someone from a bridge broken during an earthquake. It’s a fabulous event, and the atmosphere reminds me of a room full of entrepreneurs and inventors bursting at the seams displaying their ideas and products.
My role: provide pizza and soft drinks and a place to for the kids to work. (Aha….I think I can manage that!) In many ways what we did to facilitate our children’s team activity was similar in spirit to how we at RoseRyan help our clients.
We may provide a specific skill, like project management or budget and planning analysis, that the client team lacks. We give expert advice, as I have done helping a client translate needs into requirements for a systems implementation. We might simply help get the day-to-day job done. Or we might mediate a situation where there are opposing views, helping people understand the options. Oftentimes the most important thing we do is get the right people in the room to speak to one another, listen and make decisions—together, we figure out how to proceed. (Just like my son’s team did, using the tools that included a net and a Nerf gun.)
When all is said and done, we don’t work with our clients so that we are successful, we work so that our clients are successful. Their success is our greatest reward. We build relationships and even friendships with fabulous people who care about their business and are striving to do things better and smarter.
In the end, my son’s team rescued the bridge survivor with one perfect shot from a Nerf gun and a fabulous net catch. Did they live up to the spirit of the challenge? I answer with a resounding yes!
RoseRyan really does have this team spirit too—we go beyond the numbers and become a part of our clients’ team to meet their challenges together.
To get a taste of how we work with our clients, check out some of our project profiles.
Sizing up the impacts of NASDAQ’s attempt to close the SOX loophole created by the JOBS Act
NASDAQ recently filed a proposed rule change with the SEC that’s seemingly aimed at SOX compliance. If implemented, each NASDAQ-listed company will be required to establish and maintain an internal audit function “to provide management and the audit committee with ongoing assessments of the Company’s risk management processes and system of internal control.” Companies listed as of June 30, 2013, will be required to establish an internal audit function by December 31, 2013; companies listed after June 30, 2013, will be required to establish that function prior to listing. In NASDAQ’s view, the proposed rule change will place no unnecessary or inappropriate burden on competition.
To me, this proposed rule change signals that the NASDAQ is weighing in on the JOBS Act provision that exempts certain companies from SOX 404(b), an auditor attestation regarding internal controls that was intended to foster growth by lowering administrative burdens on emerging growth companies (those with revenues less than $1 billion) entering the public market. These companies were granted as many as five years’ relief from a number of rules, including independent auditor attestation on the design and effectiveness of internal controls over financial reporting.
The more than 30 comments posted by the recent close of the SEC comment period were primarily from CFOs of small NASDAQ-listed companies, who said the proposed rule was costly for their enterprises and duplicative of existing SOX requirements. Some comments reflected concern that the rule reduced audit committees’ flexibility to direct the focus of the internal audit function.
Here’s my take: the proposed rule change was not intended to force companies to go beyond what is currently considered best practice—and what most companies do in support of SOX 404(b). (In general, companies that comply with 404(b) have a much more robust set of internal controls and are more diligent in consistently adhering to them—and therefore have greater financial statement integrity—than companies complying only with 404(a).) Although the proposed rule specifically excludes companies’ external audit firms from providing internal audit services, it does allow outsourcing to a third party.
The NASDAQ’s attempt to close the SOX loophole should not significantly affect RoseRyan’s SOX clients. These companies typically engage us to help them ensure that their internal controls are appropriately designed, to independently test the controls’ effectiveness and to periodically meet with their audit committees. I don’t see the proposed rule greatly changing that scope of work. However, the rule will add to the workload of many newly public companies currently exempt from 404(b). I view that change as a step in the right direction for investor protection and for leveling the playing field for companies traded on the NASDAQ, regardless of when they went public.
Life Sciences Roundtable tackles challenges along product development-to-launch trajectory
RoseRyan has been supporting clients in the life sciences industry for nearly two decades. In addition to providing assistance on many aspects of accounting, we host a Life Sciences Roundtable twice a year. The event brings together a small group of finance execs to discuss best practices and get input on challenges their life sciences companies are facing. The March 2013 roundtable focused on some of the challenges of moving from product development to product launch:
RoseRyan is pleased to provide a forum for our clients in the life sciences industry to discuss issues and share ideas with their peers. We look forward to hosting the next roundtable in the fall.
