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. Last time, we talked about state and local taxes Joe Popp and Scotty Z were our guests and we were waiting for the Supreme Court to rule on the monumental South Dakota V. Wayfair case. Well, in case you haven’t heard, the decision has been made and South Dakota, came up victorious. Joe Popp, Rea’s director of state and local tax services, is back with us to talk about what this means for your business, and what you need to do today to prepare for the massive changes that are about to take place as a result of this outcome. Welcome back to unsuitable, Joe.
Joe Popp: Well, thank you Dave. It’s great to be back.
Dave: We had a little problem getting through the introduction, a lot of commotion around the office. You know, the staff here is really excited about this South Dakota v. Wayfair thing.
Joe: It’s true. We’re still picking up the pieces after the after party, lots of streamers and other things. Any each change in state local tax field, is pretty exciting. Sometimes you don’t get out much.
Dave: You know I do want to dispel a couple of rumors about the Salt team and you in particular. I understand that you’ve picked up dancing and that you’re an expert in, what’s that new dance out? The floss, you floss now?
Joe: I don’t know what the name of it is, but it’s possible that I am an expert. I just don’t know it. Yes, that’s possible.
Dave: You know, we’re going to talk about extreme nexus today, South Dakota versus Wayfair. And again, for our listeners, Joe and his team have authored several articles that are on Rea’s website and if not, we can get you a copy. There’s some great, great content in some of that stuff that is out there. But let’s dig into what does the South Dakota V. Wayfair mean for business owners?
Joe: That’s a great question. So the South Dakota v. Wayfair case is the largest change in sales tax, nexus. Nexus in general, multi-state taxation in general in 20+ years. It’s a really big change. And so actually I was just doing a presentation on this, with an ownership group and someone asked the question, “What should we expect our controllers … what should we expect our CFO’s to know?”
And what I told them is, “You know, this is a change that’s big. It’s a big change. This is a once in a career kind of change. And so what does this mean for businesses? This is not the sort of thing that, you go and you read an update and you know, you’re good. A minor change, something that someone who’s gone to school, and doesn’t focus in this area can just go to a CP and pick it up. I mean, this is a big change. So if that’s kind of setting the stage for what this really means for business owners, that’s kind of it.”
Dave: And we may not know what that means for a while.
Joe: This is true, all of the states have the opportunity to respond to this in different ways. We can talk a little bit more specifics of kind of what the actual decision changed, and what it actually means, but right now there’s about 24 states that have enacted some version of an economic nexus standard. And what that means is, with nothing more than sales, you could be forced and if you know the state found you and audited you and you disagreed with them and said, “Well you know, I don’t think you are able to do this.”
They could assess you, it would go to court, it would get upheld, because of this decision that’s come out. So you have 24 states right now today, who could look at you and say, “Well, if you’ve triggered this particular threshold on sales, or something else, maybe transactions or maybe something else besides that.” You use Amazon or one of these other particular ways of getting nexus, they can force you to file.
So, that’s kind of where we are at the moment. It’s a pretty exciting time because there’s a lot of movement, a lot of uncertainty, and a lot of change. And I can go into it a little later maybe, why I think that change is a good change for business owners.
Dave: You know, if I want to go off the grid, and go to a state where there’s no sales tax, I’m headed to Montana.
Joe: Sure you can do that.
Dave: Is that a good place to go? I’m taking my business out there and we’re going.
Joe: Knock on wood, it’s no sales tax for now. You have a couple of other states that don’t have a sales tax in them. They’re very few, and usually they’re in that status because of something else. There’s another kind of revenue raiser that is sufficient that they don’t need sales or use tax.
Dave: Let me share a visual if I can with our listening audience. Yesterday you gave me a map, and think of this map as you’re looking at Election Day and there’s red and there’s blue and you can kind of figure out what’s going on. Well, you gave me this map. Didn’t give me much explanation, but gave me a map of all of the states and what they’re doing sales tax wise, what they’re not doing. And I looked at this and my first response was, “How are we going to manage this?” The risk is huge.
Joe: Yeah. Well I’ve got two really cool salt puzzles for you.
Dave: Puzzles?
