Why COVID-19 and the Recession Should Have You Worried About Sales Tax
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…
Earlier this year, the Internal Revenue Service (IRS) extended the deadline for filing federal tax returns to July 15, 2020. Now, there is talk of extending it even further. However, sales tax expert Michael J. Fleming fears that if this were to go into effect, it would only put states into deeper economic trouble.
This crisis has created a perfect storm for businesses across the nation, who are already facing a new recession. Michael wants to help these businesses stay proactive, rather than reactive, in order to take control of their post-COVID options.
In this episode, Michael J. Fleming, founder and president of Sales Tax and More, is interviewed by his co-host Ellie Moffat about the impacts that COVID-19 will have on sales tax. Michael talks about the possible effects of extending tax deadlines, why the COVID-19 recession will be different from previous recessions, and how you can keep your options open. Stay tuned.
Here’s a glimpse of what you’ll learn:
Michael J. Fleming talks about how sales tax is being impacted by the COVID-19 crisis
Michael shares his thoughts on the possibility of federal tax deadlines being extended past July 15
How the COVID-19 recession will differ from previous recessions
Why you should stay proactive, not reactive, during this time
Where to learn more about Michael J. Fleming and Sales Tax and More
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
“COVID-19 and Tax Extensions - Not All Extensions Are Created Equal” by Michael J. Fleming
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's 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 topic, which is of course sales tax. Today, Ellie Moffat, my co-host is going to interview me about why COVID-19 and the recession should have you worried about sales tax. But before we get started, let's introduce you to Ellie. Ellie, you want to say hi?
[0:55] Ellie: Hey, Mike. Hey everyone. It's great to be here. I'll do a quick introduction for Sales Tax and More and then we then we'll go ahead and get started here. 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. We do a lot of returns, registrations, consulting, research and like our name states more. So if you have questions about our services, please reach out and ask. We'll give you plenty of ways to reach out and do so. But I'm gonna go ahead and get started here. So I think COVID-19 is obviously on all of our minds. It's a crisis in many, many ways. And it's created a recession. We see states talking about how much revenue they're short. Mike, will this have an impact on sales tax?
[1:45] Mike: Yeah, absolutely Ellie, and unfortunately, so. Right now the states are trying to be nice guys. And they are doing all sorts of, you know, extensions and delays on taxes that need to be paid, but that's making this so much worse. You know, whenever there's a recession, states get less money. You know, there's less sales. So there's less sales tax, there's less income, so there's less income tax. So, you know, a recession always hurts states. At a time when the states really need more revenue than ever because they need to help their citizens. So, recessions are bad to begin with. But, you know, because of the COVID-19, the states have been even reducing their revenue more, making these holes bigger. So, what typically happens during a recession is once that recession is over, states increase their discovery efforts, they increase their collection efforts, they increase their auditing Because sales tax and income tax, those are two ways that they can refill their coffers very quickly. So I think that, you know…whenever we come out of recession, we see states starting to get very, very aggressive. And I don't think this time is going to be any different if states have a lot of ground to make up.
[3:30] Ellie: Yeah, Mike, you know, it's interesting. I was reading an article today about federally, there's talk about extending deadlines even further. And I think this is from what I could tell from the article making states panic a little bit. Do you, do you have anything to say about that? Is there anything else that you think you might see the states do in response as well?
[3:53] Mike: Well, two parts question there. You know, I've read that same article where you know, the treasury secretary is looking about perhaps extending the federal deadline past July 15, you know, extending out those IRS returns even further. And, you know, there was a group representing the states, you know, urging the federal government not to do this, because that would just make the hole that much deeper. I mean, the state really needs the state income taxes, and if the federal returns are getting pushed out, so are the state income tax returns for the most part. So the states are saying please don't do this. We're already having enough trouble. So that's, that's number one. Well, you know, remains to be seen. If we'll get anything I think the treasury secretary was floating a trial balloon to see how it would be received. Now, you asked me if there's anything else we may see states do
[4:52] Ellie: Yeah, I gave you a double question.
[4:56] Mike: Yeah, that double question. So I think the answer is yes. In again we go back to recessions what do states normally do coming out of recessions? So, we may see, you know, some of these economic nexus thresholds which are, are fairly new, we may see the state start to lower so that some of those numbers for example, Tennessee right now has a $500,000 threshold and they are currently looking at dropping that threshold from $500,000 down to $100,000. So, we may see more of that with other states, we may see an expansion of the tax base, you know, a lot of times coming out of recession, you know, we may see items that have not been taxable before or even services that have not been taxable before become taxable. They may do this through elimination of some of the different exemptions that are out there right now, or they may start taxing, you know, new surfaces. I mean, every year, even without a recession, more and more states are looking at more and more services to tax. Also, digital products, excuse me, these are items that, you know, a lot of states don't know how to tax. So there are new states that haven't caught up yet. So I think we're going to see, you know, more services being taxed digital products, perhaps software as a service. So we may be seeing all of that change, either through an expansion of the tax base or an elimination of some of the different exemptions out there. And again, we may see some of the thresholds coming down. We may also see some newer taxes. You know, earlier this year, we had the state of Oregon, introducing a gross receipts tax. And we may see more states follow that route so that they can get more state and not income tax but an alternative to the income tax because there's a federal law that protects a lot of taxpayers out there. This, you know, it overrides the state laws on the collection of net income taxes, and that's Public Law 86-272. So they're finding ways around this. And for those of you who may not know what public law 86-272 is, it's a law passed by Congress back in 1959. that prohibits states from charging or imposing a net income tax. If your only activity in that state is the solicitation of tangible personal property, the orders go outside the state for approval, and then they're fulfilled from a point outside the states. So, I think that we're going to also see, perhaps the state's get a little bit more aggressive in trying to find ways around Public Law 86-272. And of course, one of the ways to do this is by pressing gross receipts taxes or other taxes like that.
