Starting the Year off Right
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 talk about how to start your year off right.
Here’s a glimpse of what you’ll learn:
What does it mean and where should someone start if they’re trying to take a look at their nexus footprint?
How will a couple states dropping their transaction thresholds on January 1 affect people and their nexus footprint?
What does trailing nexus mean?
How could registering and deregistering apply to someone’s tax plan?
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, everyone. Happy New Year. 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, we're going to talk about starting off the new year right, but first let me introduce you to my co host, Ellie Moffat.
Ellie Moffat: Hey everyone. Great to be here. Mike, I'm going to beat you to it, but Happy New Year. If you're listening, thank you for tuning into another great year of our [00:01:00] podcast episodes. We hope that we can bring you a lot of really great information via these podcasts. And before we get started, I'll also do a quick introduction for Sales Tax and More.
So 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, exemption certificate management, audit defense, 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 as well. So Mike, we've previously discussed understanding your nexus footprint going into a new year. People may have even seen that on our social media.
We talk about it a fair amount. What does it mean and where should someone start if they're trying to take a look at their nexus footprint?
Michael Fleming: Okay, great question. Let's start with [00:02:00] what's nexus. And nexus just fancy word that means linker connection. And when we're talking about taxes, it's the link or connection you must have with the state before the state can require you to do anything like collect its sales tax or vendors use tax or pay its taxes like an income tax or a franchise tax or some sort of consumer use tax.
So before a state can make you do these things, You have to have a link with that state called nexus. Now, nexus can be physical or it can be economic. By economic, we mean just having a certain number of transactions or certain number amount of sales in a state. We call those thresholds. Now the nexus footprint is where you may have a responsibility to collect tax or pay tax.
In other words, where do you have this link or connection with [00:03:00] the states? And the reason we say it's good to do in December or January is because when we're looking at economic nexus, a lot of the thresholds are based on the previous calendar year or the previous calendar year, plus the current calendar year.
So the states that are the previous calendar year. We just want to look back last January through December 31st and see if we cross the threshold and if we cross the threshold, then we've got to take a look at whether our sales were taxable and if we have a responsibility to collect the tax in general, the answer is going to be yes, if you cross the threshold and what you sell is taxable.
So, that's why we want to do this in January. Now, you don't have to, for those states that just say previous calendar year, you don't have to worry about this again until next January. Those are the easy states. Some of the other states that say previous calendar year or current calendar [00:04:00] year. If your sales are growing at, a normal pace, maybe three, four, five, ten percent a year, and you look back last year and you were not over it.
Then again, maybe you can wait until next January to see if you're over the threshold. However, if your sales have exploded, we had one client who went on Shark Tank and their sales virtually exploded. And by March, they had a register in a bunch of additional states, so if your sales are growing exponentially, then at that point, you might have to check it a couple more times during the year, but if your sales are growing at a normal pace, then January is a perfect time of year to do this.
Now, some states say you got to check every quarter like Illinois. So there might be some more work. If you were close to crossing a threshold last year, some of our clients are going to say, I'm going to cross it this year. Might as well just get registered now. So I don't forget. So that's one of the [00:05:00] reasons why January is a great time to determine your nexus footprint.
Now, while you're at this, if you have physical nexus and we have lots of resources on our site that talk about what constitutes a physical nexus. And while we're talking about the site, we also have resources that will tell you what the thresholds are in each state and whether it does current year or and previous year or just previous year or every quarter.
So some great tools on the website. Now, if you don't want to do this yourself, we also have a service where we can determine this for you. It's relatively cheap service, 799 dollars for what we call a data review. But, you also want to check your physical presence because maybe you hired a salesperson in another state, or maybe you hired a remote employee in another state, or maybe you opened a warehouse in another state.
These are all types of physical nexus and they may [00:06:00] require you to register in a new state and a lot of times the accounting department doesn't know all these answers while they're happening throughout the year. So if the accounting department is the one who's determining where to register, you may have to reach out to some of the other departments to get some of these answers.
But think that there's no better time than January. Any time is a good time. But January, I think is the best time to be figuring out where you should be registered in the coming year.
Ellie Moffat: So a lot of talk about thresholds here, Mike, on January 1st, a couple more states dropped their transaction threshold.
What does this mean for people? How does this play into their their nexus footprint?
