Why Doing What You Have Always Done for Sales Tax Could Be a Disaster Waiting to Happen
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…
The world of sales tax is constantly changing, and it is very important for companies to stay aware of these changes. For example, the 2018 ruling on the South Dakota v. Wayfair case had a great impact on the way companies and states handle sales tax for out-of-state sellers. In another recent update, digital products and software as a service are now subject to sales tax.
According to sales tax expert Michael J. Fleming, this means that companies that ignore the filing and collection of sales tax could find themselves in serious, potentially business-ending trouble.
In this week's episode, Michael J. Fleming, the founder of Sales Tax and More, is joined by his co-host Ellie Moffat to discuss why companies that have not filed sales tax, or have not updated their filing processes, could be at risk. Tune in as Michael explains why you should not rely exclusively on your CPAs, why it’s important to stay on top of multi-state sales tax, and how to best file in the face of the COVID-19 pandemic.
Here’s a glimpse of what you’ll learn:
The problem with companies that last reviewed their sales tax five to ten years ago
Why companies should not just rely on their CPAs when it comes to staying on top of sales tax
The potential business-ending risks of ignoring your sales tax
Michael's advice to companies in regards to filing sales tax
How to get in touch with Michael J. Fleming and Sales Tax and More
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'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 everybody's favorite topic, which is of course sales tax. Today we're going to have Ellie Moffat interview me and our topic is going to be why doing what you've always done for sales tax could be a disaster waiting to happen. So, Ellie, you want to say hi, before we get into the interview here?
[0:57] Ellie: I do. Hi everyone, hi, Mike. Really great to be here, I'm going to do a quick introduction for Sales Tax and More, and then I'll start grilling you. So 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 or related needs. So we do a lot of returns, registrations, consultations, research, and like our name states, more. So if you have questions about our services, please reach out and ask we'll give you lots of information on how to do that. And there should be lots of written information for you to link to this as well. So, Mike, I have heard from our salespeople, that many companies they speak with are telling them that they reviewed their sales tax with their accountant three, five, even ten years ago. Are these companies okay? Do you think these companies are okay?
[1:53] Mike: Well, you know, just like a lot of branches, in sales tax, it depends. But in general,
[2:02] Ellie: Our favorite answer.
[2:05] Mike: Our favorite answer. But, in general, my answer is going to be absolutely not. And two main reasons for this, number one, things are constantly changing. I mean, I talked to accountants out there really smart people who, you know, know a whole lot more than me, except when it, you know, comes to sales tax, and they tell me that, you know, things like services are just not taxable. Well, you know, 10 years ago, not a lot of services were taxable, but nowadays, just about every state or every state, actually taxes some type of service, in some states actually tax all services. So things change, you know, in the sales tax world, things are constantly changing and you know, digital products and, you know, software as a service. These are all new, you know, items that have come up, so how the states you know, treating those so that's one part of this. But when we're talking about change, the whole sales tax universe was altered back on June 21 of 2018. We had to Wayfair case. And this changed everything. Prior to this, maybe what your accountant told you is true. Maybe it wasn't. But let's assume that it was true. That's ancient history. That's before this cataclysmic change that's happened out there. I mean, you no longer need a physical presence to create a requirement to collect sales tax. I mean, companies that have never had a requirement to collect sales tax, except in their home state perhaps, all of a sudden have a requirement to perhaps collect tax everywhere. And this is a lot of exposure and it's growing every single day and the states they're going to start coming and they're going to start coming hard. So if you talk to your account two years ago, you know, prior to this or three years ago or five years ago, everything has changed. So what have you done recently? When was the last time you've talked to your accountant? Because what worked in the past is not necessarily going to work in the future, or even today.
[4:28] Ellie: So you mentioned the first reason there, Mike. Do you have a second reason as well?
