Dave Cain: Welcome to unsuitable on Rea Radio, the award-winning financial services and business advisory podcast that challenges your old school business practices and their traditional business suit culture. Our guest are industry professionals and experts who will challenge you to think beyond the suit and tie while offering you meaningful modern solutions to help enhance your companies growth. I’m your host Dave Cain.
While it certainly feels like we’ve covered all angles of tax reform on unsuitable, we’re not done yet. Sure we’ve hit the tax cut and jobs act from a Federal perspective, but what happens when we look at the implications of the legislation at the state level? Joe Popp, director of Rea’s Salt team is a frequent flyer here on the podcast, is gonna dig deeper into the legislation and we’ll discuss the various considerations states are grappling with as a result of tax reform. And while we’re on the topic of state and local taxes, Joe is gonna talk about a few other Nexus concerns business owners will be left to contend with as the year continues to unfold. Welcome back to unsuitable Joe.
Joe Popp: Well thanks Dave, it’s great to be back.
Dave: You are a tenured guest!
Joe: I think so. I think I’m at what five? Is it five now?
Dave: You might be five. Apparently, the speaker fees are going up, that’s why we’re getting you back in here.
Joe: That must be it yes.
Dave: Now wait it’s my show, I’m the guest. I’ll start with the questions here. You just wanna jump right into state-
Joe: I’m so excited to go. I am. You know Dave, you hear year of the dragon, year of the ox, year of the monkey. Well this is the year of salt my friend. Year of salt. And as we go through presentation today, man you’re gonna see why.
Dave: Oh you got it. But let’s start with a couple definitions for those of the week. We use the term salt, and we’re gonna use the term salt throughout today. Now a lot of our listeners like salt on the rim of their cocktail glass, but what does salt stand for?
Joe: So salt is state and local tax. And so it’s kind of a broad field with state income tax, state transactional taxes, like sales use tax, grocery seats tax. It also encompasses things like property tax at the individual and state level. Local income tax, like Ohio all of our municipal income tax. So kind of a broad field.
Dave: And you are the director of Rea’s Salt Services and Consulting group.
Joe: I am that’s right.
Dave: And it is the fastest growing segment that the firm has at the current time if I have my numbers correct.
Joe: Yes we’re out there trying to do good work for clients. Just had a nice call with people today, we’re gonna get em a nice refund on some Cat Tax. And the other thing we found that people tend to not really fixate on is a lot of times with sales and use tax, it’s not necessarily something that’s gonna cost your business something. What these guys are doing is they were potentially overcharging on their bids for some work that really should be tax exempt. And so by going through that with them, we’re gonna be able to help them to be more competitively positioned as compared to other folks that don’t have this kind of state and local tax knowledge to back them up.
Dave: You know I’m surprised, and again to our listeners, Joe and I our offices are right next to each other. Joe is constantly on the phone and we’re constantly sharing ideas and we’re constantly hearing stories about businesses of all sizes in all different industries who are having trouble with sales tax, maybe over/undercharged. This Cat tax or commercial activity tax, I mean there’s a lot of misreporting out there.
Joe: It’s true. You know often the thing on commercial activity tax is people just decide to source all of their receipts to Ohio as an example, if they’re an Ohio based company. And they don’t really have to do that. As we’ll talk about a little bit later on today, there are lots of other states that are hungry for that revenue. They don’t have to be overpaying to Ohio. The other states will take care of that for them. And so, you know what I don’t know if this is a good transition there to what some of the states are doing with regards to the Federal tax law.
Dave: I was just gonna ask you that.
Joe: Well okay there you go.
Dave: The great … huh?
Joe: Yes I need the hat. So a couple of cool fun things. The year of salt, so this is a really fun time to be a part of a salt department, talking about salt topics. One of the things as you might of heard from some of the other guests are these itemized deductions limitations, right at the Federal level. And what are states doing to combat this? I have two funny stories about two states, we’ll call them New York and California.
Dave: Just for fun huh?
Joe: Just for fun, yes. And so the first one, New York has decided, hypothetically New York right? Has decided what they’re gonna consider doing is abolishing individual income tax for workers in New York. And instead they’re gonna make it a payroll tax. Now think about that, if you have a payroll tax, that’s 100% deductible by your employer if that’s money that you don’t actually get you don’t have to pay Federal income tax on it. And so the idea here is that the employers potentially in New York may be paying someone about the same amount of money but we’re gonna mess with some of the numbers on the payroll, pay stubs and the W2s. And at the end of the day in New York, they may completely sidestep this itemized deduction limitation for state tax. You won’t have to worry about it, you get a full deduction.
