Rapid Fire FAQs: Round One
In this episode, Stacey and Meredith explore the complex world of state and local taxation, focusing on one of the most misunderstood topics: nexus. Our team of tax professionals unpacks the common myths businesses often hold, especially around physical presence and economic nexus rules.
A key misconception we address is the belief that a company’s tax responsibilities stop at its state of incorporation. In reality, doing business and making sales across multiple states can create tax obligations in each of those jurisdictions.
Key Takeaways:
- State and local tax compliance goes far beyond a company’s headquarters.
- Many businesses mistakenly assume that only physical presence determines their tax obligations.
- Because tax laws differ widely from state to state, compliance must be tailored to each jurisdiction.
- Nexus can be triggered in overlooked ways, including remote sales and employee activity.
Chapters
00:00 - Intro
03:06 - Nexus and State Tax Jurisdiction
13:00 - Tax Compliance in Multi-State Operations
16:36 - Drop Shipments and Sales Tax
24:45 - Software Limitations in Business Compliance
40:20 - Navigating State Tax Compliance
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Transcript
Welcome to Saltivation.
Speaker A:The Saltivation show is a podcast series featuring the leading voices in SALT where we talk about the issues and strategies to help you make sense of state and local tax.
Speaker A:Hi everyone and welcome back to Saltivation.
Speaker A:We had done this historically or previously where we had kind of taken a lot of our frequently asked questions and kind of put them out kind of in the ether.
Speaker A:And so we've gotten a few more, had some life lessons learned that we thought we might kind of push these out again as our FAQs.
Speaker A:So bear with us as much of our conversations go.
Speaker A:Very free flowing, honest, candid, maybe a little messy.
Speaker A:So today you have with us Meredith and Judy and Stacy from the Saltivation team.
Speaker A:And and so we are going to dive right in with some common misconceptions people might have about state and local tax.
Speaker A:So Stace, I'm going to start with you.
Speaker A:Why do you think or why do people ask why do my state activities matter?
Speaker B:Well, I think one of the common misconceptions, right, is that a company might think, well I'm physically located in the headquarters state, so that's my home state and that's where I need to file.
Speaker B:And maybe their employees are all in their home state, maybe they don't have a remote workforce, etc.
Speaker C:Right.
Speaker B:But they have to really look and see where their sales are, what they're selling, etc.
Speaker B:Because maybe they've tripped nexus in a jurisdiction that's not their home state because they sell into other jurisdictions.
Speaker B:And most companies, unless they're in certain industries, are multi state.
Speaker B:They just might not really realize it until they start to take a look behind the curtains to say, okay, we're selling in multiple states, we're selling tangible goods into multiple states, or we're selling whatever it is we sell.
Speaker B:Could be software, could be so services, et cetera.
Speaker B:And all of those types of income matter, all those streams matter for purposes of determining whether there is a nexus trigger that has been flipped in another jurisdiction and they have to look at that activity.
Speaker B:They also need to, you know, consider those physical presence triggers such as traveling into a jurisdiction.
Speaker B:I mean we've got many taxpayers that still have a traveling sales force, those still exist, trade shows still exist, et cetera.
Speaker B:And so there could be some activities that are occurring that maybe just are not top of mind for them, that are creating nexus and potential filing requirements in another jurisdiction.
Speaker B:That's nexus.
Speaker B:Right?
Speaker B:So while they may have a duty, then the next question is do they actually have a liability which is a whole other analysis so, Judy, I guess.
Speaker A:How does a state even have jurisdiction over a taxpayer?
Speaker C:Well, if you're doing business there, selling, delivering it all is doing business.
Speaker C:So that's.
Speaker C:They have, through the United States Constitution, we have set up a supremacy clause that allows cities and states to have their own rules and laws because we don't want a king.
Speaker C:So we don't have the federal government making all the decisions.
Speaker C:So we very much have allowed our local jurisdictions and states to have autonomy over their tax base in their community.
Speaker C:Therefore, you know, they're allowed to tax you if you meet certain constitutional parameters.
Speaker C:And we were just talking earlier where Stacy was mentioning physical nexus.
Speaker C:So that was the premise of taxing jurisdiction many years ago.
Speaker C:Now we have remote nexus or E commerce nexus or economic nexus.
Speaker C:And so we've seen that doing business spread incrementally as business does business the way business does.
Speaker C:And now we're talking to.
Speaker C:Right now we're in three different cities, or.
Speaker C:Well, two of.
Speaker C:No, we're actually all in the same city, three different homes.
Speaker C:So how has that happened?
Speaker C:I mean, when I started, you know, I started out in a desktop with a tower.
Speaker C:So we've just seen business transact differently in our nation.
Speaker C:And we're seeing the parameters within our Constitution to allow states to tax the citizens.
Speaker C:You know, basically say, if you're going to do business with our citizens, we're going to tax you accordingly.
