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 guests 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 company’s growth. I’m your host Dave Cain.
Remember when Schoolhouse Rock! taught us how a bill becomes law, they did it in such a fun way, I feel like we need a little more of that in out are lives today because let’s face it, there’s really nothing normal about some of the legislation being discussed on Capitol Hill these days. Take for example the South Dakota v. Wayfair case. It’s all about sales tax and nexus, and kind of boring. That is until you really get into the details of the case and what the implications are for businesses nationwide. Rea’s State and Local Tax Services Team recently visited Washington, D.C. during the month of April. And sat in on the Supreme Court to hear opening arguments on this particular case.
On today’s episode of unsuitable, we’re glad to have Joe Popp and Scotty Z, state and local tax ninjas back on the podcast to talk about their experience and explain why this case matters to businesses everywhere regardless of where they’re located. Welcome back to unsuitable Joe and Scotty Z.
Scott Zielaskiewicz: Good to be back.
Joe Popp: Thanks Dave. Always great to be with you again.
Dave: It’s good. We need to dive into a couple topics here. I would imagine that 99, almost 100% of our listeners on the podcast have never been to a Supreme Court opening argument, oral arguments. And you took a team. Tell us a little bit about that. How many from Rea & Associates attended?
Joe: Sure. So none of us had been to the Supreme Court either. So we’re definitely part of that 99%, at least until a few weeks ago. We had five team members from the State and Local Team join us at the Supreme Court. It was really great time. We had to stand outside on line, no guest seats for. And so we met some really interesting people. Some folks from Amazon were there. A lot of lawyers, a lot of tax nerds. I think I references in the last podcast episode that when [salt 00:02:27] nerds get together, we party and we talk about these kind of things. So we have that-
Dave: Pretty exciting.
Joe: Yeah. We had that at 4:00 AM outside of the Supreme Court along with some new friends. So it was a good time.,.
Dave: There you go. There you go. So you were there in line at 4:00 AM? So take me inside Chambers there with the Supreme Court. Were you guys intimidated as you sat there?
Scott: Being there for the first time, definitely. It’s a massive place obviously, without the directions of the thousands of the guards in there, I wouldn’t have known where to go or what to do. But actually it was a really good experience actually seeing the Justices at work, what they actually do. And seeing, of course a case live, it was definitely an experience worth-
Dave: How many people were in the room, would you say?
Joe: There were probably about 300.
Dave: 300? Okay.
Joe: Maybe about 300 people.
Dave: So you were an exclusive guest?
Joe: Yes, we were exclusive guests among many others.
Dave: Yeah. Is this like a sporting event when you like what you hear? Can you like, “Yeah, let’s go!” Clap, yell, hold up a sign?
Scott: No, complete opposite. Any whispers in the courtroom, the guards are on point and looking at you, warning you. Next thing is your going to be out of the court and in contempt. So yeah, definitely no cheering or anything like that.
Dave: Yeah, I could see that. Putting that on your resume that arrested for whispering in the Supreme Court hearing. You guys would be famous.
Joe: We came close actually. As we were listening to some of the oral arguments, it became clear that some of the attorneys, not salt people, didn’t really get some of the finer details of the case in terms of the experience that we have working and Rea & Associates. So we see a different piece of the puzzle than a lot of those guys that were arguing in front of the Justice’s seat. Because we’re in it every day. We’re in it with our clients, we’re in it with our prospects. And we see it from a different angle. So we’re not looking at the issue from necessarily the same perspective as they were. So it’s interesting, and we had to restrain ourselves a couple times. There were a couple very burly looking security guards-
Scott: They were bouncers.
Joe: … that they were doing the whole complete hand motions, like when the Justices came in, he did one of these for those of you on the YouTube, he was like … all dramatic and séance-y a little bit. So it was good, it was good. It was one of those things that you look at that branch of government, and sometimes you’re like, “Yeah, okay, it’s a bunch of judges.” But it was definitely cool being there.
Scott: Very professional.
Dave: Yeah security at a high level as you went in. Couldn’t do the cell phone and any of that. Just had to sit there like you were in church.
Joe: No electronics. Nothing that beeped, nothing metallic.
Scott: Yeah, I think the only thing you were allowed in was a pad of paper and a pen, or pencil.
Dave: Great experience. Appreciate it.
Joe: Yeah, it was great, very great.
Dave: Appreciate you going on behalf of our clients in the firm. I think we’ll get into the case here shortly. I certainly want to welcome you guys back to the podcast. I know you’re frequent guests and part of that is because your ratings are so high when you’re always on the show. And when your ratings are high, that means I get a little bit extra in my paycheck. So I like when you guys are on the show. So I appreciate you coming back.
