Halloween Horror Stories
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…
We hear about state tax horror stories a lot, and we have been talking about doing a podcast for these types of discretionary tales for a while, but when we came across these three tales, we said, let's finally air a horror story episode for Halloween. So today we are going to discuss three different horror stories related to sales tax software companies, salespeople, and the Streamlined Sales Tax Program.
Here’s a glimpse of what you’ll learn:
Why it seems like these discretionary tales are more and more commonplace
Why salespeople and the streamlined sales tax program may be common factors
A company with 850,000 in tax collected and not remitted spanning a 4 year period - what happened and why
A destination-based sourcing horror story
Connect with Michael
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.
[0:27] 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 everybody's favorite topic, which is of course sales tax. Today we're going to talk about Halloween horror stories in relation to sales tax. And we hear about these horror stories a lot, all year long, and Ellie and I have been talking about doing a podcast for these types of discretionary tales for while. But when we came across these three, I said, let's finally air a horror story episode for Halloween. So today we're going to discuss three different horror stories related to sales tax, software companies, salespeople, and the Streamlined Sales Tax Program. But first, let me introduce you to our co-host Ellie Moffat.
[1:14] Ellie: Hey everyone, really excited for this episode today. Mike, you know that I am excited about it, and it's great to be here. Before we get started, I'll do a quick introduction for Sales Tax and More. Sales Tax and More is a full-service consulting and solutions firm. So 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 registration, consultations, research, and like our name states, more. So if you have questions about our services or you'd like to work with us, we will give you plenty of ways to reach out. But Mike, we are always hearing about these horror stories. Why do a podcast now? Let's fill everyone in.
[2:02] Mike: You mean other than tying it into Halloween?
[2:05] Ellie: Yes.
[2:06] Mike: Okay. So, great question. It's because we're seeing an accelerating trend. We're starting to see more and more of these stories. And we're now three and a half years in from Wayfair and all during this time, the software companies have been pushing their professional services. You know, software companies are good at doing software. That's my opinion. Once they start getting into professional services, that's not what they do great, but they've been really, really pushing those services during this time. And we're seeing, you know, three and a half years, at least, of this push. And now all of these horror stories are starting to bubble up. We're seeing some of the results. I mean, a lot of times things are going smoothly. Companies don't even know there is a problem until there is. And now is when a lot of these problems are really starting to bubble up.
[3:09] Ellie: So Mike, you mentioned salespeople and the streamlined program as contributing factors. How do they fit in?
[3:15] Mike: Well, you know, the software companies, they have legions of salespeople and they've got very high quotas and, for what I'm being told, the streamlined program is one of the most profitable programs for some of these software companies right now. So they're getting the salespeople to push it. Salespeople are super aggressive, even when it may not be the best program for the company. For example, the taxpayer may only need to register in five states, yet since the software company is getting paid on all of the states that they register you for. And you're not, you know, a company's not paying for them. They're pushing and companies that should only be registered in five states are filing in twenty-four states or more. So this can open up companies to additional audit risk. It's just one of the many issues that aren’t being disclosed by these salespeople who are under tremendous pressure, these really high quotas, and the streamlined sales tax program. I mean, it's a tool and like all tools, there really isn't any one size fits all tools. Now, another thing, and I say this jokingly, but the person who's giving you tax guidance when you're talking to these software companies is generally the salesperson, and they go through a whole lot of salespeople. So, your salesperson may be selling shoes, cars, stocks, widgets, you know, whatever, just last week they may have been selling them or two weeks ago, three weeks ago. And now they're out there providing you sales tax guidance; and to me, there are major issues when you're getting your guidance, when you're listening to a salesperson in how to move your business forward.
[5:07] Ellie: Mike, these are some really strong feelings. So let's talk about what has you so stirred up specifically.
[5:14] Mike: Yeah, I definitely do have some strong opinions, but let's get into the actual horror stories and you can see why I feel the way that I do. So, I mean I could really speak nonstop about this all day in and day out. We're starting to see that many stories, but I'm going to limit it to three. This is not a joke. One of our primary growth factors right now is actually cleaning up the messes that the software companies are actually making. And I feel bad for the companies that have really gotten themselves into fixes by following the guidance of these software companies of these salespeople.
[5:56] Ellie: Well, so Mike, this episode is going to air right before Halloween, spooky season. So what is the first horror story that you want to talk about?
