According to a Recent Survey
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…
According to a recent survey conducted by Avalara, approximately 50% of companies are not sales tax compliant. Michael J. Fleming believes that there are many reasons behind this non-compliance, including complacency or a lack of knowledge on the part of the concerned parties.
However, if a company has nexus in a state, then it is required to register, collect, and remit sales tax. So what do you need to know in order to stay proactive and avoid the consequences of sales tax non-compliance?
In this week's episode of Sales Tax and More, Michael J. Fleming is interviewed by his co-host Ellie Moffat about his thoughts on the recent survey done by Avalara on sales tax compliance. He talks about the main reasons that companies have been non-compliant, the greatest areas of exposure for these companies, and how CPAs can help their clients resolve issues with non-compliance. Stay tuned.
Here’s a glimpse of what you’ll learn:
Michael J. Fleming’s thoughts on the results of the recent Avalara survey about sales tax compliance
The importance of being proactive and vigilant about changes in the world of sales tax
Michael shares the three greatest areas of exposure when it comes to non-compliance
How CPAs, bookkeepers, and other accountants can help their clients comply with recent changes in sales tax
Where to learn more about Sales Tax and More
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax and More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More your go-to resource for all things state tax-related. Now here is your host Michael Fleming.
[0:26] Mike: Hi! Mike Fleming here, Founder of Sales Tax and More and today's co-host of the Sales Tax and More Podcast, where we talk about everyone's favorite subject, which is of course sales tax. Today my co-host Ellie Moffat is going to be interviewing me about my thoughts. There was a recent survey where it was done by Avalara, where approximately 50% of companies are not compliant for sales tax. So I'm going to share some of my thoughts on why this has happened. With Ellie but before we get started, let's you know introduce Ellie.
[1:05] Ellie: Hi everyone. I am very interested in today's podcast, I think it's going to be a great one. But I'm going to do a quick introduction for Sales Tax and More here. So Sales Tax and More is a full service consulting and solutions firm. We have a great team here of experienced tax professionals who are very dedicated to fulfilling any of your state tax or related needs. So we do a lot of sales tax returns, sales tax registrations, consulting, research, and like our name says, and more. So if you have questions about our services, please reach out and ask. We will give you plenty of ways to do so to reach out to us and I'm going to start grilling Mike about his thoughts here. So Mike, this recent survey by Avalara showed that roughly 50% of the companies are not compliant for sales tax like we just stated. Do you agree and if so, why such a low number?
[2:02] Mike: Thanks, Ellie. And you know, this was a very interesting survey, based on my experience and the experience that the firm here is seeing, you know, when our salesforce reaches out or people are calling in with questions, I do agree and I actually think that 50% number is a high number. I think that the actual number of people out there who are not compliant is greater than 50%. One of the reasons I think that is because this was really geared towards economic nexus. But compliance covers a lot more than just economic nexus. I mean, we still have physical nexus, which a lot of companies are not aware of, and you know, that has the much higher liability associated with it because you may have had physical presence like independent contractors for you know, going on to say ten years, whereas this economic nexus, you may have only had exposure for two years. So I think that the number is actually less than 50%. And let's not forget about taxability. So, we'll touch on those, I think, you know, depending on your questions, Ellie, but I think we'll touch on them in a little bit more detail but why is a little bit tougher, but my opinions are, number one, it's a lack of knowledge. And, you know, some people's sales tax is not the most important thing to them, you know, we hear in the industry, you know, this Wayfair case back in 2018, which threw out the need for physical presence was earth shattering, I mean, universe changing. I mean, it's that big, every company that sells into multiple states is potentially impacted. So if you're not keeping up on the news, or if you're not in sales tax circles, if you haven't been hit by all of the calls of, you know, the Avalaras and Tax Jars of the world or even our own people, you just may not know about it.
[4:19] Mike: So I think it's a lack of knowledge and some of this flies in the face of common sense. I mean, independent contractors, subcontractors, these are third parties. I mean, common sense, you know, to me would say, there is no way that these people could be creating a requirement for us to collect and remit tax, but unfortunately, two US Supreme Court cases one in 1960 and 1987 that say that yes, third parties can create nexus for you if they helping you to establish and maintain a marketplace. So that's a big area that most people just don't even think about. So lack of knowledge is probably the one big thing there. Complacency, I think that plays a big part here. You know, our salespeople here all day long, this is the way we've always done it. It's always worked and it's, it's going to continue to work for us. We've had our CPA look into this three years ago, five years ago, seven years ago, and we don't have to register anywhere. This is the way that all our competitors do it. So we're okay or we'll deal with it when a state finds us. So complacency is I group all of them under unfortunately, as I was mentioning, the universe has changed. Some changes are gradual, like taxability changes, I mean, more and more services are being taxed by more and more states every year. So taxability is changing. States are getting more aggressive on what they're taxing. So even if what you used to sell wasn't taxable, it may be taxable now. But when it comes to nexus, a lot of companies had it wrong for all these years. And I can give you story after story of companies who used independent contractors or subcontractors or they didn't even label it, they just used the company and everything was great. And 30 years down the road, they were contacted by state and once one state contacts you sometimes you'll see other states not all states share information, they're not all going to jump on board and call you. But you'll probably get contacted by another three, four or five states at some point in the following six months.