Michael Fleming: Yeah let's take Alaska. Alaska effective on January 1st, said that the transaction threshold no longer applied in Alaska, and that if you only [00:07:00] registered because of the transaction threshold, you could deregister immediately, and that's a great thing because some states have what's called trailing nexus, and trailing nexus says that you must stay registered for 12 months from the date that you're nexus ended or for the period in which you had a nexus. Generally, it's from the date that your nexus ended.
Even though, the nexus threshold may have ended, you need to stay registered until your trailing nexus ends up, but not Alaska. They did this the right way. And we're seeing more and more states do it. When I say the right way, the way that's favorable to you. When you're going through your nexus footprint, it's not only to determine where else you might have to register, but where you can deregister.
Some states have dropped the transaction thresholds. Maybe your business has changed and you were doing a whole lot of business in the state of Iowa last year, but not so much this year. So you [00:08:00] may want to deregister now. You don't want to register, deregister, register, deregister. If you have a down blip, but it looks like business is going to bounce back again. It's better to just stay registered, in my opinion, try to get you filing frequency change, be the quarterly or annual or semi annual so that you have to file less returns, but it's a process to deregister. So you really only want to be deregistering if you don't think you're going to be having a requirement file returns in the near future. That makes sense?
Ellie Moffat: Yeah. And Mike, to keep driving in on some points you're making here and expand on this a little more for people. Can you talk about registration and deregistration a little bit more, a little bit more, how that could apply to someone's tax plan? Just a little bit, let's just expand on that part of it a little bit more.
Michael Fleming: Yeah a couple things. Number one, when we talk about plans, we want to know [00:09:00] what our responsibilities are for the future. How are we gonna budget? If you're doing taxes yourself and you only are in three states right now, maybe that's manageable. But if you've gotta go into another 10 states.
Maybe that's not manageable to do on your own anymore. Maybe you got to start planning on doing something different, hiring someone like us to do the returns for you. So that's what we're talking about tax planning. Now it works in reverse. Maybe you can deregister as we were just talking about.
So in the beginning of the year here, how many states do I have to add? How many states can I remove? That's all part of your planning process. And when we're talking about registrations, it's important because if a state finds you a year down the road and you haven't registered and there's a number of ways that they can find you, they're going to want all of the back taxes plus penalty and interest.
[00:10:00] So if you're being proactive, all of that money is going to come out of your customer's pocket. But if the state finds you a year down the road, now we call this the greatest tragedy in sales tax. Instead of it coming out of your customer's pocket at the point of sale, now it's coming out of your pocket with the added insult of penalty and interest.
So it's important that we plan these things correctly. Also a lot of people like to register prospectively and in a number of states you can do that. But there are a number of states like in Illinois, Wisconsin and Arizona and Arkansas that are going to audit your date. They may not do it today.
Sometimes, it may take them 234 years to get around to it. But they're gonna audit your registration date. Not all states, just some of the states I mentioned or all of the states I mentioned. And what that means is three years from now and [00:11:00] think that everything's hunky dory all of a sudden you get audited you got to pay all this back tax because you use the wrong registration date.
And again, it's the added insult to be coming out of your pocket now with penalty and interest which is going to be a lot higher because it's three years from now. Or however long it is from now, there's going to be a higher amount of interest. So we want to be compliant as early as we can. Again, this goes back to this is the perfect time of year to really look into this, because a lot of you don't have nexus as of the first of January or excuse me as of December 31st, and it's just starting on January 1st.
So what better time to do it than now.
Ellie Moffat: All right, Mike, thank you so much. This has been a lot of good information, and hopefully it's helping some of our listeners out there as well. Anything else you want to add into this? [00:12:00]
Michael Fleming: No if we can't assist in, in any way, let us know, as I said, we get a lot of free resources up on the website to help you determine what you gotta be looking at in each state.
But, I know that you're busy. Some of you don't want to get bogged down in the details. Just reach out and we do have programs to help you determine this as well as get registered. And if you need help filing sales tax returns, we have programs for that also. So other than that, I appreciate you taking the time to join us today.
Happy New Year once again. And we hope to see you on the next installment of the Sales Tax and More Podcast.
Ellie Moffat: Yes. Thank you so much. And if you have any other needs or solutions or services, you can reach out to me at E Moffat. That's E M O F F A T at sales tax and more. com or visit our website, sales tax and more. com. And we hope that you continue to listen with us. [00:13:00]