Sales Tax Broken Hearts
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 the complexities and challenges of managing sales tax, particularly highlighting the emotional and financial troubles businesses face due to inadequate services from tax software providers. They delve into the risks associated with over-reliance on automation and the importance of accurate tax collection and remittance, emphasizing the need for clear communication and realistic expectations.
Here’s a glimpse of what you’ll learn:
The emotional and financial toll of sales tax issues.
Flaws in tax software services.
Automation pitfalls and tax errors.
Sales Tax More's mitigation advice.
Connect with Michael
Episode Transcript - Audio Version
[00:00:00] Intro: Welcome to Sales Tax More, your go-to resource for all things state tax-related. Now, here's your host, Michael Fleming.
Mike: Mike Fleming here, founder of Sales Tax More and today's co-host of the Sales Tax More podcast, where we talk about everyone's favorite topic: sales tax. And today, we're going to be talking about broken hearts. With Valentine's Day coming up, sometimes it's not always a pleasant holiday for some people. And we're going to concentrate today on some of those broken hearts issues out there—more specifically, those broken hearts by sales tax issues and created mostly by software companies. But before we do, let me introduce you to my co-host Ellie Moffat.
[00:00:55] Ellie: Love is in the air. Until it's not, huh? This is something we come across so often that it's sometimes it's a horror story, sometimes it's a broken heart, but all really relevant and good information to know that you might not hear otherwise. So it is great to be here. And for those who don't know Sales Tax and More, we are a full-service consulting and solutions firm. We have a great team here of experienced tax professionals who are dedicated to fulfilling any of your state tax or 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. So please always reach out to us if you have questions about our services, we'd love to hear from you, and we would love to work with you. So Mike, we have a lot of clients who've come to us over the years. Just absolutely brokenhearted, absolutely distraught after leaving a software company, what would you say is a leading cause of this kind of breakup?
[00:02:00] Mike: Ellie, it's really the same types of things that can cause a relationship to break up. Things like poor communication, attentiveness, unrealistic expectations, a lack of taking responsibility. You were being misled either prior at the beginning of the relationship or something has changed during the relationship and just a general sense of being unsupportive. So let me give you a more concrete example here. Say that we had one client who signed up with Avalara and they think that everything is being handled correctly. And lo and behold, three years later, they find out that Avalara was collecting the tax, the state and local tax in both the states of Colorado and Louisiana, but they were only remitting the state tax.
[00:02:59] Mike: So after three years, they find out that they've got almost a million dollars, just under a million dollars of tax collected and not remitted, spread out amongst all these local jurisdictions and when the client finally realized this and said something to Avalara. They said, Oh, we had a note buried here that this was not happening, and you never did anything about it. There was poor communication there; they weren't being attentive, and they didn't take responsibility for it. They blamed it on the client, which, to be a little bit honest. Yeah. The client has some responsibility, but you're collecting the tax. Okay. You're remitting the tax. Number one, why were the local taxes on remitted? So that's an issue. But number two, why was it not communicated and saying, hey, you got a problem here. You got to do something. Here's why we're not collecting the tax. You got to take care of this. So a whole bunch of different issues there. And I could go on and on with stories like this, but it all boils down to a lack of responsibility.
[00:04:20] Mike: They actually said we can't even fix this for you. It's so it's a big problem. Yeah. Why don't you go to Sales Tax and More? They referred them to us. That's basically saying, hey, we made a mistake. We don't want this client anymore because now they're our client, and they brought over a number of companies. It wasn't just one entity. They had multiple entities. So same reasons relationships break up. Same reasons why people are unhappy with software companies.
[00:04:49] Ellie: And, while you could send a company to us for sales tax issues, please don't send anyone to us for relationship issues. We are not, we're decidedly not the people to help you but okay, lack of responsibility here.
[00:05:05] Mike: I don't. Maybe you need to speak for yourself. I personally have a good relationship.
[00:05:10] Ellie:I have a great relationship too, but it's a miracle. So, bring your sales tax problems to us. Best of luck with your broke, your brokenhearted relationship. Mike, so lack of responsibility here. What have you heard that salespeople are promising exactly that they can't, that they can't deliver on? Where's this disconnect happening?