[6:49] Mike: So you know, the way we've always done it, not a great way to look at this. We had our CPA Look into these three years, five years, seven years ago, this is something it's living and breathing in 2018, the universe for sales tax has virtually changed. I mean, companies that had no responsibility at all, before 2018, all of a sudden, may find that they have a responsibility to file in every state. And, you know, there's a lot of companies that are somewhere in between, you know, from zero to five, zero to ten. But it could be an all-states with the sales tax. This is the way all competitors do it. I mean, I can give you story after story of where a state finds one group, and they say, hey, all our competitors do it that way. And the state says, great, give me a list of all your competitors and all of a sudden, you know, didn't help you but it threw all of your competitors underneath the bus and now the state is targeting the industry. So in my webinars, I use a case of a camera company that was selling across state lines and they owned equipment in the state of Massachusetts wanted to last eight years back tax penalty and interest. In Texas, you know, unfortunately, you know, website design and hosting are not listed as an enumerated service, but Texas believes that's data processing. So if you're going quickly, you may think that website design and hosting is not taxable, but it is. and Texas knows that a lot of people make that mistake. So these industries are targeted quite often. So deal with it when a state finds this. Well, if you've been proactive, you've got lots of options on how you can deal with that past exposure. Once the state finds you. They're going to want all of the back tax and all of the penalty and interest since the date that your nexus began in, you know, in theory, this could be 20 years ago, 30 years ago. In practice, the states routinely go back either seven, eight, or ten years, Texas will go back seven years, California eight years, and Hawaii would go back ten years. So that's a pretty long time. And just because they say they routinely go back seven years, doesn't mean they can't go back further.
[9:33] Mike: We had a case where Texas tried to go back 12 years so at complacency, you know, you can't be complacent. You got to be vigilant, you got to be out there looking for the changes. You can't know, just look at this once and forget about it. I mean, the one of the things I like about the sales tax world that keeps it, you know, refreshing for me is that things are constantly changing every day. is a new challenge. Unfortunately, for the reasons I like it, that's a negative for everyone else out there. So complacency, I think is a big, big issue. And then we've got apathy. You know, some people don't care enough to investigate, they may have heard, you know, they should be registered, but they just don't care. You know, enough to investigate, they don't care enough to act. I've talked to so many people who have what I call terminal uniqueness, hey, that may apply to everyone else, but it doesn't apply to us. Well, why does it apply to you? I mean, it applies to everyone else in your industry. So this terminal I call it terminal uniqueness because if the state does find you, you can literally be put out of business with the amount of money that you could owe and back taxes, penalties, and interest. So terminal uniqueness is an issue and then a lot of people I talked to, the states don't have the right, or the states don't have the powers to come after me. And, you know, the states do they have a lot more power than anyone believes? You know, you get money in a bank account, you know, going back to the 1970s. Maybe it was hard in the 80s it was hard for states to go after your funds in a bank account because they had to go to each state. But now we have a national banking system and you can just, you know, stake and go down to the local branch and say, please put a lien on this person's account. So a lot easier today than it's ever been before.
[11:42] Ellie: So Mike, what do you feel are the greatest areas of exposure when it comes to non compliance then?
[11:49] Mike: Well, I think there are three that come to mind. The first is, you know, nexus. And if you have nexus in what you sell is taxable. And you're going to be required to get registered and file and remit sales tax returns. So nexus by itself is not a big deal. But nexus is what's going to determine if you have a responsibility to collect or pay taxes. And by the way, nexus is just a fancy word that means link, or connection. And it's the link or connection with a state where once that's established, the state can require you to collect or pay taxes. So with economic nexus, just having a certain amount of sales into a state, you know, $1 threshold of $100,000, very common, or a certain number of transactions in the transaction numbers are very, very small, 200 transactions. That's pretty easy to meet. Now, not all states have a transaction threshold, but a lot of them do. So if you don't know what your nexus footprint is, then you can't possibly know where to register to collect and remit taxes. So nexus is the number one. And by the way, as I mentioned earlier, if a state finds you, they can go back to the date your nexus began. And if it's economic nexus, well, that's just a little over two years old. That's bad enough. But if you have some other type of nexus, like, you know, a third party who's helping you to establish or maintain a marketplace, that may be, you know, 10 15, 20 years, so nexus is, is perhaps the biggest issue only because you can have a requirement to collect or remit taxes or pay taxes like an income tax or franchise tax.
