How to Set Yourself up for a Successful Year and Avoid Tax Issues
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 will dive into the intricacies of sales tax strategies for 2024. Mike offers insight into various aspects of sales tax, including economic and physical nexus, registration and de-registration, filing frequencies, and changes in taxability and exemptions.
Here’s a glimpse of what you’ll learn:
We explain where to start with your sales tax strategy for 2024.
How do registrations and deregistrations come into play?
Taxability and exemption updates.
We dive into filing frequencies and changes
Connect with Michael
Episode Transcript - Audio Version
[00:00] 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 everyone's favorite topic, which is, of course, sales tax. Today, we're going to talk about how to set yourself up for a successful year and to potentially avoid some of the bigger sales tax issues.
But first, let me introduce you to my co-host Ellie Moffat.
Ellie: Hey everyone, great to be here and quick for those who don't know, Sales Tax More is a full service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling any of your state tax or related needs.
We do a lot of sales tax returns, sales tax registrations, consultations, research, and, like our name states, more. If you ever have questions about any of our services, please reach out. So, Mike, I don't know what happened. We blinked. Here we are in 2024, and it's been a really great year. 2023 was a great year for Sales Tax and More. And it is very important to our entire team that we help people set themselves up for a sales tax success. So let's get this podcast started with a really broad question here. Where can our listeners start with their sales tax strategy for 2024?
[01:21] Mike: Well, before I get into that, Ellie, I just want to welcome everyone. I hope that everyone had some great holidays and that we're all set to start this new year. I know many of you have said that your New Year's resolutions are to get sales tax compliant or state tax compliant this year. And here's a couple of pointers. You know, number one, January is so important to get the year started off right because, you know, there are certain times during the year when, you know, we've got to look at our nexus footprint.
[01:57] There are new filing frequencies that often come up, you know, in January, new taxability. So let's get started with an economic nexus. Because there are thresholds for economic nexus, those thresholds can be based upon dollar amounts or the number of transactions and every state that has a sales tax has thresholds at this point, including Alaska.
Many of you don't realize that Alaska has, an economic nexus threshold. Yes, no state sales tax, but there are a bunch of local sales taxes administered by the Alaska Municipal League. And these thresholds have different look back periods. So, the reason why January is so important when it comes to these economic nexus thresholds is because one of them says you've got to look at the previous calendar year.
[02:52]So what better time to look than in January? And if you look back over the previous calendar year, that would be from last January through December 31st. If your sales were over 100,000 or over 200 transactions in a state that manages their thresholds that way, then if you're over either of those thresholds, then you should consider getting registered. If you're not over one of those thresholds, well, you can forget about it until next January. You only have to look at that once a year because it's just the calendar year. Now, the next lookback period has to do with the previous calendar year plus the current calendar year. So that also is a perfect time to look back now because we got to look at the previous calendar year.
[03:43] And if your business is growing. You know, normally, then maybe you don't have to look at it again until the following January, but if your business is exploding and some businesses really take off, then you've got to check it a couple of times during this year because it's previous year or current year. So that's important. I'll give you an example. I use this example a lot. We had a company, a salesperson came to me and said, Mike, we need to do an economic nexus review for this company. And they only have the previous year's sales. I said okay. They were a small company. They were currently registered in like three states.
[4:29] Looked at their numbers, and told them that they had to register in another two states and the salesperson said, no, their sales are up. You know, this was the month of March. Their sales are up huge. We've got to look at year-to-date. I said, okay, we'll give me year-to-date numbers. And when I looked at the year-to-date numbers, they were substantial, and they ended up getting registered all in all in about 20 states. So if your business is exploding, you got to check this a couple of times during the year. Or if you're growing faster this year than you did last year, you've got to check a couple of times during the year. But at the very least, you've got to check it every January, end of December, beginning of January.
[5:12] And then you have the states that say, a rolling 12-month period, like the state of Illinois. And, you know, they're going to tell you at least once a quarter, you got to check that and you go back to proceeding 12 months. So that's something that you'll need to be checking throughout the year also, but January very, very important year. You want to get started on the right foot. Make sure you're not accruing any liability because of thresholds you passed in the previous year.
[5:43] Ellie: You know, Mike, we always say in our webinars, too, it all starts with Nexus, eh?
[5:48] Mike: Yeah.
[5:49] Ellie: Okay, so great info on Nexus, though. What about physical nexus?
[5:55] Mike: Absolutely, and you know, states start out looking for economic nexus, but in the process, and let me actually back up, states know that the majority of companies out there are not compliant at all or not fully compliant with this economic nexus. I mean, the Wayfair case, which ushered in an economic nexus for sales tax, was 2018. So we're going on five and a half years here. And still, you know, depending on what survey you look at, roughly 50 percent or more of the companies out there are not fully compliant. And the states know this. So they're getting very, very aggressive.
