COVID-19 Issues Creating Sales or Income Tax Nexus
Michael J. Fleming is the founder and president of Sales Tax and More. 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 also a writer and speaker, regularly presents on webinars, and is 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.
Ellie Moffat is the head of marketing at Sales Tax And More. She is an experienced marketer with a demonstrated history of working in the marketing and advertising industry. Ellie graduated from Brigham Young University - Idaho and is highly skilled in search engine optimization (SEO), photography, social media consulting, graphic design, and social media ROI. She is also a co-host of the Sales Tax and More Podcast.
In this episode…
Because of the effects of the COVID-19 pandemic, there have been a lot of income tax and sales tax extensions in the United States. Businesses and individuals have been getting relief to help cushion them against the effects of the crisis but not all tax extensions are applied in the same way. One such case is that of income tax.
There has also been some confusion coming out of the state of California following statements made by the governor regarding sales tax extensions. This means that business owners need to be aware of the effects of these extensions on their businesses and finances, as well as what to look out for.
In this week's episode, Michael Fleming and Ellie Moffat discuss the reasons behind sales tax and income tax extensions in the U.S., the implications of these extensions, why history has shown that states tend to be very aggressive coming out of a recession, and employees creating a nexus working from home. Stay tuned.
Here’s a glimpse of what you’ll learn:
Why there have been sales tax and income tax extensions in the U.S.
Michael talks about the confusion in the state of California about tax extensions
Why states are usually very aggressive coming out of a recession
Michael explains whether employees working from home creates a nexus
Michael shares his perspective on the possible future and outlook of states and taxes after COVID-19
Resources Mentioned in This Episode
COVID-19 and Tax Extensions - Not All Extensions Are Created Equal (By: Michael J. Fleming)
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 Flemming 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 topic, which is of course sales tax. And today, we're going to be discussing COVID-19 and how it's impacting the different state taxes and we're going to be having a discussion with Ellie Moffatt. She's my co-host. She also works very closely with me in creating all of our great COVID-19 resources. So, Ellie, you want to introduce yourself real quick.
[01:01] Ellie: Yeah, absolutely. Hi, everyone. It's really great to be here. Mike is right, we do work really hard on creating those resources for you. We hope that you've gotten a chance to go and take a look at those and enjoy those. A quick introduction for sales tax and more sales tax and more as a full service, consulting and solutions firm we have a really great team here of experienced tax professionals who are very dedicated, dedicated to fulfilling your state tax or related needs. So we do a lot of returns, registration, registrations, consultations, research and like our name states more. So if you have questions about our services, please reach out to us. We're happy to answer those questions for you. So, Mike, I'm going to flip it back to you.
[1:44] Mike: All right. So not only did you do a great introduction for yourself, but you did a great introduction for sales tax and more. So kudos to you. Alright, so today I want to start off by talking about extensions. You know, due to COVID-19, we're seeing, you know, the federal income tax extensions. We're seeing state income tax extensions, and we're seeing sales tax income, sales tax extensions, not sales tax income tax extensions, just plain on sales tax extensions. Now, not all extensions are created equal. And we have some great materials. I've done a blog post about this. I've done a snippet, which is a short seven-minute piece. We've got them up on the website, but I want to touch on this again. Because you know, income tax is always going to be your money. Now it's set aside or we need to pay, you know, either the federal income tax or the state income tax. If we don't we may get our hands slapped. But it's our money, and if we need to use it to fund our businesses, if things get that bad, then that's what we need to do. Sales tax, on the other hand, these are trust taxes, they're like payroll taxes. It's never our money. It's either our clients' money, our customers' money, or it's the state's money, were only collecting it in trust. So some states, you know, say that any use of that money for business purposes is a crime. It's against their statutes, in states like Maine have reminded us of this. They say, unlike income tax, sales tax is a trust tax. So there's a big difference. Well, what a trust tax means is that, as I mentioned, we're collecting it in trust. And the reason why the states are primarily giving us an extension is because we're working from home or accountants are working from home. We may not have access to all of this data, we need to file the returns. So the states are saying, hey, you may not even know how much tax you need to file. So we're going to give you a little bit more time. But they're not doing this. So you can use that money for your business. If you do use that money, just using it is an issue in a lot of states. But tax collected not remitted is the cardinal sin of sales tax. So if you don't have this money, to be able to give it to the states, when it is actually due, the states look at that as a fraud, as theft. So as bad as things are, they can be worse. Because there's personal responsibility in this type of debt is not generally dischargeable in either business or personal bankruptcy. So if you get to the point where you have to use this money to fund your business, it's not like you know, a credit card that you've run up and then you can walk away from or file bankruptcy and get a fresh start. When times are at their worst, and you're losing your business, the state can still pursue you and probably will. The states are in dire straits. Also, they want that money. So, sales tax is not meant… these extensions are not meant to fund your business with it. I understand that for many of us times are really tough and that that temptation is there. Some of our clients have gone so far as to say “Hey, Mike, even though this money is not due for another two months, it's quarterly. I want to send it to you now so that out of sight out of mind, I won't be tempted to use this and when the time comes, then you can go ahead and pay this to this day.” We do a lot of sales tax returns. So anyway, not all tax extensions are the same. Income tax is very different from sales tax, by all means, if we have to, let's go ahead and use the money from the income tax to fund our business. Let's make sure that we can get through to the other side. But we're encouraging all of our clients and anyone who's listening to stay away from that sales tax money.
