State taxes on distribution fees

Wondering how other TPA's handle this - distribution fees that are paid by the recordkeepers directly from participant accounts to the TPA are generally round numbers.  For some states though, this is revenue that taxes must be paid for as a Sales Tax, and this is indeed detailed in the contract.

We have always passed this on to the plan (ie line item lists distribution fee, and later line item after sales tax calculation lists round paid amount, netting just the tax due payable for that item).

Just had a client complain about this, first time one ever noticed this. 

I have not encountered this situation and am curious about some of the specifics.  Perhaps an example may help.  Let's assume a participant with a $5000 vested account balance requests total distribution and your firm charges a $100 distribution fee.  Does the participant get $4900 and your firm receives $100, or does the participant get $5000 and your firm receives a $100 distribution fee payable from the plan as an administrative expense? 

Let's assume that the state sales tax on the distribution fee is 5%, so the state is owed $5.  What is the process for paying the $5 to the state?

• Does your firm remit it to the state so you net $95 and then bill the client for the taxes to recoup the $5?
• Does your firm remit it to the state so you net $95 and then bill the plan for the taxes as an administrative expense to recoup the $5?
• Is there some other calculation that is done?

You indicate that  the tax payment process is detailed in the contract. 

• If the recouping of the sales tax is charged to the plan, is it disclosed in the 408(b)(2) disclosure and signed off on by the Responsible Plan Fiduciary?
• If the recouping of the sales tax is charged to the participant either by adding it to the distribution fee or separately debited from the distribution, is it this detail disclosed to participants in the 404(a)(5) disclosure?

Thanks in advance for teaching an old dog a new trick.

Consider also legal and practical differences between the two audiences of disclosures:

A service provider’s 408b-2 disclosure to the responsible plan fiduciary can be the service agreement itself, with no separate document.

But a 404a-5 disclosure to a directing participant, beneficiary, or alternate payee calls, practically, for a distinct writing beyond the service agreement.

Is a sales tax charged against the plan’s assets but not allocated particularly to the individual distributee who caused the sales tax to be incurred?

If not charged particularly, is the plan's expense for sales tax generally allocated among all individuals’ accounts, including those who did nothing that incurred a sales tax?