Dear Mike #2 - Please Answer My Sales Tax Questions
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
Mike Fleming and Ellie Moffat discuss some questions we have received from clients and listeners of our podcast. We are calling this episode “Dear Mike”.
Here’s a glimpse of what you’ll learn:
Should you register if you hit the threshold one year but don't anticipate any more activity in that state and all the sales are tax-exempt per the state's laws? Does it make sense to do this and then deregister?
Do I need a registered agent when registering for sales tax
I’ve determined economic nexus in each state but need time to research taxability… What do I do?
Connect with Michael
Episode Transcript - Audio Version
[00:00:00] Welcome to Sales Tax and More, your go to resource for all things state tax related. Now, here is your host, Michael Fleming.
Hi, Mike Fleming here, founder of Sales Tax and More. And today's co host to the Sales Tax and More podcast, where we talk about everybody's favorite topic, which is of course, sales tax. And today we're going to do the second installment of the ask Mike. It's a little bit of a different format. We had great response to our, to our first, ask Mike and in this format, I answer questions that we've received either through webinars or from our clients or [00:01:00] our sales people have received, and we try to get these questions answered because we figured if one person has a, a question, multiple people probably have the same question.
So I, I really enjoy doing this, this type of format. So before we get started today, let me introduce you to my cohost and my question asker today. Ellie Moffat. Hi everyone. Great to be here. We are going to get through a few more of these questions and we'll probably continue this series. So let us know what you think.
And let us know if you have questions yourself that you want answered and we we might be able to work them in here. So for those who don't know, Sales Tax and More, We are a full service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling your state tax and related needs.
So we do a lot of sales tax returns, sales tax registrations, consultations, research, and like our name [00:02:00] states, more so if you have questions about our services, if you'd like to work with us, please reach out. We would love to work with you as well.
Alright, Mike. So let's jump right into the first question that we have here. Should you register if you hit a threshold one year but don't anticipate any more activity in that state and all the sales are tax exempt per the state's laws? Does it make sense to do this and then deregister?
Well, we could, we could go a couple of different ways with this answer, but, let's start out by saying that generally our clients, look at 3 things before they decide to register. The 1st is, do you have the link or connection with the state that we call nexus that may require you to collect and remit taxes in that state?
So that's, that's number one. And it seems that you've already determined that you do have a nexus. Now, a number of states only count taxable sales. They don't count exempt sales. [00:03:00] Some states do count exempt sales. So you want to make sure that you actually have nexus. Number two, since most states, and there's an exception to every rule, so that's why I say most states, their penalties and interest are based on the amount of tax owed, and if you don't have any taxable sales, they're all tax exempt.
You're not going to have any penalty or interest. So even if the state says that you should get registered, there's no teeth in that requirement by the state. They, you know, what are they going to do? Charge you a 0 percent at penalty, 0 percent interest. Not all states, some states will charge you $50 for every missed return, but the majority of states penalty and interest is going to be based upon the amount of tax owed.
So you don't have anything owing. And the third thing is materiality. And, just because the state says you should do something doesn't necessarily mean it makes good business sense. I think we need to [00:04:00] use common sense. For example, about 40 percent of the states out there still, still have a 200 transaction threshold.
Let's say you're selling 200 transactions and you're selling something at $5. Well. You cross the 200 transaction threshold. Most states are going to say yes, you need to get registered and collect tax going forward. However, your sales, your total sales are about $1, 000. And if that's what's going to continue going forward, the average tax rate is 8%.
8 percent on 1, 000 is $80. So, does it make sense to jump through all of these hoops, especially in a state like Georgia, where if you register, you're going to be a monthly filer for at least the first six months. So not only do you have to spend your time and energy getting registered, which time is money, you could be doing something else.
Now [00:05:00] you have to file a return every month. And again, your time is money, or you could be hiring someone like us to do your registrations and file your returns, and that's actual money you're spending. I don't know. I can't ever make the numbers work like this. You know, if it's $80 in tax, even if you have 100 percent penalty in interest, the state's going to charge you for every year that you're doing this.