But let’s talk about this South Dakota v. Wayfair, and what exactly that means to clients that are in the Internet business, sales business, across states. It’s a big case. And so Scotty, why don’t you start out and just talk to me a little bit about, at the high level, what the facts of the case would be.
Scott: Sure. So the Wayfair case is actually a renewed case that was seen by South Dakota Department of Taxation that they ruled that they cannot impose sales and use taxes on out of state sellers such as just any online selling. If they don’t have no Physical Presence, no actual building or employees there, they would not be allowed to impose any tax on that out of state company. This Wayfair case is reopening it. And it was recently granted, with the Supreme Court, the US Supreme Court earlier this year. And that’s what we saw was the beginning of the arguments from South Dakota and the Amazon/Wayfair respondents.
The biggest issue in this case is the Physical Presence, and it’s going to affect every one of our clients because a lot of our clients are going to the online retailing. And nexus and thresholds are going to change after this Wayfair case due to just straight sales into a state. If you’re just an online vendor, you only have a location in one state, that’s still … you might have implications for sales and use in other states.
Dave: So Physical Presence is a new term for my vocabulary I need to use. So how long has, and Joe, maybe I’ll throw this to you, how long has this case been around? Seems like we’ve been hearing about the South Dakota v. Wayfair case for many years.
Joe: This particular case, South Dakota v. Wayfair is a relatively newcomer in the world of sales tax nexus. The last major case that got to Supreme Court and actually had an impact in a major way was the Quill case, that was from the nineties. And so the Quill case is the case that sort of established that new vocab word, the Physical Presence. And so now this South Dakota v. Wayfair case is basically asking the question, “Shall we abandon that as our standard?” And we can talk a little bit more about that, “Or should we go to a new standard which is based entirely on your sales?”
And so if you are operating out of your house in Ohio, and all of your product is manufactured in China, and it’s shipped directly to a customer, you have no Physical Presence anywhere except for your Ohio house, right now, most of the time you’re probably not filing in a number of states. They can’t force you to do that. However, if this case were to go through, and South Dakota were to become victorious in this case, that particular example, if they had sufficient sales in other states, they would have to file there, pay tax there, collect sales tax there, just based on the level of sales they have.
Dave: Scott, any idea when the Supreme Court will make their final decision?
Scott: Their expected decision is supposed to be somewhere around June. But listening in the case, the arguments from both sides and the Justices, it doesn’t seem like anything’s going to be resolved any time soon.
Dave: Any time soon.
Scott: Both sides were far off in my opinion.
Dave: Right, right. I’d like to invite our listeners to jump on YouTube, I think we’ve got a couple of pictures posted in the background that they check and see the Rea team. It really doesn’t look like you guys are working too hard in those photos. I thought you were going to work 24/7.
Joe: These are strategy sessions Dave, I think you’ve been part of a couple of those here locally. And they actually are very useful in getting the whole team together and throwing ideas against the wall. It was a great forum for us, and just a great time.
Dave: Is that a Rea & Associates “koozie” I see in one of the pictures?
Joe: That may be yes.
Dave: Well have to audit the expense accounts when they come flying through here. So what kind of odds does Vegas have on the outcome of this? Are they going with South Dakota? Are they going with Wayfair?
Joe: Well, if I was a betting person, I would have to say having listened to where the Justices were, at least at the time they were looking at the case when we were in the courtroom, I would say that the winds are blowing, they’re not going to change. They’re going to throw this one back to Congress, and say, “Hey, this is something that’s in your wheelhouse to be able to fix. Don’t look at us to fix it, because all we can do is say yes or no. You guys can actually do something more creative, something that will actually be a little more meaningful.” I would say that’s my thought, I don’t know if, Scott you want to add in what you think.
Dave: Well maybe I’ll throw the question a different way. And you had started down this path Joe, but Scott let me throw this to you. What’s likely to happen if South Dakota wins?
Scott: You’re already seeing in a lot of states they’re implementing laws and regulations based on just sales and thresholds that a lot of them are holding depending on the case outcome. But a lot of state are already going that way to the threshold. So if you don’t have any Physical Presence, but you sell a certain amount, or a certain amount of transactions into that state, that’s going to cause you to file there, too.
Dave: And Joe, what if Wayfair wins?
Joe: So if Wayfair wins, we get to keep the Physical Presence rule. And that’s a good thing and a bad thing. So you might think if your new to this kind of issue, and you think about it and you say, “Well Physical Presence, I think I know what that means. It means that I have some Physically Present in a state. So that a person or maybe a location. Okay, I understand that. I can wrap my head around that. Got it.” Originally that is what the states decided that was the rule. Now they’ve gone, I feel like way off the dep end on this, because they’re restricted as far as what Physical Presence actually means. They can’t break that and go to an economic presence rule or treatment.