[6:27] Ellie: Mike, I think it's really great that you're bringing this up, but there has been a lot of question and confusion and concern. What about the state of California, they came out and set they came out and kind of called back.. called the extension alone. I think that there's a lot of confusion, a lot of concern there. Do you want to touch base on that for everyone?
[6:47] Mike: Yeah, absolutely. I think Governor Newsome he's the governor of California. I think his heart is in the right place. I can commend him for that. However, I don't think he has a great grasp of sales tax. You know, they basically have come out and said, hey, this is a tax-free loan for a year. And, you know, they're pretty much telling everybody that the state's not going to lose any revenue, because they're just gonna forego penalty and interest and they'll get paid all of this tax a year later. Well, that's not being very realistic. I mean, California is a state that is still being very aggressive in keeping the state closed, and not all businesses are going to make it through this. I mean, that's just the sad reality I feel for these companies, but you know, the governor's not waiving any personal responsibility, or he hasn't yet. He may not even have the authority to do so. I'm not an attorney, but you know, that it's this is set by statute, so I think they'd have to, you know, create another statue. or something or maybe they could, you know, do an emergency order. I don't want to get into that. But as it stands right now, there's still personal responsibility, and it's still gonna survive the bankruptcy. So for everything that I said before, I think this is very bad. And if the governor really wants to, to help people, then he should say, hey, you can keep the sales tax money, don't worry about it, but he's not doing that. He's saying this is a loan. And the worst thing that can happen is you take this loan, every other type of loan you can walk away from you can file personal bankruptcy, business bankruptcy. I mean, none of us want to do that, but it can be done. You can't do that with the sales tax. So like I said, why I believe the governor's heart is in the right place. This would be the absolute last source of funds that I would use and I pray that all of you who do take the governor up on this, that when it comes time to pay that back, you actually have the funds to do it, and that you have survived this crisis. And, you know, you're not going to be kicking yourself for saying why in the world that I ever tried to save my business, which sales tax money?
[9:16] Ellie: Yeah, you know, and we've talked so much I've heard you talk so much about how when the states are hurting for money, they historically come out of recessions and get more aggressive in finding that money. And that going hand in hand with California, it does seem very concerning to me. Can you share with the audience what we've talked about, on other occasions along this note?