[4:35] Mike: Yeah. You know, we have a lot of accountants in the audience. We've got a lot of CPAs so this one's a little bit touchy. And I, I sort of mentioned it, you know, most CPAs know so much more than me on so many things. But when it comes to sales tax most CPAs you know, they just don't know multi-state sales tax. They may know their home state, they may know all of the surrounding states, but they don't know all of the states out there, and they just haven't had the or most of them have just not had the client base that they needed to know all of this and that has changed. Many CPAs don't offer, you know, sales tax services. There aren't very many classes in school that teach sales tax. There are no questions on the CPA exam about sales tax. So, you know, CPAs just, you know, the only way you learn sales tax is by doing it if you don't have a bunch of multistate clients, a lot of CPAs just have never had the experience. Now there are a lot of firms out there that have people who know and understand sales tax very well. And I'm not talking about them. I'm talking about the other firms, and good CPAs will let you know, hey, I don't know what I don't know. And let's get you in touch with someone who does. And they have relationships, we work with lots of CPAs out there and they introduce us to their clients. And we make sure that their clients are protected in turn, they themselves are protected because no one ever wants to hear, why didn't you tell me because even though you tell them you don't do sales tax, they think you know everything. They think that you know, everything that's tax-related, and you don't ever want to be in that position.
[6:33] Mike: Now, I gotta tell you something, you know, in all the time that I've been doing this, whenever someone has a big problem and they call us up, you know, the state found them they owe, hundreds of thousands or millions of dollars and to the last one, every one of them always says my CPA told me or my accountant told me or my attorney told me that I did not have to worry about this. So not all CPAs know that they shouldn't be commenting on this, they have very limited knowledge. And what they tell their clients can actually end up putting their clients out of business sometimes. So if you know, you know, sales tax, great. If you're not an accountant, ask your accountant, how they're staying on top of all of these changes, because the world has literally changed. And if you're not looking at it on a daily basis, because it's changing that quickly, then how can you protect your clients? How can they protect you? So, you know, that's the second reason, you know, and by the way, most CPA sales taxes, they don't even pretend that they're offering those services. You know, some of them do, and some of them are very good at this, but the average CPA, they just don't, you know, offer these types of services. So, you know, you've got to ask those tough questions. How long has your CPA been doing you know, multi-state tech services? You know, what do they know about? If you're in Florida, what do they know about the state of Washington? What do they know about the state of California? What do they know about the state of Maine? Very important. So that's the second reason in general, accountants just don't know about sales tax, except if you have a very special accountant, and them what they know about sales tax, ask them how they're staying on top of this with all the other things they need to stay on top of to, to work with you. How are they staying on top of sales tax?
[8:40] Ellie: Wow Mike. Thank you for that, and I think what everyone is wondering now is how big are the risks that these companies are facing?
[8:51] Mike: You know, this is not hyperbole, they're literally business-ending. You know, if a state finds you and we're talking about economic nexus and that's only, you know, two years old and some of these states, eight years old, and in other states, probably not going to put you out of business. But, you know, you got to figure the average sales tax rate is 8%, and penalties and interest can quickly add up to 50% or more. So, you know, if you're only doing that for two years, and only one state fine, should you know, you'll survive that. But, you know, the states are coming right now hard after economic nexus, but they're gonna find all sorts of different types of physical presence nexus out there. And one of the ones that we see creates the biggest problem is, you know, third-party nexus, and the reason this creates such a big problem is because it defies common sense. I mean, who thinks that someone who it's a true arm's length transaction, they have no relation to you whatsoever? Who thinks that you know, someone like that can actually create a sales tax filing collection and filing requirement for you. I mean, this is unfortunate, the Supreme Court has talked about it twice, once back in 1960. It was the Scripto case. And you know what the Supreme Court case the Supreme Court said there that we had Scripto was a Georgia company that had 10 independent contractors in the state of Florida, Florida said, hey, that's enough of a significant presence and the Supreme Court agreed. They said it's constitutionally insignificant as to watch your call these people as to how you pay these people, they're doing the same thing that employees would do, and therefore, yes, this can create Nexus. In 1987 we have this tested again. So the state of Washington goes after Texas company, Tyler pipe and they said, hey, according to the Scripto doctrine, We think you should be collecting our tax and paying our business and occupation tax. And Scripto said, oh, no, this is not like that at all. We only have one person in the state of Washington, they don't represent us exclusively, and they're really not very good at their job. They don't send us a whole lot of business anyway.
