The Biggest Issue Sellers Should Remember at Year-End
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…
As 2020 draws to a close, it’s important for sellers to look back at the year and review their nexus footprint. Many states put in place thresholds that sellers should look at as they carry on with their business and prepare for the coming year.
Additionally, they require sellers to look at certain time periods–mostly the previous calendar year–so that sellers can determine if they met the economic thresholds and physical presence requirements set out by a specific state. If they did, then they need to register for sales tax.
In this week's episode of the Sales Tax and More Podcast, Michael Fleming and Ellie Moffat talk about why it’s important for sellers to review their economic nexus position as the year comes to an end and how it can help them plan for 2021. They will also be discussing the importance of looking at physical presence nexus and explaining why this should be done on a regular basis. Stay tuned.
Here’s a glimpse of what you’ll learn:
Why sellers should focus on economic nexus as the year comes to an end
Should sellers only be concerned with economic nexus?
Why physical presence nexus is important and how it can be created for a company
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax and More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now, here is your host, Michael Fleming.
[0:26] Mike: 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 everyone's favorite subject, which is, of course, sales tax. Now, today, my co-host, Ellie, and I will be talking about what's one of the most important things to do before year end? But before we get into that, let me introduce you to Ellie.
[0:48] Ellie: Hi everyone, great to be here. I am very excited for today's podcast episode. But Mike, before we jump in here, I want to do an introduction for Sales Tax and More. Sales Tax and More is a full-service consulting and solutions firm. 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, sales tax audits, consulting research, and like our name states more. So if you have questions about our services or would like to work with us, please reach out and we will give you plenty of ways to do so. And we would love to hear from you. So, Mike, I know that there is always a lot you want to share. But we're counting down the days. So the end of the year here. And I want to know if you had to choose one thing to remind sellers to focus on right now. What would that be?
[1:43] Mike: Well, I got my answer. But before I did it was that a nice way of saying I like to talk a lot?
[1:52] Ellie: I would not I would never? I would never say that in a mean way. All right. We love our sales tax, or sales tax expert. Okay.
[2:00] Mike: And I do like talking about all things state tax. But at this time of year, it's got to be an economic nexus, we say it all starts with nexus. So as we're going into the new year, I think what we need to do is look back over 2020 and review our Nexus footprint.
[2:24] Ellie: I think for a lot of listeners right now, they're probably thinking, you guys talk about nexus all the time. Anyone who's been to a webinar, who's listened to a podcast, they're probably thinking, yes, I go on nexus all the time. Why is this most important right now?
[2:42] Mike: Okay, so in particular, let's, let's limit our discussion, right this second to economic nexus. And the reason why this is so important right now, is because the states when they're saying, you know, what their thresholds are, they tell you to look at a certain time period. And a lot of those states say, let's look at the previous calendar year. So all you have to do is come the end of December, beginning of January, look back on the previous 12 months. And if you're over 200 transactions in some states, or if you're over $100,000, or $250,000, or $500,000, in other states, then you've got to register on a going forward basis. If you're underneath those thresholds, then you don't have to do anything until this time next year. So that's one of the big reasons now, there are another group of states, by the way, some of the states that fall into that previous calendar year would be Alabama, Alaska, Indiana, and New Mexico, Oklahoma. It's just a partial, but that's some examples. And Ellie is going to attach our economic nexus chart to this podcast so that y'all can take a look at it and see which states are just the previous calendar year. And then which states say previous calendar year, or current calendar year. So, you know, you can't just sit you know, leave it alone once you look at this. But you are still for these states. And this is the majority of states going to look back over the previous year and see if you're over any of those thresholds. Some of those states would be Arizona, Arkansas, California very big one there, and Colorado.
[4:37] Ellie: Okay, so it sounds like you're saying, while, this is the most important time of the year. Is it the only time?
[4:48] Mike: No, unfortunately, this is one of the most important times a year for this economic nexus. But as we were saying, some of these states Say, previous calendar year, or current calendar year. So anytime during the year, you may cross that now, when people always ask me, when should I look? Well, a couple of triggers out there, you know, if your business is just growing leaps and bounds, I mean, if growth is going through the roof exponentially, then maybe you want to check in all the states, you know, quarterly, or maybe you get a large customer. And you know, they're going to be $100,000 worth of orders from this one customer, or maybe you get two customers, and you know, that these sales are going to put you over the threshold in a state, you know, so it may be customer-specific, maybe you've got a bunch of new hires in a state, and you think that they're going to drum up a bunch of business. So a lot of these have certain triggers as to when you want to relook at this, maybe you know, you've got new business channels or new territories where you haven't been concentrating on before. And it's fairly easy to get over a 200 transaction threshold. So number one, if your business is virtually exploding, you're going to want to check that. If it's growing in the same way that it grew last year, then hey just check it again at the end of next year. But if you've been close to thresholds in 2020, and all of a sudden businesses doubling or tripling or quadrupling, then you're going to want to check it sooner, rather than waiting till this time next year. If you get a big customer in any one state, rather than checking all of its states, well just check the state where you have these huge amounts of sales going or where you have new salespeople going. So you know, it's just you can't do it once and forget about it. You've got to be aware of what's going on in your business. And you know, when these certain trigger events happen, then go back and reevaluate.