[6:06] Mike: All right. So one of the scariest things that I know of when it comes to sales tax is tax collected and not remitted. That's really the cardinal sin of sales tax that sends shivers down people's spines, especially when we start talking about big money over years and years. I mean, this is the one area of sales tax where people could go to jail. We hear stories all the time, especially in Minnesota and in Florida and states like that when we've got tax collected, not remitted. Now in general and in this scenario, no one's going to jail. You can have criminal penalties on top of the civil penalties. So tax collected, not remitted, real big, big issue. In this particular company, they were told by the salesperson of one of these software companies that the streamlined sales tax program was the best program for them, and the salesperson convinced them that they were going to take care of everything. So they signed up for calculations so that the software company is going to be doing the calculations, help them collect the tax. And they signed up for the returns and the software company was going to be remitting those returns. So collecting and remitting, you would think that both of those hands and know what they're doing. After the...by the way, they're signed up and in over forty states and in two states, it's Louisiana and Colorado, these states have what are called home rule jurisdictions. And in these two states alone over a four-year period, there was $850,000 of tax collected not remitted. That is unbelievable. How could the one hand at the software company not know what the other hand is doing? I mean, if you do in business with a company like ours, as soon as we see there's a discrepancy in the data, we're going to reach out and say, “Hey, what's going on here? You need to get registered in these areas here. We got to do something with this tax. You just can't sit on it.” That didn't happen. So to me, that's a big, big issue. Now, yes you can say, “Well, Mike, why did the company not catch this?” They really believed the salesperson. They thought that all of this was being taken care of. You know, they're in an explosive growth mode. They're concentrating on other things. This was really on the back burner and yes, I know it's still their responsibility. However, I don't understand that if someone's doing your returns and they're collecting your taxes and they're seeing all of the tax that's being collected, why was nothing ever said? Why did this go on for four years? How did this go on for four years? To me, that's an absolute horror story, and here's why, I mean, remember this is the cardinal sin of sales tax. We've got over 120 jurisdictions we're now working with here and luckily a lot of these jurisdictions seem willing to work with us on the penalty, because generally when you have tax collected not remitted, not only do they not work with you on the penalty, sometimes there are additional penalties. So we don't know what the final numbers are going to be but it's huge. And this company's losing sleep at night. They want this off their books as quickly as possible, who wants a potential $800,000 I mean, you could double this almost with the potential penalties and interest, with this out there. So to me, this is a perfect example of one of the reasons why you don't want a software company out there doing your professional services. I don't know of any company that would have let something like this slide. Like I said earlier, you come to us, with one person is doing your returns, month in, month out, they know your data, and when they see discrepancies, they're going to report it. Unfortunately, I don't know where the breakdown was here on the software company side. Yes, as I mentioned before, the company should have caught it themselves, but this is... two wrongs definitely don't make a right.
[10:30] Ellie: I would absolutely agree with you there, Mike, and, you know, we are always talking about how bad tax collected and not remitted can be. This company must be so nervous with all of that exposure.
[10:43] Mike: Yeah, and not only are they nervous with the exposure, but you know, We greatly discounted our fees, but you know, we're doing a mix of VDAs and you know, some of these local jurisdictions, they don't even have formal VDA program. So there's a lot of conversations about how to get this tax remitted. How did it get it off this company's books and into the hands of the actual jurisdictions? And as I mentioned earlier, they're so far they're being quite reasonable, but this could have gone a lot differently. This could have gone a lot worse.
[11:18] Ellie: So I'm gonna, I'm going to qualify this as a horror story. What next? What else do you have?
[11:26] Mike: Next one starts at very similar, numbers are a lot smaller. But everything's relative. Again, we've got the aggressive salesperson pushing the streamlined sales tax program. They got registered in forty states. Again, the salesperson's telling them they don't have to worry about anything. The problem is, is that one of these states is the state of Washington, and in the state of Washington, you have the business and occupation tax. And when you're filing normal returns, the business and occupation tax is a part of the sales tax return, and whoever's doing your sales tax returns, generally files the business and occupation tax. Now it's a real small number, usually less than half percent, depending on your classification, on your sales, into the state of Washington. However, The streamlined sales tax program does not allow the business and occupation tax to be filed with the sales tax form. So you've got to file a second form. So in my mind, why in the world, are we going to duplicate the efforts here? If I've got to file two forms and I have to pay the software company to do that business and occupation tax, why should they be allowed to double-dip? Why should they get paid by the state for doing the other one? So that they're getting paid twice for what's really one form. I mean, it can all be done on the normal sales tax form. So I don't think that anyone who's doing the streamlined sales tax program that is of any size that should really be doing it this way. Now here's where the problems come in. The sales tax consultant, the salesperson who sold this program never mentioned any of this. Now in the software companies defense, in the very small print, it says that you have to pay for this separately. But a lot of people don't read the very small print. The salesperson never told them about it. So here they are three years into this, and all of a sudden they get a call from the state of Washington saying, why are you not paying your business and occupation tax? Well, we thought it was being taken care of with every other company in the world. It's part of the sales tax form. Well, no. when you're filing through the streamlined sales tax program, it's not part of the sales tax form. You're not...you gotta be filing that separately. We have no record of you ever filing it. So over this three-year period, it's $112,000 of business and occupation tax. Now you would've had to pay it then or pay it now. Only the state of Washington has a 39% penalty. So, yeah, it's coming out of my pocket, no matter what, but that penalty's not. 39% is a huge hit. Then you get the interest on top of that. So, you know, Washington said, they're going to work with us. We're going to try to work through this and get that penalty removed. But we still have the interest and here's the thing. How many, you know, why in the world would you not make sure that your customer understood this. I mean, this is such a big area of exposure. Why in the world would you not break it out? I mean, yeah, it says it in the fine print, but a good salesperson would do that. So, you know, are they under such pressure because of the quotas they left it out on purpose? Was it an honest error that they didn't talk about it? Were they poorly trained? I don't know what the reason was. Maybe it was more nefarious. Maybe it was, you know, maybe greed. In any scenario, I don't see why the larger companies, anybody with a potential B&O exposure would utilize the streamlined program.
