Sales Tax FAQs
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 answer some of your frequently asked questions about sales tax.
Here’s a glimpse of what you’ll learn:
When does someone need to register to collect sales tax?
What is nexus?
What’s the difference between sales and use tax?
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.
Michael Fleming: 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 absolutely favorite topic which is of course sales tax. And today we're gonna answer some back to the basics type questions from our frequently asked questions list.
But first, let me introduce you to my co-host, Ellie Moffat.
Ellie Moffat: Hey everyone thank you for being here. We're so grateful to have you as listeners. Somehow it is already March. The year [00:01:00] is flying by and we see a need for some of these basic questions. Like Mike is saying we've touched on before, but it's been a couple years, so it's time to revisit.
And quick introduction for Sales Tax and More. We are 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 registrations, consultations, research, and like our name states more.
So again, if you like this podcast, please like
and subscribe. And after a little bit of rambling here, Mike, I'm ready to ask you some questions. So first one, when does someone need to register to collect sales tax?
Michael Fleming: Okay. Couple things need to be in place, and the first one is when we have what's called nexus.
So when a seller has nexus, what [00:02:00] they sell is taxable and then their exposure is material and someone else is not collecting it. We've got nexus, what we're selling is taxable. Now we gotta look at materiality and everyone says Mike, what's material? And I can't answer you what is material.
Each of you need to decide that for yourselves. But I think just because a state says you need to do something doesn't necessarily mean it makes good business sense to do so.
I'll give you an example. Let's say that it's a state that has a 200 transaction threshold for sales tax, and you're selling a $5 item.
200 times $5 is a thousand dollars. If we use an average sales tax rate of 8%, 8% of a thousand dollars is $80. So I don't know where you can go. The state thinks that you should be registered once you [00:03:00] hit that 200 transactions, but I don't know where you can go to get registered for $80 or less.
And that is, even if you're doing it yourself, there's opportunity cost, and the time you take to, to do the registration is gonna be more than $80. Plus, now you've registered, now you have to file a return. In some states like Georgia, you are automatically a monthly filer for at least the first six months.
So now you gotta file a return every month. And again, whether you're doing it yourself or whether you're hiring someone like us, it just doesn't make sense. You'd be better off in that scenario. In my opinion, waiting for a state to find you, whether it be 2, 3, 4, 5 years down the road, and then paying the state out of your own pocket, even with a hundred percent penalty and interest let's say $120 worth of penalty and interest per year. That would be [00:04:00] $200 per year.
You couldn't get that done. The registration and the returns for that amount, or do it yourself for that amount. So even if you gotta pay it five years down the road, that's a thousand dollars. But you would've saved all the compliance costs over that time. So again, the state may want you to do it, but I think we need to use common sense.
We gotta look at it and again. Common sense is my idea. There's nothing common about the sense that the states use. So they're probably not happy if they're listening to this, but again I think we have to use the common sense. And just because the state says to do it doesn't necessarily mean it's so. I can tell you this.
Based upon today's prices out there for returns and registrations, I don't think that it makes sense in most instances to register if you have under $5,000 in taxable sales. I think in most instances, it's cheaper to let the state come and find you. Once you [00:05:00] start getting over that, it makes a heck of a lot more sense.
And I'm not saying don't ever register. I am a big believer in being compliant and that you need to register. I just don't think that we need to run out there and get registered too soon. Second, big mistake. Make sure you're the one who's responsible for collecting the tax. Maybe you're selling through a marketplace and the marketplace is responsible for paying the tax.
Again let's do this. You got nexus, what you're selling is taxable, your exposure is material, and you're actually the one responsible for collecting it. And that's when someone needs to get registered to collect sales tax.
Ellie Moffat: Thank you so much, Mike. And you probably hear us say bits and pieces of that information here and there, but I think that's a pretty good summary.
Mike what is nexus? What is nexus?
Michael Fleming: Ah, it's just a fancy word that means link or connection. I bet you thought I was gonna talk about some hair shampoo for horses or something [00:06:00] like that. Which a lot of people make jokes about that is a type of nexus it's a product out there called nexus, and it's shampoo for horses. And now many people with luxurious hair utilize that also. But when it comes to taxes, it's just a fancy word that means link or connection, and it's the link or connection that must be present. Before a state can require you to do anything like collect its sales tax or seller's use tax or pay its taxes, like an income tax, a some type of consumer use tax,
franchise tax. You gotta have some sort of link or connection with the state. And this link or connection is what we call nexus.
Ellie Moffat: Okay. Thank you so much, Mike. Switching gears, here, what's the difference between sales and use tax?
Michael Fleming: Good question. Historically, they were complimentary taxes.