Speaker A:And so just to clarify, so basically when we're talking about states, state taxes, every state has the ability, kind of within constitutional constraints, to determine how they're going to have or what those qualifiers are to have jurisdiction.
Speaker A:So someone could implement $100,000 sales threshold.
Speaker A:Someone could do a 500,000.
Speaker A:So states still have the ability to kind of do what they want within the Constitution.
Speaker C:Like the wayfare case was 100,000 or 200 transactions.
Speaker C:States have said or, and, or neither.
Speaker C:Right.
Speaker C:We're only going to look at one.
Speaker C:So the states said, this is just sort of your minimum bright line threshold.
Speaker C:And this is where we're going to go for economic nexus.
Speaker C:But there's factor presence.
Speaker C:There's all kinds of presence for the income tax space.
Speaker C:And certainly physical presence is achieved by having remote employees having a salesforce that travels.
Speaker C:We've had that forever.
Speaker C:So that is where I think a lot of the newer businesses in today's world of E comm and or software or professional services or consulting or anything tech related.
Speaker C:I think a lot of people misapprehend these duties because they don't wanna have an office anymore.
Speaker C:They're agnostic about where they hire, but they don't realize this creates this footprint of tax because they have a physical person sitting somewhere working on behalf of the business.
Speaker C:So we haven't come close enough to fix that.
Speaker C:We're where one employee is not enough to create nexus.
Speaker C:We don't have that yet.
Speaker C:I think we need it, but we don't have it.
Speaker C:So we have a lot of just one day in the state creates nexus for visiting perspectives.
Speaker C:And then the economic has been a clear standard.
Speaker C:I think that a lot of newer businesses are understanding, which has been wonderful for people to understand these duties because we spent a lot of time explaining nexus to people pre Wayfair about what else are you doing besides selling?
Speaker C:Right.
Speaker C:How.
Speaker C:How did you get that sale?
Speaker C:Why did that customer come to you to begin with?
Speaker C:I mean, what they just appeared?
Speaker C:That's really not what happens.
Speaker C:Right.
Speaker C:Word of mouth.
Speaker C:A lot of things happen.
Speaker C:People hire influencers and those people are all over the place traveling and putting things out to the community.
Speaker C:TikTok.
Speaker C:Right.
Speaker C:And they're building momentum around that.
Speaker C:So that is creating a nexus and a filing duty across our nation.
Speaker A:So I think kind of the takeaway before we transition is just you can't take one blanket set of rules and try to apply them to all 50 states, unfortunately, because even you could say physical presence.
Speaker A:But physical presence means two different things in nine different states, right?
Speaker C:Yeah.
Speaker A:So then kind of on that stace, if I don't have physical presence in a state, why would I file an income tax return?
Speaker B:Good question.
Speaker B:Well, there's a lot of states this, this list used to be fairly short, but there are states from an income tax perspective that have had what we tend to call factor presence taxes, which means that if they sell over a certain dollar threshold into a jurisdiction very similar to the wayfarer thresholds.
Speaker B:And you know, in some ways, I mean, the dollar amounts might not be the same, but this whole economic nexus threshold for income tax was put in place many years before Wayfair in several states.
Speaker B:California, actually, our state of Colorado, they were very early adopters.
Speaker B:2010ish.
Speaker B:And so sometimes I think taxpayers are caught unawares by the fact that we've got some states out there and states for many years that have had and maybe it's like a $500,000 threshold of sales into a jurisdiction that would be enough to create an income tax filing requirement.
Speaker B:As I said, there's been several states on the list, and that list stayed pretty much static for several years until Wayfair was passed.
Speaker B:And then as we've seen in the wake of Wayfair, a couple things we've seen where there's some states that have said, you know what, we're going to match up our wayfare threshold for sales tax to our income tax threshold.
Speaker B:And so like New Jersey is a state that put that into place a few years ago where they said, you know what, you have $100,000 of sales into New Jersey, you're going to have both a sales tax obligation as well as an income tax obligation.
Speaker B:Hawaii has done the same thing.
Speaker B:But what we're also seeing is where a taxpayer may say, oh, I've heard of this thing, Wayfair.
Speaker B:I've heard that, you know, I need to look at my sales, sales volume into, into jurisdictions.
Speaker B:I'm going to go get registered.
Speaker B:And those states that don't have what we call that bright line threshold, a lot of them have doing business standards that are pretty broad, meaning that they might say something to the effect of, you need to file a tax return in our jurisdiction if you're deriving income from our state or you're maintaining a market in our state.
Speaker B:And it's very easy for a state to just to look at a sales tax registration and say, hey, taxpayer, you're freely admitting that you're deriving income from our jurisdiction.
Speaker B:So where's your income tax return?
Speaker B:So we are starting to see more and more states really expect that alignment.
Speaker B:Not just those states that have some kind of factor presence nexus like I mentioned, but just the rest of them that have maybe not even joined that bandwagon of putting some kind of dollar threshold around it for income taxes.
