Illinois vs. Everyone: Digital Goods, Legal Fights, and the Future of Tax Policy

Intro: 00:00:34

Welcome to SALTovation.

The SALTovation 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.

Intro: 00:00:46

Welcome back for part two of our conversation with Diane Yetter of the Sales Tax Institute. If you missed part one, be sure to go back. We laid the groundwork on nexus thresholds and evolving state guidance.

In this episode, we shift focus to Illinois's controversial tax law changes in the PetMeds case, explore the ripple effects of South Dakota's use tax ruling and dive deep into the complex world of sales tax automation.

Meredith: 00:01:14

So then kind of shifting gears in your issues to watch you put the spotlight on a separate case that pitted South Dakota against Minnesota based Ellingson Drainage around use tax.

What were the circumstances that led to South Dakota Supreme Court issuing a no review ruling in in that and left the taxpayer on the hook for about 75 grand in use taxes. And what do you think the takeaway is for taxpayers?

Diane: 00:01:48

You know, I think it's an interesting case. So you know, when we think about when does tax apply? And here we're talking about the consumer's use tax. You know, it's based on first use initially.

And so when you have first use of something happening in a state, then you owe tax on 100% of that value.

Diane: 00:02:10

Right.

Diane: 00:02:10

And then if you move that to another location and the, the items at issue in this case were heavy construction equipment. And so it's, it's clearly an asset.

And so when you move something from one state to another, the second state, state has the right to tax that, but has to give a credit for any tax that you paid in the first state.

So if you moved something from a taxable Status in State 1, Minnesota in this case to a taxable status in State 2, South Dakota, assuming the Minnesota tax was paid at the initial purchase of the asset, when it comes to South Dakota, South Dakota would have the right to tax it, but would have to give you credit for the Minnesota tax that you paid. In this situation, no Minnesota tax was paid, so there was no offsetting credit.

Now, what didn't get argued is usually the states will allow some sort of depreciation allowance. So if the item had been used for some period of time, I didn't see any discussion about that in the case.

So it might have been that it was a new piece of equipment and then it got moved over. It was only used in South Dakota for a short period of time.

So the argument that the taxpayer made was it should only be taxed based on the portion of the time that it is actually used in the state. And, you know, we've got a lot of history of use tax not being apportioned.

And you know, one of the arguments that was made, and I actually, you know, Richard Pomp and Jeff Friedman, pro bono, took this case to try to get it to go to the US Supreme Court, even which denied cert. And what they were trying to argue is, yes, sales tax shouldn't be apportioned because sales tax is a tax at the time of the transaction.

Use tax is a tax based on use. And so why shouldn't use tax qualify for some sort of apportionment?

If it is something like construction equipment that is, you know, moved across different jurisdictions, you can make the argument with, you know, vehicles with a lot of different sorts of equipment that moves around regularly. And so it's an interesting argument and an interesting, you know, concept to kind of think about.

It goes against everything that we've all learned, right, over all of our years of sales tax, that tax, you know, it's, where is it used? Where is that first use? And yes, a credit can apply if tax was paid. And in this case, it was just that there was no tax that was paid.

So, you know, by South Dakota winning and then the South Dakota Supreme Court, you know, not opining, and then the U.S. supreme Court denying cert. You know, it basically the court, the case stands as it was decided, which was the South Dakota taxes due.

But I think it's an interesting, it's an interesting thing to get us thinking about in today's world, particularly where we are so mobile, you know, does it make sense? But I also would say let's be careful what we wish for.

Diane: 00:05:39

Right.

Diane: 00:05:40

We all travel.

Diane: 00:05:41

Right.

Diane: 00:05:42

Can you imagine if we had to apportion a value of our laptops or our cell phones?

Stacey: 00:05:46

Right.

Diane: 00:05:47

You know, for every state that we go into.

Stacey: 00:05:49

Yes.

Diane: 00:05:50

You know, we both are in very high rate states, so there would likely be little additional tax due. But it, you know, I think we have to be careful of.

Yes, maybe there is a good legal argument that it should be apportioned, but do taxpayers really want to have that administrative burden of trying to figure out that apportionment of things that move? And I don't think most taxpayers.

Stacey: 00:06:21

Right.

