Dear Mike #3 - 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:
When does someone need to register to collect sales tax?
3 things to look at to determine if your sales are material.
Do states care whether sales are taxable or exempt when analyzing economic nexus thresholds? Do they look at total sales or just taxable sales?
Do exemption certificates expire and how often should people be requesting updated ECM certificates?
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.
Mike Fleming: Hi, Mike Fleming here, founder of Sales Tax and More, and today's cohost 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 do a Dear Mike podcast, where we answer some of your frequently asked questions. These are actual questions that we've gotten from either current clients or prospective clients.
But before we get into the questions, let me introduce you to my cohost, Ellie Moffat.
Ellie Moffat: Hi, everyone. It's really great to be here and I'll do a [00:01:00] quick introduction for our company. So 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, audit defense, exemption certificate management, and like our name states, more, which I will say leads us to have a lot of questions like this. This is how we get those questions because of these services that we offer.
And, we've also found that this kind of, this kind of podcast style is really popular. So if you have questions yourself, please send them in, please reach out to us. If you'd like to work with us, we'd love to work with you as well. And let's, let's, jump in here, Mike. So, When does someone need to register to collect sales tax?
Mike Fleming: Well, this is, I could go a number of different ways. This is a big [00:02:00] juicy question. It seems kind of simple.
Ellie Moffat: I almost said we're going to go broad to start out here, but
Mike Fleming: Yeah, very, very broad. I could, I, I see a number of different ways we can go with this, but let's start real 10, 000 foot level. You need to register to collect sales tax when you have what we call nexus, which just means some sort of link or connection with the state.
What you sell is taxable and your sales are material. Now that last bit, the sales are material. That's something I say, the states don't say that once you have nexus, the states think that you should collect from dollar number one. I think we need to use common sense. So just because the state says you should do something does not necessarily mean that it makes good business sense to do so.
For example, if you only have 1, 000 in sales during the entire year, and you have an 8 percent tax rate, [00:03:00] you know, you will have collected $80 in, tax. Now, there's a cost to getting registered, whether you do it yourself or you hire someone like us. And then once you're registered, you got to file sales tax returns.
So, some states like a Georgia, you're going to be a monthly filer for at least the first six months. So I don't know any state or I, I just can't make the math work there. It makes sense. The, you know, let's, let's say that. You don't collect the $80. Well, penalty and interest on that is probably 50%.
Maybe let's double it. Let's say a hundred percent. So $80 becomes $160. I still don't know anywhere. Even if you're doing this yourself where you can make that math work, is it worth your time to go out and get registered and then have to file a sales tax return every [00:04:00] month to remit $80.
I think you're better off in that instance, waiting for the state to find you, and if they do, they're going to want their $80 plus their penalty and interest, so $160, you're still better off because it would have cost you more than that to, have gone out and get registered , so to sum this up, when do I need to register to collect sales tax?
Number one, you got to have this link or connection that we call nexus. Number two, what your sales got to be taxable. Why file $0 returns? Now, some states say you should do that. Even if you don't have taxable sales, they want you to file a return. I say, let's use some common sense. So most of our clients only get registered.
When they have taxable sales and the third thing, the sales have to be material. Remember, that's me saying it, not the state. States think you should be registered from dollar number one and they're going to, if they ever find you, they're going to want their tax from the dollar [00:05:00] one when you created nexus, but you're still going to come out ahead of the game.
So long as you're looking at whether this is material or not. I'm a big believer in getting registered if your numbers are material. In other words, would it leave a mark? Would you say, ouch? I really wish I got registered, at the levels you're at. So every person has to figure that out on their own.
And, we talk about that in a number of our different webinars about what people consider to be meaningful. So basically comes down to, you know, how fearful are you? What's your risk tolerance? You're going to have a higher number if you're fairly risk tolerant. If you're hearing footsteps and you're afraid the state's going to find you, you're going to have a lower personal number.
Capital reserves. I mean, if you have a lot of capital reserves in the bank, you're going to have a [00:06:00] higher number. If you have lower capital reserves, you're going to have a lower number. And then profit margins. If you've got a 2 percent profit margin, I mean, this is counterintuitive. You're going to want to get registered at a lower number because if a state does find you, it could literally put you out of business.
So, you know, if you figure the average sales tax rate is 8%, you're only making 2%. Not only have you wiped out, you know, if the state finds you three or four years down the road, have you wiped out your profits in one state, you probably have put yourself out of business. So, risk tolerance, capital reserves, profit margins.
So those are the three things you got to look at when determining if your sales are material and then if you have this, link or connection, we call nexus. If your sales are taxable and if your sales are material, go ahead and get registered.
Ellie Moffat: Yeah. So big question here. I mean, really there's a million in between [00:07:00] questions we could ask about it, but I think that's a great starting point.
So thank you so much, Mike. And, we're going to switch topics entirely. So, do states care whether sales are taxable or exempt when analyzing economic nexus thresholds? Do they look at total sales or just taxable sales?
Mike Fleming: What's my favorite answer, Ellie?,
Ellie Moffat: I'm going to go with, it depends.