Speaker B:So it's really, really important for taxpayers to marry up those filings.
Speaker A:And so if we have clients who just say, you know what, I'm a wholesaler, it doesn't matter.
Speaker A:I don't sell to end users.
Speaker A:All of my taxes are exempt.
Speaker A:So why, why do I need a sales tax license if I'm not remitting everything?
Speaker A:That seems like a lot of money, a lot of time, a lot of effort.
Speaker A:But so tell me why there's, you.
Speaker C:Know, what's so interesting about this distributor network, the manufacturers.
Speaker C:I mean, historically, there has been a lot of come catch me, I don't care.
Speaker C:Well, now with Wayfair, the economic presence, you, you know, because you have to go through the conundrum of what am I doing in the state to physically create a sale.
Speaker C:I visited one time, I got the customer.
Speaker C:I haven't been back since I just been Billing them every year because they consume and buy more.
Speaker C:And I think a lot of people are like, well I, I shouldn't have to do anything, right?
Speaker C:Why do I have to create all this?
Speaker C:Well, the problem with anything that's exempt is in order to prove it, you have to have a form, you have to have a license.
Speaker C:So you can't prove a negative without a filing.
Speaker C:So this is where the value is.
Speaker C:And I, you know, I happen to be a lawyer.
Speaker C:So this thing called statute of limitations is really important because if you don't have a statute of limitations, the government can come back indefinitely.
Speaker C:And they have.
Speaker C:And so that's just a big conundrum of whether you want to buy insurance basically to protect yourself against what I would call government overreach.
Speaker C:Because they have a right to decide or make up what they think you're doing without knowing the facts.
Speaker C:Because it's your duty to assert your position.
Speaker C:It's a voluntary system and you are supposed to file whatever that is.
Speaker C:You should know your business and what your duties are, where you do business and file accordingly.
Speaker C:And if you don't, they will make it up.
Speaker C:And that's why we have a career unfortunately.
Speaker C:Cause a lot of people don't get licensed every.
Speaker C:And then now with Wayfair they want to go direct as well as indirect.
Speaker C:And you can't go direct tomorrow when you were indirect before because you didn't have a license 10 years ago, 20 years ago, and yes, maybe there wasn't a whole lot of risk, but now you don't have proof because you didn't get licensed and you get the right documentation and your business, your clients are out of business and that time has passed.
Speaker C:And so this is the conundrum every business faces when it's dealing with a multi state operation, which most business does.
Speaker C:And so there's just a value in complying.
Speaker C:And once you got to do 1, what's 2, what's 3, what's 5?
Speaker C:Go get the money, go sell and just do the compliance.
Speaker C:It shouldn't be the hand that, you know the cart that drives a horse.
Speaker C:It should be the opposite.
Speaker C:But we find a lot of small business, and that grows to big business hasn't taken the steps to properly license itself or it's over license itself.
Speaker C:I can remember years ago working on a client with their legal counsel, registered them with every secretary of state in the nation.
Speaker C:They did not need to do that.
Speaker C:That was over registrant.
Speaker C:So you do need a balance of what your regulatory compliance requirements are and what you tell Each government, there should be a matching of those.
Speaker C:But you gotta do something.
Speaker C:If you are doing something, when I.
Speaker A:Think we've run into something and we've even, you know, been having the same conversation with a client over the last couple years of, well, are you gonna be a wholesaler forever?
Speaker A:You know, your reseller, your var, your whatever is taking your product and marking it up.
Speaker A:So why can't you eliminate the middleman, control the services potentially associated with your product and go direct to the end user, Right?
Speaker A:Do you want to be beholden to that strategy forever?
Speaker A:And so if you're changing your method or kind of changing your process, what happens?
Speaker A:Like you said, you've been doing it this way for 20 years and now you have to say, now you have to get a license because your facts change.
Speaker A:But you.
Speaker A:When that question on that registration says, hey, when did you start making sales into my state?
Speaker A: And you're like, well,: Speaker A:So then you've just kind of added an extra layer of compliance if you truly want to do things kind of on the up and up.
Speaker A:And, you know, how many times do we see our clients say they're one thing, and then you find out like, oh, well, 10 years ago maybe I did go get, you know, go to a trade show when I had a.
Speaker A:Got a license or oh, yeah, I guess, you know, I do have a couple retail transactions that, you know, as much as we love our clients, they're not, they're still human and they're not perfect.
Speaker A:And so you can't know everything that's always happened in that business.
Speaker C:And you're open for business.
Speaker C:Your business is to sell what you provide, right?
Speaker C:You don't want to be disabled from selling to a new customer.
Speaker C:So if you create that process around that, then you can do all the things.
Speaker C:And at some point you get economies of scale when you add a volume.
Speaker C:And so, you know, in my career, as with you two as well, like, we started work with some of the biggest companies of the world and they had a giant footprint, physically and otherwise, and they sold all over the nation.