Joe: This is cutting edge salt stuff, not probably on websites, not in news agencies. This is stuff inside of our Salt community that we’re talking about, and wondering and trying to figure out exactly how these things are going to come out. So I’ll give you this one on that map. So let’s say there’s a little logic problem. So let us say, I don’t know, logic problems sometimes can be tricky, but this one I think is pretty easy.
What if we have a state and in their law, they say, “We are going to assert nexus jurisdiction on a taxpayer to the extent allowed by the US Constitution.” They say, “We’re going to tax you, as long as it’s not illegal for us to tax you.” It’s very generous, right? “But we’re going to go all the way up to that edge. We’re going to go right over the top of the roller coaster. Look down, we’re going to pause right there.
And this is just as long as we’re not doing something illegal, that is what we’re going to do.” And so many states have that in their law. They say, up to the extent allowed by the constitution, we will tax you. So this is the first piece of the logic problem. The second piece of the logic problem is, the supreme court just said, this thing in Wayfair is constitutional.
Now, if you put those two things together, do any of those states who say, “We’re going to tax you as long as the constitution allows it.” Do they need to change their law? I don’t think they do. I think that with those two pieces together, the Constitution is satisfied because the supreme court has said that this Wayfair standard, which by the way is $100,000 worth of sales into a state in an annual period or 200 transactions into a state in an annual period that’s enough to pass the constitution. That’s it.
And so this map that I gave you, with no explanation, I grant you that has different colors on it, these states have these things. These states don’t. At the end of the day, if all states that have a sales tax, have that provision, we’re going to tax you as long as it’s not illegal, I don’t think they need to do anything, which is our laws to potentially be able to tax you.
Dave: You know, it just occurred to me that you’ve been a guest on the podcast for several times. This may be your last time. You’re supposed to do bring good news to business owners in the podcast community. This is not good news.
Joe: Well, respectfully, I disagree. I think it is good news. I have my own little spin on this, right? And so I’m a worrier for my clients. And so this is why I would say this is good news. This Wayfair case is very similar to your walking into your dentist office. You walk in, and your dentist looks at your teeth. They look at the health of your business, let’s say, and they’re poking and they’re prodding at a couple places and they say, “You know what? You should really floss.
You should. If you don’t floss, right? If you don’t floss, you’re going to lose your teeth. So do us a favor, floss.” And you’re like, “Okay, sure, no problem.” You go back home, what do you do? You floss a day or two, then you don’t floss anymore. You come to the dentist the next year, the next six months, whatever. And you ask him again, “How am I doing it?” And he says, “Have you been flossing?” “Nope.” “I see you haven’t been okay. Well, you know you’re going to lose your teeth if you keep this up.”
And so this goes on for some time and then one day you walk into the dentist’s office and they say, “Hey, I’ve got to pull a tooth.” “Why?” “Well, you haven’t been flossing. Sorry.” This situation that we have with the states right now, it’s exactly like that. A lot of our clients, and people that we talked to know they have nexus in these other places. For other reasons, they have people there. They have salespeople there, they have inventory there.
They have all sorts of these things that are happening and they decide, you know what, I’m not going to worry about it. I’m not going to floss my teeth, and then sometimes they get hit with really big business busting kind of assessments and so this is very much like the metaphor of going to your dentist and flossing your teeth or not. Why I think the Wayfair case is actually a benefit for a lot of business owners is, now it’s very clear and easy to see where you have risk.
And it’s very clear and easy to see what the states too, where you have risk. Our nexus studies used to be fairly involved, and they still will be for some clients, but anybody can do a nexus study now. At home, we can even go through it. You need like two things. It’s like one of those old science experiments, right? The baking soda and the whatever to make the volcano. You can do that at home. Pretty easy.
Dave: You know, you’re the only consultant probably in the world that has drawn an analogy between flossing in my state tax liability. Well, done.
Joe: Thank you.
Dave: I mean, that’s kind of unique. But let’s go a little bit further. Let’s go back to some basics for a minute. And, I did have a brief conversation with you about these sales tax exemption certificates that my personal opinion, the compliance in the marketplace is probably not very good.
Joe: It’s true.
Dave: And so that’s a foundational issue. Can you talk to us about some policies or procedures that we need to put in today on the exemption certificates, and then we’ll expand from there.
Joe: Good point. Good question. One of the things that’s on our website, if you go to our state local tax section of our-
Dave: At reacpa.com?