Another state let’s say California is setting up a charitable trust. You can make your voluntary donation into the trust and then take an 85% credit on your California tax return. So another kind of cool interesting way of getting around the itemized deduction limitation. So those are just a couple of fun things that some hypothetical states are thinking of doing.
Dave: And it’s interesting that you used blue states in your hypothetical example.
Joe: Yes those are high tax states, I believe right blue? High tax?
Dave: Must be. You know a couple of other topics, and this will launch us into the discussion, you used the term Nexus. And we’ve talked about that on previous podcasts but let’s just give a brief definition of what Nexus is.
Joe: Sure so Nexus is a concept that is created by lawyers, so of course we have to give it a fancy term that means something more complicated than what it really is. Really it means connections. If you have enough connections with a state, then you’re forced to do something. And there’s all different types of Nexus. So as an example, and this is the one I usually give. If you bake cupcakes and you put nails in them, and then you mail them into Michigan because that’s what you do, is it possible you could be sued in Michigan State courts? Well of course you could, because you’re putting not safe food into the marketplace in Michigan. But if you delivered those cupcakes with the nails in them via common carrier, could Michigan require you to charge sales tax on those, assuming that sales tax would apply. And the answer is no, so you’d have Nexus for being sued in the state but you wouldn’t necessarily have Nexus for collecting sales tax, or maybe paying income tax. So that’s kind of the concept of Nexus, and there’s different types of Nexus for different sorts of things.
Dave: It sounds rather complicated, and it is. That’s what your group has been sorting out for a number of our clients and friends. Because when you talk Nexus, we’re talking about money somewhere along the line. You know you’ve also used the term in some of our internal discussions and meetings and webinars, Brightline. What does that for a listening audience, when you talk about Brightline, you know I mainly think of snowbirds going to Florida for the Winter. But Brightline goes a lot deeper than that.
Joe: It does yeah. So Brightline, there’s a number of different ways to think about it. An example I like to give that is kind of salt themed is no matter who you are or the other things that are going on, if you have five shots of tequila in about five minutes, you’re done. That’s a Brightline. You crossed the line and you’re done. And so with Brightline as it relates to state taxation, as you said with snowbirds. If you’re in a state for a given number of days, that’s a Brightline. You’re a resident or you’re a non-resident. It’s a line in the sand, it’s easy to kind of spot.
With brightline nexus in the past, what we’ve had is a physical presence. So in order to be subject to sales tax in a state you have to be physically there somehow. You either have to have a person there or inventory sitting in a warehouse or do an installation job there in the state. That’s what the brightline concept has been in the past, but it’s changing potentially.
Dave: Now are the Brightline rules uniform across the states?
Joe: No that would be too easy.
Dave: You ever ask a question you knew the answer of? You know this is kind of what I feel like.
Joe: I should just say, yes they’re different. Just leave it there.
Dave: There you go.
Joe: So yes they’re very different across different state lines. Some states have enacted what are called Amazon laws. Everyone’s familiar with Amazon and so let me kind of go through what this looks like. There’s actually, one of the reasons I say this is the year of salt is there’s a current US Supreme Court case talking about this very issue. So here’s the current kind of structure of this. Right now if you have an employee that goes into a state, the state can tax you. Right that’s pretty easy, it’s a Brightline. These Amazon laws tried to get at Amazon.com back in the days when they weren’t really trying to play ball or play nice with states on sales tax for example.
And so the idea here was if you have a blogger, let’s say her name is Abbey. And she writes about shoes all the time. She has a shoe blog, let us say. People go to this blog in order to find out more about shoes. Well Abbey decides that I’m gonna put a link there on my webpage for this particular kind of shoe I’ve just reviewed. People can click on it, go to Amazon, make a purchase. And then Amazon was gonna pay me a bit of a commission. States have said well you know Amazon, Abbey happens to be sitting in New York or Ohio or Michigan. Abbey is a person inside this state who’s doing this thing for you, this referral through Amazon or through a website/ a marketing piece. That’s enough of an in state connection for us to consider you here, present and we will tax you.
And so there are 28 states that have a version of this Amazon law, where as little as $10,000 of sales for the whole state, for the whole year plus one triggering point like an Abbie with a website. That is enough for a state to be able to tax you.
Dave: Sounds like Abbey’s in trouble.
Joe: Yeah she could be.