Perks nice, but focus on corporate culture to attract talent and improve your bottom line
What makes a company succeed? High on the list is corporate culture, a newly hot topic since Yahoo! CEO Marissa Mayer announced her controversial decision to abolish the Internet giant’s work-from-home policy with the intent to spur collaboration and innovation and, ultimately, increase profits. Mayer’s move runs counter to the culture of many companies such as Cisco, Hewlett-Packard and American Express, which embrace telecommuting as a tool for increasing productivity and morale as well as attracting and retaining talent. No matter where you land on the telecommuting debate, the larger point, I would argue, is that corporate success hinges on creating and consistently communicating your corporate culture.
Attracting and retaining great employees who will boost your bottom line has a lot less to do with ping pong tables and free snacks or sky-high salaries than with corporate culture. I’m talking about articulating your company’s core values, defining the employee behaviors that align with them and ensuring that managers support and recognize these behaviors.
In a Q&A for the Build Network, RoseRyan CEO Kathy Ryan discusses how to draw—and keep—top talent by embedding your core values in every facet of your organization. At RoseRyan, she created a team of values champions responsible for reflecting and integrating our company’s values into hiring practices, work performance, colleague relationships and recognition, just to name a few areas. The result? RoseRyan has successfully recruited and retained highly qualified individuals in one of the most competitive marketplaces for finance professionals in Silicon Valley.
Two of RoseRyan’s values have been critical to my success as a dream team member: professional growth (what we refer to as “Excel,” or “Stretch, Grow and Innovate”) and trustworthy and honest communication. The former signals that management supports me when I try new things and challenge myself in my role. The latter assures me that I’m informed because the dealings of my colleagues and company are transparent. Out with office politics and hidden agendas.
You don’t have to look far to find examples of companies where corporate culture is a draw for employees and a large factor in corporate success. Take San Francisco-based eco-friendly cleaning products maker Method Products. In their book, The Method Method, the two co-founders describe how they struggled to hire top talent. To differentiate itself, the company created an offbeat corporate culture that dictates that every job candidate be asked this question: how will you help keep Method weird? Having created its weirdness value, Method identified the behaviors it would support: feedback, transparency, creativity and caring. The Method method clearly works: the 2000 startup is now a $100 million giant that competes with Fortune 500 companies.
Here’s the take away: creating a corporate culture—articulating values and identifying prized behaviors—is an investment in your organization’s future. A well-defined and deeply embedded corporate culture tells employees what to expect and how to succeed in your organization. Set the expectation, and you’ll likely get a happier, more productive work environment that boosts your bottom line.
Sales tax: the growing headache
On September 1, 2012, the state of California started to collect sales tax from Amazon after a years-long argument over whether the Internet company should pay such a tax. In just the first four months of collection that tax amounted to $96.4 million. A good deal? Maybe, but you could argue that this apparent win for California was not so good, as the state agreed not to pursue Amazon for back taxes, penalties and interest that it may have been owed—a potentially huge sum given the number of years Amazon has been in business.
California is pursuing other out-of-state Internet business companies for sales tax on business performed in the state. It is not alone. Many states are realizing that out-of-state Internet companies with in-state sales are a huge potential source of income to themselves if they can somehow establish that the companies have a business presence, or nexus, in them.
The Internet businesses potentially affected include not only those selling tangible goods, like Amazon, but others that sell or license products such as software and social gaming—products that did not exist when states first established their sales tax rules. Not surprisingly, states are rushing through legislation to pursue these new forms of revenue. Unfortunately, this means that sales tax rules will vary from state to state, making compliance a nightmare.
The rules for determining nexus in each state can be complex and subtle and can involve relationships that you wouldn’t think would affect tax status but in fact do. Take a California-based Internet company that sells to New York-based consumers. If it advertises in New York via a fixed-fee advertising agreement with a New York-based company, it probably has not created nexus in New York under that state’s nexus rules. However, if the fee is found to be commission based, even in the remotest way, the company probably has created nexus, as the arrangement amounts to a reward-based referral. What seems like a minor variation in the terms of an advertising agreement can have very large tax liability consequences.
The size of the deal is irrelevant for determining nexus. Once you have nexus, you pay sales tax on all your sales to consumers in the state, not just those sales generated from the agreement. So the price of bad tax planning can be high.
Some sales tax rules remain straightforward. For example, if your company employs someone resident in another state—someone who assists in any way with the company’s sales process or sales cycle—you have nexus in that state. But with new sales-tax rulemaking afoot across the land, you will need to consider many other factors to determine your liability.
Internet businesses have choices. Good tax planning will pay off, but it’s not cheap. Some businesses pay third-party organizations to help them comply with ever-changing state tax rules. Unfortunately, many businesses choose to ignore the rules altogether and hope they don’t get caught. That’s not a smart choice, because when they are caught, the back taxes, penalties and interest will be considerable.
