Dear Mike - 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:
What are the most aggressive states conducting audits?
Are the states still enforcing notice and reporting?
Is click through nexus still in effect?
Connect with Michael
Episode Transcript - Audio Version
[00:00:00] Intro: Welcome to Sales Tax and More, your go to resource for all things state tax related. Now, here is your host, Michael Fleming.
Mike Fleming here, founder of sales tax and more. And today's co host of the tax and more podcast, where we talk about everybody's favorite topic, which is of course, sales tax. And today we have a little bit of a different format. We're going to call this format, dear Mike. And this is where Ellie asks me questions that we've received from, clients or potential clients or, just people out there who have asked questions, either through our podcasts or webinars, or some of these are actually client questions.
The questions come [00:01:00] from all over. We figured these were great questions and that other peoples might want to hear the same answers. So we're going to do this at least once a quarter, maybe a little bit more often where we have a segment that we called Dear Mike.
So before we get started today, let me introduce you to my co host and the question asker. Ellie Moffitt. That's me, the question asker. So, hey everyone, great to be here. , these questions are all over the map, but they are, fairly helpful. So hopefully there can be some good information gleaned from today.
I'm going to do a quick introduction for our company, Sales Tax More. We are a full service consulting and solutions firm. We have a really great team of experienced tax professionals who are very dedicated to fulfilling Any of your state tax related needs. So we do a lot of sales tax returns, sales tax registrations, consultations, research, and like our name states more.
So as always, if you have questions about our services or [00:02:00] you'd like to work with us, please reach out. We'd love to hear from you. , so Mike, are you ready to go? I'm ready to go. Before we do, though, I want to thank you and your team. I want to let everyone know that you've gathered these questions. We've answered these questions for the people who have asked the questions, but these are good questions.
We think that everybody would be interested in hearing the answers. So you guys always do a great job, but I really like this batch of questions you put together. So thanks very much. Yeah, absolutely. And thanks everyone for asking these to us. So, Mike, you can't avoid it any longer here. , what are, the first question we have here is, what are the most aggressive states conducting audits?
Okay, so, what's one of my favorite answers to all questions? We all know it. It depends. Yeah. Yeah, it depends. So, here's what it's going to [00:03:00] depend on. What are we talking about? There are certain states that are extremely aggressive when it's coming to the start dates for economic nexus. Some states will take you at face value.
Whatever you tell 'em, they're gonna believe you. Other states have begun auditing. Everybody and other states are looking at the amount of your sales on your returns, and then making the assumption that you could not just have, possibly have, crossed the threshold. So. Some states, you know, just registering prospectively with the date going forward.
They're letting you get away with that right now. The states that are not, the most aggressive states when it comes to auditing for economic nexus start dates are Illinois by far, the most aggressive out there and they are registering everyone, excuse me, auditing everyone, not registering everyone for the registration [00:04:00] dates.
And they're going back to October of 2018. So that's, that's number one. Number two is Wisconsin. They're doing it also. Number three, and this is a newcomer to the list is Arizona. We've just started seeing them question. You know, say you're doing two, 300, 000 worth of sales. And you're saying that, you know, you just crossed the threshold last month.
They're saying not so much, but they usually let you file a number of months worth of returns before they come back and, and, you know, Bang y'all on it. so, Maine is another state, not quite as aggressive as the others, especially since they've gotten rid of their 200 transactions, and it's just a 100, 000.
The state of South Carolina hasn't gotten to audit But they are asking a lot of questions. South Dakota asks a lot of questions, during the registration process that [00:05:00] usually, our clients usually end up doing a historical registration there. But it's not as big of an issue because South Dakota did away with their transaction threshold, just like Maine.
So it's a hundred thousand dollars and a hundred thousand dollars of sales into either Maine or, South Dakota. That's a lot of sales. So when it was 200 transactions, we had a lot more problems with Maine and South Dakota, but those are the, the big states right now, that are auditing, for the start dates of economic nexus.
Now, in general, the more auditors a state has, the more aggressive that state is. So states like California, states like Texas, you know, Texas has, last time I checked, almost 600 auditors. And people say, well, You know, I'm in the state of Washington. Texas isn't gonna fly someone out here just for little old me.
Well, roughly 20 percent of their [00:06:00] auditors are not located in Texas. They're located in remote offices all across the country. So they're not flying someone out there just for little old you. They're already out there and they're looking for companies in your area that they think, They can get some extra money for the state of Texas for so, all of the states, the big states have remote auditors across the country.
California does also. So it's not just Texas, but the bigger the state's population, the more auditors they have. And the more auditors they have spread across the country. Another state, maybe their population isn't as big, but very, very aggressive, the state of Washington and state of Washington is really bad because.
They also have one of the highest penalty rates out there, so 39%. That's their penalty rate. Now their interest rate is not as bad, [00:07:00] but that's the the highest penalty rate or the base penalty rate that that I know of, and I say base. It's actually 3 penalties stacked on top of each other, but they routinely come out with that.
