Ethical considerations in reporting use taxes on state income tax returns.

• Author: Villa, Michael J.

Many states now allow their residents to report a liability for state use taxes on their individual income tax returns. The rules vary by state, but using the individual income tax return to report a use tax liability is usually a convenience and not a requirement. As more states adopt this approach, practitioners will have to explain to clients their obligations in reporting any use tax liability and address the professional standards for reporting use tax on a state income tax return.

While this item focuses solely on the application of the AICPA's Statements on Standards for Tax Services (SSTS) to state use tax reporting, CPAs should be aware of any applicable state professional standards that might apply in the states in which their clients file returns. Note that some states require all CPAs to follow the SSTS, regardless of whether they are members of the AICPA.

The SSTS are a set of enforceable ethical standards that members of the AICPA must follow when providing tax services to clients. Under SSTS No. 1, Tax Return Positions, a CPA is precluded from signing a state income tax return reporting a use tax liability unless there is at least a reasonable basis for the amount of use tax reported on the return (SSTS No. 1, [paragraph] 5). Though a CPA can rely in good faith and without verification on use tax liability information furnished to him by the client, the CPA must make reasonable inquiries if the information or documentation appears to be incorrect, incomplete, or inconsistent either on its face or on the basis of facts known to the CPA (SSTS No. 3, Certain Procedural Aspects of Preparing Returns, [paragraph] 2).

When it is impractical to obtain exact data, a CPA can also use client estimates when preparing a tax return reporting use tax if the CPA believes (based on professional judgment) the use tax estimates are reasonable in light of the known facts and circumstances (SSTS No. 4, Use of Estimates, [paragraph] 2). A CPA should inform a taxpayer promptly when he or she becomes aware of a taxpayer's failure to file a required return, including a use tax return (SSTS No. 6, Knowledge of Error: Return Preparation and Administrative Proceedings, [paragraph] 4). If an unreported use tax liability is insignificant, it is not considered an error for purposes of SSTS No. 6, paragraph 1.

A CPA's obligations under these standards when reporting a client's use tax will depend on (1) whether the reporting is either optional or required...