Nightmares Before Christmas
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 are getting into the holiday spirit by discussing some sales tax nightmares.
Here’s a glimpse of what you’ll learn:
Nightmare #1: State of Iowa & Software Companies
How to prevent issues with getting deregistered
Nightmare #2: Canada & Registering for the goods and services tax (GST)
Making sure you’re registered in all five Canadian provinces
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 More, and today's co host of the Sales Tax More Podcast, where we talk about everybody's favorite topic, which is, of course, sales tax. And today usually we like to put some space between these webinars that we do, and we did, a Halloween horror story.
But we had two topics come up, cases come up, whatever you want to call it, situations. So I said, we can't wait. We've got to warn the clients on this here potential [00:01:00] clients. Just anybody listening, we need to warn them about this. So we're calling this The Nightmare Before Christmas, because these two situations are truly nightmares.
But before we get into it, let me introduce you to my co-host Ellie Moffat.
Ellie Moffat: Hey, everyone. Great to be here. And I'll just do a quick introduction for Sales Tax and More. We are a full service consulting and solutions firm. 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.
So if you have questions about our services or you'd like to work with us, please reach out. We'd love to hear from you and we'd love to work with you. And all that being said, Mike, it sounds like what you want to say here. So why don't you go ahead and jump right in?
Mike Fleming: Yeah, absolutely. I'm not exactly sure about what I want to say, but I want to get this out there.
This is real, real important and states are getting more and more aggressive in situations [00:02:00] like this. In this first situation, it involves the state of Iowa TaxJar, the software company out there. And this gentleman came to us to try to fix the situation here. I may be a little bit fuzzy on the details as to how this happened.
What we think happened, Iowa changed their website. And most of the software companies out there told their clients they had to go out and get registered on a new site. Whenever that happens, and this has happened a number of times in a number of states, we always take care of that for our clients.
We know that our clients get busy and sometimes sales tax issues are always not top of mind. So we want to make sure that we do that for them. It's one less thing that they have to do. It's just part of our normal service. There's no additional fees for that or anything else. But anyway, what we think happened here is [00:03:00] either the returns were not getting filed.
There was some sort of miscommunication with TaxJar or they were getting filed on the wrong website. They were going to be zero dollar returns anyway. But the state of Iowa, they think that they should be getting returns and payments. So the state of Iowa reaches out to their bank and puts a million dollar lien.
They took as much money as they can out of there. They got a million dollar lien on this bank account. That is just absolutely ludicrous. And we talked just recently about another state doing that. You can't just stop filing returns, even if you're filing $0 returns you got to make sure that whoever you're working with is actually doing what they're supposed to be doing.
And what parts do you have to play in this? Our client is not innocent in this. They should have gotten themselves registered on the new website if they knew about it. TaxJar should have [00:04:00] let them know about that. And like I said I'm a little bit fuzzy as to the details on how this happened.
I know what the results are. I'm sure about the results. The results are there's a million dollar lien or levy on this bank account. And this now client of ours is frantic. They need access to their money. They need access to their bank account. So the takeaway from this is that deregistrations are processed. They're not that simple. And if you don't deregister properly, the state thinks you should still be filing returns. You can't just stop filing because you're going to get ugly letters or liens or levies or whatever else happening out there. Because they want their money and they want their penalty, and they want their interest.
Whenever we're doing a deregistration, states are notorious for not [00:05:00] doing what you tell them to do when it comes to deregistrations only. So we tell the state what we're gonna do, then we do whatever the state requires. A lot of states, there's a special form, there's a letter, there's a final return that needs to be filed. We do all the things that the state wants us to do, but we have found that's not enough because the state's notorious for not following through on that, so about 20 to 30 days after we've done everything that the state wants us to do.
We follow up. We make sure that the account was actually closed per all of the documentation, or we did exactly what we're supposed to do. We want to make sure that account is closed. So a lot of times it's a lot harder deregistering than it is actually to get registered. There's more steps involved.
It's more hands on. But if you don't do it correctly, all of a sudden you get a state reaching [00:06:00] out with their hand in your pocket and a million dollars. My goodness. That's a lot of money. That truly is one of my worst nightmares is that some governmental agency is in my bank account tying up my money or taking my money.
Not sure exactly where the fault predominantly lies. I'm not exactly sure as to who's at fault for the state not getting those returns but I do know that this person had contacted us maybe nine months ago, they had said, hey, we're interested in you having closed some accounts and one of our salespeople quoted them and they said for that money, then we're going to go do it.