[00:05:37] Mike: It’s really two different areas. And, the salespeople, and you gotta love salespeople. They're out there. They’ve got a lot of obstacles to overcome, but unrealistic expectations. The salespeople are setting up the relationship for failure. One of the things that I have heard time and time again is that the sales person says, just sign up with us. That's all you got to do. You can set it and forget it. Once you sign up, we'll take care of everything. And unfortunately, that's just not the way it is now in the small print in their contract, it may be addressed.
[00:06:19] Mike: But a lot of people don't read the contracts in detail. They don't read the minutiae. They're listening to the salesperson. They're trusting they're in that pink cloud phase of the relationship. They're hearing that all of their problems are going to be solved. And it's only after time that you've realized that, hey, this was, is not what I thought it was going to be. So you cannot just put all of your faith in the company. I'll give you some concrete examples in the small print…we're going to pick on Avalara today—a lot. Be real honest. We should actually be paying Avalara referral fees for annoying their clients so much that they defect us. So that's why we're picking on Avalara here. But in this particular instance, they said, oh, just sign up with us and we'll handle everything.
[00:07:19] Mike: You don't have to worry about anything. Three years into this, all of a sudden, they get a call from the state of Washington saying you owe the business an occupation tax. And the reason this fell through the cracks is that Avalara has a tendency of signing up people on the streamlined sales tax program. I personally don't like the streamlined sales tax programs for a lot of different reasons, but here's the big one. If you're working with Avalara and they're telling you to go into a streamlined sales tax program, whoever's doing your sales tax returns usually files the business and occupation tax. It's actually part of the sales tax return. Except it's not a part of the streamlined sales tax return. So Avalara is just filing the sales and use tax. They're not filing the business and occupation tax, where in most instances, whoever's preparing the sales tax would be doing the business and occupation.
[00:08:23] Mike: No one explicitly comes out and tells you this. It's in the fine print. So you're responsible for reading that, and you're responsible for making sure that it's taken care of in a different way. Now, the state of Washington has the highest penalty rate out there. Their penalties total about 39% before they start tacking on the special stuff. So you owe them a hundred thousand dollars. You don't just owe him the 100,000, you owe him 139,000 plus some interest. So this is a huge problem, and it's not just one client that we have that came to us because of this issue. It's multiple clients. And that's just one example of a salesperson overpromising and not being able to deliver.
[00:09:14] Mike: Another thing, and this really irks me: there aren't very many classes on sales tax in school. There aren't any questions about sales tax on the CPA exam. Sales tax is something you really learn by doing. And the majority of CPAs, prior to 2018, when we had the Wayfair decision and the ushering in of economic nexus, they didn't have a whole lot of multi-state clients. They may have done sales tax, but it was for their home state or maybe the bordering state, but they didn't have a whole lot of clients that had sales tax responsibilities across the whole country. And, it's like, when I'm talking to foreign clients. Each state is like its own little country. They all have their own ideas as to what's taxable, what's not taxable, how they want certain things done, what, and how you register even is different widely on a state by state basis. Avalara goes out there, and they're telling all of these accountants, Hey, we got an accountants program.
[00:10:24] Mike: All you need to do is sign up with us, and you, too, can be a sales tax expert. And a lot of accountants buy this hook, line and sinker. Unfortunately, you can't be a sales tax expert because you're working with a software company that just happens to do the sales tax. A lot of these accountants are finding out the support just isn't there. And when their clients have questions, how do you answer a question about sales tax? Just because you're brokering out someone's sales tax returns to a software company. Doesn't mean you have the knowledge or the experience to know if it's getting done correctly. Doesn't mean you have the knowledge and experience to be answering your client's questions. And it's maybe some of you out there are utilizing this program, and you're very happy with it and they're being attentive, but we have more and more just like their clients are coming to us. We have more and more CPAs coming to us and saying, hey, We need something that's more hands-on. I am not a sales tax expert, despite what Avalara is telling me.