[8:23] Ellie: Yeah, I mean, thank you for that in-depth answer, Mike. I think that's incredibly helpful. And I think something else that is worrying everyone is trying to predict the future here. We've had recessions in the past. Do you think this recession is going to be any different?
[8:40] Mike: Yeah, unfortunately, I do. And you know, this is almost like the perfect storm. We had the Wayfair case, you know, it just had its two-year anniversary the other day and then what the wayfarer case did was do away with the requirements physical presence for sales tax nexus. And what that means is, there's now an economic nexus and an economic nexus just means that you can create a link or connection with a state, which is what nexus means by simply selling into that state. And there are two different ways that states you know, measure this one is a certain dollar threshold, and the other is a transaction threshold. And some of these thresholds are pretty low, you know, it's $100,000 of sales, or 200. transactions and 200 transactions is a really low number. Now, not all states have transactions but they… you know, all but Florida and Missouri right now have some sort of thresholds. The problem is, not everybody is compliant, and the states know this, you know, they've given you, you know, some time to get around to getting registered and start collecting the tax, in other words, to be compliant, but that's changing. And we've started to see that change. Prior to any mention of COVID-19, the states had started getting very aggressive. The state of Maine started auditing people. Their effective date was July 1 of 2018. So, you know, there's two years of back tax, penalty, and they think that people should be paying them. So the state of Maine being a very, very aggressive state of South Dakota, which is the state involved in the Wayfair case. Very, very aggressive they're going back to November 1 of 2018. states like Utah have purchased lists where they, it's a list of states of people they believe have crusted thresholds in their state, and the thresholds in Utah are $100,000 or 200 transactions. That became effective July 1, 2019. So the state is calling everybody on this list. So they stopped. Most of these states have slowed down a little bit since the crisis has taken place. But they were already gearing up, states like Texas, we're already hiring more auditors in a lot of other states out there, you got to remember that for more than 25 years, the states have been trying to figure out how to get some of this remote income tax. And because of Wayfair, the states can now do so. So they just don't think that people are being compliant and they're going to go out and they're going to be looking for people.
[11:45] Mike: That's why I think it's different. The states are coming no matter what. Now, it's going to be even worse because of this recession. So that's why I say it's, it's really the perfect storm, and while the states are going to be out there, probably Merely looking for an economic nexus because it's brand new, and they don't believe that a lot of people are compliant. They're going to find all sorts of nexus. So, you know, one of the things that, you know, is going to be popping up left and right, I think, are the use of third parties, you know, independent contractors, subcontractors, you know, anyone who's helping you to establish or maintain a marketplace. You know, you may have been using these types of relationships for you know, 8, 10, 12, 20 years. So, while they're the states are going to be looking for this economic nexus, which two years is bad enough, having to pay, you know, eight years worth of back tax plus penalty and interest, because you've been using independent contractors and just didn't realize that was a nexus creating event. You know, that's part of this perfect storm, and that's one of the reasons why I think, you know, COVID-19 and this recession are just making it so dangerous for companies out there who, for whatever reason, are not moving forward with becoming compliant on these issues. I mean, you know, the economic nexus is not going away, the physical nexus has not gone away, it's still a big thing. And you know, as much as we may wish that congress is going to step in and handle this, well, there'll be another court case, it's just not going to happen, at least not in the short term. And I just think it's, it's gonna get real ugly out there. For companies that already are hurting because of lower sales or some companies have done very well during this time. But for all the gains that the companies who have increased their sales, you don't want to give a lot of it back because of their state finding you and you know, saying you get to pay all this back tax plus penalties and interest, penalties and interest can be more than 50% the total amount tax owed. So, you know, the average tax rate is 8%. You know, you got eight years worth of back taxes, penalty and interest, this could actually be business ending. For a lot of companies out there, I've seen it happen before. And it's not something nice to talk about. And it's not scare tactics, it's reality. So if you're being proactive, you've got lots of options available to you. It's when we're being reactive, you know, waiting for the state to contact us that our options go away. recessions, we know that the states come and that they come hard. This recession is not going to be any different except that I think it may be even worse than previous recessions.
[14:49] Ellie: Thank you so much, Mike. And let's, let's wrap it up here. Do you want to tell everyone how we can contact us and Yeah, let everyone know how they can contact us?
[15:02] Mike: Okay. Well, you can go to our website that's very easy Salestaxandmore.com all spelled out salestaxandmore.com Or if you have any specific questions, you know, you can always, you know, ask someone to contact you through the website. But Ellie is a great point of contact too. So you can reach Ellie at emoffat@salestaxandmore.com. And, you know, we can let you know all about the different services that we do offer. We also have consultations. So if you need a little bit of help figuring this out. You know, you can schedule a consultation and we'll help you through it. Thanks, everyone. And we'll talk to you next time on our next podcast.
[15:55] Outro: Thanks for listening. Be sure to click subscribe and check out all of the resources we have On the web