And it's not that expensive. It's $350 a state. As I said, it's a lot harder to get deregistered and do it correctly than it is to get registered. And this gentleman has now come back to us and is asking us to get them deregistered [00:07:00] everywhere because obviously there was a dropped ball somewhere on their side somewhere maybe it's partially TaxJar's fault partially their fault.
Maybe 100 percent their fault maybe 100 percent tax. I'm not sure what it is but they didn't deregister now they're scrambling. So like I said, the moral of the story here is if you're going to stop filing, make sure you go through the de registration process. And it's going to be similar but different in every state out there.
And the states are notorious for not doing what they say they're going to do, even though you do everything they've asked you to do, they're notorious for not doing it. So if you're going to do this on your own, make sure you're doing that third step, which is following up. First step, tell them what you're going to do.
Second step, do what they want you to do. Third step, follow up to make sure they've [00:08:00] done what you've asked them to do. So that's a way to prevent issues like this from happening, but this is the second one. We, I think we included one of these in our Halloween horror Stories. And here we are with another one and the dollar amounts are much, much larger on this one, a million dollars.
So I did want to get this out to everyone. It's very important as we come into the end of the year, beginning of the year, a lot of people are looking at their sales tax. They're looking to cut costs. What states can I deregister in? Where do I need to register in additional states?
So I thought that while people are reviewing their information this is something that we needed to talk about. This make sense, Ellie?
Ellie Moffat: Yeah, it makes sense. And I just want to reemphasize, deregistering is hard. It's a hard mess to untangle, but it's a lot easier than a state taking a million dollars out of your bank account without you knowing yet.
So it is another lesson in paying [00:09:00] attention and knowing what sales tax compliance entails and what your provider is providing, which we have emphasized so many times, Mike on other podcasts, but really just trying to drive home that point for everyone know what you're getting yourself into
Mike Fleming: Yeah, and you can't set it and forget it despite all of these commercials. If you think that you can just relax and set it and forget it and not worry about any of this, you gotta be a little bit vigilant, especially when you're dealing with the software companies where you're just a number, you don't have any personalized service there. There's really not a whole lot of accountability. Some people may slam me for saying things like that but that's my truth.
This next case here may illustrate that a little bit more. Let's talk about Canada. And when you register for the goods and services tax in Canada, GST, you're [00:10:00] automatically registered for five provinces local tax. They call that the HST or harmonized sales tax. And what these provinces have said is, we're going to make it easy on businesses.
We're going to make our rules the exact same as the federal rules in Canada. Canada has two levels of taxes, the federal level taxes and the local level taxes. So these five provinces said, we're going to harmonize with the GST. And what that means is we are going to make our rules exactly the same. And we're going to give Revenue Canada the ability to administer these.
So they're going to collect the tax and they're going to literally have everything to do with it. You don't have to worry about reaching out to each one of these provinces individually. The way you do your invoices it's going to show us a single rate instead of, a 5 percent [00:11:00] GST plus the local rate as in the rest of Canada, these five provinces, you just show one rate, 5 percent plus 10 percent or Ontario is only 8 percent and you're going to show it as either a 15 percent or 13 percent HST.
So that's how the invoice has to look. One registration. You don't have to go out and say, I want to register in these provinces. You're automatically registered in these five provinces that they call the HST provinces. Most software companies out there, when you're setting it up to collect tax, they know this.
When you say I'm registered for the GST and you turn that on in the tax, it's generally turned on for these five local jurisdictions also. So if you're selling into Canada and you're registered for the GST, I strongly suggest you go into your settings and make sure that the five HST [00:12:00] provinces are checked and those provinces consist of Ontario, Prince Edward Island Labrador and Newfoundland, New Brunswick and Nova Scotia.
So those are the five provinces that you want to make sure are checked because if they're not, you're only collecting the 5 percent GST. And we have a client, Canada does not audit companies very often but sometimes they do, especially if there's a red flag. And in this audit, Revenue Canada has said, hey, you're only collecting the 5 percent tax here. So in all of these transactions, you should have been collecting 15 percent. So they're 10 percent short the amount of tax that they owe three and a half million dollars.
Now, that's Canadian, so it's not quite as bad as it sounds, but three and a half million dollars, whether it's Canadian or U. [00:13:00] S. dollars, that's a heck of a lot of money, especially when you thought someone else was handling this. If it goes against, if it's not intuitive, if I do one registration, should I not just check one place?