[9:41] Mike: Yeah, absolutely. You know, states like California saying they're down $45 billion, because of this crisis, and the tax money and a lot of that has to do with sales tax. And historically, we look back to any of the recessions you know, states are generally very aggressive coming out of recession. Because their taxpayers, their citizens have such a great need for services. You know, because so many of them are hurting and the state wants to provide all these services but they don't, there are sales taxes down, there income taxes down. So historically, they, you know, step up their discovery, you know, discovery units are where, you know, the State Department's of revenue or sending out you know, auditors or doing remote audits of people that they believe should be paying tax to the state, who are outside of the states because you know, you don't want to dump on your people who are already hurting. So you're going to be looking for people outside the state who you think should actually be paying tax to the state. They're going to step up enforcement, they're going to step up collections. So a lot of these people who've got the Amazon letters, unfortunately, I think that we're going to see a lot more of that being turned over to audit and then trying to do estimated assessments. So, but it's not just California, it's going to be all states. This is what we generally see and what makes this time even, you know, so much more acute is number one, many of these states were gearing up to do this even before this crisis hit because of the economic nexus. They think that companies are not complying with economic nexus. So they're gearing up they'd already hired extra people, some states State of Utah purchased a lead list of people who they thought were over their economic thresholds. So they already have been putting the pieces in place to do a full-on assault on companies out there trying to enforce compliance for this economic nexus. So they put that on hold, you know, none of these states are going to pile on to companies while we're talking about the virus. But sooner or later and it looks like sooner, we're going to stop talking about the virus on a daily basis. That doesn't mean the virus is going away, just means we're going to stop talking about it, we're going to start concentrating on the economy again. And once we start concentrating on the economy, these states can't afford not to pursue people. They just can't they need to make the money up. And they need to make it up quickly. And one of the ways they can do that very quickly is by going after companies for sales tax. So as you know, we've got the worst unemployment ever. So talk about even though this has been a relatively short period of time, we'll look at how many people are hurting and how much of a need there is for these services. How are those services going to be funded? You know, historically, it's a big part of that's been sales tax. So I don't think it's going to be any different this time, except that it's going to be worse because of the severity of this crisis and because the states were already coming because of the economic nexus. Now, while they're primarily coming for economic nexus, I think that they're going to stumble across all other types of nexus, while they're out, you know, performing these different functions.
[13:30] Ellie: Yeah, I think it's important that we're addressing these concerns. People are wondering about what's kind of going in this realm. Another thing that we're hearing people are really concerned about, is their employees creating income and sales tax nexus, working from home. Can you expand on that a little bit?
[13:50] Mike: Well, it depends. So that's our favorite answer when it comes to…
[13:56] Ellie: Our absolute favorite answer.
[13:57] Mike: Well, maybe not our favorite answer. I mean, everyone hates me when I say that, but it really does, it depends. It's our most common answer. Let's say that. So what it depends on is the state, number one. Some states look at what someone is doing when working from home. Other states like Michigan or Arizona say having an employee in their state for greater than 48 hours, cumulatively throughout the year is going to create nexus. Now, if you've got someone working from home, they're there for greater than 48 hours. So yeah, that's going to create nexus other states like New Jersey saying, hey, if you've got an employee in our state, you got nexus. So this absolutely can create an obligation to collect and remit sales tax. And, you know, for those of you who don't know what nexus is, it's just a fancy way to say link or connection. So you know, having someone working from home creates enough of a link or a connection with that state where the state can then require you to collect and remit sales tax or pay income tax. So can it happen? Absolutely. Now, a lot of the states, especially, you know, some states I just mentioned, like New Jersey, they have come out and again, while we're talking about this virus, this crisis, the states are being very nice. And they're saying, hey, if you have people who are working from home, because of the virus, then we're not going to enforce nexus we're not going to say that creates nexus. So again, the states are we've got their nice guy attitude on now, some companies like Twitter just announced that hey, you know, things are going so well with people working from home. We haven't had really that much of a disruption and you know, it's a way to save money. So we're going to give all our employees the ability to work from home forever. Now, that creates an issue. Now, you know, Twitter's a big enough company, they may have nexus everywhere because of the economic nexus. But, you know, there could be smaller companies that haven't crossed the $500,000 threshold in Texas. And now you've got somebody decides to work from home in Texas forever, because, you know, you're saving money in other ways. And it's a big perk for a lot of people. They don't have to do that commute anymore. So what happens then? One thing we don't see happening is that the states are turning this temporary unenforcement they're, they're not enforcing nexus in the short term because of the virus. I don't see that becoming long-term in many states. So a lot of these states that do consider this to be nexus creating. Think that again, when we start talking about the economy, rather than the virus, all of a sudden all these people working from home can be creating exposure for you they can be creating this link or connection that now requires the company to either pay an income tax or franchise tax or collect some sort of sales or tax. So it depends but yeah, it's really something that we have to worry about. I don't think there's any state out there that's really going to make an issue of this during the virus itself. But it's afterward, that's when this is going to become an issue. And they're not going to be looking backward. But if you still have people in the state, that's when we've got to really start worrying about that.