Joe: At reacpa.com, that’s right. There is an article on South Dakota versus Wayfair and it has a list of all the things that a business owner or business, may think about doing right now. Not part of that list is go out and register in all these states, but one of them is this exemption certificate item that you’ve just mentioned. If you have nexus in all these places and you’re selling to people who would be exempt, people that are distributors, people that are reselling your product, people that are taking your product and further manufacturing with it, most of them are going to be exempt.
This is not an issue that’s necessarily going to cause you a lot of sales tax headaches, as long as you’re collecting their exemption certificates for the state that the property is going.
Dave: Big foundational issue needs to be beefed up a little bit.
Joe: Absolutely.
Dave: And so let’s go on while you’re there. While you went there, which business owners do now. We talked about the exemption certificates and you mentioned it’s still back to the basics. Is that service, is that product actually taxable for sales tax?
Joe: That’s right.
Dave: So again, you might be getting excited over something that’s not taxable.
Joe: Yeah. So I don’t know if on this program before I’ve gone through this example of bottled water and whether it’s a-
Dave: Yeah, you’ve done that twice.
Joe: Twice okay, I got it.
Dave: Yeah, you need new material.
Joe: I need new material. But anyway, so refer back to our previous … a previous podcast for that example so that you can know what we’re talking about, get up to speed. But on the tax ability issue, the thing that you’re looking for is, how big of a problem is this for me? If I’m in the business of making a widget and the particular widget that I make always goes into the automobile industry, it’s a component part of a car, that’s always going to be used in manufacturing for the most part.
You might have some, one off, repair part kind of sales, but most of the time your product is being used in manufacturing. That’s probably exempt most everywhere. What if you’re selling drywall? Well that’s probably taxable in most places. So just based on what it is that you’re selling. And, if you’re selling a service that’s also kind of iffy because some places tax all services, some tax none, and some tax some.
So figuring out whether your product or service is actually taxable, is another elemental step like this exemption certificate thing, to figure out if all of your stuff is generally not taxable in all the places. This is just an information reporting issue for you on the sales tax side.
Dave: So again, we’ll go back and revisit some of those items, but from a risk perspective, and again we always like to talk about risks on unsuitable on Rea Radio. And, in the concept there is, we have to eliminate the risk for the business owners to increase the value of the company. A sales tax audit, it may be years, a couple years until this all kind of circulates, and gets back to the business owners. So when this happens, you may be faced with multi-year rate sales tax audit, which then gets to be extremely expensive if found guilty.
Joe: Yeah, I mean, and this is why I use this metaphor of the dentist. You know, you don’t floss one year, okay, that may not hurt you in the long run. But, if you don’t floss over a period of five, six, seven years, that is going to add up and it is going to be very damaging to you, and it’s going to impact your ability to continue with life the way you have in the past. Right?
And so in a similar way, just as you mentioned there, if you have this going on for multiple years, you are not addressing it, you ignore it. A lot of willful blindness has gone on in the past on this kind of issue, championed by companies like Amazon, and Ebay and all these other Wayfair even, right? These online sellers who are like, “Well, you know, come get me. I’m not going to collect sales tax.”
And that’s a little infectious. It’s something that other people have latched onto, this phenomenon and said, “Well, you know, Amazon’s not doing it. I’m not going to do it either, there you go.” And now I think there’s this moment for us, now that this has happened to really revisit that because we’re looking after the longterm health of our business.
Dave: Right, right. I think I’ve got a way around this.
Joe: Okay.
Dave: Yeah. Can I share it with you?
Joe: All right.
Dave: Okay. Do we need to turn off the mics or no, they’re still hot so we got to keep going. I’m going to bypass all this because you know, I have all this stuff that I make and I sell. I’m just going to sell it through Amazon, and I don’t have to worry about it, I’ll let Amazon kind of worry about that. Am I home free feet up on the chair?
Joe: You know, Dave, we should really hire you. That’s a great … in the Salt department.I mean, that is an amazing a question.
Dave: What do you guys pay by the way?
Joe: Well, reasonable rates. We will pay you in cheese and in other things that our clients give us. So, that’s good. That’s how we get paid after all. So Amazon, really interesting things happening with Amazon. Amazon used to be this company that was, the bad boy of the world. Didn’t pay sales tax in a lot of places, and then they’ve come all the way over to the other side, not only are they filing sales tax in a lot of places, they’re informational reporting on anybody that uses their service to the State Tax Department.