A lot of other software, that's all you would do. So you're the one collecting the tax. You're the one doing the returns. You're the one who did the registration. Yeah. The client is the one who you said, you got to go in and set this up, but did you not provide him any guidance?
This is another Nightmare Before Christmas here. The takeaway in this is you cannot just set it and forget it. You cannot just kick back and relax. You gotta make sure that everything is set up correctly. And sometimes getting guidance on how to do that is tough. So if you're selling in Canada, make sure you have all of those local provinces that are HST provinces, [00:14:00] the five that I just mentioned turned on also.
You have to individually turn them on. Otherwise, you're only collecting a third. Of the text that you're supposed to be collecting and this shows up three, four years later. You're thinking that you're having a great three years and all of a sudden you got to pay three and a half million dollars in taxes that were never collected because it was set up incorrectly and the company didn't bring to your attention that hey we registered you.
We know that you should be collecting this. We're doing your returns. We see it's not being collected. And it's an issue. I just don't know how that happens. It's just so counterintuitive. But, for those of you who have listened to me previously that's the reason why I don't think that software companies are good choices to [00:15:00] provide services.
Software companies should stay in their lane. They should do what software companies do the transactions, do the taxability. However, all of the horror stories that I see, or the biggest horror stories that I see usually involve a software company. So two different issues, but huge amounts of money.
Three and a half million dollars of tax in the one instance a million dollars that's being locked up in the other instance just nightmares, especially this time of year. Companies, usually putting a lot of inventory out there for the final push. Third quarters, when a lot of these retailers make their money and, you know, have a cash shortfall at this time, not a fun thing.
So anyway, we're working with Iowa. We're working to get that bank situation cleared up, provide the correct documentation and that client will be happy. Like I said, I'm not exactly sure [00:16:00] how it got to where it was, but I know what the situation is now and I know that we are correcting it.
In Canada, we're looking for input tax credits. This client did not know that they could take input tax credits, so we'll get that number down. However, it's still gonna be a big big number, input tax credits, by the way Canada has some sales taxes, just like the U. S., but the federal level tax and some of the local taxes are actually value added taxes.
And in a value added tax everyone pays tax at every step of the distribution channel. In order to prevent double taxation, they allow you, pretty much everything is taxed there, so they allow you to take a credit for any tax paid in the legal course of business. Postage or if you're importing it, there's a 5 percent tax as you cross the border.
These are things that you can take as [00:17:00] credits and whenever you're doing an audit, you want to get as many credits or refunds as you possibly can inside of the audit. That's what we're working on now, but when one third of the tax is not collected and we're looking at a number as big as three and a half million dollars we got to find a lot of input tax credits.
Just a word of warning and if you are selling it to Canada, maybe you're set up correctly. Don't wait for Canada to come and find you though. Take the time, go out there, make sure that you actually have your settings done correctly. That it's actually collecting the right amount of rates because in the long run, any jurisdiction is not going to care why you didn't collect the right amount of rates.
They want their money, and it was your responsibility to collect it. Ellie, you have anything to add on that one? [00:18:00]
Ellie Moffat: I don't have anything to add on that one. But, there's a reason we keep having all these horror stories, Nightmare Before Christmas. And it's, again, like we emphasized before, sales tax compliance is complex.
Working with the right person is complex. And yeah that's all I got, Mike.
Mike Fleming: Yeah. And we hope that you can learn from other people's misfortunes. The one deregistration is a process. You gotta take it seriously. And in the other you can't just assume that a software company, because they have fancy commercials is doing everything correctly.
Because the salesperson told you that you could set it and forget it. And they would take care of everything from there going forward. You can't just turn it over blindly. You got to check and make sure that it's being done correctly because heaven forbid, you try to go back to these companies and try to get them to pay.
It's not going to happen. The fine print says you're responsible for pretty much everything. And in this [00:19:00] instance, there is some responsibility on the part of our now clients. But there's also responsibility on other parties also.
Alright. So Ellie, at this point, I'd like to wrap this up and wish everybody a happy holiday and we hope to see you on the next installment of the Sales Tax and More Podcast. Thanks everyone.
Ellie Moffat: Yes, and if you have any sales tax needs, we offer a lot of solutions and services. You can reach out to me directly at E Moffat.
That's E M O F F A T at sales tax and more. com. You can also visit our website sales tax and more. com. And we have a lot of free resources and paid resources on our website that can help you out in your sales tax journey. Please like and subscribe to this podcast and thank you so much for listening today.
Mike Fleming: Thank you again, everyone. Bye bye. [00:20:00]