Mike Fleming: Oh, yes. So often in, when it comes to taxes, the answer is it depends.
And in this case, it depends on the state because the answer to that is all of the above. E. Do states care, whether sales are taxable or exempt? Well, it depends on the state when doing economic thresholds. Some states say, all exempt sales are included. Some say sales for resale are excluded, but all other exempt sales are included.
Some say they're all excluded. So it's really on a state by state basis. And again, do they look at total [00:08:00] sales or just taxable sales? Really, that's just another way of phrasing this. And some states look at all sales. Doesn't matter whether they're taxable or not. And other states just look at taxable sales.
And if we wanted, we could really tie this answer back to question number one. When do I need to register to collect sales tax? When you have nexus. And determining where you have nexus is the first step and most important step because, you know, state can't make you do anything if you don't have this link or connection with that state that we call nexus.
So you don't even have to worry about collecting tax if you don't have nexus with that state. And there are basically two types of nexus, economic nexus, which we were just talking about. And then there's the old fashioned nexus or physical presence nexus. So, I like it that I tied those two questions together.
Ellie Moffat: You know what I was actually thinking as I was asking it, I was like, Oh, [00:09:00] He's good. Okay. I'm wrong for saying that these aren't related. So I'm glad you did. And, we're just trying to keep the listeners on their toes a little bit, you know, what, what am I doing wrong? So, next question here, Mike is do exempt exemption certificates expire and how often should people be requesting updated ECM certificates?
Mike Fleming: What's my favorite answer?
Ellie Moffat: It depends. There's a lot of that going on today.
Mike Fleming: It goes around a lot. And again, it depends on the state, and it depends on the type of certificate. So, sometimes a resale certificate expires, but an exemption certificate does not. A resale certificate is a type of exemption certificate.
It's a specialized, certificate. And there's distinctions between the two. There are some states like Florida that say that it expires every year and that you should get a new certificate every year. Unless [00:10:00] you have a continuous relationship, uninterrupted business. That's the exception rather than rule in general, you want to be asking for a new certificate every year.
Now there are other states out there that, have unwritten rules, that, it doesn't say on the certificate that this certificate is good for just one year. And you're supposed to know that. But very few certificates, you know, actually expire. There are quite a number, but the majority of them don't expire.
However, just because there's no expiration date on a certificate doesn't mean you shouldn't be updating them because a lot can happen. One time I was doing an exemption certificate review and I looked at one certificate and it was 27 years old and I'm sure it was valid when they accepted it, but it was the wrong company.
It was the wrong state. This company had switched states and they never updated their [00:11:00] certificate. It had switched ownership. It had switched entity types. Basically any time a sales tax number changes, the previous certificate is no longer valid. So even though it's valid when you collect it, a lot can happen.
So as a best practice, we believe, and we do a lot of exemption certificate management. So all of our clients, we have them update their certificates, even when they don't expire, at least every three years. And the reason we do that is there's a lot of audit periods out there that are three years and a lot can change in a three year period, you know, it's not quite going to be like the one I looked at for 27 years, but a lot can change and you want to make sure that a certificate that was valid when you collected it is still valid today, because the auditor is not going to say, Oh, well, I see this used to be valid.
So we'll let you slide. If it's not valid [00:12:00] today, if it's not valid for the period of the audit, too bad, so sad. And nowadays audits, it's a matter of, every I dot being dotted, every T being crossed. It used to be a matter of substance over form.
In other words, if an auditor could tell, that it was an exempt transaction, they gave you a whole lot of latitude. Nowadays, since that 2008, not so much. Now it's a matter of form over substance, and that, like I said, simply means that every I has to be dotted, every T has to be crossed. So, since so much can change over a three year period, you want to make sure that that certificate is still valid today.
When we say valid, that an auditor would not kick it during an audit. Things like the name being the same, things like it being totally, signed, completely filled out. When certificates are kicked during an audit, they're usually [00:13:00] small things. That sometimes slide underneath the radar, and, it all circles back to this question.
Do exemption certificates expire, and how often should I request an updated certificate? Even on the ones that don't expire, we believe they should be updated every three years, and for our clients where we do this, that's, that's the position that we take.
Ellie Moffat: All right. Well, thank you so much, Mike, for answering these, these few questions for us.
And again, a reminder to our listeners, send us your questions. We'd love to answer them on the podcast. You know, we'd love to work with you if you, if you're looking for a sales tax partner as well, we offer many services, not just the ones that I mentioned today. And if you want to just support our podcast, please like and subscribe.
If you have questions you can reach out to me directly at E Moffat at sales tax and more. com that's E M O F F A T at sales tax and more. com or you can visit our website, sales [00:14:00] tax and more. com. And in addition to the services, in addition to this podcast, we have an entire series of free webinars.
We have blogs. We have a lot of free resources on our website that are available. And that you should check out. So thank you so much for listening today and have a wonderful day.
Mike Fleming: Thanks everyone. And we hope to see you on the next episode of the Sales Tax and More podcast. Bye bye.