Well, I think the administrative burden that exists as it is today is hard for taxpayers with tax just trying to figure out that rate differential, you know, and, and reporting it.

Diane: 00:06:32

Right.

Stacey: 00:06:33

So I can't imagine piling on the apportionment piece to your earlier point, that would just be a nightmare.

Meredith: 00:06:40

Yeah, well then too, if that data already exists, it's like, all right, well, here's also some like kind of keys to property tax assessments.

Diane: 00:06:50

Right.

Meredith: 00:06:50

Are you going to start paying now there's property taxes have, you know, de minimis thresholds sometimes. Right. You want to pay a percentage of property tax on your depreciable value of your computer when you go to IPT in June.

Diane: 00:07:02

Yeah, no, Right.

Meredith: 00:07:05

So, you know, one thing is always just one thing, but it's never just one thing.

Diane: 00:07:09

Right.

Diane: 00:07:10

Well, even income tax apportionment, I mean, so many states have moved away from having three factors, but you know, it does go to that and you know, just think of not just the use tax administrative burden, but your asset records and trying to keep track of all that. It would just be, I mean, craziness.

So I get the legal concept of let's try this, but I think the practicality of it, I don't know that it's something people really want to buy into.

Meredith: 00:07:44

Well, and then kind of in that vein of burden. Right.

We are, you know, sales tax professionals and we are often advising our clients on kind of sales tax solutions from, you know, how to comply with, you know, some of the laws. We've already talked about the transaction thresholds, the dollar value thresholds.

And so something, you know, that, that both of us, you know, from the Sales Tax Institute and Tax Ops deal with is kind of the vastness of sales tax automation solutions that, you know, people come to us with that our client that are available in the market for our clients.

What would you say, you know, taxpayers should be looking for, be aware of kind of when you talk to clients and companies about integrating a solution solution and are all of these choices out there, is that a, is it a good or a bad thing?

Diane: 00:08:48

Yeah, that's a great question. You know, I've been doing this for more years than I care to admit and you know, I've been doing it from the time when there were only two providers.

Diane: 00:08:59

Right.

Diane: 00:09:00

It was, it was Vertex, which is still around today, and at the time it was Taxware, which is today Sobos. And you know, that's what you had. That's. Those were our options.

And you know, having been in this field and watched how the technology has, has progressed, not only just with having more vendors out there, but also having, you know, how much more functionality do we have? You know, back then, you know, the only thing you could use to make a tax decision was a customer code, an item code, and a Jurisdiction.

Diane: 00:09:39

Right, that's it.

Diane: 00:09:41

Notes back in, I think it was: 2017

And I think it's easier because there are more solutions that are out there, there's more functionality, the prices have come down and just the number of providers like us have increased. So, you know, is it good to have as many new players in the market as it is? You know, I think it's a double edged sword.

I think having more providers in the market give us more choice. It also forces the legacy providers to stay on top of their game and to actually be competitive.

So I think those are all really positive things that have come out. But I think what has happened is we've got a lot of newer providers that are very niche and so they hyper specialize in what they do.

And that makes it great if you are a company that is hyper specialized in what that provider does. Like we have some that are really, really hyper specialized in software and SaaS, types of technology or taxation.

But if you decide to move into selling hardware, well, they don't have that content now the hardware may very well be taxed. But if they only have the rules for SaaS and not for the hardware, then what do you do?

Or you acquire a company that now has something different, now that software provider can no longer fully support you. So when I get asked how do I decide what is the right provider? I have a couple of key things that are top of my list.

The first and foremost is the taxability content. Do they have the content that you need for your business as it is today and as it is you think it will be in the near future?

Diane: 00:12:06

Right.

Diane: 00:12:07

I mean we never can project of what my company might do growing growth wise.

Diane: 00:12:13

Right.

Diane: 00:12:14

The second is the geography. So are you subject to tax just in the U.S. or do you need to worry about Canada and Mexico?

Are you North America or do you have global needs and there are some providers out there that are strictly us and if you are a digital goods type of company and you're selling to end consumers and you have a global audience, that solution is not going to work for you because you've got collection requirements in many other countries because of that. And then the third biggest Thing I think that comes into play is the connectors. What is your selling platform? Are you a Shopify? Are you a QuickBooks?