[15:25] Ellie: So, Mike, I think what a lot of people might be wondering right now, and I'm wondering as well, how many of our listeners may have the same issue or know of someone with this issue?
[15:38] Mike: I think this is an issue, not only for this one company here but for many companies because people just assume that the B&O tax is being paid as part of that return because that's how it's been done for years. I mean the streamline sales tax program is an abnormality. People don't expect it to be done that way. So, unless you've done a lot of your own homework, a lot of your own digging, and unless you've done the reading of the fine print on these agreements, unless, you have had a great salesperson. You may have these issues also.
[16:14] Ellie: Okay. So what's the third horror story.
[16:16] Mike: Alright. So this one doesn't include the streamlined program or salesperson directly, but still a pretty big deal because, in April of 2019, California changed the collection and filing requirements for companies that have greater than $500,000 in sales, it really went to destination-based sourcing for the district taxes and they changed the filing requirements. You got to file a schedule A. So you figure a big software company knows this and we don't have all the facts yet, we’re waiting on the data to dig through this. So I don't know if it was collected wrong, and remitted wrong, but I do know that it was remitted wrong because the way that it came to our attention, the company reached out to us when they couldn't get a hold of the software company, because the state of California was reaching out to them and saying, Hey, you never filed a Schedule A you didn't change when you were supposed to change. And you owe us $125,000 plus penalty and interest. So again, huge numbers, I mean, and they can't get the software company to return their telephone calls. So we're getting involved now we're reaching out to the state we're taking over their returns. They don't want to end up in another situation like this. You know, you think that a company that, you know, these, these software companies are big, you would think that they would be on top of this stuff, but the more we see the more we're understanding they're not and here we are you know, three years into this more company utilizing, these software providers because of you know, the economic nexus and all of these problems are starting to bubble up.
[18:09] Ellie: You know Mike, I heard you briefly mentioned something in there. I've heard as well that software companies can really just add insult to injury because you can't get anyone on the phone to work through these problems, the way to contact them is just complicated and convoluted. So, just to reiterate that point there.
[18:29] Mike: Absolutely and you know, the one program, when you add in...excuse me, the one issue, the one horror story, you know, relating to our Halloween theme here. When you add in penalty and interest in the costs of getting this all straightened out, it's going to be well over a million dollars. So there's a seven-figure issue and they still can't get the software companies on the phone. The other two is smaller, you know, they're, you know, six-figure issues, you know, a hundred twenty-five, a hundred twelve, maybe one hundred and fifty when you throw in that 39% penalty. So what happens when you have small issues? What happens when you have everyday issues? If you know, large six figures and seven-figure problems, don't get responses from the software company. How do you expect to get any help when you’re a lot smaller than that? So, it's just so true Ellie. It’s like I said, in the beginning here, software companies do software great. In other words, they calculate what taxes need to be collected. They provide the rates, they provide, you know, taxability decisions on a real-time basis. That's what the software companies are good for. You know, we're just seeing more and more of these horror stories when they try to stick their toe, in the professional services arena.
[19:56] Ellie: Yeah, I reiterate everything, and thank you so much for sharing this information, Mike.
[20:05] Mike: Ellie, I want to say one thing, we were talking about this now because we tried to time it to Halloween, but we are seeing so many of them at this point, and they're happening all year round. I think we're going to start sharing them on a more frequent basis. So we're going to work them into our podcast lineup just an update as to what's happening out there. What you need to be aware of if you are utilizing these software companies, or if you're thinking about utilizing these software companies, what do you have to be aware of? How do you protect yourself?
[20:40] Ellie: Yeah, absolutely. Thank you again, Mike, just to say it again and end to wrap things up here a little bit. I just want to let everyone know that if you think you're having any of these issues, if you'd like to work with us in any capacity, please reach out. You can reach out directly to me at emoffat@salestaxandmore.com You can also visit our website salestaxandmore.com. We have a ton of resources and a ton of information on our website that is incredibly helpful to most people. And yeah, we have these podcasts, a series of free webinars offering CPE credit, blog posts, state tax charts, and matrices, if I can say it. So, please reach out again, if you have any questions or would like to work with us.
[21:29] Mike: And have a happy Halloween. Thanks, everyone for joining us and we'll see you on the next episode of the Sales Tax and More podcast.
[21:32] Outro: Thanks for listening. Be sure to click subscribe and check out all of the resources we have out on the web.