Not everyone can get the past eradicated like Amazon did.
For our two new directors, anticipating client needs is all in a day’s work
Keeping pace with our clients’ needs is our number one priority. So we’re pleased to announce that our two new directors are working behind the scenes to ensure your consultant and service requirements are met.
Stephen Ambler now manages the team that matches RoseRyan gurus to you—and helps our dream team stay current with our evolving product offerings. He acquired his wide-ranging expertise, including financial and operational management, fundraising, SEC reporting and budgeting and planning, through 30-plus years of accounting and business experience on both sides of the Atlantic—13 as CFO of Nasdaq-listed companies.
Kelley Wall adds creating new-product strategy to her current role of leading the Technical Accounting Group. Her efforts to provide services that offer practical business solutions are aided by her knowledge of the operational challenges that changes in the technical accounting and reporting landscape pose to our clients. She’s held senior management roles in areas such as SEC reporting, technical accounting, financial planning and analysis, stock administration, internal controls, worldwide consolidations, mergers and acquisitions and investor relations.
Check out the press releases to get more intell on these new moves.
RoseRyan videos deliver the big picture on IPOs, equity comp, and valuation
We know that making time to attend a seminar is tough in our over-scheduled lives. And reading presentation slides is rarely an ideal way to connect the dots of complex subjects. Maybe you’d like to expand your knowledge while wearing your sweats and eating popcorn? Well, now you can.
We’ve made getting guidance easy—with our videos, you can take in valuable information while propping your feet up on your desk or walking your way to fitness at your mobile workstation, if you insist on multitasking.
Check out videos of our three most recent seminars:
IPO Bound? New Strategies, New Ideas and Tips for Success
IPO ahead? Learn the dos and don’ts at key stages and get legal, finance and auditor perspectives on how to get your house in order, tell your business story, nail your S-1 and hit your runway. (This program provides great business advice, even if an IPO’s not in your future.)
Equity Compensation: End-to-End Strategies for Private Companies
Whether your plans are for growth or a lucrative exit, don’t let thorny equity compensation design and execution issues ground them. Get legal, HR, accounting and industry perspectives on setting yourself up for success, avoiding common pitfalls and planning for an M&A deal or IPO.
Valuation Metrics and Drivers in Today’s Economy
Whatever your goals, a high valuation is a top priority. Demystify the valuation equation and understand market variables, business model economics, and analyst and investor perspectives; develop a valuation strategy; and avoid mistakes and deal breakers.
How to rise to the rev rec challenge
Accounting for revenue is no piece of cake, and it’s especially true for a lot of Silicon Valley firms. If your rev rec won’t stand up in an audit, you’ve got your work cut out for you.
RoseRyan guru Miranda Chook has seen her share of rev rec fiascos. “Firms with complicated multiple-element agreements can really get tripped up,” she says. “They don’t have or haven’t consistently applied the proper accounting treatment for their various revenue streams. After awhile, they’re really in the weeds. They’ve closed a lot of deals, but they’ve documented them in incorrect ways. Now the audit needs to happen. Panic!
“What companies need is an auditor-approved treatment that covers all revenue types. Then they need to go back and apply industry-specific GAAP literature to deals. Once the accounts are clean, they need a template going forward so they don’t get in the weeds again.”
If rev rec is the bane of your existence (or just a nagging worry), rest easy—it’s one of the things we live for. Find out how we helped one high tech firm rectify its revenue accounting and come through an audit with clean books and a user-friendly rev rec template.
New report: Summit your audit mountain with peak-performance audit prep
We’ve seen audit delays wreak havoc on implementation of business plans and make financing a costly affair. Why? Companies failed to undertake a pre-audit review to pinpoint problems and make recommendations for solving them, as well as improve efficiency and implement best practices. Once they initiated audits, they failed to collaborate with their auditor to make the process efficient and keep its costs in check.
It doesn’t have to be that way. Our new report, Audit Time? Don’t Sweat It by RoseRyan guru Julie Gilson, will help you speed up your audit summit and plant a clean flag. Its audit preparedness tips will help you work with your in-house audit team and audit firm to address technical accounting issues and missing or messy documentation that could waylay your audit.
Tip #1: Find out how knowledgeable you are about your company’s accounting. Our report asks three questions that will help you figure out whether you need to start talking with your audit firm to vet issues that could cause audit adjustments.
A pre-audit review, followed by audit prep, is key to a timely and cost-effective audit. Check out our report and breathe easy knowing that your audit is no obstacle to your business plans.