episode 182 | State Taxation | SALT | Podcast | Rea CPA

episode 182 – transcript

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 the traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think beyond the suit and tie, while giving you meaningful modern solutions to help enhance your company’s growth. A big welcome to the podcast community. And I’m your host, Dave Cain. Just because we made it past April 15 doesn’t mean we’re going to stop talking about taxes. In fact, every time we think we have a handle on one thing, another tax concern leaves us scratching our heads and dipping into our wallets.

Dave:               Which brings us to today’s topic. Now that Wayfarer is the law of the land, we need to talk again with Joe … Joe, how are you?

Joe Popp:                Hi, Dave. It is great to be back on the podcast. Thank you guys for having me back. I think this is 6 or 7 or 12. I’m not sure. I’m not keeping score, but it’s so much fun I’ve lost count. It’s great. Thanks for having me back.

Dave:               You know what? Actually, a lots going on in the state taxation.

Joe:                Yes, that’s right. We got a real interesting list of things to try and go through today. Just general updates, primarily for folks in the small business community, this is a really good podcast for you. Just a lot of stuff that you may not be aware is going on, lurking around the corners in the state and local tax area.

Joe:                And so, this one is a really nice one I think to listen to. We’ve got some dangers out there, some funny stuff, some tragic, funny stuff, and then also some cool opportunities for us here in Ohio.

Dave:               Joe, like I said, you’ve been here… What? Seven, eight times?

Joe:                Something like that.

Dave:               Good, good. So, what we want to do is I want to take off on this this. I’ve talked many times about this Wayfarer thing.

Joe:                Yep.

Dave:               And it’s crazy.

Joe:                It is.

Dave:               Let’s call it crazy town.

Joe:                It is crazy town.

Dave:               There’s a lot going on out there.

Joe:                Yeah.

Dave:               Let’s start with crazy town.

Joe:                Okay.

Dave:               What’s going on?

Joe:                Well, so the states have now kind of gone through and they’ve looked at the Wayfarer case. Most states now today as you’re listening to this have implemented some version of Wayfarer. And so, as I have mentioned in previous podcasts, sort of the do it yourself at home, make your own volcano version of this is you got a $100,000 of sales. You got 200 transactions in a state. You might have to worry about doing something in a state, even if you don’t have any presence or people or anything there.

Joe:                But to this crazy town stuff, so now states are looking at the next level of this. And one of the things they’re starting to do is to put together anti-avoidance rules. This is for all of us cool accountants and attorneys and other things that are looking to help people out. And so, when I said, Hey, it’s $100,000 a year in a particular state, I have a $150,000. Why don’t I just chop my business in two? Hey, there you go. I got $75,000 and $75,000, that makes $150,000, but both are below a hundred. I don’t have to worry about this. And states are now coming back and saying, Hold on, we’re going to go through and do these anti-avoidance rules to say if you really pass that threshold you can’t chop up your companies to avoid having to pay us tax.

Joe:                So, they’re going and doing that. To go all the way to crazy town, you might think well, it’s kind of crazy town. To go all the way there, now what the states are doing is they’re farming out their state tax audits on a contingent fee.

Dave:               What?

Joe:                That’s right. That’s right. So, they’re actually going to these people who have this knowledge in state and local tax and they’re saying< Guys, we can’t afford to do this with our local people. I’ll tell you what. If you will go and you will audit this person over here, we’ll give you a percentage of whatever you find. Give the rest to us. We don’t have to pay anything else. You don’t find anything, we’re not paying you. So, you’re on the hook to make sure we get results. And then, we’re more than willing to cut you a check based on a percentage of what you do.

Joe:                And so, we’ve always had some people doing contingent fees on the other side, on the defense side. Now we have it on the prosecutor side. So to put this in like Law & Order context, we got contingent fee prosecutors and we got contingent fee defense attorneys. And we’re in for a really fun wild ride to crazy town.

Dave:               That’s great. Now, you mentioned to me off mic that Massachusetts is doing something crazy?

Joe:                Yeah. Yeah. There’s another one that’s all the way-

Dave:               Crazy.

Joe:                Now, this one might be past crazy town. I’m not sure what you’d have… We have some band people that are around us in the room. So, I don’t know if there’s something a little further out there that Ozzy did than Crazy Town, but I’ll tell you. What Massachusetts has now proposed is daily sales tax reporting. Every day, if you meet some of their requirements.

Dave:               What?