And back in the 1930s when the first modern [00:07:00] day sales taxes were rolled out, it was widely believed, even the states didn't believe that you could tax transactions directly, interstate transactions. They didn't think you could do that directly. So a sales tax could only be charged inside the state. So what we started seeing happening, I live out close to Texarkana, Texas, which is, it's on the border of Arkansas, Oklahoma, and Louisiana. So you got three states there and you would see someone come out and set up on the border and be selling into Texas. Maybe, like the City of Texarkana, part of it is actually in Arkansas and part of it is in Texas.
So you could set up right across the street and be selling into Texas and not have to collect the sales tax. So people would just walk across the street and pay you. And that created an unfair advantage for out-of-state companies. So they came up with what's called a [00:08:00] compensating use tax. And a use taxes for the storage, use or consumption of a product or service in a state.
So it's not a tax on the transaction itself. It's a tax on the use. It's really, some people say it's just semantics. And actually it is, it's an end run around what they believed to not be allowed at that time. And if a seller had nexus, they still had to collect this use tax. So historically, anything that happened 100% inside of a state was a sales tax, and anything that crossed a state line was called a use tax. Now, that started to blur in 19 77, we had Complete Auto Transit and the US Supreme Court in the Complete Auto Transit case said that yes, states can tax interstate commerce so long as it [00:09:00] meets this four prong test and the four prong test
very easy to meet. Every once in a while state's not too smart, they get in trouble, but most of the time, most taxes are going to be constitutional 'cause they meet this four prong test. The line started to get blurred at that time. And people stopped making so much of a distinction between a sales tax and a use tax.
Some states did away with it totally. And when you got registered, you would get registered for the sales use attacks all at the same time. Not all states. Some states still made a distinction. And where it mattered if you're paying a tax, it's still the same tax. So it doesn't matter if you're collecting a tax, you're still collecting a tax.
So it doesn't make a big difference to a lot of people except for the people who were getting you registered. They had to know what type of tax to register you for. And for the people filing the returns, they had to know what form to use to get that tax. The tax was the tax. [00:10:00] When we had Wayfair, that changed even more.
And at that point they said that if you have an economic nexus, that's enough of a significant presence that it's the same as being located in our state and therefore they made everybody go out and get registered for the sales tax so that the use tax at least from the seller's side has very little significance in most states at this point.
There's still a few holdout states that still make a distinction, but most of them have gone the other direction. When we say use tax nowadays, most people are talking about is on purchases. Because if the seller doesn't charge you tax doesn't mean it's a tax-free transaction. Maybe they didn't have nexus, they weren't required to charge you the tax.
Maybe they didn't know that they were supposed to charge you the tax. Whatever the reason. If you are not charged tax and it's a [00:11:00] taxable item, you are supposed to self-assess that that tax and remit it directly to the state yourself. And we call that today a consumer use tax. It's always been the same tax, whether it be consumer or seller.
And sellers use taxes are referred to as retailer use taxes vendor use, taxes. There's a couple of different names for 'em. All we're making the distinction between it's the same use tax, it's just who's paying it, the seller or the buyer. And by the way, it's compensating. And what compensating means, only one or the other needs to be paid.
If the seller is paying the sales tax or collecting the sales tax, then the buyer doesn't have to worry about the use tax. But if the seller's not charging it, then the buyer should be doing it, and that's for individuals and companies. The problem is individuals don't get audited for sales tax.[00:12:00]
So a lot of people were not paying their use tax, which is why we get the Wayfair case and why Amazon and the different marketplace companies out there now have to collect the sales tax because the individuals would not remitting it to directly to the states on their own. However, businesses are audited.
And this is a huge problem when it comes to audit. When an auditor comes out, they're not just looking at your taxes to make sure that you collected all the right amount of taxes and that you've paid all the tax you collected into the state. They're also looking at your purchases because they want to make sure that you've been paying the consumer use tax. That it's not a tax-free transaction just because you weren't charged tax. You gotta be self-assessing and remitting it. So that's what the auditor is looking for, which why this is either the number one or number two reason for large assessments and audits [00:13:00] for businesses. Individuals, they're not getting audited.
So it's a much smaller issue there. And that's why we now have Amazon and eBay and all those big companies collecting. Does that sort of help out Ellie?
Ellie Moffat: Yeah, I think so. I think we covered a lot of basics here for people and hopefully it's this is a good, these are good questions to revisit and and if you have any needs for any of our services, we have many solutions and services.
We'd love to hear from you. We'd love to work with you. Please reach out and you can reach out to me directly at emoffat, that's E-M-O-F-F-A T@salestaxmore.com. You can also visit our website sales tax and more.com. And thank you so much for joining us today.
Michael Fleming: Thank you everyone, and we hope to see you on the next installment of the Sales Tax and More Podcast. Bye-bye.