You know, you're talking about $160, your time is generally going to be worth more than 160 for the hours, that it would take to, to be compliant. And it's definitely, I don't know of anybody out there who's going to be able to do this for less than $160 a year. So, in a situation like this, most of our clients are going to say, I'm going to wait, until my sales become more material.
Yes, I understand that if I get audited, I'm going to have to pay this out of my pocket, but [00:06:00] that's still cheaper. Even if it goes four or five years, you're not having to pay someone or take your own time to file an inconsequential amount of tax. Now I'm a huge believer that if your exposure is material, you want to get registered as soon as you can.
But to specifically answer your question now, getting registered is a, is an issue. It's a process and getting deregistered is often tougher than getting registered. States are notorious for not doing what they say they're going to do. So you think that you are deregistered, All of a sudden, three months later, you start getting notices that say, Hey, we haven't received your returns and we're selfish.
We're gonna assess you this money because this is what we're guessing the taxes you, owe are. So you have to make sure you're deregistering correctly. So to answer your [00:07:00] question, no, it doesn't make sense to me. None of our clients are going to do this, even if a state says that you should be registered.
And a lot of states say you don't need to be registered in your scenario. But even if they do say, yeah, we still want you to be registered. Most of our clients would not because it just doesn't make common sense.
All right. Thank you so much, Mike. Let's move on to the next question here, and it's kind of a bit. It seems like a little bit of a hot topic, at least within our firm. It's come up a little bit here. But do you need a registered agent when registering for sales tax? You know, this is such a great question and it's so timely.
Number one, the state websites, when you go out to register, they all make it look like you need a registered agent. But if you're registering because of economic nexus, I don't know of a state out there that's going to make you get a registered agent. They make it look like it, but there's a workaround for every state or a backdoor or some way that you can do this.
If [00:08:00] you're doing registrations on a regular basis, you know how to get around that. So, the states are going to make you think that you need one. Now, if you have nexus, this link or connection, due to something else other than an economic nexus, maybe you do, maybe you have an employee in the state and you need to get registered with the Secretary of State, but it's not automatic.
You don't need one for every registration. It all depends on your specific facts and circumstances. Now, the reason why this is especially timely, for those of you who have listened to me before, you know, I have a love hate relationship with the software companies and that's when they're sticking to the software.
When they're performing services, I just think it's a huge mistake for anybody to be relying on a software company to do services for them. And we were contacted just the other day, by a company who wanted, we do registered agent registrations. So this person contacted us [00:09:00] and said, I need to be registered for a net, registered agent.
And we said, Okay, how come? And they said, well, Avalara told me because I'm a foreign seller, I need to be registered for a registered agent so they could give me a social security number. Well, I'm sure that's not what Avalara told them, or I'm not sure, or maybe they did. Salespeople will say anything to get you to buy what they're, what they're selling you.
But even if they didn't say that, they were talking about registered agents and registering with the Secretary of State. And you just don't need to do it. So with this gentleman, Talked to our salesperson and our salesperson actually talked, this gentleman out of, utilizing our service because they just didn't need it once he explained everything.
So no, you don't need a registered agent, for sales tax automatically. And it wouldn't just be for sales tax generally would be for other reasons that you needed a [00:10:00] registered agent. In general, most people nowadays I see registering or registering because of economic nexus, and I don't know any states that require that.
So be careful of what the states lead you to believe. Be careful of what, software companies are telling you. They usually get it wrong. And be careful of so called sales tax experts. Since Wayfair, it appears that everybody is a sales tax expert. And unfortunately, that's just not true. It takes years to learn this stuff.
And most people, you know, just started doing this last night. So you got to make sure you know who you're working with and are they actually qualified to give you correct answers. Alright. And final question, last but not least here. So someone said, I've determined economic nexus in each state, but need time to research taxability.
