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Focus
D al l as Bar A ssoci ati on l Headnotes 15
Corporate Counsel & Securities
Five Issues Corporate Counsel Should Be Addressing with Accounting BY JAY CAIN
1. Business Entity Structuring Attorneys tend to focus primarily on liability protection when forming business entities, and they may overlook important tax implications. You should consider the Texas Franchise Tax when you review your company’s business entity structure with the Controller or CFO. Take for example the no-tax due threshold of $1,110,000. If you have a single entity with multiple business units that are unrelated and easily divisible, consider creating separate legal entities for each business unit that has a margin under the threshold from year to year. Also, if you have a business unit that generates passive income such as rent or interest/dividends, consider a LP or LLP over a LLC. Attorneys prefer LLCs because of the broad liability protection, but if a partnership or trust has passive income of at least 90percent of its federal gross income, it can avoid the Texas Franchise Tax.
2. Sales & Use Tax Some Controllers and CFOs may not have a complete understanding of the law regarding sales and use tax. It’s a great area for Corporate Counsel to step in and help the company avoid a sales tax audit. Sales tax regulations are complex. Analyze transactions in your industry by asking: (1) Does it involve the sale of tangible personal property (TPP)? If so it is subject to sales tax unless specifically exempted (ex: bottled water). There is also the resale exemption and occasional sale exemption to consider.
Next, ask: (2) If the transaction does not involve TPP, is it a taxable service? For example, the maintenance and repair of TPP is generally a taxable service, but in the automotive industry the maintenance and repair of a motor vehicle is exempt from sales tax (Tex. Tax Code Ann. §151.0101(a)(5)(C)). The analysis gets increasingly complex if your company is involved in interstate transactions and the physical presence standard comes into play. E-commerce and “click-through nexus” statutes/regulations are a developing area of the law (see S.698 – Marketplace Fairness Act of 2015). The last thing to consider is who bears the sales tax in an asset transfer, buyer or seller? It is usually the buyer, but make sure your accounting team is aware that this can be a point of negotiation in a Purchase/Sale Agreement.
3. A/R Collections (1) Be on a first name basis with the A/R team, (2) know what accounts are past due, and (3) make sure the A/R team has a basic understanding of consumer law governed by the Federal Debt Collection Practices Act (FDCPA) and Texas Debt Collection Act (TDCA). Under the FDCPA, an entity collecting its own debt, as well as officers and employees of a creditor are excepted from the definition of a “debt collector.” But if your company operates using different business entities and trade names, make sure the A/R team avoids representing itself under the name of Company A when collecting a debt for Company B. Under the TDCA, a “debt collector” is anyone who collects a consumer
debt. it is critical for your A/R team to understand how threats, coercion or fraudulent, deceptive and misleading representations et al are prohibited by the TDCA.
4. Cybersecurity Accountants can be responsible for data ranging from customer lists and credit card information to employee social security numbers and banking information through payroll. A cybersecurity plan should include: (1) cybersecurity insurance (data breaches are often not covered through errors and omissions policies); (2) a written policy addressing IT rules and procedures, which must be actively followed; and (3) compliance with industry specific regulations. In the automotive industry car dealerships are considered financial institutions and must comply with the FTC Safeguards Rule under the Gramm-Leach-Bliley Act. A written policy is especially important for accounting. It’s estimated that 32 percent of data breaches are caused by employee error or lost laptops and
devices. Simple password protection and data storage/retention policies can go a long way in preventing a data breach in your accounting department.
5. Long Term Purchasing Agreements It’s critical for Corporate Counsel to help accounting avoid “cohesive” long term purchasing agreements. The scenario: there is a purchasing agreement that was executed years ago in multiple counterparts. The Controller or CFO signs approval for what appears to be a routine order of supplies, but this approval triggers an extension of the agreement for another year. A well drafted arbitration clause keeps this practice from being challenged in court. If Corporate Counsel is involved from the beginning, your company can avoid a large buyout fee when it’s time to try a new vendor. HN Jay Cain serves as Corporate Counsel for The Sewell Family of Companies. He can be reached at jay.cain@teamsewell.com.
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