And so now they’re thinking about doing, if you go to a website, and you go to say an online seller’s website, there’s a cookie, a little computer file that’s placed on your hard drive on your computer. Your computer that’s sitting in Ohio, or California, or Idaho, or wherever it happens to be. And that cookie is a physical thing and it’s sitting on a computer are that’s in this state. And it definitely helps you do business because it saves shopping carts, and shopping preferences, and all those things of people who have come to your site. And so there some talk that the states are going to move Physical Presence to that. Where if you have a website and you have online ordering, guess what? You have nexus in all 50 states because everybody has a website. Most people who have some kind of Internet sales, you can do an online order. And the states are investigating whether or not to push the rule to that length.
So if we look at it and say is it 200, or 100,000 or a $300,000 threshold preferable to saying if I have a website, then I have nexus in your state. At this point I think it might even be a little better if we go with the South Dakota version of the rule. So if Wayfair wins, it’s Wild West. And unfortunately for clients, and tax payers, and business owners it’s how do you figure it out? You really can’t because they’re inventing new ways to say you have presence.
Dave: So again, I think I heard both you guys say in some of your notes and presentation that Congress eventually will probably step in. Is there a bipartisan solution here? I mean you guys are Washington, DC, you’re now experts on this bipartisan stuff.
Joe: Yes, expert. So D.C. has had a number of pieces of legislation that have been proposed and have failed on something like a streamlined sales tax initiative that would further improve the ability of business owners and tax payers to interact with sales and use tax in a more fair way, shall we say. And those have consistently died. When they’ve been proposed, they go through a particular Congress. They die in committee, they die without being voted on, they’re re-proposed, and then they die again. And this continual birth, and renewal, and death cycle has been going on in this issue for so long now that it’s pretty clear that Congress is not going to act until someone forces them to. Is there something that they have that is a solution? There are some barebones working things that they can definitely do, but they don’t want to do them.
Dave: As this thing plays out, again going back to some discussions we’ve had as a group, if you look at 10 businesses, 9 of those businesses have some kind of state and local tax issue, whether it’s in their favor or greater risk. But it sounds like this is going to do it all over again. The numbers are just going to be incredible. So let’s talk about what … And really the big question really is how is this case going to impact me? How is this case going to impact my business? Is there anything I can do to be proactive about this? You’ve already mentioned, “I’ve got problems in my business with some of the state and local taxes, this is going to make it worse.” But what can I do, starting today? Joe, you go first. You seem to be grabbing that Mike, you’re ready to go. Scott’s got his hand up, he’s on deck.
Joe: All right so-
Dave: We’ve got enough questions for both of you.
Dave: I’m going to put the timer on you, Joe.
Joe: Okay, all right. So one thing you can do, assume you have nexus all over the place. That’s what we do. Most clients that we talk about this issue to, we say, “Guess what? Phase one, nexus done, you have nexus everywhere.”
Dave: Physical Presence.
Joe: Because mostly it’s true. If you’re going to system of … if they have a website that I can order something on I have nexus. Well guess what? I have nexus. Okay, so what’s next. Look and see where you have risk. So that’s what we’re doing now. That’s what we suggest people to do is to look at it and say, “Well if I have a risk of a $500 tax in state number 1, do I care? I might not. If I have a $30,000 risk in state 2, maybe I care. If I have $300,000 risk in state 3, I care.”
Dave: Probably care.
Joe: I need to do something about that. And so you don’t have to wait. The Wayfair case is about nexus. It’s not about risk. If you have the nexus already, really you should be managing towards risk, not whether or not you have nexus. So if you take that as a thing for your business, assume that you have nexus everywhere. Talk to your CPA and say, “I’ve got nexus in all 50 states, what do I do? What’s next? Where do I have exposure?” That’s the conversation you want to start having because that is the conversation you will start having if South Dakota wins the Wayfair case.
Dave: I always love to correct guests when they’re wrong.
Dave: And I’m going to make a correction. You said the client should talk to their CPA. I’m going to say no, CPA should be coming to you talking about this. And I know your team, both of you guys and your entire team is being very aggressive in this area, you’re going out and talking to our clients, being very proactive on this. Scott, maybe the next question for you would be, as we talk about this, we assume that a lot of these roles are based for online sellers, online retailers, online businesses. But that’s not necessarily the case, it’s all in.
Scott: Yeah, that’s true. There was a case that came up with Amazon that was just directly related to online retailers. But that’s just a small piece. This nexus regulation, the Wayfair case is going to impact and brick and mortar store, any type of business out there that’s selling across multiple states, and doing operations in multiple states. So it’s not just directly related to online retailers.
Dave: And Scott, I think I’ve heard you, we’ve had discussions on a particular client we’ve worked on together that different rules for different states. And it drives you nuts. So what about a manufacturer who sells really big machines that also sells parts? Would you like to take that one, Joe?