Speaker C:And, and then as we've changed firms, we've worked with small to medium business that's also selling everywhere.
Speaker C:It's just that they didn't have the team internally to manage the issues.
Speaker C:And so there's been a lot of big business taking on the cost of small business.
Speaker C:So.
Speaker C:And that's just shifting.
Speaker C:We're seeing a shift where it's creating more parity around.
Speaker C:You know, you didn't invest in operations and physical locations and warehouses.
Speaker C:Too bad we still need you to collect that sales tax.
Speaker C:And like you were saying, why would you want to take away your margin if you can sell directly, if you have a good enough product?
Speaker C:Why, why have a middleman?
Speaker C:I mean, we have this American markup.
Speaker C:At some point you might find you're just as effective as that as anybody else.
Speaker B:Dan.
Speaker B:I would also just add, I feel like our clients, which I completely understand, they kind of talk to us in generalities at first, right?
Speaker B:They, they say, oh, we're all wholesale.
Speaker C:Right.
Speaker B:But auditors don't speak in generalities and don't look at things generalities.
Speaker B:So therefore it's really, really important for our clients to be to understand their data, to understand their transactions.
Speaker B:Because the states may want, like Judy said, they may want those certs from 20 years ago and they may, those customers may not even be in existence anymore.
Speaker C:Yeah, and we've definitely caught with it.
Speaker C:Got caught with our clients pants down, proverbally, which is really just proving a negative is just so frustrating to begin with because it's just you want to move forward and not look at the past, but if you don't figure out the past, you cannot move forward.
Speaker C:So it's like you can't sell your house if you can't prove you had an inspection on the remodels you did.
Speaker C:Kind of the same kind of thing happens with business as well from a sales tax and income tax perspective, for sure.
Speaker A:It seems like lately we've been having a lot of conversations associated with drop shipments.
Speaker A:So just high level.
Speaker A:Do you want to, you want to speak to kind of what a drop shipment is and do you need a sales tax license and, or why would you need a sales tax license if kind of similar back to that wholesale?
Speaker A:You know, you're not really.
Speaker A:You're doing something on behalf of someone else.
Speaker C:All right, so a lot of times you have someone who's a sales force, right.
Speaker C:And they're going out smiling and dialing and getting people to buy their products either via a webpage or themselves, you know, and then they don't have all the products in stock, so they're like, well, we're not going to fill it all in our warehouse.
Speaker C:We would rather just have the manufacturer drop ship it to you directly.
Speaker C:It'll be less expensive from a shipping and handling perspective.
Speaker C:We don't have to house that inventory in our warehouse and it's same day ready to go to you.
Speaker C:So the manufacturer will ship directly to the customer.
Speaker C:But the transaction is between you and the manufacturer is the distributor and also between you and the end customer.
Speaker C:And now there's a transaction between the manufacturer and, and the customer.
Speaker C:And because of that three legged stool, the government's like, prove it.
Speaker C:Well, if the manufacturer doesn't have a license in the state of receipt, they can't provide a resale certificate, so they have to charge tax.
Speaker C:If you're a distributor selling to an end user in the state of receipt and you are not licensed there, you can't prove you're exempt when you're selling to the manufacturer.
Speaker C:So because of this, and especially now with Wayfair, we're seeing a whole lot of getting, the matching is not working.
Speaker C:So the drop shipments really matter.
Speaker A:You know, there are states that will accept an out of state exemption certificate.
Speaker A:So if you're shipping to Nebraska, but you're a Colorado registered reseller, you know, Nebraska might say, you know what, I get it, you're reselling this, I'll accept that Colorado certificate, no problem.
Speaker A:But there are those instances where, you know, Massachusetts and Maryland will not accept an out of state certificate.
Speaker A:So if your end user, if you're dropshipping on behalf of your kind of the company that's engaging with the customer to one of those kind of handful of states that won't accept an out of state certificate, you have to collect tax regardless.
Speaker B:Right?
Speaker B:So yeah, and I think there are, to your point, Meredith, I think there are some states that if you were to look at their rules and their laws, they would say that they will only accept that their state certificate.
Speaker B:But like when push comes to shove during an audit or whatever the case may be, they might be flexible and take out of state certs.
Speaker A:So then Stace, we get a lot of, and I, and I will admit it has kind of dwindled down, but we've had a lot of conversations that say, like, hey, my customers aren't collecting sales tax.
Speaker A:Why do I have to.
Speaker A:And you're putting me at a competitive disadvantage advantage because I have to charge, you know, 10%.
Speaker A:You know, all else being the same, if I'm charging sales tax and my competitor isn't, my, you know, customer's paying 6 to 10% more.
Speaker A:So why should I?
Speaker B:Yeah, I, I, we have gotten those comments and all I can say kind of in response to those are everybody's, Every, every business is different and it doesn't always mean that the competitor is doing it right.
Speaker B:And so we've, I've definitely been part of those conversations.
Speaker B:And then, you know, we do talk about the fact that.