Joe:                That’s right. Every single day, you may have to file a sales tax return and make a payment. Because after all, what’s easier than closing the cash register at the end of every day and giving them their money right then and there? And so, that’s one of the things that’s been proposed. And that’s crazy town.

Dave:               Wow, that could that could have riveting effects across the business community.

Joe:                It’s true. That’s right.

Dave:               So, what do you think? Give us a percentage. Is it going to happen?

Joe:                Oh, I think so. I think that when you take a look at some of the failures and compliance in the sales tax area, a lot of it are these folks that have to file quarterly. They let things go over a period of time. And then they oh, gosh, it’s due next week. We got to hurry up and get all our ducks in a row. A daily reporting thing might actually be a benefit for compliance percentage. So, while it is going to be really burdensome, if they make it easy enough, I think it might just be a hey, it’s the end of the day. Let’s close this down. We know what happened. Here it is. And so, I don’t know that it necessarily would end up being a bad thing. We’ll see. We’ll see.

Joe:                So, that’s a few of the things that are out there that are on the crazy side of the Wayfarer case, but there is actually one little bright spot. So, I know that you chastised me one time for coming onto to the podcast and only giving out bad news.

Dave:               Not me.

Joe:                Someone did. Could have been one of the ghosts that’s floating around over here. But anyway, so one of the actually cool positive things that the states are now doing is they’re looking at this Wayfarer case. And if you remember, this was the $100,000 or 200 transactions. And in a prior episode, we talked about what if I only sell a $10 item into the state and I sell it 200 times. My gross receipts are $200,000. My profit is not that. And my goodness, that means I have to do all this sales tax filing and reporting and have all this software and stuff. That can’t possibly be right.

Joe:                And so, what the states now have come back and looked at is they’re looking at these transaction numbers, and a lot of them are thinking you know what? Maybe we need to just back off on that, and say could we subject you to tax in our state if you do 200 transactions? Well, we could, but you know what? Why don’t we just cap it at the dollar amount. If we do the dollar amount, if you’re making a $100,000, I’ll tell you what, you don’t have a strong argument to say I’m not making enough money to file a tax return in your state. If you’re making $2,000, yeah, probably you do have a good argument on that.

Joe:                So on a bright note, a lot of these states now that have implemented Wayfarer, they’re now walking it back just a little bit and they’re saying, You know what? We don’t want to be super crazy aggressive on this and cause ourselves a lot of problems. Tell you what, maybe we’ll walk those back and that 200 transaction limit may actually become less of a problem as we move forward. Right now, it still is, but this is kind of the next version of the state’s looking and considering what they’re going to do with this.

Dave:               So, is that what we’re looking at in 2019-2020?

Joe:                On Wayfarer?

Dave:               Yes.

Joe:                Well, unfortunately, we have a couple other things to look at. One of those things is online marketplaces. Have you heard of those? Amazon?

Dave:               Absolutely.

Joe:                Ebay.

Dave:               Absolutely.

Joe:                Etsy, Wayfarer. So, these online marketplaces, so I may have mentioned this a little bit on one of our prior podcast, but I’ll tell you this has now become a really dangerous thing for people. If you are selling through an online marketplace and that online marketplace has any of your inventory anywhere, Amazon is prime example of this, throw out the word Wayfarer. Doesn’t matter. You will have Nexus in every place that that online marketplace has Nexus, because where their warehouses are, that’s where your stuff is.

Joe:                And so, if you’re selling through Amazon using their fulfillment service, toss the Wayfarer thing out the window.

Dave:               Oh, boy.

Joe:                It’s now based on where your property is, in addition to Wayfarer.

Dave:               This doesn’t sound good for me.

Joe:                Well, what are you selling, Dave?

Dave:               Well, I’m selling stuff.

Joe:                Okay. All right. Autographed guitar picks. I like it.

Dave:               Yeah. There you go.

Joe:                Okay, very good. So, if you’re doing that through the online marketplace, that’s something to be concerned with. Here’s the other problem. A lot of states now have implemented these rules for online marketplaces where if you’re selling through the online marketplace, the online marketplace has to collect the tax and file it, send it to the state. Well Dave, if you’re selling your autographed guitar picks through Amazon but also on your personal website and also through catalog and also at musical festivals throughout the United States, when you go and you have the table where you’ve set those up, well, Dave, where are you going to have to collect sales tax? And on what sales?