Joe: Yes, I can take that one.
Joe: So a common fact pattern that we have found is we go to a client, so we’re being proactive, and we bring this issues up. And they tell us, “Well you know what? We sell these really large manufacturing machines. And we ship them via common carrier, they’re big, the customer come and they pick them up at our facility. And we don’t have nexus in all these places. We know we don’t have Physical Presence.” The next question that I ask them is, “Do you sell parts for your being machines?” And they say, “Well yes, we do.” And I said, “Okay, so where do you sell those? How do customers interact and get those?”, “We sell them via Amazon, we sell them via our website. They can just go on. They see the stock that we have, then they make an order, and then our team fulfills it, and sends it out.” I said, “Okay, so you sell over the Internet then? All of your parts?” They’re like, “Yeah, but they’re not that expensive after all. Really our money is made through the big manufacturing machine.”
And the piece that they don’t get is once you have it, nexus, you have it. So whether you get it … kind of like a disease, whether you get it from a rusty nail or some other source, you have it. And the fact that you sell big machines that you may be selling in a way that you don’t have nexus and this state, if you get it from something else, you have nexus with the state for those big manufacturing machines. So that’s a misconception that some people have that they can insulate the sales of the larger items by making sure they’re paying attention to that. Then they forget about the other minor sales they have.
Dave: Right. Do mind if we, in the next few minutes we have left, do you mind if we play Stump the Guest? We have a little game we play every now and then called Stump the Guest. You guys mind if we play?
Joe: That sounds really fun Dave.
Dave: Yes. So let me give you an example. Let’s say that CPA firms aren’t exempt from sales tax, etc. There are some things. But let’s say that I get a bill from the producer of this podcast.
Dave: Now this bill I get from the producer of the podcast has two pieces to it. It has the consultation and the production, and then it has the storage of the podcast material. And I look at that invoice. Should that invoice have sales tax on it? Scotty, go for it.
Scott: Are the items separately stated on the invoice?
Dave: No, they’re combined.
Scott: Then it would probably be taxable because there’s a piece in there that would be taxable of the storage of the data. So if you don’t separate the taxable piece versus the non-taxable piece, the whole transaction’s going to be taxable.
Dave: So the consulting piece, if it’s separately stated, the consulting piece would be tax exempt?
Joe: Yes, in Ohio.
Joe: In Ohio, but of course there are other states that have different rules on that.
Dave: Yes. Okay, so the producer of our podcast is probably in deep trouble, would you say possibly?
Joe: This is a hypothetical game question, right?
Joe: Okay, good.
Dave: Yes. So again, in the next few minutes we have left, just kind of give us one or two highlights to look forward to over the next couple months in our business regarding risk and sales tax, or various other local taxes. Scotty, you’re up.
Scott: I think the biggest highlight is going to be, once this Wayfair case determination comes out, obviously we’re going to reach out to all our clients and anybody to provide updates to this case. But definitely we’re already being proactive, contacting new clients within 30 to 60 days, just the make sure that all their state and local taxes are no issues already. So we’re being proactive instead of reactive right now. But the biggest highlight is going to be once this case is determined, and then we’re going to have a lot of work cut out for us.
Joe: Yeah I would say certainly the largest thing on the horizon is the Wayfair case, and the planning coming from that. You’ve heard us talk a lot about sales tax. The Wayfair case is talking about nexus with regards to sales tax. But as you may know, once you’re in the system, once the state knows you’re there, once the state knows your address, once the state can data mine you and pull items relating to your business, it’s very easy for them to say, “Well you know what? You do have nexus in this other way for income tax.” Nexus is a very big topic. There’s a lot of ways you can get nexus, a lot of them are pretty difficult to diagnose and manage and keep track of by a single person or even a group of people at a company. Because you have to look at salesmen, where do they go to states, where do they go to different locations? And so really that’s the thing that you’re looking for.
Dave: Our guests today have been Joe Popp and Scotty Z from Rea & Associates State and Local Tax consulting team. And wonderful presentation guys. Thanks again for joining us on unsuitable today. The possible implications of this case are incredible. Thank you for following this case so closely guys, and your team. Great effort, great effort. Needless to say, listeners if you have questions regarding the South Dakota v. Wayfair case, you can email us at email@example.com. Or you can contact Joe or Scott directly. Their contact information can be found on www.reacpa.com. We will be sure to have you guys back after a final decision has been made. In the meantime share this episode with your friends and colleagues. And please subscribe to unsuitable on Rea Radio on iTunes or anywhere you’re listening to podcasts. Until next time, I’m Dave Cain encouraging you to loosen up your tie and think outside the box.
Disclaimer: The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only, and is not intended to replace professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.