Dave: What?
Joe: Yeah. So in many states they’re actually reporting on anybody that uses them as a marketplace to the state tax departments. So this has caused some of our clients some worry and heartburn as it should. That’s one aspect of the Amazon. The other aspect is kind of a shrewd business move. Here’s another one of these little SALT gems, if you will, that is cutting edge, that we talk about in our community.
So Amazon could potentially be the way in the future for business owners to not have to deal with this. Right?
Dave: Okay.
Joe: And so I’ve got your interest maybe, hopefully.
Dave: I’m listening.
Joe: So Amazon right now in one of the states in the Northwest, collects on every single transaction that goes through Amazon, whether it’s them that’s selling it, or whether that is a marketplace seller, just a person that has an Amazon account. And I believe it’s Oregon, but I always get it screwed up. It’s either Oregon or Washington. And they are withholding sales tax on every single transaction and they’re remitting it to the state, every single one.
And so you look at that and you’re like, “Well if I sell into that state? If I just sell on Amazon, Amazon’s going to take care of the collection and the remittance. The state knows they have an agreement with Amazon. They’re going to pass on all of these things. That’s fantastic. Why don’t I just outsource this to Amazon?” This is something that some people in the community are thinking Amazon is going to go toward in the future of not just this state, but two states, 10 states, 20 states, 40 states where if you sell through Amazon, one of the perks of it, no sales and use tax compliance.
Dave: There’ll be on my brother.
Joe: That’s right, they’ll essentially do it for you. And so you got Amazon as this kind of cool champion of, “I don’t want to pay sales tax front,” to kind of the enemy of those sorts of folks, and then potentially back swinging the other way in the future of, for a small reasonable fee we’ll just take care of this for you, you won’t even have to worry about it.
Dave: You know, it’s interesting as I’ve listened to you a number of times. You know, the good old days used to be, you were concerned about your federal tax liability, and exposure. And that’s kind of taken a back seat to all of the state tax liability exposure. And a lot of it is just the uncertainty that’s out there.
Joe: Well, it’s uncertainty and sometimes it’s not exactly common sense, and sometimes maybe it’s common sense, but no one knows about it. So here’s another example. I don’t know that I’d call this a gem, but in quite a few or all of the states I’ve worked with lately, if you, Dave, are selling your business, let’s say. And you decide, “You know what, I don’t want to sell like my actual business, but I want to sell my assets. I’m going to sell my assets.” Right?
Because people don’t want to buy a business necessarily, the stock of it. But I’m going to sell my assets. I’m going to sell it to, let’s say a lady named Abby, who’s passionate about my particular business. So she’s going to buy the assets. She might close it down for a little bit and then reopen it. Basically, doing the same thing, her own tweaks on it, fantastic. So you do that. Abby buys assets.
So she’s thinking, “Great, I’ve got assets. Don’t have to worry about potential tax liability … State tax liability.” Turns out in most states, there’s a successor liability statute that says, if you had by Dave’s business the whole thing, or you buy most of the assets of Dave’s business, Abby would step into the shoes of Dave’s business in terms of unpaid sales tax, use tax, income tax.
All these other things, and so one of the things that is going to become a bigger part of business owners lexicon and to do list is, if you’re planning on selling your business, if you’re three, five years out of maybe getting out, whether in a stock sale or an asset sale, you really need to pay attention to where your exposure is, because you better bet that your buyer is going to be paying attention to it. And, if you don’t pay attention to it, you may find quite a bit of the funds being paid to you get put an escrow in case something actually comes of it, if a state decides to audit and finds unpaid liability.
Dave: Our guest today is Joe Popp, director of REA’s state and local tax consulting group. And these guys, their calendar is very full with a lot of this stuff going on. But, in the few minutes we have left to Joe, bring this thing home. What are the things that we have to do as business owners do, tomorrow to get this thing in line is it training? Is it change our accounting system? Is it education? You know, let’s give our listeners two or three things that have to happen by the end of the week. Let’s hold them accountable.
Joe: I got it. All right.
Dave: You got it, bring us on home big boy.
Joe: All right. Step number one, go to your internal accounting person. Or if you are your internal accounting person, ask yourself this question. Report of sales by state for the last year. What is it?