Joe:                Well, you’re going to have to collect tax on the booth at the music festival. You’ll have to do it through your website. You’ll have to do it through your catalog. If you have Nexus in those places, right? But on the online marketplace, you can’t charge sales tax. If you do, it’ll get taxed twice, because the online marketplace has to collect the tax and then you collect the tax. So, you’re in this weird situation where you actually have to go into your software and say these products that I have, those I have to collect sales tax on if I sell into these states, but these I do not. These I do not include on my sales tax filing. I do not include them in my payments.

Joe:                And so now, the simple and awesome sales process of the autographed guitar picks that you’re going to be selling trademarked Dave Cain 2019, you are going to have to integrate that into your sales process, which is really unfortunate because you make awesome products. And now, you have all these other problems you have to work through.

Dave:               Joe, this sounds like a little bit of the Wayfarer hangover. I mean, all this stuff is coming out of the Wayfarer just left and right.

Joe:                This is the sequel.

Dave:               How’s a small guy going to survive? How are our Rea clients going to just navigate through this?

Joe:                It’s a great question and I’ll tell you I’ve got a couple of clients that we’re talking to you right now. And here’s what they tell me. They say, Joe, we’ve gone through this. We’ve looked at the Wayfarer thing and we’ve looked at risk. So, I’ve mentioned in the past, okay, look at where you have Nexus, but also look at where you have risk. If you don’t have a lot of risk, you still may not choose to file in some of these places. And we’ve looked at that and we say there isn’t a whole lot of risk in some places. There is in others. We’re going to file there, we’re not going to file in these places.

Joe:                And so, they’ve made the business decision, which I agree with, maybe we don’t file every single place that we have to, that we are supposed to. And then, I hear about their major client. Joe, we got one client that loves our guitar picks so much that they have decided that we will be there exclusive provider. We provide all the guitar picks for their entire operation. There are an enormous company. They sell all of these guitars and they have these guitar picks that they put in with them. Gosh, their department is so incredible. They’re very detailed. And they’ve asked me, Dave, when you sell us this stuff and you ship them all over the country for us, these guitar picks to all of our different stores and locations, why aren’t you charging us tax in all those places?

Dave:               You got an answer for that? That is a great question.

Joe:                Did I leave you hanging? …

Dave:               Because I’m thinking oh, my God, I get risk.

Joe:                And so, in a situation where it’s just a guitar pick, maybe that’s for resale. Maybe you don’t care. But what if it’s a product they’re going to use in their music store? They’re not reselling it. They’re the end user. They have to pay tax. And they say, Dave, we love your stuff. Why aren’t you charging us tax? Or worse yet, Dave, we noticed you’re only charging us one tax rate. It looks like it may be an Ohio rate. Why are you doing that? Shouldn’t you be charging us tax in all these places. We do so much business with you.

Joe:                And the business owner having had the conversation with me on well, some of these places you may not have a whole lot of risk. Maybe you don’t care about Kansas or Nevada or one of these other places that have a pretty small exposure picture, and then you get to your major client and they say, That’s nice. But we want you to file and pay, so that we don’t have to do it.

Joe:                And because they’re your major customer, as a small business you’re left with well, if I don’t do it, do I piss off my major customer? What happens to me? Now I’m in a real tricky spot, because you go through and you do the traditional business decision of do I do this, do I not do this? What’s the risk? And you come to a place where you’re good and you can sleep at night, and then your major customer comes in and puts that all in perspective and say, That’s nice, but that doesn’t matter. You actually will have to do all this.

Dave:               Joe, you mentioned tricky spot. As a business owner, I don’t want to be in a tricky spot, right? I want to be able to sleep at night. How do I get my arms around this risk, this liability? This thing is killing me.

Joe:                Right. Well, what we started to see among some of our clients that were doing some of these projects for, they have now started a little bit to migrate from the Nexus studies, because we’ve talked about Wayfarer before. There’s a lot of complexity there and states doing a bunch of different stuff, but with people having inventory in say an Amazon warehouse and having sales in a bunch of places, they’ve kind of gone away from you know what? I don’t have Nexus in all these places. A lot of people now are coming to me with, Joe, I know I have Nexus all over the place. I don’t even want to talk about it. I know I have it all over the place. We don’t we don’t have to spend time on that. You got me. We’re good.

Joe:                And then, we start talking about risk, right? And so, what we start talking about there is let’s take a look at sales tax and income tax and franchise Tax and gross receipts tax. And all the other sorts of things that they might want to look at, and then we put it in context of based on every single state finding you today, what would you pay where? And the real interesting thing that we found, again moving on from this Nexus issue and analysis. The thing that we found now is a lot of people are telling us, Joe, I sell these guitar picks to this music store and you know what? I think that they’re reselling them. So, I think I’m good. I think I don’t have any sales tax exposure, because they’re reselling them. I know that. They know that. Everybody knows that. … going to know that. I’m good, right?