Speaker B:Okay, well then let's talk about, you know, maybe how you can increase your, you know, your price or whatever the case may be to defray some of that.
Speaker B:I've also had it come up in this from the standpoint of an income tax in the income tax world, where it's an entity that is set up differently maybe than a competitor, meaning legally, maybe they're set up as an LLC and their competitor might be set up as a corporation or a partnership, et cetera.
Speaker B:Right.
Speaker B:And I've had those conversations about competitive disadvantage with respect to how they're set up and some of the taxes and fees that might be imposed on those entities depending upon how they are set up legally.
Speaker B:Case in point is California.
Speaker B:California likes to tax LLCs.
Speaker B:They pile on the fees and taxes for LLCs, but for partnerships and S Corps and C Corps, not quite as much filing responsibility and just paperwork and, or fees associated.
Speaker B:Plenty of taxes.
Speaker B:Still, don't get me wrong, but from an ll, like if you, if an entity is an LLC doing business in California, there's a lot of compliance and fees and taxes.
Speaker B:And I had a client that they were saying, well, my competitor doesn't have to pay all these taxes in, in California.
Speaker B:And I said, well, how are they set up?
Speaker B:And sure, sure, sure enough, they weren't an llc.
Speaker B:And I said, well, you know, the one nice thing about an LLC is that there is some flexibility with respect to, you know, you can check the box on this entity, etc.
Speaker C:Right.
Speaker B:But there needs to be good business reasons for doing so.
Speaker B:But there's lots of different, you know, nuances with respect to how companies do business.
Speaker B:Who are their customers, you know, where are they located, etc.
Speaker B:That could be driving some of, you know, what these, these taxpayers think might be some kind of competitive disadvantage compared to their competitors in the market.
Speaker A:When you can always go back to that old adage like, you know, if your friend jumped off the bridge, would you like, you know, just because one person does something one way doesn't mean it's a good idea.
Speaker A:Right, Right.
Speaker A:We may or may not talk about this in more detail later, but it's like, what's your out?
Speaker A:What's your strategy here?
Speaker A:Lately, like Wayfair has got a lot of attention.
Speaker A:Companies that never cared about sales tax, never FAZ5 did or whatever.
Speaker A:New, fast, whatever.
Speaker A:I'm old, it's fast five.
Speaker A:Do you need to have a reserve?
Speaker A:Do you need to have, you know, are you going to sell?
Speaker A:Do you want an ESCROW like what's your out?
Speaker A:What's your end game?
Speaker A:So those are all things to think about.
Speaker A:And just because, you know, just because someone's doing it one way doesn't make it right.
Speaker B:Right.
Speaker B:Yeah.
Speaker B:And I think that that's, you know, that's really kind of the, that's the takeaway is that just because you're looking at your competitors and saying, well, they don't do this doesn't mean that they're doing it right.
Speaker C:I mean, it's.
Speaker C:So Amazon would have even survived since they had 100, had a sales tax strategy for 13 years.
Speaker C:They were sued right, left and down the middle from a bunch of states and they paid them off.
Speaker C:So if that's how you want to spend your resources by buying off government auditors, you go because you will pay at some point seven someone by.
Speaker C:Because you don't have a strategy around your compliance.
Speaker C:And that will cost you more than it would to comply.
Speaker C:Now, mind you, small to medium businesses often find they struggle with the right talent and then they buy software and then they think that's going to do it.
Speaker C:But then no one manages the software.
Speaker C:I mean, it's like anything you would never buy QuickBooks and have nobody enter anything into it.
Speaker C:Right?
Speaker C:You have to have someone manage the ins and outs of your company.
Speaker C:Same thing with this part of your company.
Speaker C:You have to have HR and benefits.
Speaker C:I mean, there's a lot of work to be an entrepreneur to keep people engaged, to make the sales, to market, to sell.
Speaker C:It's a lot.
Speaker A:So, Judy, that is the perfect transition to something that, you know, again, we talk with a lot of our clients about is, well, I've got software.
Speaker A:Doesn't software do it?
Speaker A:Like I bought this, can it do it?
Speaker A:So, you know, is software our savior to sell?
Speaker C:I actually was, I actually kind of thought it was about 15, 16 years ago.
Speaker C:I thought, oh, I'm out of a job.
Speaker C:And then I went to an immigration call and I went, oh, these guys don't know anything more about this than I do.
Speaker C:So if I was sitting here, my client would have been confused because they didn't know how to advocate for themselves or what their duties were.
Speaker C:All they were being told to do is how the software works, but that person didn't understand their business.
Speaker C:And so you have to have, you know, liaison between the business operations and the physical software.
Speaker C:And software has limitations.
Speaker C:It's a, it's, it's not super flexible.
Speaker C:It's a rules based system.
Speaker C:You, you want to bend the rules.
Speaker C:The software's not going to let you do that.