[7:08] Ellie: All right, so Mike, is there anything else you like to share?
[7:12] Mike: Yeah, absolutely. While economic nexus, this is a great time of year to do it, because it tells you to look back on the previous calendar year. You have to be aware of physical presence also. So this year, more than any other year, I think that both economic nexus and physical presence nexus are going to be important. Because, you know, prior to this pandemic, there were already states gearing up to track down people who are not compliant for economic nexus, they know that less than one in two companies are compliant at this point, there's a recent survey done said fit roughly 50% I, our experience shows that it's closer to 60% of companies are not actually compliant, when it comes to economic nexus in the states know that. So they've been gearing up to track down companies, you know, they've been enhancing their discovery units, the group that looks for new tax papers who are not currently registered. They've been beefing up, you know, collection and auditing and all types of compliance efforts. Now, that all got slowed down because of the pandemic. But as we come out of the pandemic, you know, there's emergency shutdowns and everything else, the states are going to ramp that up. Now, something else, this is like the perfect storm, we've got something else we've got this big recession or these big deficits created by these closures. And whenever states are coming out of a recession, or, or have such huge deficits, they always ramp this up historically. So they were looking to ramp this up. You know, just because one out of two people roughly are not compliant. Now, they have to fill their coffers. Again, I mean, they're running on empty. So this is the perfect storm and they're really going to come hard, they're really going to come strong. So you are looking for you, those of you who are out of state, who have some link or connection with a state where the state can require you to collect its taxes. So that's why this is really, really important. And while these states are primarily going to be looking for economic nexus, they're going to be stumbling across all types of physical presence. Physical presence can be created in a lot of different ways. We have a lot of webinars you can go to and see what creates that. But one of the ways that trips up most companies because it just has made common sense, is third parties. So anybody who's new… whether you call them an independent contractor or subcontractor, any type of third, you don't even have to put a label on it, it can just be someone performing services on your behalf. If these services help you to establish or maintain a market, then that's probably going to be a nexus creating activity two US Supreme Court cases, have said this. So one of going all the way back to 1960. That was the Scripto. case. And then we've got Tyler Pipe in 1987. So although you know, this is very well founded, it just doesn't make common sense. How can a third party somebody doesn't even work for you? How can that create nexus so catches a lot of companies unawares. And while the states are primarily going to be looking for this economic nexus, these thresholds we've been talking about, they're going to stumble across these other things. And, you know, it's bad enough that the state finds you for economic nexus or finds one of your clients, I mean, Texas and California, they're over a year old at this point. Some of the other states, like New York, are two and a half years old at this point. So it's really not a good thing. I mean, every day that goes by your exposure continues to build, but think of an independent contractor, maybe you have a client with them all across the country, and has had it for 20 years. That's where the real exposure is. So you know, every year, we should be checking our nexus footprint. Maybe we hired some new employees out there, maybe we started selling something in states where it wasn't taxable before, and we didn't have to worry about it. And now, we realize it is taxable. Or maybe we've been selling the same thing. And the state changed the way they looked at taxability. So we don't constantly have to be updating our nexus footprint, because the world changes, and we may have greater responsibilities. So I know you're probably chuckling Ellie and saying, oh, boy, we said we're gonna talk about one thing. And here, Mike is talking about nexus and all types of things. And well, it's all-important. And it all starts with nexus. So as we go into the new year, let's start it out on the right foot, and really help our clients and our sales understand what our nexus footprint is.
[12:29] Ellie: No, Mike, I think we all really appreciate it. And we love jamming these podcasts episodes full of helpful information. So I do want to say that, again, if you have sales tax needs, we do offer many solutions and services. You can reach out to me directly at emoffat@salestaxandmore.com or you can visit our website, www.salestaxandmore.com. In addition to the services we offer, we also have an entire series of free webinars, we have these podcasts, we have video snippets, we have a lot of resources available, that are free, and also resources available that are paid for as well. So Mike, anything else you want to add in here?
[13:17] Mike: We just want to thank everyone for joining us for today's episode of the Sales Tax and More Podcast and we hope to see you next time.
[13:25] Outro: Thanks for listening. Be sure to click subscribe and check out all of the resources we have out on the web.