[6:37] You've got states like Illinois, states like Wisconsin, and now Arizona,, our clients have started getting letters from Arizona. Questioning registration dates and in a lot of instances, turning into full blown audits. So that's a number one. Now, while they're looking for this economic nexus and whether you actually use the correct start dates, when you get registered, they're also looking for other types of nexus, and you know, that comes to physical nexus.
And we've got some great webinars on physical nexus. I'm just going to touch on a couple here, the ones that gave our clients and other people that we're speaking to the most problems. The first is third-party nexus, and this gives us a problem because it just doesn't make common sense. I mean, if we're thinking about what activities we do to create nexus, we rarely think of the activities of third parties.
[7:34] Yet there are two U.S. Supreme Court cases that touch on this and basically,in Tyler Pipe, that's the last one, 1987, they said, it doesn't really matter what you call someone, doesn't really matter how you pay them, doesn't matter if they represent you exclusively, here's what matters. Are they helping you to establish or maintain a market?
And if they're helping you to establish or maintain a market, that's probably going to be nexus creating. Now that's paraphrased. But that's real, real important because the states took that language and incorporated it directly into their statutes, their rules, their regulations. They use it to provide guidance.
[8:17] The state courts use it as precedent. What better case to use for a precedent than a U. S. Supreme Court case? So very, very important. In all my years of doing this, this has been the biggest issue that has created problems for companies. It's the use of third parties. So it doesn't matter if you call them a subcontractor, an independent contractor, you don't even have to call them anything.
If you have somebody, whether it be a company, an individual performing work on your behalf, then there's a good chance that's going to be nexus creating. So we've got to watch that when we're determining what our nexus footprint is. Some other big ones, remote employees. I mean, during the pandemic, a lot of us had employees start working from home.
[9:08] Some of them have returned to the office but in a lot of places, they have not and during the pandemic, there were exceptions passed. In other words they, they weren't enforcing their rules concerning remote employees, creating nexus and not anymore. All of those have lapsed. So, in most instances, if you have an employee living in another state. That's probably creating nexus for you. Traveling doesn't matter if they're an employee or a third party. If they're traveling on your behalf, then that is going to be nexus-creating in most states. And some states have very low thresholds—state of Arizona, the state of Michigan. If you've got someone there, you know, greater than 48 hours cumulatively throughout the year, that's generally going to be nexus-creating.
[10:02] So traveling, employees, sometimes hard to track, especially if you're in the accounting department, you don't always know where everyone is traveling, but that is something that can create nexus and then the last big one is inventory and a lot of people, you know, sell on Amazon as well as through other channels. And in most instances, having inventory, even at an Amazon warehouse, even though Amazon is collecting the tax. If you have inventory in a state, most states are going to say that that inventory creates a physical nexus for you now.
[10:43] If it's just in an Amazon warehouse, some states have changed their position since we have economic nexus; Arizona now says that unless you're shipping the inventory directly to Amazon in Arizona, then that's no longer nexus creating, you know if Amazon is just moving the inventory there, that's no longer nexus creating.
If you're shipping it there directly, that is nexus-creating. The state of Texas they say that if you're only using the inventory at Amazon to fulfill Amazon sales, not nexus creating, if you're using it to fulfill sales on, say a Shopify, then that is going to be nexus creating and by the way, that's just for sales tax. For income tax purposes, that is generally going to be nexus-creating.
[11:35] In Texas, we don't have an income tax, but we do have the Texas franchise tax. So nexus, very, very important. The states are getting more aggressive, and I think we're going to see that continue, especially as we talk about recession and you know, state's revenues are drying up. They have less and less money, and their constituents need more and more services. They got to find that money somewhere.
[12:00] Ellie: So Mike, is this just a consideration for registration? Should we look at deregistrations as well or can you speak to that?
[12:11] Mike: Oh yeah, great point. Registrations, you know, very important because I call this the greatest tragedy in sales tax.
If we could have collected the tax at the point of sale and didn't now years down the road or months down the road, however long that is that tax that our customers would have been. Grudgingly paid, if not willingly paid, it's now coming out of our pocket. So we're transferring their liability to us. So that's what we call the greatest tragedy in sales tax. So, knowing where you have a responsibility to collect tax is important. And a big part of that is knowing nexus. Nexus just a fancy word that means link or connection, and it's the link or connection that must be present before the state can require you to do anything like collect its sales taxes or vendor use taxes or pay its taxes like an income tax or a consumer use tax.
