Should You Get an Automated Nexus Review?
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 talk about automated nexus reviews and answer questions about the process.
Here’s a glimpse of what you’ll learn:
Are the automated nexus reviews offered by software companies and accounting firms good deals?
How could someone avoid getting registered in either too many states or too few states?
What would an alternative route be besides an automated nexus review?
What can you do if you’ve gotten registered in too many states?
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 of 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 talk about automated nexus reviews. But before we get into it, let me introduce you to my co host Ellie Moffat.
Hey everyone, really great to be here. And as always, I'll do a quick introduction for Sales Tax and More. We are a full service consulting and solutions firm, and we have a really great team here of
[00:01:00] experienced tax professionals who are very dedicated to fulfilling your estate tax and related needs. So we do a lot of sales tax returns, sales tax registrations, consultations, research, and like our name states more. So if you like what you hear today, if you like our podcast, please like and subscribe that helps us greatly. So Mike, let's just jump right in. So it seems like many platforms, software companies, and even some accounting firms are offering automated nexus reviews.
Many are even free. Are these good deals? Well, what's my favorite answer when it comes to sales tax? I'm going to take a stab in the dark and say it defends. Right. So in this case, what it depends on is your definition of a good deal. There are some benefits to these programs and there are some negatives to these programs.
And one of the big benefits is that it keeps nexus front of mind.
[00:02:00] And, they can act as red flags, you know, Hey, I've got to take some sort of action and that action should not always be run out and get registered. The action should be, let me do some further investigating. So, as red flags, as keeping the topic of nexus, front of mind and reminding us that as things change, we need to get registered.
They're a great deal. Especially when they're free. Now, the problems, the negatives, are that I have not seen a platform yet that can get granular enough to do that. To give you accurate answers. Sometimes maybe the software can be granular enough, but because of the way we do our data. For example, maybe it's Shopify.
Shopify has a system on there that tells you when you cross nexus, but you're only running your taxable sales through there. Your marketplace sales, you know,
[00:03:00] they're going through Amazon. Why run them through, you know, Shopify? So not all your sales are being included. And when you're looking at the different states, some states include sales through a marketplace.
Some states include sales for resale. Some states include exempt sales. Some states will include, exempt sales except for sales for resale. So each state looks at it a little bit different. So many of the platforms out there, they just can't get granular enough to give you the correct answers. And sometimes it's a limitation of what we're doing.
Sometimes we're not having all of our data in there and we think that it doesn't matter. But when it comes to nexus, it really does matter. Now, here's the biggest problem when it comes to utilizing one of these platforms if they're not being granular enough. You get registered in too many states. Because it's, it's just
[00:04:00] looking at the raw data.
How many transactions do you have? And how much revenue do you have? It's not looking at where that revenue is coming from. So even though you may think or it may think that you're over a threshold. You may not actually be there based upon your specific facts and circumstances. So, it all depends on, on your definition of a good deal as to whether these are good deals or not.
I think they're great tools to alert you to possible scenarios and situations. And as a reminder that, Hey, I got to stay on top of this stuff. But for those who are just utilizing, them without doing any additional work, nine times out of 10, you're going to be getting registered in too many states.
And that 10th time you're not getting registered in enough states because you're not putting enough detail in there.
So How could someone avoid this or what would be an alternative route that they
[00:05:00] could look for? Well, let's, let's start with how to avoid this. We said there are great red flags. So let's pick on Shopify again. If it's telling you, you need to register in 20 some odd states, then the next logical step is to look at your own individual fact pattern.
Now we've got a free resource up on our website. It's a chart, and it's going to tell you what's included in each state. Do you include sales for resale? Do you exclude them? Do you exclude exempt sales? Do you exclude sales for resale? So you can go state by state and break up your sales to see if you actually have to get registered.
And I'll tell you, this is a big deal. We have many companies come to us and say, Mike, I need to get registered in 20 states. And I say, how come? Well, Shopify is telling me, well, let's review it. And when we review it, I make a recommendation to get registered in three or four states. Those are the ones based on their specific fact
[00:06:00] patterns to actually, merit or require registration.