What do I do? Alright. So Favorite answer is [00:11:00] it depends. And it depends on a number of factors. What are you selling? You know, if you're selling tangible, personal property, by default, tangible, personal property is going to be taxable. So, what a number of our clients would do is especially if they have large exposure and it's growing every day is just go out and get registered everywhere.
Because. Chances are what you're selling is going to be taxable. Now, if you're selling something that, you know, has a lot of exemptions out there, maybe it's solar equipment. Maybe you need to do some research. Maybe you're selling services and you don't know which states it's taxable in and which states it's not.
At this point, You got to look at the states where your greatest exposure would lie. So if it was taxable in state A, let's say state A is Texas, I would concentrate on that state first. So if [00:12:00] you, you are taxable and you had a need to register, I would concentrate on the states where your exposure could be largest first.
And do the top five states. And get registered in those top five states and then work down your list until you get to the smallest states. That's one way to do it. The other way to do it is to concentrate on the states that are most aggressive when it comes to using the actual date of nexus. So a lot of people, when they get registered, they just want to register on a going forward basis.
They don't want to pay any of the back taxes. They owe out of their own pocket. They just want to start being compliant on a going forward basis. That's not the way the states want you to do it. And if they ever catch you, then you're going to have to pay all of the back tax prior to that period, plus the penalty in interest, because there is no statute of limitations, if you've never
filed a return [00:13:00] for the period. If you have never been registered, there's no statute of limitations. A lot of people say, well, Mike, the statute of limitations in my state is three years. Yes. If you've been registered and you have filed a return for that period, but if it's before the period you were registered, if you've never filed a return for that period, in theory, It's always open.
In reality, states can still go back 7, 8, 10 years, and sometimes even longer, for those transactions. So, you want to make sure that you're going to look at the states who are going to audit you like the state of Illinois is auditing every company right now to make sure they're using the right date.
And they're not doing it right away. Right now, they're still working on the companies that, you know, registered a year, two years ago, and making sure they all go back to the date that their nexus began. They'll eventually get to you. So you got to really pay attention to a state [00:14:00] like Illinois. You got to pay attention to a state like Wisconsin, who's doing the same thing.
State like, Arizona just started doing this and they look at your sales and if your sales are large enough and you're saying you, just had nexus as of last month. And they're looking at $100, 000 or $300, 000 of sales over the first year. They're saying, Hey, chances are you probably had $100, 000 going back a number of years, so they're going to audit you.
So it's these states that are very aggressive right now, which would be Wisconsin, Illinois, Arizona. To a little bit of a lesser degree, the state of Maine, the state of South Dakota, they both did away with their transaction thresholds, and this is much less of an issue, but both of those states were very aggressive when they did have transaction thresholds.
South Carolina, if you're doing a regular sales tax registration, They don't ask questions, but if you are trying to [00:15:00] do a remote seller registration, then they do ask questions. So it all depends on what you're trying to register for, and the state. If you're selling something digitally and California's your biggest state, well, you may know that, California doesn't tax digital products, so cross them right off your list.
So your specific facts and circumstances are going to play a big part into what you should do. But in general. I generally recommend starting where your greatest exposure is and working your way down that list. Don't wait until all of the research is done. Do it in manageable chunks so you can get registered and start collecting tax as soon as possible.
And Ellie, that's, that's what I've got on that one. Alright. Well, thank you so much, Mike. As a reminder to everyone, please, send in your questions. We'd love to include him on this if we can. And if you have other sales tax needs, [00:16:00] we offer many solutions and services along with a lot of free resources on our website as well.
So please check that out. You can reach out to me directly with any questions. My email is E Moffat, E M O F F A T at salestaxandmore. com or visit our website, salestaxandmore. com. And thank you so much for listening today. Thank you everyone. And, thanks for joining us and, we hope to see you on the next episode of the Sales Tax and More podcast.
Bye bye.