So it can go higher from there. That's just where they generally start. So, those are our three big states. But, all states have the potential to be aggressive. All states, you know, are auditing companies all of the time. So it's like a lot of, you know, certain states, you know, have a lottery for who's going to be chosen, to be, audited.
So even if, you know, the state doesn't have 600 auditors, if you show up in that lottery, you care if they're one of the more aggressive states or not, an audit is an audit and it's going to have the same impact on you, depending on, on You know, who's doing it. So when we say aggressive, I'm [00:08:00] assuming who's more likely to audit you.
When it comes down to, are the auditors are aggressive, that's going to vary from auditor to auditor. Auditors are people and you have all types of personalities out there. A lot of auditors are going to be very great and work with you. Some of them, not so much. Some of them, you know, this is their, where they get to exert their power and influence and they can make your life miserable.
So, those are, are some of the big states, but Florida, you know, shows up on that list from time to time, state like, Louisiana, the local jurisdictions can be quite aggressive and, and hard to deal with. So again, it all depends on what we consider aggressive, and if you show up on a state's radar.
Take care. It doesn't matter if the state's aggressive or not. If we're talking about the likely of being audited, your [00:09:00] numbers up. So I hope that answers that question, Ellie. Yeah. Thank you, Mike. Let's jump right to the next one on these. So are states still enforcing notice and reporting? All right.
What's my favorite answer? It depends. All of the answers to these questions are, it depends. I'll save you some time. No one has to listen any further. This is it. So it depends. Just kidding. Keep listening. All right. So in general, most states who had, well, let's talk about what notice and reporting is first.
Notice and reporting started back in 2010 and Colorado, the state wanted some of the remote revenue. And at this point, Amazon was not collecting taxes and the states believed that the third party sellers should be collecting and remitting the tax. And if you had Inventory in one of these warehouses and in their state, then you needed to collect and remit the taxes.
[00:10:00] Unfortunately at that time. And there was no warehouse in Colorado. So Colorado wanted this remote revenue, but they couldn't make you get registered because you didn't have this link or connection with the state that we call Nexus, because there was no warehouse there to have inventory in. So Colorado came up with this unique idea.
They said, we're going to make. People's lives so miserable, we can't force them to get registered, but we're going to make their lives so miserable that they're going to voluntarily register. I mean, that's just a heinous thought to me. And we thought that Colorado was crazy at the time and it immediately went to the court, spent about seven years there, went to the U S Supreme court.
Who then sent it back to the lower court and said, this is not a tax, so lower court, you can rule on it, which Judge Gorsuch at the time, before he was a Supreme Court Justice, said that Colorado was allowed to move forward with this, and the Direct Marketing [00:11:00] Association immediately delayed you know, appealed or out sued again, and it went back, or they tried to get it back at the Supreme Court, and the Supreme Court refused to hear it.
So this is the most heinous thing that we have ever seen states try to do. And the supreme court let them get away with it. And basically, the way they make your life miserable is you got to do three or four things depending on the state. And one is having a statement on your website that says, Hey, we're not registered to collect tax.
So you, Mr. Purchaser, you, Mr. Customer. You need to, self assess the tax and remit it directly to the state as a consumer use tax. Then you need a notice at the point of sale. And then at the end of the year, you got to remind them, Hey, remember we told you, you got to, you know, report this to the state.
Well, it's time. And we're just reminding you that you need to report to this, to the state and pay the tax directly to the state. [00:12:00] And Oh, by the way. We're going to be turning over a list of all of our customers to the state. So they're going to know who you are. So that's what Colorado's ideas were.
They wanted to make everyone's life so miserable. And we thought Colorado was crazy at the time. But the court allowed them to get away with it. So, at best, this is a poor marketing message. I mean, what your customers heard was we're not doing our job. So, you, we're going to make you do more work and by the way, then we're going to knock you out to the state.
So we're going to tattle on you. That is not a great marketing message. What makes it worse and what makes Colorado look like they were sane when they did this is a bunch of States came on and started saying minimum penalties were 20, 000 per instance. So States like Washington and [00:13:00] Pennsylvania, they, you know, that's what was so draconian about this.
They have since sunset. Their, their, notice of reporting rules. So, some states have not, most states have sunsetted since economic nexus came by state like Colorado still has it, but it's not a big deal. I mean, most people are going to have economic nexus anyway. So it's, it's not a big deal.
Vermont still has theirs, but it's a 25 penalty. So it's who cares? And then, You're left with Louisiana. They've never really outlined theirs, but again, you're probably going to have economic nexus. So that's not a big one that most of our clients worry about. It's got a 50, 000 threshold. So maybe you're not at their 100, 000 economic nexus.