[13:14] So very, very important that if we know what our nexus footprint is and what we're selling is taxable that we go ahead and get registered if it's material. Now this, the flip side of that coin is deregistrations. For example, maybe we're seeing a lot of clients that sell purely online. It did great during the pandemic, and now they're seeing their sales drop off. Their revenues drop off, and they're below the thresholds in a number of states. So not only do you want to know your nexus footprint so that you can register and avoid, you know, having a liability start to stack up, but you can deregister. You can keep your costs down. I mean, yes, there's a cost of compliance in why continue filing returns somewhere where you no longer have a responsibility to do so. So deregistrations could be an outcome of, you know understanding what your nexus footprint is.
[14:22] Ellie: We talked about nexus. We have that down. We've talked about registrations and deregistrations. What else? What about filing frequencies?
[14:33] Mike: Yeah, great point. You know, filing frequencies can change throughout the year and the filing frequency is just how often you have to file a sales tax return. This is something that we keep up for all of our clients.We do a lot of sales tax returns, and we, you know, manage the filing frequencies for them. But if you're with one of the software companies, especially a lot of times, they're not staying on top of this. And January is when a lot of filing frequency changes take effect. For example, maybe you were an annual filer last year.
You only had a file once a year beginning in January. You may be monthly. Depends on how big a jump in your sales you've had. Maybe you're quarterly. Maybe you went from quarterly to monthly. So lots and lots of changes can go the other way too. Maybe it went from monthly to quarterly. So you don't want to be filing returns if you don't have to. But you definitely want to file them on a monthly basis if you work quarterly. Because what happens, and we see this with, you know, the software companies all the time, they keep filing on a quarterly basis. All of a sudden, the state says, Hey, you owe all of this back tax and penalty and interest for these missed returns because they're only filing quarterly and you should be filing monthly. So changes in filing frequency, as I said, can happen, you know, at any time during the year, but a whole lot of them take effect as of January 1st.
[16:07] Ellie: Alright. Well, thank you, Mike. What? What else do you want to talk about here? I know you had mentioned some important points, but what else before we close this out?
[16:19] Mike: Oh, a couple of things. Number one, we also have to keep in mind changes in taxability and/or exemptions. For example, the state of Iowa, they had a good exemption for computer, computer peripherals, that were used in, in the processing of storage of data and other information. This was for insurance companies, financial institutions, commercial enterprises.So it was a pretty good exemption as of January 1st, 2024. That's going away. So, you know, a lot of times when people have exempt customers, they don't think to update this. They don't think to change their tax settings and although they were tax-exempt last year, as of January 1st, you should be charging the tax. And this is just one example. I mean, there's all sorts of examples like this across the board. So we really have to stay abreast of what these changes are and, you know, more and more states are taxing more and more services every year. So, that's an area I see companies stumbling, with also last year, my service wasn't taxable. This year it is taxable.
[17:38] So you got to stay on top of changes in taxability and changes in exemptions, because, if you have a responsibility to be collecting tax and you're not because you think an exemption is in place and it's not, that is a big, big issue. Last thing I want to talk about, and I want to end on a positive note.So many of our clients have to file the Ohio Commercial Activities tax or the CAT as it's called. And some of them have an annual filing frequency, some quarterly, some monthly. The big changes to that program, and they now have a minimum threshold of $3 million. And what the state of Ohio has said is that if your revenue in the state of Ohio is less than $3 million, you can deregister. For the Ohio commercial activities tax. So, that is good news. Not everything is about getting registered and spending more money. Some of it's actually about saving some money.
[18:43] So, you know, just in summary, it's real important that we know our economic nexus footprint, our physical nexus footprint because we can either register or deregister, you know, deregister, you know, save you some money. The registration is still going to save you a lot of pain because, liabilities can start to stack up very quickly, and penalty and interest can sometimes, you know, reach levels of 50 percent or more changes in filing frequencies, changes in taxability or exemptions. All of these are things that generally happen in January and then you know, on the income tax front, not really an income tax. It's a grocery sheet tax, but very similar to the income tax. We've got the Ohio CAT tax, and Ellie, that's all I've got for today. We're going to be doing a lot more of these podcasts this year, going into a lot more specific issues. And,I greatly appreciate everyone listening. And I look forward to seeing y'all on future episodes of The Sales Tax and more Podcast.
[19:51] Ellie: Yeah, Thank you, Mike. And thank you for helping people start their new year out right. If you have sales tax needs, if you want to start your year off, right, and you need help, we offer many solutions and services. You can reach out to me directly at Emoffat@salestaxandmore.com You can also visit our website directly. Salestaxandmore.com In addition to the services, we have a lot of free resources out there. We have a series of free webinars that provide CPE credit along with just some really helpful charts and information as well. So thank you again for joining us today, and happy new year.
[20:38] Mike: Thank you everyone. Bye bye.