Joe:                And I said, Well unfortunately, a lot of these states, they look at do you actually have the resale certificate? If you don’t, they’re not exempt, right? And so, part of this risk assessment, which is what these are, is we go through and we can model all that and then we also go over and we model on the sales tax side what would your exposure be if you had all these exemption certificates and what is it today?

Joe:                And some of the differences have been, to use a recent example, $0. If you had all the exemption certificates. And if you didn’t, $16 million dollars of sales tax. And that’s a huge difference. And so, when you put that in front of a business owner, sometimes you have CFOs and accountants and bookkeepers, and other people that are looking at this, and they’re saying hey, it’s fine. And then you put that in front of a business owner and they say, My goodness. This is such a difference. We really need to make sure we’re doing that.

Joe:                So to your question on what does this small business owner do, how in the world can they navigate all this?

Dave:               How do we get through this?

Joe:                The first thing I would say is assume for a moment you’ve Nexused every single place. 50 states, all the places, right? And Puerto Rico and the US territories and maybe even Canada, interestingly enough.

Dave:               I’m going virtual.

Joe:                Right. … Virtual guitar picks. I’m in. We’re good. Pokemon guitar pick, save that one for later.

Joe:                So, how do we go through this? First, assume you have Nexus everywhere. On the sales tax side, go down into the dungeons of your building. Or in the virtual situation, go into whatever virtual dungeon that you have, and look at what exemption certificates do I have on file for my people. And then, it’s very easy ask yourself then, okay, now I’m going to pull my sales and I’m going to look at what do I have exemption certificates for? What do I don’t? All the ones in this category over here of I don’t have exemption certificates, multiply that by 15 percent. And that’s your risk. That’s what it is.

Dave:               What?

Joe:                Yeah, because you got tax, you got interest, you got penalties. 15% is a pretty good number to get started with. And so, the very first thing that we talk about when we talk about this with small business owners grabbing their heads around this is if your sales you think are exempt, what do you have in hand? If you don’t have anything, you’re not exempt. Just know that. There are things that you can do to start collecting those things, that you can do to start mitigating that risk and that can happen.

Joe:                On the income tax on the other side, you know where you sell stuff. Look at your major states, and those states, think about how you’re going to start complying.

Dave:               Right. As an aside, we’re doing some due diligence for a client that’s looking at a prospect to maybe merge. And one of the things we’re looking at very closely is the sales tax and the Nexus issue. And that’s going to decrease the price. There’s no question.

Joe:                Oh, yeah.

Dave:               There’s some hidden liability that you wouldn’t believe.

Joe:                Well, so if I walk into a business and they say, Joe, I got Dave here. He has a well-established guitar pick business, and I want to go in and I would like to purchase that business from Dave. And I say, That’s fantastic. I love Dave’s stuff. It’s great. It’s awesome. How can I help you? Well, I’m looking at Dave stuff. I don’t see any kind of procedures or controls or exemption certificates or sales tax or … accounts, where they’ve collected stuff and they need to pay it. And I’m not seeing any kind of returns for other states, but I know Dave is all over the place all the time because he’s this major rock star in all the places, right? And so, I’m concerned because I feel like Dave’s business may be not be as valuable as what he thinks it is, because he has all these problems.

Joe:                And I can actually go in there and look at all the things. And unfortunately for Dave on the buyer side, you can get a pretty hefty discount on a business, because they don’t have the proper controls in place. I’m not saying that Dave’s guitar pick business has any problems, but boy, it looks like it could. And that’s enough to push-

Dave:               Push a business? Yeah.

Joe:                That’s right.

Dave:               So, this crazy town thing we started off with, with Massachusetts. This is nuts.

Joe:                It is.

Dave:               This is nuts.

Joe:                I got some good crazy town?

Dave:               … Let’s go for it.

Joe:                So, we and all the ghosts in the room here are all wearing glasses or some other form of eye corrective things. Guess what? July 1st, 2019 in the state of Ohio, great state of Ohio, those will no longer be subject to sales tax. Eyeglasses, contacts, all of that, not subject to sales tax as of that time. And they have also made the sales tax holiday in early August for clothes, school supplies, things of that nature. That has now been made permanent. So, that is now a permanent thing every year we’re going to be able to enjoy that.

