Why are software companies registering their clients in too many states?
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 why software companies are registering their clients in too many states and the problems that creates.
Here’s a glimpse of what you’ll learn:
Why are companies registering their clients in too many states?
Is it a problem of too many or not enough when it comes to state registrations?
What are the issues with either of those problems?
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, founder of Sales Tax and More, and today's co host of the Sales Tax and More Podcast, where we talk about everybody's favorite topic, which is of course, sales tax. And today we're going to talk about why software companies are registering their clients in too many states. And this is not my usual software company bashing.
This is for those of you who have listened to me before. This is something we all should pay attention to. But before we get into it. Let me introduce you to my co host, Ellie [00:01:00] Moffat.
Ellie Moffat: Hey everyone. Really great to be here. Thank you so much as always for listening to the Sales Tax and More Podcast.
Please like, and subscribe. If what you hear from our podcast is helpful to you, it helps us quite a bit. And as an introduction to Sales Tax and More, we are a full service consulting and solutions firm. And 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, audit defense, and like our namesakes 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 would love to work with you as well. So Mike why are companies registering their clients in too many states?
I think this is a question that I think that their clients are asking as well. So why, why is this happening?
Michael Fleming: Well, really Ellie, there are two different answers to this. [00:02:00] And the first one's not limited to just software companies. It's it's any platform you're selling on, like a Shopify that is providing some sort of guidance on where you need to get registered and.
You know, why this is a problem is I don't know of a software out there or a platform out there that gets granular enough to be able to give you specific answers. For example, for an economic nexus, most of these platforms are just looking at your gross sales or software companies looking at your gross sales.
Yet the states, they say, you know, some states are going to say include sales for resale. Other states say excluded some say say let's exclude sales for resale but include all other exempt sales. Some states say only taxable sales some states say all sales gross sales [00:03:00] through marketplace, exempt, or resale. So each state has their own ideas as to what will or will not be included in the thresholds and unfortunately not all that information is getting into the software or is even can be put into the software.
In some instances, it's just looking at the gross. So that's number one. That's that's one of the reasons why. And sometimes it's it's no one's fault. Maybe the software or the platform has the ability to recognize that, but the people utilizing it don't run all of their data through the software or don't run all of the data through the platform and then the platform can't pick up all of that data. So that's that's reason number one. Reason number two I think a little bit more sinister. A lot of software companies are some software companies one in particular and you can probably guess the answer, but i'm not going to [00:04:00] say it. They get paid by the Streamlined Sales Tax Program to do the returns for you.
So if you go to them, maybe you have nexus in five states and you need to be registered in five states. Unfortunately, they are going to turn around and get registered, register you in 24 states. Because the state is paying them to do so. And now you gotta collect the tax in, in those 24 states. Well, why is that a problem?
More transactions! How do these software companies get paid? They get paid, you know, by the number of transactions you do. So they've got their finger on the scale. You know, they're, they're increasing their revenue by telling you to get registered in states where you don't have to, they tell you, well, there's no cost.
You know, you don't have to pay for the registration. You don't even have to pay for the returns. The cost is in figuring out what the tax is. So they're not exactly being very transparent there. [00:05:00] Number two is you know, there's always issues associated with you getting registered in a state. I mean, you could be subject to audit now.
So the first way here. Hey, it's just a matter of the limitations of software, either whether those are the user limitations or not putting enough input in there or the software limitations themselves. It's not very accurate. The second way a little bit nefarious people trying to make more money.
And they're taking advantage in my opinion of their customers.
Ellie Moffat: So Mike I know we said we mentioned too many states here, but is this a too many or not enough problem when it comes to state registrations? And what are the issues with either of those things?
Michael Fleming: Okay, a couple different ways to go with this answer.
Let's start with scenario one. Let's start with [00:06:00] the software or the marketplace is telling you where you should get registered. By far, I see more problems with people trying to get registered in too many states. I had one example. A guy came to us and said, Hey, Shopify is telling me I need to be registered in these 20 states and we have a service out there for non sales tax return clients. If we're doing your sales tax returns, this is a free service. If we're not doing your sales tax returns, it's $799 a month. But what we'll do is we'll look at all of your sales last year, plus year to date, and let you know where you should or should not be getting registered. And we're looking at your specific fact pattern.
And when I did that. I said, Hey, you only got to get registered in four states. Otherwise, you know, you don't fit the, you don't cross the thresholds based on your specific back pattern in these states. Yeah, your total sales were over the thresholds, but look at [00:07:00] everything you have to exclude. So that is the biggest problem.
However, like you said, not getting registered in enough states is also a problem because if you're relying solely on this what about the states that say include marketplace sales and you're not running your marketplace sales through Shopify? You look, you know, accounting for them totally separately.