Dave: Now in your example, Abbey’s not the brightest person in the world, can she claim ignorance that she didn’t know these rules?
Joe: Well Abbey, interestingly enough if she is using to go a little further into this example, if Abbey not only reviews shoes but she also has a few shoes that she sells, and she uses the fulfillment by Amazon service which is a new thing Amazon has. The idea is you ship your product to Amazon, Amazon stores it in it’s various warehouses and then when you make a sale Amazon will fulfill it for you. It will ship it from their warehouses. So they have your products in a good thirteen states. Well guess what, those thirteen states are now going to Amazon and asking for all of that information on the people who use that service. Now Abbey may have a filing requirement in thirteen states based on her use of Amazon.
Dave: She is in trouble. … And again, your team has a solution if that comes to fruition. That there’s some, I don’t want to call it amnesty that’s maybe not the right term. But there’s some voluntary disclosure things that you can do to help Abbey meet her tax obligation.
Joe: Yes.
Dave: You know quickly and correctly.
Joe: Yeah and some of that as you said is doing some kind of corrective action. But it could also be talking with Abbey about the sorts of business decisions that she’s making and the potential impact of those are. So the choice to sell through Amazon doesn’t require Abbey to use a fulfillment by Amazon service. She could just sell through Amazon and fulfill the packages on her own. In which case that simple choice ends up costing Abbey in our particular example here, filing in maybe half or maybe all of those states if they come after her. So some of the things that our group does in addition to talking through some of the mitigation items with the state might be tax efficiency. Looking through what your business is doing. Do you really need to hire that mobile workforce person in the seventeenth state? Or could we perhaps contain it within the sixteen states we already filed it yes?
Dave: Absolutely. Yeah got a deal for you. I’ve been waiting to lay this deal on you for a couple days. I haven’t seen you, you’ve been too busy on the phone with projects but I understand you’re looking for a stand up desk and I’m looking a stand up desk. That’s the thing to do and a couple of other folks around the office. I got a deal I found that we could get a deal on Wayfair for these stand up desks. I mean it’s a pretty good deal, and even further than that I think they won’t charge us sales tax on that. So let’s order these desks from Wayfair.
Joe: You know Dave it’s funny you mention that name Wayfair. By the way I’ll definitely take you up on that because I love saving sales tax. Wayfair is this supreme court case. South Dakota versus Wayfair. Wayfair versus South Dakota. And this is so exciting for people in the salt world. I mean I know that you probably haven’t met, for the viewers and listeners to the podcast, you may not have met in person a lot of big state and local tax nerds. But man when we get together, this is the stuff.
Dave: Nirvana?
Joe: Yeah that’s right. This is primo stuff, this is decades in the making this particular court case. So if I’ve given you an adequate segue into it.
Dave: Are we gonna talk about the Wayfair case maybe?
Joe: We should yes we should.
Dave: What’s going on with the Wayfair case?
Joe: Alright counselor jeez. So the Way fair case is a case where South Dakota has imposed another version of an Amazon law, a different pathway if you’d like. So the rule of the land is you gotta be physically present in order to have a state do something to you in terms of having a tax collection possibility let’s say. Some states have gone down the path of Amazon laws, They’ve kind of bootstrapped into physical presence by you utilizing some other agent in the state. This is a complete departure from that, totally different path. Basically what South Dakota has said is if you make $100,000 worth of sales into our state or 200 transactions into our state in a given year, that is enough. That is enough connection with our state that you then must collect sales tax.
Dave: That’s the connection.
Joe: That’s the connection. And so the supreme court has taken this case up. And so one of two things is gonna happen as a result of this case. The first is they’re going to double down on the prior rule from years and years ago. I say years and years ago, I mean before there were iPhones and Internets. That’s quite a while ago.
Dave: Is there such a time?
Joe: Yes there is I think. The Wayfair case-
Dave: Yeah let’s get back on the Wayfair case-
Joe: The Wayfair case-
Dave: Because you guys are excited about the Wayfair case.
Joe: We are. So we have the Amazon law kind of branch and then we have the South Dakota Brightline $100,000 or 200 or so transactions in a year. There’s eight states that have now decided to do this. Right so we have 23 states with Amazon laws, eight states with these Brightlines. And so the Wayfair case is either going to double down on the old rule or it’s gonna validate this new rule.