[00:11:34] Mike: I need help. I need someone who can get on the phone and talk to my clients about this. We'll be able to explain it to me. Walk me through it in terms that I can understand so I can relay it to my customers. And unfortunately, Avalara is just not set up that way. They don't have the people you're talking to salespeople for your sales tax advice a lot of times, at least in my experience and from what I'm hearing from the people who were working with Avalara and are now coming to work with us. So those are the two areas that I see that salespeople are just over-promising and under-delivering; just sign up with us and forget about it. And you, too, can be a sales tax expert when they're talking to tax professionals out there.
[00:12:26] Ellie: Yeah. Thank you so much for that, Mike. And I empathize with people because there is a line of logic that I can understand of for a couple of questions I have for you here, Mike. So the first one is, what's the harm in registering in too many states? What's the big deal of just covering your bases, registering in all of the states, or just too many of them?
[00:12:47] Mike: And this is a big thing, and we're going to go back to the streamlined sales tax program. The streamlined…it's not free, Avalara may tell you that it's free, but Avalara gets paid by the states directly. So their incentive is to go out and get you registered everywhere in all of these streamlined states even if you don't have a responsibility to be collecting and remitting the tax. So now to your question: where's the harm in that? The more states that you're registered in, the more potential liability you have the more potential for audits. You got to defend yourself in an audit, even if you're doing everything a hundred percent correctly. And even if you do it internally, you don't hire someone to do it for you. You still have to take the time to work with the state when you don't even have the responsibility to be collecting the tax. And what happens if you get something wrong? That's a big issue. What happens if, like in the first example, we talked about where there's all this tax collected and not remitted. If that's in a state you didn't even need to be registered in oh my, you've created this ginormous issue. Penalty and interest can add up to 50% very quickly over time in most of these states. So you didn't have a responsibility to collect, but because Avalara signs you up, something went wrong. And now you've got to pay a lot of penalty and interest.
[00:14:19] Mike: That's your worst-case scenario. The best-case scenario is you've got to defend yourself in more states against more audits because you're registered in too many states. So if you're doing everything correctly and there's never a hiccup, then no big deal. Since they're free, who cares? If Avalara is going to take care of all of it and everything's getting done correctly. But I personally believe in Murphy's law, and whatever can go wrong will go wrong. I just think that we want to limit our exposure wherever we can.
[00:14:54] Ellie: Mike, another thing that seems so simple, and this is a little bit different of a point here I'm making, but in theory, it seems so simple to collect tax and remit it. How are people over and over finding themselves in this situation? How does tax collected and not remitted happen?
[00:15:14] Mike: Automation is a necessary evil. You can't do everything by hand. There are too many invoices going through. So automation is something that we need. There are two problems that come up with automation. If you set it up incorrectly, and most of these software companies do not set it up for you, you got to go in and match your apples against their oranges, your codes against their codes, your products against their codes. So if it's set up incorrectly, then garbage in, garbage out. So you're not going to get the right results. And even though you're paying this company to collect taxes for you and to keep track of taxability, it's not happening correctly. So that's number one, but the real downfall of automation. Is it's so easy to turn the tax on, I'm going to throw out another name out there. Shopify: A lot of companies sell on Shopify, and Shopify has notifications.
[00:16:20] Mike: Hey, you crossed the threshold, and you have a responsibility to collect tax in this new state. I've got a problem with that to begin with because they're just looking at gross numbers. They're not looking at the actual facts and circumstances, and some states include exempt stay sales. Some states exclude them. Some states exclude marketplace sales. Some states include them and most of the time, this software that tells you have economic nexus somewhere is only looking at the gross sales. So that's a problem. I think that they need to say, Hey, You may have nexus, and you need to look into this.
[00:17:02] Mike: What we're seeing happen is companies are going out and getting registered when they're not even taxable in a state. So that's one problem. But the bigger problem is you've got someone who's in charge of the Shopify website, and they're not a tax person. And all of a sudden, Shopify saying you need to collect tax in these five states or these 10 states or these 30 states, and what happens? The person goes in and turns the tax on in those 30 states, not realizing that you can't just collect the tax. You got to collect the tax and remit the tax. And in order to do that, you have to be registered in these states. So we're seeing people come to us with tax collected, not remitted.