So that's one thing you can do. This free resource is a chart we keep updated. We just updated it in July when, North Carolina eliminated their 200 transaction threshold. So that's, that's a great resource. So that's one way that you can, avoid getting registered in too many states and, do it when the platform or,
The software is telling you that you should get registered. Just, you know, a system of checks and balances. Now, one way to avoid this altogether is to ask us to do a nexus review or a company like us. We have what we call a data review. It's for economic nexus. And there is a fee for it. Our fee is 795, But you know, if you don't want to mess with it, if you don't want to do this on your own.
You know, if you want someone to do it for you,
[00:07:00] that could be a good deal. I mean, it's a lot cheaper for us to go through this and tell you, yes, you need to be registered here. Or no, you don't need to be registered here rather than going out and getting registered everywhere. Yeah, you spend some money, but you save money in the, in the long run.
So those are ways to avoid it or mitigate getting registered in, in too many states. One of the ways is do it yourself. We give you the tools. You can go out there and, and, and actually do it yourself and figure out where you actually need to get registered or where you need to watch, and where you don't.
And the other is, if you don't have the time or don't want to mess with it, you can pay us a relatively, small fee to, to go out and do this for you. So let's say that someone, they, they've already done this, they've gone this route, they're registered in too many states. What do they do now? Well, what's my favorite answer?
It probably probably it
[00:08:00] depends. Yes, it depends. So again, it's going to depend on your facts and circumstances. How close are you to actually being registered or require needing to be registered? I mean, if you're real close to a threshold and there's a chance you're going to cross that threshold, then just stay registered.
Even though you're a little bit early, getting deregistered is a process, and it's a lot harder to get deregistered many times than it is to get registered. So even though you got to pay for returns and you're a little bit early, you just stay registered. Now, sometimes I'll do a review and, and the taxable sales, you know, are minuscule.
You know, maybe they're 1, 000 dollars and you've, you're over the 100, 000 dollar number, but 99, 000 of that 100, 000 number is actually going to be exempt sales. So technically, maybe you should be getting registered. But I don't think that we can just go out there and do what
[00:09:00] a state says, because the state said to do it. I think we need to use common sense. We got to look at materiality. I mean, if it's going to cost more to go out and get registered and then file the returns, whether you're doing it yourself, you know, time is money, there's an opportunity cost in there. Or whether you're paying someone like us, it's not always a good business decision, at least, to go out and get registered just because the state says to do it.
We got to use common sense. You know, on a thousand dollar example there, at an 8 percent sales tax rate, you're talking about 80 dollars in tax, and even if you double that number with penalties and interest, you're looking at 160 dollars. I don't know how, if it's a state like Georgia that requires monthly filings, I don't know how you justify, the cost of getting registered, the time of getting registered, and of filing a return every month just to remit 160.
Or 80 worth of tax a year. You'd
[00:10:00] be better off not getting registered, letting the state come and find you and then paying them out of your pocket. So materiality, I gotta play a part in the common sense on whether we're going to get registered or not. And if you are registered and you've got small exposure like that, get deregistered.
Even if technically you should have been registered, you'll spend less money getting deregistered and paying the state out of your pocket if they ever find you. So in, in those scenarios, you know, it all, like I said, it depends. If you, if you're close to needing to get registered, stay registered.
If you're nowhere near close, or even if you are over the threshold, but your sales aren't taxable, go ahead and get deregistered. So anything else you want to add in? Anything else you want to say about this or add in here, Mike? No, I just want to say that, just
[00:11:00] reiterate, you know, re say what we've been saying here.
Free is often the enemy of good. You know, it may be free today, but you end up paying more in the future. And in this case, if you're just doing what these, software companies or platforms are telling you to do, nine out of 10 times, you're going to be getting registered in too many states because they're just not granular enough.
So, do some extra work. Hire someone to do the extra work for you, and you may save money in the long run. So, that's, that's my final 2 cents, Ellie. Thank you so much, Mike. And for everyone else, if you have sales tax needs, we have many solutions and services and you can reach out directly to me, Ellie, at e Moffat, E M O F F A T at sales tax and more. com. You can also visit our website directly sales tax and more. com
[00:12:00] and we have many free resources available as well that are on our website. So please like and subscribe to our podcast and thank you so much.
Thank you everyone. And we hope to see you on the next episode of the Sales Tax and More podcast.