How Third Parties Can Create Nexus
States share their information with the IRS, so if you pay independent contractors, you would usually do that using Form 1099. So if the state finds out from the IRS that you issued a 1099 but check their tax roles and you are not signed up with them, you can expect a letter from them.
Such was the case of a pipe seller who contacted Michael Fleming for tax assistance.
Michael is the founder of Sales Tax and More and is one of the country's leading authorities for state tax issues like consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers. He is a writer, speaker, and puts on webinars regularly.
This week Michael Fleming is interviewed by Dr. Jeremy Weisz to talk about amnesties, historical registration, and how third parties can create nexus.
Here’s a glimpse of what you’ll learn:
The case of a pipe selling company with independent contractors
How Michael helped the company solve their problem
Registering a company in all the right states
How a state can find you through Form 1099
Resources Mentioned in This Episode
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.
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: Mike Flemming here, founder of Sales Tax and More and today's host of the Sales Tax and More Podcast, where we talked about everyone's favorite topic, which is, of course, sales tax. And today I have but Jeremy Weisz with us, and he’s done thousands and thousands with very successful entrepreneurs, CEOs, and today, we’re flipping the table. We’re going to have him interview me, so.
[0:54] Jeremy: Michael, thanks for having me. And I know, Michael, personally and professionally, many of the experts I know go to you for their sales tax needs. So thank you for what you do, and the episode is brought to you by Sales Tax and More. They assist companies and their trusted advisors, like CPAs, with their sales tax needs. They offer consulting and research, registrations, returns, and much more. Over the years, they've assisted thousands and thousands of sellers both foreign and domestic with their tax issues in the United States and Canada. So you can go to salestaxandmore.com for more information. Also listen to more episodes, because he tells some crazy crazy sales tax stories, nightmare stories, in a lot of cases that you want to avoid. And today, Michael, in my notes I've written down we need to talk about this topic, which is - it's not just the state you need to worry about. What did you mean by that?
[1:52] Mike: Well, in this particular story, we have a, give you a little bit background on it first, we've got a CPA who’s been doing a company's books for 25 years or so, signing off on all the annual reports saying no problems. You know, they got a bunch of bank loans out there, you know, signing reports for banks. And it's a father-and-son team, and they’ve been building the business for 30 years. They decide it's time to sell the business, and they find a buyer, and they're going to pay 30 million dollars for the company. So it's not a huge company.
[2:32] Jeremy: That sounds good to me.
[2:34] Mike: Yeah. And the father-son team are ecstatic. And then, the buyer does the due diligence. And the buyer uncovers that they’ve got independent contractors all across the country. And independent contractors, unfortunately, people who don’t work for you, I mean true third-parties, there’s two Supreme Court cases say that doesn’t matter that they’re a third party. If they're helping you to establish or maintain a marketplace, that’s going to create nexus. And nexus means you could have the responsibility to collect and remit the tax. And this, of all the different things that create nexus out there, this is the one I hear about most often, because you know, even CPAs think how can third parties, I mean, how can someone who has no relationship to you whatsoever, how can that create nexus? So we hear these stories three, four, five times a day from companies as well as their advisers.
[3:33] Jeremy: They just weren't informed, their advisors.
[3:36] Mike: They didn’t know. And the CPA’s contacting us. So he didn't know. And here's what he tells us - He wants to know if the purchaser is trying some trick for negotiations, because they found out that there's nexus, they found out there's exposure going all the way back, and they wanted to put 15 million-dollars aside in an escrow account. In other words, the seller is not going to get that money, or they reduce the sales price. So the accountant comes to us. He signed off on all this paperwork and done all the audits for them for twenty-five years, and he’s thinking right away - I got personal liability. You know, I've been saying to everybody that this is okay. How do I go back and tell the owners of this company that, you know, they've had issues all of these years, and I missed it. So he didn’t realize that there's a problem here. And he’s thinking this is just some type of ploy to lower sales price. And unfortunately we had to tell him - No, it's true what they're saying. And he said - Well how do we get out of it? And. . .
[4:49] Jeremy: That’s a good question. Is this an eCommerce company, or what kind of what kind of?
[4:54] Mike: No, this is a pipe company, so they’re selling pipe, you know, and they’ve got independent contractors, you know, pipe for the oil businesses. So they’re selling it all over the country there.
[5:07] Jeremy: How do we get out of it?
[5:09] Mike: How do we get out of it? I jumped the gun there. I wanted to tell you how we get out of it. Again, there's a mixture of voluntary disclosure agreements, there's a mixture of, at that point there, again, was a lot of amnesties. Very few of those around that are true amnesties today, but at that point we had a lot of amnesties. And you know, in some cases where the exposure wasn’t too high, we just do what’s called the historical registration and pay the back tax and ask for a penalty. But we get the 15 million dollars down to about a million dollars. And at that point, everyone was comfortable enough to let the deal move forward. That was a number that was much more manageable than roughly half of the purchase price. So again, all happy campers. I mean the. . .
[6:05] Jeremy: It's hard to believe.
[6:06] Mike: Yeah. The CPA, I don't know whether that relationship stay together or not, but whereas he was, he just, you know, was crying. But he was extremely, extremely worried that he was going to be blamed for all this. And now we found a way out of it. So, although he may have missed it in the beginning, he came with a solution, which was us. So that's a happy ending there.
[6:38] Jeremy: So, Michael. . .
[6:39] Mike: Do we ever do case studies with unhappy endings?
[6:41] Jeremy: We should
[6:43] Mike: We should
[6:45] Jeremy: Maybe not your case studies. Someone else’s case studies. Yeah that guy went to jail. They didn’t use me, cause they went to jail
[6:54] Mike: Well I’ll think of a case study that doesn't have a happy ending.
[6:57] Jeremy: Right, yeah, we need an unhappy ending case study. But, in this case, so they weren’t, was one of the problems they weren’t registered in all the states that they should’ve been registered?
[7:06] Mike: Yeah, they were registered nowhere but their home state, because they didn't have employees, so they were under the mistaken impression that independent contractors, I mean everything they did was in the single state. And they used third parties, and they thought, you know - Hey they’re not employees. I mean, I don't control what they do, I don't set their hours, I send them 1099s, I don't send the W2, so I mean, they were true 1099 contractors. And unfortunately, they just didn't realize that third parties can create nexus. You know, I can, two other case studies where the IRS has found someone by the 1099. That’ll be the next case study. You know, where it’s not a happy ending.
[7:52] Jeremy: Ok, stay tuned. Maybe the IRS will send if you don’t want the IRS to find you listen to the next episode.
[8:01] Mike: No, the states share information with the IRS. And states ask the IRS who’s got a 1099 because if you do pay independent contractors, you’re usually paying them with a 1099. So when the state goes to the IRS, they say, who’s issued this 1099? And then they look at their own tax rolls, and they say, “Oh, this person’s not signed up for sales tax. You’re on the list.” And just being on the list isn’t a problem, but all the states have discovery units that follow up on these leads. So the risk of you showing up in someone’s audit, not great, but that is one of the biggest. . .
[8:38] Jeremy: I don’t want to be on one of those lists
[8:40] Mike: No, no one wants to be on the list. But that is one of the biggest ways that states can find you.
[8:46] Jeremy: Nice. Thank you, Michael, Everyone can check out salestaxandmore.com for more information. Check out more episodes. Thanks again.
[8:56] Outro: Thanks for listening. Be sure to click subscribe and check out all of the resources we have out on the web.