If it doubles down on the old rule, the result of that according to commentators is states are going to go to the next level, unleashed in terms of this argument of what gives you physical presence. Where they’re going is if you’ve heard of cookies before, not the kind you eat but the kind you get when you go to a webpage and they put a little cookie on your smart device, on your laptop or the like. That is a physical thing that exists on a device inside of a state, and that is enough to give you physical presence. That’s where they’re gonna go. So they’re gonna take the Amazon law and they’re gonna keep going down that path all the way until it becomes ridiculous.
Or if the court decides to go down this other path and validate this new $100,000 threshold, what we’re gonna have is a bunch of states enact this kind of legislation and for most folks that file, or that have significant sales in a bunch of places, they may be adding five or ten states that they’re filing in probably not for 2018 tax year but for 2019 tax year. So the day is fast approaching when we’re gonna get some kind of answer from Supreme Court on this. And we can’t be more excited as you can tell.
Dave: Sure now as you’re talking about this and all the different states and all the different rules, especially with sales tax. Is there a discussion about a uniform Federal sales tax? Where does that stand?
Joe: Yeah so there have been several discussions over time. One of the main proposals is to take the stream line tax project, which is about twenty states or so that have some standardization single source to do registrations and filing and the like, to take that and make it a federal thing. You may also take a look at our neighbors across the pond in Europe. They have a value added tax, VAT tax. It’s a transactional tax. Interestingly enough they went from a system where we had gross receipts taxes, like Ohio’s cat and abandon them for the next step in evolution which for them was this value added tax. And so it’s possible that at some point we may see the same thing where some of these other tax types, gross receipts and the like fall into disuse and maybe something like a national transactional tax might come to be.
Dave: Sure in the few minutes we have left I want to kind of wrap this up where we started and this is talking about the state response to Federal tax reform. And I think you’ve kind of scratched on a couple examples where the states were gonna try to combat some of the changes, but give us your opinion. What is your opinion on the states reactions to the Federal tax reform?
Joe: So this is the other reason why this is the year of salt. So we have so many choices to make at the state tax level. Give you a couple quick examples. So one of the deals if you like that happened as a part of Federal tax reform was “Hey we’re gonna limit your interest deduction, but we’re gonna lower your rate. We’re gonna cap your interest deduction but we’ll give you 100% expensing on depreciation.” It’s a couple give and takes, things that move the needle on both sides. At the Federal level, all of that is part of a package. At the state level they can choose to keep the things that raise their revenue and not keep the things that would lower their revenue.
And so here’s a good example. So Pennsylvania, the way that the law is written at the Federal level, Pennsylvania has a decoupling of depreciation. And so depreciation what that means is if you buy a car, you buy a cubicle for a new employee let’s say. The feds will let you expense that the year you buy it. Normally states will say, “Well you know we don’t want you to do that but we’ll let you do it over the normal period of time you could’ve done that in five years let’s say.” So you get to deduct it over five years. The current Pennsylvania is you have to add it all back and you do not get any further deduction. So what that means is if you buy a truck, you buy a cubicle, you buy other things in Pennsylvania today in 2018 as we sit here right now, you get no depreciation deduction until you sell it. Which in a cubicle that maybe fifteen years when you decide to replace them. Yeah great thanks a lot.
So Pennsylvania is right now legislatively trying to go through this process of changing their rule because this is kind of ridiculous, even for Pennsylvania. Which most state and local-
Dave: That’s where Abbey lives by the way.
Joe: Oh really okay, well it’s a great state except for it’s tax department.
Dave: Our guest today has been Joe Popp. Hate to cut you short but we’re on a time frame, you know we buy time on the air and I get a budget I gotta stay on. Our guest today has been Joe Popp, director of Rea’s Salt practice and Consulting services. And Joe I do have one compliment I have to share with you. Every time I talk to you or a member of your team, you guys come up with an idea to A, save tax, get a refund or help me understand the risk on the state level. So to our listeners Joe’s available. Email, phone call, good guy to get to know and has a lot of fun doing his passion. Very famous, so thanks again for joining us today on unsuitable. You’re never short of a horror story or two, that’s for sure.
Listeners we put an excellent tax reform resource center together on our website. Not only have included articles and tax guides, you’ll also find past podcast episodes and webinar recordings to help you stay on top of tax and business issues and also while helping you minimize your tax burden. Go check it out at www.ReaCPA.com/tax-reform. And of course you can always email us at Podcast@reacpa.com. If you haven’t already done so, don’t forget to subscribe to unsuitable on iTunes or check out video from today’s episode on Rea’s YouTube channel. Thanks for listening. Until next time, I’m Dave Cain encouraging you to loosen up your tie and think outside the box.
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