Speaker C:I mean how many of us have got on an app and if we didn't type our zip code incorrectly, it wouldn't let us continue along and we don't know what we did wrong when we're inputting our data.
Speaker C:So that is 100% not a sound.
Speaker C:It's helpful but it's not a saving for all things and it's not going to replace some human interaction and oversight.
Speaker A:Do you find that set it and forget it is a good mantra when it comes to software and it wouldn't.
Speaker C:Be with anything like let's just think about my husband used to do auto pay on our bills and then guess what, the due dates change and then we didn't pay it right.
Speaker C:And I will never do that again.
Speaker C:I will pay my bill every month when it is due because the dates could change and I didn't check.
Speaker C:So I don't believe it.
Speaker C:Even from my own personal mantra like I change my passwords, I pay attention to what I am interacting with.
Speaker C:It should be the same with any kind of technology.
Speaker C:So you really can't set anything and forget it.
Speaker C:You can't even buy a brand new car and never repair it.
Speaker C:You have to maintain it.
Speaker A:Well, here's my little PSA about auto payments and you know, kind of tying this into what we're talking about.
Speaker A:Denver has a tendency to vote in lots of rate changes and so my auto loan can change depending on what that current sales tax rate is for my financing.
Speaker A:So when the rate changes from a sales tax per perspective, if you have a car loan, you should probably go in and make sure that you are auto drafting the correct amounts.
Speaker A:One rate change.
Speaker A:My financer changed it the other time it didn't.
Speaker A:So I was like 14 cents.
Speaker C:Well, I just refinanced my home.
Speaker C:That is so funny.
Speaker C:I just refinanced my home and the paperwork we had to sign, I mean it took an hour and a half.
Speaker C:It's ridiculous.
Speaker C:Like what?
Speaker C:Why is that?
Speaker C:Right?
Speaker C:And that's money moving around.
Speaker C:Of course it's going to be the same thing when you're dealing with technology.
Speaker C:It's money moving around.
Speaker C:So it solves some, you know, some things.
Speaker C:But even a sales tax return can't be automated yet because every system and portal is separate to each state's individual choice.
Speaker C:And so you cannot just auto submit a filing in any system yet and not any system is the same.
Speaker C:Some use certain backend technology that similar but every single one was built to suit.
Speaker A:So we've kind of talked about Nexus.
Speaker A:So I but I want to kind of maybe jump ahead to more kind of high level.
Speaker A:And these are some of my favorite questions is, you know, the states are never going to catch me.
Speaker A:Like what I do is de minimis.
Speaker A:How would a state even find me?
Speaker A:And I'll let both of you speak to it because I think each of us have a, you know, a story that we've kind of go to in her but is our elevator pitch for like how you get caught.
Speaker A:So you know, how do you get caught?
Speaker B:How are you going to get shot out?
Speaker B:Can I go first?
Speaker B:Sure, go ahead Stace.
Speaker B:So this is probably my favorite story and kudos to this auditor.
Speaker B:So I had a client that was out of state and sold into the state of Washington.
Speaker B:Washington is notoriously aggressive and they've got resources and those resources clearly will work even on the weekends because this story is about a wedding dress seller that shipped dresses to boutiques all over and just so happened to be selling at some boutiques in Washington.
Speaker B:And a Washington auditor happened to be out dress shopping with her future daughter in law and looked at the label and said I wonder if this company's registered with Washington.
Speaker B:Sure enough, they weren't.
Speaker B:And so next thing I know the client's getting a, you know, audit notification and inquiry from the state of Washington.
Speaker B:And for those, you know, those of you who have listened to us with the state of Washington, again I can't stress it enough, they are so incredibly aggressive and once they find you, it's really hard to, you know, work to get penalties abated, etc.
Speaker B:They are just not, they don't play in the sandbox very well.
Speaker B:So it's again kind of one of those cautionary tales.
Speaker B:It's so much better to be proactive to go to them and say whoopsies, should have been filing, should have been remitting, et cetera.
Speaker B:But in this case, this client was found and that was all because the auditor, like I said, she was out shopping.
Speaker A:So to tag onto your Washington.
Speaker A:And then Judy, maybe you take us through some of the other kind of just high level ways that you can get caught is so Washington does not exempt itself.
Speaker A:Governments are not exempt entities for Washington sales tax.
Speaker A:So we had a client that was selling software in the state of Washington.
Speaker B:Was.
Speaker A:A customer of theirs and so they had been paying Washington sales tax.
Speaker A:And so they finally realized that this entity that they were giving their tax to was not actually giving them the tax back to them.
Speaker A:So that's how they got caught.
Speaker A:In Washington because they were charging the state and not remitting it.
Speaker C:Yeah.
Speaker C:And I feel like so this is my 30th year of practicing and you're like how are they going to get caught?
Speaker C:And we get this asked a lot by small business especially because they don't have a CFO necessarily.
Speaker C:They don't have a board of directors.
Speaker C:They're not getting information, they're just running their business.