Dave: Can we do it?
Joe: Can we do it? Can Our software do it? Interestingly enough, quite a few clients aren’t able to do that. That is critical. It’s critical for defense. It’s critical for figuring out where your risk is. Do that by the end of the week. Where are your sales by state? And when I say sales by state, I mean shipping location.
Dave: Shipping, right?
Joe: Where did it go? Any of those states with over $100,000 worth of transactions. So here is that little volcano at home kind of situation. Anything that’s over $100,000 that you have not filed a return in or sales tax return or income tax return that registered, that’s a problem. Second thing that you need to do, assess the ability of your software to determine whether something is taxable or not at the click of a button, can you do it? Can your software do that?
It should be easy, right? Go to someone in AR, someone that sends out invoices. When we send out an invoice to, Joe Popp Inc, can we say this thing is taxable or not inside of the invoice, or is it a manual process? A manual process means your software might need to have a look at it for technical upgrades.
Dave: Great, great.
Joe: So those two things would be absolutely this week, figure that out.
Dave: Get it done.
Joe: And then the third thing would be exemption certificates. What is our policy? Where are they stored? Do we have boxes and boxes of them? Do we have lots of PDFs, or is the person that’s in charge of that, say the exemption certificate what? That will also help you out with where you are on that.
Dave: You’d mentioned a software. What about number of transactions? I heard you say that there’s a threshold of 200 transactions. … myself we’re going to handle that. Do I have to do that by the end of the week or do I get an extension on that?
Joe: You get an extension on that that one. That one is more difficult because usually this hasn’t been an issue that CPAs have asked for before. And so it’s entirely fair to have an accounting system that isn’t really set up to generate that. At least right now. That one is one of those between now, and let’s say the end of the year kind of things. That’s by the way, the timeline that states have given us.
You basically have from now until the end of the year to get all this stuff figured out, decide where you’re filing and moving. Most of the states that have implemented these economic nexus, and the ones that are going to come after this between us recording this and you hearing it, they’re all going to be effective probably the end of this year, beginning of next year. You got some months. Don’t waste them.
Dave: Yeah. You know, these guys are waving flags at me, times up, but just ignore them. I have one more question.
Joe: Okay.
Dave: You know this-
Joe: I’m right here.
Dave: You got it. Just you and I. They can take off. They’re on overtime now. I don’t care.
Joe: Okay.
Dave: So anyway, the state and sales tax, that’s a liability that said, that’s out there that could be exposed.
Joe: Yes.
Dave: But also income tax liability in that particular state, and well, you know in Ohio we have the commercial activity tax, all of that’s going to change and have to be looked at.
Joe: And, and that is the last of the special SALT issues that I will mention very quickly is right now we have this law called public law 86-272. Sounds weird, might’ve heard about it before. No worries. Bet all right, so the basic idea behind that law is, if all you do in a state is solicit sales, with a person there, no income tax, nexus states cannot tax you. It basically translates to, if the only way you have nexus is having a person there, soliciting sales, then they can’t impose an income tax on you.
But what happens if you have another way of gaining nexus like your sales from the Wayfair case. Now I don’t think the public law 86-272 protects you anymore. So I think this is a sales tax franchise, gross receipts, income tax, all of the tax types that you potentially will have. And even if it isn’t, the state knows who you are because you’ve registered, you’re collecting sales tax from them, it’s going to be more and more challenging to have that distinction of states you don’t file income tax in.
Dave: I got you on speed dial, buddy.
Joe: Okay. Thanks Dave.
Dave: Thanks for joining us Joe. I know our listeners appreciate the update. Even if the news isn’t necessarily great, but there are solutions, but you got to do it by the end of the week? You’ve got to start the process. And listeners, thanks for putting aside some time to listen to this episode. If you want to learn more about the South Dakota V. Wayfair case, check out our blog at www.reacpa.com. Joe and his wonderful team do a great job at keeping us all informed, there’s a lot of great insight there.
In the meantime, if you enjoyed today’s episode, give us a thumbs up, like it, comment, and share on. We love the high ratings and don’t forget to check out our videos of our podcast on YouTube. Until next time, I’m Dave Cain encouraging you to loosen up your tie, think outside the box and don’t forget to floss.
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