Are you a NetSuite? Are you a custom built ERP? Are you SAP or Oracle? What is your platform that you're selling from? And if you have multiple, what are all those?

And does that tax engine actually have a supported connector? All of the tax engines you can write a custom connector to. But why write a custom connector if another tool has a standard connector?

And so to me, those are the three most important things actually in that order.

So your tax content, your geography, and third, your connectors that I think you have to look at, you know, then I think you look at, you know, what is their pricing model? So is it based on revenue? Is it based on transactions? Are they a streamlined provider?

Is that something that's important to you to get some of those states for free? Do they do compliance? We've got some out there that only do tax calculation and don't do compliance, or vice versa.

Ones that only do compliance and not tax calculation. Do you need exemption certificates? Some of the newer platforms do not support exemption certificates.

And yes, there's some standalone exemption certificate providers out there. Maybe you use one of those. But if you want to use streamlined benefits, you have to have the certificates in the calculation engine.

So having an external tool for certificates now just kind of increases your cost with things.

So those are the sorts of things that I look at and then, you know, kind of the intangible of, you know, certainly pricing, but I think more importantly, understanding their support. And what are they, what will they do for you? What can they do for you? And what do they do well? And what do they not do well?

What is their partner ecosystem like?

You know, if the only people that can implement their software are their own employees and there aren't any partners like us that work with them, you're going to be really tied to them. And you know, whenever I talk to leadership of software companies, they say, we are not a services business, but they have to do some services.

And in this field, I talk to so many technology companies in this field that say our customers are leaving us because we can't answer their sales tax questions, but we don't want to answer their sales tax questions. We're not a sales tax firm. Can we partner with you? And I'm sure you guys get the questions too.

And so they're having to now develop this partner network, which just adds some complexity on all sides, because how do you work with that partner network? Who is a good partner.

You know, do you want a partner that is experienced in quality like our two firms are, or do you want to go with a startup that maybe has capacity?

And particularly if you're in a race to the bottom on pricing with your model, then if you bring in a more experienced, higher end consultant to help your customers, that's going to be a mismatch. You got to get somebody that's willing to charge a consulting price that aligns with, with your software prices.

So there's all of those sorts of things that come into play. I love seeing the new people coming into the market. We've vetted many of them. I'm not going to name any names.

Some of them, when we go through the vetting, you know, their calculations are wrong and we tell them they're wrong and they're like, oh, we'll come back to you. And we never hear from them again.

You know, that's a tool that I'm not gonna recommend because I have figured out that they don't know how to do tax, you know, and I think that where firms like ours need to be able to stand up and talk to clients about those sorts of things.

Meredith: 00:16:55

Well, and we've talked to a couple different vendors that are saying, well, you use the native functionality in whatever is in Netsuite or Shopify to kind of like put the tax in your cart, on your invoice, whatever, and then we'll remit it. But in the, in, in doing so, we'll recalculate the tax and remit what we think should have been on the invoice.

And so it's like, well, that's not helpful. No, right, like, because that's not what I charged. That's not what I charge my customer. I'm either collecting and not remitting or I'm heating.

And it's like, I guess, are you just serving the need to file returns? Because, but you're acting like you're a sales tax like vendor to. Yeah, to get, you know, tax correct.

So it's very confusing when you start kind of, because we're similar. We'll. We'll kind of listen to anyone kind of talk about what they're doing. And you know, we like to listen to ourselves talk and provoke.

We have a podcast. Right, obviously, and kind of provide feedback on that. It's like, well, that's, that's not helpful. Like you're, that's not.

So what are you guaranteeing?

Diane: 00:18:09

Right.

Meredith: 00:18:10

I know no software vendor guarantees anything, but like there's Already immediately a mismatch in what we've charged our customers and what you're sending to a state.

Diane: 00:18:19

Right?

Meredith: 00:18:20

Yes.

Stacey: 00:18:21

Right. Well, yeah, and I mean, in all of this is very, you know, appro. You know, it's all applicable. Right. I mean, I think we've our.

We have a lot of clients that come to us asking for our advice, thankfully. Right. But we've got, you know, because they don't always know what they're buying. Right.

And this just goes to show, right, that, I mean, we've got the expertise, right, to know, okay, they're not charging the correct rate or there's certain things that may. That because of the facts of the taxpayers, certain, you know, vendors might not be able to serve them appropriately, those kind of things.