Speaker C: hen the Great Depression hit,: Speaker C:They look at the information sharing is common between governments.
Speaker C: So: Speaker C:They use that list and they go after send letters.
Speaker C:I mean when they need to scurry up some money, they hire auditors because auditors pay for themselves probably 10 to 1 in terms of their costs and the benefit they create for the state getting new taxpayers that they didn't have before.
Speaker C:So I found that to be surprising and certainly in our career we have found ourselves to be, you know, tech boss proof.
Speaker C:We've been recession proof, we are pandemic proof.
Speaker C:I mean there's always ways where governments are hustling up money.
Speaker C:And I'm starting to read more and more about how our state, Colorado, where we live is in the black in the red.
Speaker C:So how is this.
Speaker C:I mean there's just always more needs for the community, more ways to have to spend money for in state services and in city services and they are not getting enough federal dollars to spend support that.
Speaker C:So they have to get it through their own tax base.
Speaker C:So you're just going to constantly see different creative ways that they figure out who you are.
Speaker C:And then I at when I was at Deloitte and PwC, you know, as I saw clients move up the, the revenue ladder, what do they have?
Speaker C:Great marketing.
Speaker C:They're on every website you go and you see them every time you google them, you just see them come up in your feed.
Speaker C:Otters see that too.
Speaker C:They can call that.
Speaker C:We had clients that do equipment rentals.
Speaker C:They drive around and look where the equipment is Citus and they audit them up.
Speaker C:I see this backhoe sitting in this city.
Speaker C:They are not licensed.
Speaker C:I can see their lame right on it.
Speaker C:We know who they are.
Speaker C:We're going to go ahead and tax them.
Speaker C:So they're just as aware as anybody else.
Speaker C:In fact, I have a client that did a trade show in a city and the city found out about it.
Speaker C:They went to the trade show checked out all the vendors at the trade show and went after the actual promoter.
Speaker C:So they.
Speaker C:They know what's happening in their communities because they are there.
Speaker C:Right.
Speaker C:So they are very aware.
Speaker C:The more marketing you have, the more blogging you have, the more influencing you have, the more you will get.
Speaker C:Well, I don't.
Speaker A:So our first, I think it was our first episode with Diane Yetter when we were kind of did like the intro.
Speaker A:When Diane was working for the Kansas Department of Revenue and she was doing field audits, they were required to go pick up phone books, right?
Speaker A:So they would go travel somewhere, they would pick up a phone book and then they would bring it back.
Speaker A:So.
Speaker A:So they had just kind of this list of businesses.
Speaker A:And, you know, auditors ask for invoices during audits.
Speaker A:And so if you get an invoice that doesn't have New York sales tax on it, well, ABC company, I see a $600,000 invoice that doesn't have sales tax on it.
Speaker A:You're in my next letter because that's economic nexus, regardless of physical presence.
Speaker A:So auditors are in audits, writing down companies that are not charging sales tax.
Speaker C:And so we wish more business would be proactive.
Speaker C:I know it costs money.
Speaker C:And I know these software companies, they're having you over license.
Speaker C:So that's something to be very leery of, like, go get your license.
Speaker C:Because how do they make money?
Speaker C:They make money off your volume, off your transactions.
Speaker C:So you need to be very cognizant what a sales tax license opens up for you.
Speaker C:Like, we were speaking early to income tax compliance.
Speaker C:Payroll, payroll, trips to sales tax license.
Speaker C:The trips and income tax license.
Speaker C:I think a lot of people just, I just need a payroll account.
Speaker C:Well, there's other things on that license form you filled out that the payroll company is not providing.
Speaker C:You get a Secretary of State license with your lawyer.
Speaker C:That is a ripple effect because that information is out there in the universe for auditors to consume.
Speaker C:And they do consume it.
Speaker C:And, you know, a lot of, you know, just to wrap up with the drop shipment issue, you know, business is known.
Speaker C:We know when you are incorporated.
Speaker C:So you go to a state and you fill out a license and you put the wrong date where you did a sale into that state.
Speaker C:They can look it up, they know when you incorporate it, and they can say, you've been around 25 years and you never sold to our state.
Speaker C:We have 20 million humans here.
Speaker C:Why aren't you selling here?
Speaker C:Of course you are.
Speaker C:So I think that's where the Challenge lies in terms of our business community doing, trying to take advantage of a multi state market and not recognizing the duty that comes with that sale.
Speaker A:So Stace, let's say, all right, I got caught.
Speaker A:The auditor found me.
Speaker A:How?
Speaker B:They audit her.
Speaker A:I bought a wedding dress.
Speaker A:I didn't remit the tax I collected from them.
Speaker A:They saw my name on a backpack at the airport or in swag, you know, at McDonald's.
Speaker A:So I got a notice, I got a nexus questionnaire, I got a failure to file notice.
Speaker A:What do I do with it?
Speaker A:Should I ignore it?