[00:17:51] Mike: That's the cardinal sin of sales tax. And we're seeing more and more of this 12 months, 24 months, three years. And they think that. someone's remitting it on their behalf. It's not. Some people don't even know it's being collected. And it's just there are extra penalties on tax collected, not remitted sometimes. If it's intentional…this is the one area that people actually go to jail for is tax collected, not remitted. Because it's never really in most states, it's never really your money. It's either your customer's money or the state's money, and you're collecting it in trust for the state in most instances. When you're keeping that money, a nice way of saying this is it's unjust enrichment. You're not due that money, and you're utilizing that money. It's a nice way of saying fraud. A lot of people don't like the F word. If it's intentional like a lot of cash businesses underreport their sales, people go to jail for that.
[00:18:59] Mike: States are a lot more aggressive than the IRS. But most of the time, this is not intentional; it's unintentional. It's still a criminal issue. And in addition to civil penalties and civil liabilities, you have additional criminal penalties and criminal liabilities. And that is fairly frequent when you have tax collected, not remitted, especially if the state finds you before you step forward. If you step forward, there are mitigation programs like a voluntary disclosure agreement where we'll wipe out all penalties as what, the civil as well as criminal penalties. So that's another great reason for doing a voluntary disclosure agreement, but getting back to this it's a huge issue because you have non-tax people not realizing the ramifications of just flipping that switch.
[00:19:57] Mike: And the same thing can happen when someone's adding new products. It's not just tax turning the tax on incorrectly. It's turning it off by mistake. With automation, it's really easy or leaving something out. You forget to include it in a taxable group. You label it incorrectly, and now it's not being taxed. So automation is a tool, but you got to use that tool wisely and correctly. Can make your life very easy, or it can make your life very tough. And we're just seeing more and more of it. I’m picking on Shopify here. Shopify is… relatively good platform. They have some good basic sales tax tools in there, but the people who are looking at these messages put out by Shopify are not usually the tax people. So that's a big issue. But this is a problem across the board. Anywhere you have it relatively easy to turn on the tax, we're seeing this issue. Whether it be Avalara or whether it be Shopify, whether it be TaxJar, which is now Stripe. It's just this is a monumental issue right now.
[00:21:12] Mike: So what I would suggest is that you look at where you're collecting the tax. And if you're collecting tax somewhere that you're not registered. Deal with it now; this is not a problem that's going away. There's no statute of limitations here, and if the state finds you, it could cost you a lot of money. So be proactive, step forward, and get this tax remitted to the state. Here's an alternative. If you don't have nexus, you can always try to return that money back to your customers. Sometimes, if you only have big invoices and a relatively small number of customers, That's an easy solution. If you've got small invoices and thousands upon thousands of customers, and that can be a little bit too much to handle, but that is always an option. You either got to get that money to the state or you got to get it back to the customer. One or the other because in most states, it's not your money; you're only collecting it in trust.
[00:22:15] Ellie: Yeah. And hopefully, Mike's people have heard something here to help either collect their broken hearts off the ground to protect it before it gets broken and if you have sales tax needs, if your heart is currently broken and you need a solution or service, we have a lot of options that may be a good fit for you. And we'd love to work with you. You can reach out to me directly. emoffat@SalesTaxAndMore.com That's emoffat@SalesTaxAndMore.com or you can go directly to our website salestaxandmore.com. In addition to our services, we have a series of free webinars. We have a lot of free content on our website we have these podcasts, and we have paid content as well. So please connect with us, reach out to us, and thank you so much for joining us today.
[00:23:03] Mike: Yeah, and one parting point, Ellie. I just want to say, it's bad enough when you're disappointed in the way a relationship turns out; you maybe broken-hearted with the relationship; that can get a lot worse if the state finds you before you move on before you get these actions corrected.
[00:23:23] Ellie: Salt in the wound.
[00:23:26] Mike: Yeah, salt in the wounds. Piling on. It doesn't help. Be proactive. There are mitigation options if you're being proactive. If you're being reactive, in other words, the state's already contacted you, then there still are some things that you can do, but by and large, a lot of the mitigation programs are off the table. So I want to thank everyone for joining us today. I hope everyone has a great Valentine's Day, no broken hearts out there. We hope to see you on the next episode of the Sales Tax and More podcast. Thank you. Bye bye.
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