Right, But I think, you know, taxpayers that don't really know. Right. I mean, it's just really kind of like a. These are just really kind of tips for the unwary, right?

To be like, you know, you're going to probably get a sales pitch from a software company. Remember, it's a software company and the devil's in the details.

And if you don't really fully understand what you're buying, you know, those of us that do this for a living can help you navigate that.

But, you know, it's just really, you gotta be more proactive about it as opposed to reactive because maybe you're, you know, ultimately buying something that you don't need.

Diane: 00:19:31

Right?

Diane: 00:19:32

Well, and we've had people, you know, get sold something at a higher level than what they need, you know, because they don't know that, that, you know, do you count all the revenue or just the revenue in the states that you have Nexus, you know, do you count global revenue or just the U.S. you know, how do you count the transactions?

You know, we've had some vendors tell people they need to register when, you know, their taxable sales is resulting in $5 of tax in a year. And I'm like, does $5 keep you up at night? Yes. Legally, are you supposed to be registered? But practically, do you need to be registered?

Maybe not, right? You know, and the software companies aren't gonna. Aren't gonna take that position with anybody. You know. Why?

Well, they wanna sell more software, right? But also they're not, they're not in the business of giving tax advice, so they're not gonna do that.

But yet these customers that are coming to them and that they're going to and pitching are looking for somebody that can help them make those decisions.

Meredith: 00:20:42

One speaking to kind of your first thing to look out for from like, do you have the right taxability answers? And us kind of.

I think a second part to that is do they also make those answers available to you so you can validate what you're calling this product?

Especially kind of in that software space when you have some ambiguity, you've got, you know, enterprise executive exemptions, B2B exemptions, you know, SaaS versus downloaded versus on, you know. Right. A myriad of options and taxability intricacies when you come, when it comes to that product line. So I can't just call something SaaS.

Is it direct to consumer, Is it business to business?

Okay, well, if it's business to business, are you automatically taking into consideration New Jersey and the business of business exemption, or is it Iowa where it's going to tax and. And then you need to provide the certificate. Right. So there are all of these layers that if you don't even know SaaS, you know, SaaS. A SaaS.

A SaaS isn't SaaS. Right.

So if you're not going to tell me what this mapping code means from a taxabilities perspective, I can't validate what I'm basing my decision on. And so we have a hard time, or, you know, me in particular, have a hard time recommending a product that we can't validate what you're doing.

Diane: 00:22:00

Right, well.

Diane: 00:22:01

And I think there's two pieces to that, Meredith. One is, do they give you the definition? And then secondly, do they give you a taxability matrix?

You know, there's, there's some providers out there that say, no, we can't give that. We, we don't have one. I'm like, you have it to build it and you, I hope, are monitoring and maintaining it.

So you have to have a matrix somewhere, you know, and we went to a provider that was, you know, one of the newer ones that was offering and, you know, they said, well, for you, we'll do it. And we got like our first five codes.

And then when the company added some additional product lines, you know, we couldn't get, we couldn't even get them to return our calls or emails or anything. And they're like, well, you just need to do tests and build your own. And it's like, no, that, that is.

Meredith: 00:22:59

So I'm gonna test every.

Diane: 00:23:00

Expect somebody to go in, in every, every state.

Stacey: 00:23:05

Absolutely.

Diane: 00:23:06

Jurisdiction. You know, we were at least just trying to get what is the taxability.

So, you know, we did one order and luckily we were only in like eight or ten states. So we went in and did an order in each of those states and said, okay, this came back taxable, this came back exempt.

This came back with a reduced rate, you know, and it was just. But it was a nightmare.

And how a software company cannot provide that content, you know, and say we don't have one, doesn't make any sense because you have to have it, you know. But yes, it's, I think it's good that there's more providers out there. I think competition is always good and getting new and different ideas.

rik's first hit the market in: 2000

They said this can work outside of the United States and Canada. Canada is not a state. It is a separate country. You know, and I think that was amazing.

You know, I think the next one when Avalara came in, you know, they said all right, it needs to be, you know, know, scalable down instead of scalable up. You know, how do we make this work for small businesses? And I think that was great and, and the different providers that have come after that.