[17:48] Ellie: Yeah, and I think all those factors that you were touching on the state changing their statutes, people being far from where they originally, were working, I mean, those are all weighing heavily right now, do you want to expand a little bit more on your thoughts about the future? We don't really know what's gonna happen with COVID? I know we talked about that a little bit. But do you think some of these things will change depending on what happens with the virus itself? I mean, because no one really can see the future. The states are well aware of that companies are well aware of that as well. So what are your thoughts?
[18:26] Mike: Yeah, I mean, right now, everyone's all excited because, you know, we may have some sort of…I can't believe I can't remember the word, not a cure but a vaccine. Thank you. Yeah. I really appreciate that. I was having a senior moment there. So everyone's excited about the vaccine and everyone you know, is you know is happy. Look at the stock market went up 1000 points because you know, we've got this great news about the vaccine. A lot of the governors are opening up the states, some of them are still clamping down, you know, as we start to see more and more governors opening up the states. And as we start trying to move the economy going forward. I think that the states are… they’ve got to find a way to make up for lost revenue. And unfortunately, you know, these nice states now that are helping everyone. Everyone's going to say what happened? What happened to the nice states? I mean, they're being brutal, and unfortunately, what we usually see is the states making examples of people because they want people to step forward voluntarily. So they've got to put some fear out there. And I think it's going to get really ugly. Now if we double dip and we go back into the recession. How does that work? I mean, do we you know, go into another shutdown and people are all worried and now that, you know, the state's got to put their efforts on hold. There are just so many unknowns out there when it comes to this virus, but we've had a couple of, you know, days of good news here when it comes to the virus. So, you know, once we stop talking about that altogether, that's when we got to worry about the states coming and coming hard. And I think they will. And I think that you know, this telecommuting, you know, where the state's passed these temporary, you know, exemptions. They're all going away and the economic nexus is going to be a big issue. The telecommuting is going to be a big issue, believe it or not, and if those of you who may not have come to our webinars, independent contractors, subcontract I mean, even third parties, this is an area that most people, it doesn't make common sense. So most people don't realize it. Anyone who is performing services or acting on your behalf, in other states can create this link or connection. And you know, you may have been doing this for seven, eight, ten years in the states are going to want back taxes for that whole period. Now they're going to come looking for that economic nexus because that's what they were geared up for. And that's the low hanging fruit, but an economic nexus, maybe 18 months in some states and maybe, you know, six or seven months in other states. That's bad. But it's a whole lot worse when one of these states finds you and you've had independent contractors or subcontractors, or someone performing services for unit state for 20 years. They're gonna want at least seven to ten years worth of tax plus penalty and interest in and going to be making examples of people. So not a very rosy picture. You know, we've got time. I know times are tough out there less than you want to do is talk about sales tax. But we have people who're actually busier now than we were earlier this year. Because, you know, people realize this, they remember back, you know, with other companies that they were with, and they have experienced this in the past, and they're reaching out because, you know, you don't even have to have any experience with this. You just think of it logically, where the state's going to get this money. We know they're in a huge hole. They've got to become tougher. So that, unfortunately, is my view for the future, the better it gets for, you know, people at large, the worse it's going to get for businesses when it comes to state taxes.
[22:56] Ellie: All right, thank you so much Mike. If you want to close up, we can wrap up this episode of today's podcasts and we'll hope you guys can listen to it next time.
[23:08] Mike: And we always appreciate when you listen to our podcast here and we don't mean to be overly negative, but we want to alert everyone to the potential dangers out there. We don't want anyone to ever say, well, how come no one ever told me you know, this is what our messages now we're trying to warn people that states are coming in, they're going to be coming hard. So wish I had better news a better message for you. But that's where we are today. If you would like to talk in more detail about this, you know, reach out. We've got great free resources up on the website, where we have blog posts where we have you know, charts you know, we have a page devoted specifically to COVID-19 resources. So, thank you, everyone. And this negative message here we, we hope that you have a great day.
[24:11] Outro: Thanks for listening. Be sure to click subscribe and check out all of the resources we have out on the web.