[13:50] Mike: If you don't have nexus, the state can't require you to do anything. So it's important to know what your nexus footprint is. You can't just assume I don't have nexus, you got to know what actually creates nexus. And if you have it, then you should go ahead and look at getting registered and collecting or paying the taxes. Taxability, the second one is, as we mentioned, you know, you may be registered, and you may be collecting tax on some of your products, but you're not collecting tax on your services. We get calls all day long from companies that are saying, Hey, we believe it's not taxable because of this. Well, when you're doing tax planning, you can't really do it on beliefs. I mean, you have to do it, not on what you think it should be, but on what the state thinks it should be. Because you know, if the state finds you at some point down the road, you know, if you could have been collecting tax at the point of sale, but you chose not to or you didn't know that you had to or you didn't do the work to figure it out. And this goes for nexus as well as taxability. We call that, you know, the greatest tragedy in sales tax because you know, something that should be coming out of your customers pockets at the point of sale is now coming out of your pocket years down the road with the added insult of penalty and interest. So, assuming what you sell is not taxable is a big, big issue. Sometimes you don't do anything with nexus because you're assuming what you sell is not taxable. Sometimes you already may be registered. But you are not collecting tax on all of the products you sell or collecting it correctly. And then of course, there are exemption certificates. I mean, a lot of companies don't have taxable sales. So wholesale companies, some manufacturers, you know, they don't worry about sales tax too much, because they sell all my customers are exempt except here's the problem with that, it's sale for resale is only recognized as a sale for resale or an exempt sale is only recognized as an exempt sale if it's properly documented.
[16:21] Mike: So if you're not collecting the right certificates and validating them, I mean, you can't just collect the certificate. I mean, people can give you anything, they can give you the sales tax permit, which is not acceptable in most states. They can give you heck their birth certificate, I mean, it's a certificate, right? So you have to be checking to make sure that it's what the state wants, and each state has their own requirements as what they need in each type of circumstance. So not paying attention to exemption certificates is huge. I've seen companies, you know, and this goes along with what the statistics say if you have a responsibility to collect certificates, it's usually the number one cause in an audit for large assessments, and time and again, I see audits where we see multi million dollar assessments. Mostly due to certificates and either not having them at all, or not having what we call valid certificates. In other words, you know, it's being kicked by the auditor for one of, you know, the 10 or 11 most common reasons it's been on the wrong form. It doesn't make sense, doesn't pass the common sense test. It's not completely filled out. So exemption certificates, along with taxability and nexus are the big three Ellie, that's the trifecta.
[17:55] Ellie: Thank you so much, Mike. You know Mike, we have a lot of CPAs, bookkeepers, and another accountant listening? How can they help?
[18:05] Mike: Well, the biggest thing is education. You know, and you're doing that right now you're listening about sales tax. So we have lots of other free webinars that provide for CPE credit. They'll give you the tools and the concepts so that you can be talking to your clients about sales tax, and you're their trusted advisors. It's one thing if we call up or if you know, one of the software companies call up and tell them something, they may not believe us, but when they hear it from you, their trusted advisor, then may say, oh, I must, you know, have to start, you know, paying attention to this. And also, so many trusted advisors out there, just don't have the facts, and they're not up to date. I mean, they have enough on their plate with everything else they do, to try to keep up on all of the different states out there. So I applaud everyone who's here listening because you are taking the right steps. We hope that all trusted advisors begin to take the right steps. Some of you will feel comfortable talking to your clients, some of them, you will just feel comfortable enough saying, hey, there's a potential issue, then you need to find a good partner, someone you trust, that will treat your clients well and help them through the sales tax while protecting you. I mean, sometimes, you know, one of your competitors may be offering sales tax services, that's how they get their foot in the door. You know, they just don't want the sales tax services. So they're making an argument, why don't you consolidate everything underneath us. So find someone who doesn't compete with you, find someone you can partner up with, who's going to protect your clients, and in the act of protecting your clients, you'll be protecting yourselves. So, you know, go to our website, see what webinars are out there. And I implore everybody education is the key here. So if you're not an accountant or bookkeeper, if you're here, you know, because you own your own company or you work in a company where this may be an issue. Education is key also. Now, some of the software companies get a little bit overzealous, I mean, software companies are just that, their software companies. Software companies are not great at giving tax advice. A lot of times the person that you're talking to is going to be a salesperson. So take everything that a software company tells you with a grain of sand, it may be truthful, but it's sometimes better to get a second opinion because you don't want to be out there doing things needlessly. If you have every requirement to do it. I suggest taking action if your exposure is material, if it's not material, or if you don't have a responsibility to do it, don't do it.
[21:12] Ellie: Thank you so much, Mike and if people are interested in using us as a partner or contacting us for more resources, how could they get in touch with us? What's the best way to go about that?
[21:24] Mike: Oh, you can reach out to Ellie directly at emoffat@salestaxandmore.com. That's all spelled out. Or you can visit our website, same thing salestaxandmore.com and ask to speak to a member of the team here. So as I mentioned earlier, in addition to our services, we offer a series of free webinars that provide for CPE credit on a whole multitude of topics. We also have a lot of services that can help you or your clients as they work their way through all the changes in sales tax out there. We appreciate everyone taking the time to join us today and we hope to see and have you in the audience in the next episode of the Sales Tax and More podcast.
[22:17] Outro: Thanks for listening, be sure to click subscribe and check out all of the resources we have out on the web.