But you know, when I look at who are the two companies that probably had the biggest impact on changing this market, Obviously Tax War and Vertex starting it out back, you know, decades ago. But then I think in Avalara really, really, really kind of turned it upside down and, and, and has made it move to where it is today.

Where there are, it's, it's an easier market to enter, you know, as a company but it's been a fun ride.

Meredith: 00:25:15

It some days maybe less fun, more fun than others.

Diane: 00:25:20

Right.

Meredith: 00:25:21

Y And so as we wrap up, is there anything, you know, you shared, you know, some things that are kind of in discussion in Illinois. So we appreciate that and gave us things to, to set in our Google Alerts.

Anything else you think we should pay attention to, look out for as we kind of close up?

Diane: 00:25:44

Yeah, I, I think the next thing that we really have to pay attention to and any businesses that are in the digital space really, really need to be on top of and I would encourage them to get involved with it is the taxation of software services and digital goods. You know the multi state tax commission has a working group on this. I'm active in that streamlined is adding new things.

That's actually, you know, a call I have today.

They're going to, you know, we are looking at adding additional definitions in the digital goods space, we might get to where streamlined is going to define SaaS.

I'm not 100% sure if we're going to get all the way there, but I think this is where, you know, people that are in that space as sellers in particular, really need to be aware of this. But everybody is buying those sorts of digital goods. And as much as I hate to admit it, the tax is going to broaden this.

And so, you know, getting in at the ground level and making sure we're coming up with appropriate definitions, I think is really important.

So any of your listeners that are in this space, if they're not involved, you know, reach out, you know, to me, you know, I don't know if any of you guys are in on either of those two work groups yet. You can reach out to Streamlined, you can reach out to the mtc. All of those calls, the MTC calls are all open to the public.

There's a separate work group that's closed, but the monthly calls are open to the public. Many of the streamlined meetings are open to the public. And, you know, right now what we're trying to do is gather.

Gather products and services that we need, you know, what are the challenging things, you know, that, that we need to have the states look at and that the business needs to come up with. And this is where I think it's really important for businesses to be a little bit more open and willing to share, like, what is it that I'm selling?

You know, how do I contract for it? What is the underlying technology of IT to help the states figure out, is this software? Is this a service? Is this a digital good?

Is it telecommunications? Is it a professional service?

You know, what is it that, that all of this is really kind of melding together, that it's getting harder and harder to pull those pieces apart and figure out how to tax them.

And so that's what we're working on right now is trying to come up with what are all of these different things that we're struggling with, with that we need help saying, let's get a definition for these things. So I think that's the next thing or another thing that, that people really need to be paying attention to.

And, and then, you know, I can't go without saying the impact of tariffs.

Diane: 00:28:48

Right.

Meredith: 00:28:50

Whatever that may change from the date of recording to, right, any minute.

Diane: 00:28:56

Yeah. And it's, it's not only tariffs, but it's, it's all kinds of other things. It's surcharges.

You know, we just have to go back to the basics of what is the definition of the sales tax base. So even five years ago, it was surcharges to cover health, cleaning, stuff that, that people had to do, and masks and everything else to be open.

You know, all these surcharges for different things. Then we moved into, you know, wage supplements.

So surcharges to be able to pay higher wages to employees, all of those just become part of the tax base. Tariffs are no different.

Tariffs that exist today, tariffs that may exist tomorrow, it's just part of the tax base means the states are going to be getting more sales tax revenue because it's going to be a higher price.

And whether you separately stake those on your invoice because you're calling out that it's the tariff that's raising the price or not, they're still part of the tax phase.

Meredith: 00:29:53

Well, thank you, Diane, as always, for your knowledge, your time, your friendship. We just really appreciate any opportunity to get to hang out with you. So thank you again for visiting us here on this Ultivation podcast.

Diane: 00:30:09

Thanks for having me and it's always a pleasure. So have a great day everybody, and let's keep these conversations going, going.

Meredith: 00:30:16

And this is another episode of SALTovation. Till next time.

Intro: 00:30:21

This podcast is for educational purposes only and is not intended, nor should it be relied upon as legal tax, accounting or investment advice. You should consult with a competent professional to discuss specifics of your situation and the applicability of the information presented.