And why not? Because they're doing the transactions, they're doing the sales tax. So why run it through? One of these other systems and now that system doesn't have enough information to give you the correct answer. And it doesn't have to be a marketplace. Maybe it's your wholesale sales and you're not running those because you're not collecting sacks on them.
Why run those through a problem through your software or through a platform like Shopify. So lots of different reasons why not enough information maybe getting to these software companies. So by [00:08:00] far, the biggest problem is getting registered in too many states, but not too far behind, not getting registered in enough states.
Now, why is it a problem to not be registered in enough states? Well, because exposure starts to build from the day that you cross nexus and you start out with zero exposure. But if you don't know that you had the nexus and you should have been collecting and you find out about it a year or two later, now you got two years worth of exposure.
So that's one of the problems on not getting registered in enough states. Getting registered in too many states, you know, you're still subject to audit. And you know, you got higher compliance costs, you got to file more returns, you have to do more transactions if you're having the software calculate your taxes.
So it, it's just a lot of expenses and potentially increased exposure if you're getting registered where you don't need [00:09:00] to be. So those are the problems with that first scenario. The second scenario if you over rely on what the software company is telling you, their most profitable line of business are these Streamlined Sales Tax states.
So sometimes they over concentrate on that and they don't look at where you may have nexus in some of these other states. So that would be where the not enough states getting registered. But when they register you in theory, if there's a mistake on, on the tax rates or taxability, then the CSP, that's the software company, is supposed to be responsible for that.
Good luck getting them to try to pay for it, because when you get audited the state's coming to you for the money not to the to the software company if there's a deficiency there. And the software company is going to try to blame it on you somehow, very, I have not seen yet. Not to say there's none out there, but I haven't seen it.
Where they've [00:10:00] actually stepped up and said, Oh yeah, that's our problem. We'll take care of it. I have seen many cases go the other way where they said, Oh, no, this is your fault because of this or you know, they make stuff up. So that's the problem with getting registered in too many states. I mean, you subject to audit and all of these additional states as well as you know now you got to be paying for the transactions for them to calculate the sales tax.
So, I mean, if you only have to be registered in five states, register in five states. Why, why let a software company register you in 24? I mean, just seems ridiculous to me. Too, too much greed out there going on in the world nowadays. All right. I, I got off on my rant there early. Did I answer that, that question?
Ellie Moffat: You did, Mike. And, and you know what, I'll give you the chance to rant a little more here. Is there anything else that you want to add in?
Michael Fleming: No, I, I, I think we've, we've done enough ranting at this [00:11:00] point. What I do want to talk about is we have a chart. It's a free chart. It's up on our website. So I think that software is a good tool if you're looking at it as a red flag. If it's telling you to get registered, just don't go out and get registered. I mean, you can pay someone like us, or, you know, if we're doing your returns we'll do it for you. This data review, that's where we look at your data for economic nexus, but you can do it yourself also.
Use this chart that we've got up on our website. It'll tell you what's included, what's not included in those thresholds. And you can make the determination of whether you need to be registered or not in that state. So just don't blindly follow the software. I think they're great tools if we're using them as red flags.
If you're using them as the final be all answer, you're going to end up getting registered in too many states. And it'll help remind you when it's telling you to get registered in a state, hopefully it sparks oh yeah, I should check my [00:12:00] nexus footprint for these states that may include marketplace sales, and I'm not running marketplace sales through the software here.
So this chart is a great tool. It tells you the best time of year. You know, something says previous calendar year or current calendar year. Well, you want to check it every December or January. Sometimes you don't have to worry about it again to the following year. There are states like Illinois that want you to check it every quarter.
So but there are less than a handful of states that that have a rolling total. It's the ones that say previous calendar year or previous calendar year or current calendar year. This time of year is a great time of year to be looking at that. So, you know, I'm not saying software is horrible to determine if you have nexus, I just say that use it as a red flag.
It's another tool and tools have their purposes. You know, they're not one size fits all tools out there that'll do everything you want and need it to do. So it'll [00:13:00] be a combination of using the software tool and doing a little bit of legwork on your own or getting someone like us to do that for you.
Ellie Moffat: All right. Thank you so much, Mike. And a note for everyone else. If you have sales tax needs, we offer many solutions and services. Mike mentioned a couple today, but we have, we have a lot of them. Please check them out. You can reach out to me directly at E M O F F A T at sales tax and more. That's E Moffat at sales tax and more .com or visit our website sales tax and more .com.
And we have a lot of other free resources out there. We do free webinars to offer CPE credit. We have those charts and matrices that Mike was talking about. We have blog posts. We have these podcasts. There's, there's a lot of resources out there for you. So thank you so much. And you want to close, close this out here, Mike.
Michael Fleming: Yeah. I just want to thank everyone for listening today and we hope to see you on the next installment of the Sales Tax and More Podcast. Bye bye everyone. [00:14:00] Take care.