Joe:                So on the other side of crazy town, with the daily sales tax reporting and such, we now have these other kind of cool things that are happening in Ohio.

Dave:               Great, great. Joe, good insight. Tell us what’s going on with … Associates in the state and local tax department, the SALT team. What’s going on? You guys are like rocking and rolling throughout the state.

Joe:                Well, we’re not quite guitar pick level sales yet, but we’re moving forward. We have a wonderful group of clients that were working with, really helping them out. We do some due diligence work for clients, both on the sell side and the buy side, had a lot of fun doing some of that.

Joe:                Some really interesting cool controversy work, where we’re going up against some of the nasty state tax auditors. None of you are listening I hope, but if you are-

Dave:               Are we winning? That’s all I want to know.

Joe:                Oh, yeah. We’re winning.

Dave:               All right.

Joe:                And we may end up going to another US Supreme Court case.

Dave:               Uh, oh. Who’s all going?

Joe:                Well, probably the whole team.

Dave:               Can we do a podcast on site?

Joe:                Yeah, let’s do it. Absolutely.

Dave:               Good.

Joe:                So, let me tell you about this case because it is tremendous. You may have heard me talk about the Wayfarer case in the past. Stop me if you’ve heard-

Dave:               Maybe.

Joe:                Maybe? Okay. All right, you’ve heard that one. All right, so how about Wayfarer for income tax? Right? Okay, I got your attention.

Dave:               Yes. Joe, you need to get a new life.

Joe:                I know. Hey, this is fun stuff.

Dave:               Yes, it is.

Joe:                Fun stuff. All right, Kimberly Rice Kastner Family Trust versus Department of Revenue. It rolls off the tongue. They’re still perfecting the band name. It’s a North Carolina case. It’s going up to the US Supreme Court. And here is the real interesting thing about this case. This is a case where we had a trust. We had a trust and it’s only connection with the state of North Carolina was a beneficiary who happened to live there. That’s it. Just one beneficiary who lived in the state of North Carolina.

Joe:                And the department came back and said, You know what? Trust, you have all this interest and dividends and capital gains and all this stuff. We think we get to tax some of it. And the taxpayer said, Why would we do that? The settler isn’t there. The contracts with the providers aren’t there. The executor or trustee isn’t there. The brokerage house isn’t there. The only thing that’s there is one resident beneficiary. That’s it.

Joe:                And so, the North Carolina Supreme Court went through that and they said, You know what? I think you’re right. There is not enough contacts with the state for the state to be able to tax the trust. And so, they held it unconstitutional under some of the same provisions as the previous Wayfarer case had looked at, with Nexus, regarding taxes. And so, what a lot of us in the community are pretty excited about is sometime soon we may have the Wayfarer for income tax, where we actually get to see all right, well, if you have this much sales in a state, guess what? You have Nexus there.

Joe:                And so, we will now have a complete picture of transactional tax, gross receipts tax, income tax, franchise tax, and we’ll be able to really sit down with people and say the days of you not filing a bunch of places and being worried about do I file, do I not, which is where a lot of people are right now, those times of worry are almost over potentially. If this case goes up to… It has gone up to Supreme Court. Depending on what they decide to rule on it, it should be real interesting. And I’d love to have you and the podcast out there with the team on the steps.

Dave:               Maybe we can do it.

Joe:                It gets a little cold though in Supreme Court land.

Dave:               Yeah.

Joe:                In the morning.

Dave:               Joe, you’re always a great guest. You bring us really bad news every time you’re on the set, but you have a way to deal with it and you have a solution.

Joe:                I try.

Dave:               Thanks again for joining us today, Joe.

Joe:                Sure.

Dave:               Our guest today has been Joe … . Joe is the SALT director, or the State and Local Tax Director for Rea and Associates throughout the state of Ohio. And Joe’s team is rocking and rolling, as you can tell by his story about the guitar picks. That’s where that all came from.

Dave:               And if you need to talk to Joe on any of these issues, please contact Rea and Associates at reaCPA.com. And we’ll be more than happy to put you in touch with Joe. Listeners, if you’re watching today’s episode and you have a question for Joe, go ahead and leave it in the comment section below. And you can always send us an email at contact us at reacpa.com.

Dave:               In the meantime, if you like today’s show, like it, share it, and subscribe to unsuitable on Rea Radio anywhere you listen to podcast. Until next time, I’m Dave Cain encouraging you to loosen up your tie and think outside the box.

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