Speaker A:Should I throw it out?
Speaker A:Wait for the third notice.
Speaker A:Like now what?
Speaker B:I would just say, gone are the days of filing those notices in the drawer and walking away.
Speaker B:I know that that still sometimes happens, but it, you know, used to be when we started our career, maybe not.
Speaker B:You may, because you're younger than Judy and me, but you know that like maybe a client would get a notification from a state and then just never hear from them because they didn't have the resources, you know, technology, all of the things right at that time.
Speaker B:But these states are relentless.
Speaker B:They need money.
Speaker B:And so it's really, really important to answer the notices, to not pretend, to not put your head in the sand, to, you know, reach out if you're confused by what is being asked or you don't understand.
Speaker B:Reach out to, you know, your tax advisors to see what is this fishing expedition?
Speaker B:Because generally speaking, they are fishing expeditions.
Speaker B:That's.
Speaker B:That is still true, that hasn't changed.
Speaker B:But it's really, really important because the states have information and like we've been talking about this whole time, it's very easy for them to see where a company is doing business just by going out to a website.
Speaker B:Oh, here's all our locations or here's, you know, a sample of our customers, here's some, you know, testimonials from our customers, et cetera.
Speaker B:Right, Mark?
Speaker B:Marketing is great, but it's also like really easy pickings for an auditor to go out to a website and look at it too and say, are they, you know, are they registered here?
Speaker B:So it's just really important to answer those questions honestly.
Speaker B:And then I feel like states are reasonable.
Speaker B:I mean, there are some that will play harder ball than others, but at the end of the day they also are looking for compliant taxpayers.
Speaker B:And so it's really important to, you know, answer the questions to, to play in the sandbox together nicely because they might be able to, you know, broker a little bit of a deal with a cus, with a Client or with a taxpayer that wouldn't normally, you know, be out there if the taxpayer were being, you know, not as flexible, etc.
Speaker B:Right, so.
Speaker B:Or argumentative, etc.
Speaker B:Right.
Speaker B:So there are, there are remediation strategies that can, that can occur even if a taxpayer gets a notice.
Speaker C:And if you dig your hand feet in the sand, the governments are not going to like you and they will take punitive action because they're defensive, because they have power and they don't like being ignored either.
Speaker C:You know, and if you get the story straight, it usually isn't that material.
Speaker C:I mean if I look at my career, I don't know about you guys, I measured this for many years.
Speaker C:I'm like, I always paid for myself double what I cost.
Speaker C:And that was at the big four.
Speaker C:And then there have been times where we have paid for ourselves 10 times more.
Speaker C:Not to mention not getting caught with your pants down.
Speaker C:Like we absolutely save clients money by focusing on that special area that they can't focus on so they can get back to going to sell more things.
Speaker C:So it is like anything, you just hire the right people to have the right team to support you.
Speaker C:But most people can't afford a whole group like this, nor is there enough for us to do, which is why we work so separately on the saltivation team so that we can help more companies and see more stories and not just help the biggest companies in the nation.
Speaker A:Well, and Judy, and would you recommend a client fill out a Nexus questionnaire without consultation unless the answers are no?
Speaker C:No, no, no, no, no, I'm good with that.
Speaker A:Do you think the answers are ever no?
Speaker A:If Minnesota knows enough about you to send you a Nexus questionnaire, you think all of the answers are no.
Speaker C:Usually if you read the questions you'll see that the answers are not no.
Speaker C:Sa.
Speaker C:Right.
Speaker C:And I would just say anyone who's not an expert in this, they don't believe you.
Speaker C:They just don't believe you because you're accounting or finance or HR and they look at your title and they go, you don't know sales tax.
Speaker C:And unfortunately this has been thrown off in many fields.
Speaker C:The clerical things get thrown off, right.
Speaker C:So you don't always have an expert doing this.
Speaker C:It's just been operational costs and put somebody put a body on it.
Speaker C:But what we found, well, this whole industry in sales tax started with recovery studies.
Speaker C:I mean we went out and found refunds because people were overpaying their sales and use taxes.
Speaker C:So then that changed the narrative of like get proactive in front of it, build the right, you know, build the right tool to collect and remit properly.
Speaker C:But there are still a lot of businesses that aren't handling it correctly.
Speaker C:So and unfortunately, because so many people have to comply, nobody could have enough resources to really do it effectively internally.
Speaker C:They need to co source it somehow, some way.
Speaker A:Well, Judy Stacy, thank you for our Round one rapid fire faq.
Speaker A:I think we'll give everyone's brain a break for a minute.
Speaker A:And stay tuned everyone to your saltivation team and we will go through more of our frequently asked questions in our grab bag of state tax.
Speaker A:So thanks everyone and until next time, this podcast is for educational purposes only and is is not intended, nor should it be relied upon as legal, tax accounting or investment advice.
Speaker A:You should consult with a competent professional to discuss specifics of your situation and the applicability of the information presented.