[11:19] Mike: Well, this goes back to the Supreme Court, and again, the Supreme Court sides with the state. And this time, they say, and I'm gonna paraphrase the first part here, the second part is really, really important. Doesn't matter what you call someone doesn't matter how you pay them, doesn't matter if they represent you exclusively or multiple parties. Doesn't matter if they do it on a full or part-time basis. Here's what's important. Are they helping you to establish or maintain a marketplace? If they're helping you to establish or maintain a marketplace, then that can be nexus creating and the reason why that language, establish or maintain a marketplace is so important is because the state's picked it up. And they incorporated it directly into their statutes, the rules, the regulations, their guidelines. So it's everywhere out there. And, you know, it's an umbrella language. So although these first two cases were about solicitation, you know, sales. You know, now states Look at this, you know, as customer service as a critic work, collections, training, implementations, installations, I mean, there's a whole bunch of these different activities out there that fall under this umbrella of helping to establish or, or maintain a marketplace. So common sense. I mean, if you hire a company, maybe you don't call them a subcontractor, maybe you don't call them an independent contractor. You just hire them to perform services for you in another state. You know, common sense tells you that can't create any link or connection and again, very smart people out there, you know whether they be in business or whether they're, you know, CPAs and public practice, they just, this is one that they miss. And you know, when the states find this, maybe you've had these types of relationships for 8, 10, 12, 15 years, and states, you know, routinely go back 7, 8, 10 years, but they're not limited to that we've seen them go back further. So that's where this back tax, the penalty, and interest really come into play. And once the state finds you, you've got very little options out there. In other words, if you're being proactive, there's a number of options you can take to mitigate some of this past exposure. But once the state finds you, there's no way to do it, and states talk to each other. So after the first-day state contacts you, maybe you'll have two or three more states over the course of the next six months contact you. And that's how, why this can be so devastating. It can literally put people out of business.
[14:10] Ellie: So, Mike, I think we've sufficiently talked about the risk here. And what are your recommendations for people? What can they do?
[14:20] Mike: All right. I think that you know, times are tough right now we're, we're coming out of this COVID-19. And companies are saying I don't want to, you know, spend any extra money on compliance or, you know, looking at sales tax. But, you know, as we've mentioned, you know, in our webinars and other podcasts, now is exactly the time when you need to be doing this because this is the time when states get super aggressive. You know, coming out of any recession, states get super aggressive. They step up their discovery, which are the units that are looking for non-registered taxpayers, they step up their collections people, they step up their auditing. So this is going to be happening, but it's worse this time because you know the states have delayed the receipt of income. So they're in a deeper hole than they would normally be coming out of recession and they're coming hard. And they were starting to come hard because of this economic nexus. It's two years old. It's time that the states started making sure it's enforced. So you've got like this perfect storm out there. Everyone is…all of these states are going to be coming looking for you. And once they find you, it's too late. So what I think everyone needs to do. If you're, you know, a CPA or other accounting professional, you got to be talking to your clients, anyone who sells into multiple states. This is not an internet tax. This is anyone who's selling into multiple states is impacted by this whether they do it by phone, whether they do it by referral, whether they do it by infomercial. You know, it doesn't matter how this business is getting done, if you have clients who are selling it to multiple states, you got to figure out what their nexus footprint is, you know, we have tools on our website that will help you figure this out. You can, you know, refer them to someone like us, lots of ways to figure out what the nexus footprint is out there. And then once you figure out where their exposure may be, then you get to look at, you know, how, excuse me, you kind of look at how long has this exposure been building up. So if it's just six months, then maybe you just deal with it on a going-forward basis. You know, if it's been six years, maybe you look at doing, you know, a voluntary disclosure agreement, but there are lots of other options out there. But the first step, you got to see if you have a responsibility, collect and remit the tax, and if you do how many years of past exposure do you have? So if anyone needs help with this, you know, reach out. But it's something that I think everybody needs to do. You can't afford not to do it.
[17:15] Ellie: So Mike, you just told everyone to reach out to us. Do you want to take a second and tell everyone how they can reach out to us?
[17:25] Mike: Absolutely. You can go to our website, it's salestaxandmore.com. So, www.salestaxandmore.com, all spelled out. We have options where you can ask to speak to a team member. You can schedule a consultation directly with me. You can look at all of the different services that we do have to offer. You can also there are lots of free tools on that website. They'll help you. If you want to do this on your own. They'll help you figure out where you do have this exposure. So that's a great way to, to contact us. But you can also contact me directly. So Ellie is able to be reached at emoffat, that's emoffat@salestaxandmore.com. And she'll either be able to answer your questions yourself or be able to put you in touch with the people who can. Remember, sometimes, you know, there are no quick and easy answers. Sometimes a consultation may be required. But if someone's quick and easy to answer, we'll go ahead and get that answer for you. So thank you, everyone, for joining us today. And we hope to see you again soon. Bye Bye.
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