And some of our more conservative clients would actually say, okay. Let me register it even though we're at 50 rather than 100. The two big ones that we [00:14:00] need to worry about. The state of Oklahoma and Puerto Rico, Puerto Rico. We tell a lot of our clients, you know, they may have four or five sales in Puerto Rico, total thousand dollars.
And on those numbers, in theory, they could have, Penalties in excess of 30, 000. So does it make sense for 1, 000 of sales to risk 30, 000 for doing this incorrectly? We don't think the answer is yes. So, 1, 000, I can't justify the cost of a sales, tax registration and filing returns to avoid the notice of reporting requirements.
Cause once you get registered. You don't have to worry about these requirements anymore. Remember, Colorado said, we're going to make your life so miserable. You're going to volunteer to register. So if your sales are material in Puerto Rico, and you want to continue making sales, And we suggest registering there so you don't have to comply with notice and recording reporting, [00:15:00] Oklahoma.
This is one that's up in the air right now, because they implemented there's back in July of 2018. And there's is the most heinous of any I have ever heard. Their threshold is 10, 000. It's still in effect when you hit 100, 000, you have to register. But at 10, 000, you have the option of either registering or doing notice and reporting.
Now, Colorado says you got to do three things. Excuse me, Oklahoma says you have to do three things. And, for each one you don't do, you pay the lesser of 20, 000. Or 20 percent of your revenue into the state over the past year. So if you get 10, 000 of revenue, that's only 2, 000. Doesn't sound so bad right now, except how many transactions did it take for you to get to 10, 000?
[00:16:00] Thousand maybe, whatever number that is, it's not just that thousand dollars, not just that transaction number times, $2,000. It's that transaction number times three times $2,000. You can quickly get up into the seven figures here. Now, the way the statute was written, the department has the ability to mitigate those, those fees for the first five years.
Well, that five year period was up in January of 2023. I haven't seen them, actually, you know, go after anyone for this. Recently, however, if they did, would they have to hit them with a seven figure penalty? Of course, that's going to be litigated, but litigation takes time, takes money. So our clients just to stay clear of this, go ahead and get registered once they hit that 10, 000 [00:17:00] threshold, then they don't have to worry about it.
And that's the one I worry about most. Is it going to be hard for. Oklahoma to make that stick? Absolutely. Is it still on the books? Yes. So unless you want to be the guinea pig, unless you want to be the one taking them to court, I say just go ahead and get registered once you hit 10, 000 of taxable sales.
Okay. And Mike, this will be our last question. Good news for everyone else. We have an entire list of great questions here. But, and so they'll bleed into follow up episodes that will also be called dear Mike. So keep your eye out for them. But Mike, is click through Nexus still in effect? It depends. So, in this case, it's going to depend on the state.
A lot of the states actually have sunset their click through Nexus. And we've got a chart, I think it's being updated right now, so it may not be live. But we have a chart that will be available on the website, has been available on the website, that tracks these. [00:18:00] And, this is important to know, because if you're trying to figure out what your Nexus footprint is, and you're looking at these thresholds, you think you only crossed it, You know, a year ago, but, you're in one of these states that still has clicked through Nexus and you had an affiliate program, and these affiliate programs say if you generated a certain amount of business, some of them, it's a 5, 000, some of it's 10, 000.
But if all of these types of relationships within that state were over that level. The state looks at that as a type of physical presence, so they can go back before the Wayfair case. And the reason why is they base this on the Tyler Pipe case, and in Tyler Pipe he had one independent contractor, who was in the state of Wash, Washington, a company was in Texas, and the Supreme Court said, yeah, actually this didn't go to the Supreme Court.
The New York State [00:19:00] Court, the highest court in New York, said, you know what? The Supreme Court said one independent contractor that you're paying commissions to, can create a significant nexus. What happens if you have a whole state full of people that you're paying some type of referral fees to?
That's a heck of a lot, worse than having one. You know, independent contractors. So, never went to the U. S. Supreme Court, but, a number of states, I think at its peak, 21 states or so, jumped on board there. A lot less number than that now. However, if you're trying to accurately gauge what your potential exposure is, you need to know if you're over these thresholds for notice and reporting.
So, when we get that chart back up. We'll let you know, it'll be on the free portion of our website and, definitely check it out. All right. And thank you everyone again so much for joining us. If you enjoy our podcast, please like, and subscribe, it goes a long way in helping us, leave us a [00:20:00] review.
And if you have need of other, Solutions and services. We do offer many of them. You can reach out to me directly at E M O F F A T at sales tax and more. com. That's E Moffitt at sales tax and more. com, or you can go directly to our website, sales tax and more. com. We also have a series of free webinars that provide CPE credit.
Mike mentioned one free resource. We offer a whole host of them on our website as well. So be sure to check those out and yeah, thank you so much for joining us today. Thank you everyone. And we hope to see you on the next episode of the sales tax and more podcast. Bye bye.