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. We’ll offer you meaningful, modern solutions to help enhance your company’s growth. I’m your host, Dave Cain.
From word processing to filing taxes, there’s a software solution for everything these days. As society continues to change and legislation alters the way business is done, people smarter than me are hard at work developing programs to address these changes. Take the recent Supreme Court case South Dakota v. Wayfair, for example. Overnight, the way companies calculated and paid taxes in different states changed. Fortunately, solutions were immediately available to make the changes a little more tolerable.
Today’s guest is Kathy LaMonica, a senior manager and technology consultant on Rea’s state and local tax team. Kathy is located in “Browns Country” Cleveland, Ohio, and Kathy is here to talk to us about the various tech solutions available and how they can save businesses from costly fines and penalties now that Wayfair is the law of the land.
Welcome to unsuitable, Kathy.
Kathy LaMonica: Thank you. Good to be here.
Dave: Great … thanks for traveling down 71 to Dublin, Ohio.
Kathy: Beautiful. Beautiful drive.
Dave: Rea Radio Headquarters here in Dublin, Ohio. What we want to do today is kind of take a crack at some of the software that’s out there that maybe can help our listeners with some of their state and local compliance, so-
Kathy: Sure.
Dave: Let’s start with maybe the Wayfair, some fallout from the Wayfair. What did you see the last couple of months with your clients and the Rea clients?
Kathy: Well, for the most part what I’m seeing across the board and ever since Wayfair and the fall as the legislation has come into play is that my clients are panicking. They hear about Wayfair, they have no idea what it’s going to mean for them, how they’re going to cope with the extra compliance burden, what they’re going to do. We as a sell group have looked at all different ways of figuring out where they have an nexus, where they have exposure, but then at the end of the day you say, “Okay, you have an nexus in 46 states. What are you going to do about it?” That’s where I come into play. That’s where I come with the software solutions, the options for simplified processes, automating different processes, and try to walk them through and make sure they realize it’s not as big and scary …
Dave: You’ve got a solution.
Kathy: I do have a solution.
Dave: Important thing. Let’s stay on the Wayfair because you’re right, I think we’re hearing a lot of … the media got the word out and I think our clients are saying, “What is this all about?” All of a sudden like you said, stepping back and say, “What are we going to do with all these multiple states? We can’t possibly file in 40 states, 30 states, 20 states?”
What states are you seeing now that are probably the very aggressive states?
Kathy: I think in general that the states like California, Illinois have always been pretty aggressive, but I’m seeing new players on the field with Indiana sending out … hiring third-party consultants to mine data to see who’s selling into their state and then sending out letters to these clients and say, “Hey, you have enough sales that you should be registered.”
The usual suspects are always going to be there looking for ways, and some of the letters came out almost immediately to people who are over a certain threshold of sales. I think clients have to understand that you can’t just think, “I’ll wait and see and let them come get me,” because I think the states are aggressively trying to come get them.
Dave: The landscape has changed and one of the things we’ve noticed in our discussions is you can’t make that business decision and let people just come find you because that liability continues to-
Kathy: Absolutely.
Dave: Just develop and develop and it actually will impact the value of your business.
Kathy: We’ve seen that, too, where either a client is being bought or they’re looking to buy somebody and how they got to look at successor liability and, was the company previously doing it right or wrong? If they’re not, you can cut your price of what you’re offering because they have all of this exposure. You’re seeing it on every different level, and the people who are kind of trying to blindly say, “Oh, let them come get me,” it’s like, “No.”
Dave: There’s twofold, like you said, the due diligence, and due diligence with your experience, it doesn’t take long for you to uncover a big liability …
Kathy: Absolutely.
Dave: Unfiled state taxes, plus penalty, plus interest, year after year. We have an example, and I’m sure you can share one, but share one that we’re working on now is a state, California you mentioned, they’re starting in 2014, and so by the time this is all complete it’s going to be like a five-year deal. Now, there weren’t a lot of sales, a lot of activity in that state, but still, you start adding a little bit here, here, here, and here, and all of a sudden that liability is pretty significant.
Kathy: I think one of the issues that I see a lot with my clients are the wholesalers who think, “Oh, I don’t have this exposure because I’m selling to companies for resale,” but their exposure comes because they’re not collecting the right exemption certificates. Once they’re aware that that’s actually contributing more than they think it is, it’s eye opening.
Dave: Sure, sure. Our auditors here at Rea also are telling us they’re taking a very hard second look at these unrecorded liabilities as well, so it could affect your financial statements …
Kathy: Absolutely.
Dave: Your ratios, your loan covenants, so there’s a lot of things in play here. Again, like you had mentioned, a business decision not to do anything is probably not the way to go.
Kathy: We can help them all along that process up before they even get to the software issues with if they have exposure going through voluntary disclosures and trying to limit their penalties and interest for the past years of exposure. If they don’t do anything, it’s wide open. The state and probably what you’re seeing, if they’re going back to ’14, they can go back to the beginning of your time … your company started doing business, and then it’s up to you as the customer to prove to them, “We don’t have this nexus,” or, “We have coverage.”
Dave: I find it interesting on the Rea website in the bio under “People,” you tell a story about a pretty significant client that they were making multiple journal entries each and every month.
Kathy: Multiple.
Dave: And it’s because their software just wasn’t-
Kathy: It wasn’t… it
Dave: It wasn’t getting it right.
Kathy: No, and exemption certificate management, tax credits to customers, the clients AR people were overriding sales orders and not charging the right tax rate because they were changing the address and not updating to the right … it was crazy. Hundreds of tax credit adjustments because you’d get your customers coming back like, “You shouldn’t have charged us this tax. We haven’t”… whatever. For whatever reason it is, but huge. They actually had a software, but they had done so much behind the scenes to counteract it that it took away …
Dave: It just blew up on them.
Kathy: It just took it away. It took away the effectiveness.
Dave: I mentioned in the intro that you’re from Cleveland Browns Country. Are you a Browns fan?
Kathy: I’m more of a Jets fan. I am originally from New York, but I root for the Browns, except when they’re playing the Jets.
Dave: Ooh, Jets. Well, not a lot of people step up to the plate and say, “I’m a Jets fan.”
Kathy: I know. They don’t. It’s kind of like being a Browns fan.
Dave: Well, it is. It’s totally. We understand, so good. Let’s talk about this software. When you talk about software, are you’re talking about like my general ledger package like a QuickBooks software? Or something beyond that?
Kathy: We’re talking beyond that. A lot of my clients or our clients that I’ve seen are using QuickBooks. Some might be using something more robust like an SAP, but what I’m talking about is an add-on, third-party, sales tax-specific software. There’s a couple of different vendors that I’m experienced with.
I’m actually a Certified Vertex Implementation Specialist, but I’ve come around to Avalara, which is the other one that’s out there. They take that to not only determine product taxability but helping you manage exemption certificates, getting the rates. There’s 12,000 rates … 12 to 15,000 rates jurisdictions in the country you got to manage, and I tell you they change every month. Different localities change, knowing how to source your sakes. The software takes that process and really streamlines it for you.
Dave: Kind of integrates
Kathy: Integrates perfectly.
Dave: With any other software?
Kathy: Yes. Yeah, and a lot of these softwares have built-in connectors like a lot of the ERP systems so that you can connect them relatively simple.
Dave: If someone is wanting to get started with implementing a new software … let’s say, “Hey, look. QuickBooks, it’s fine for the debits and the credits and receivables, but we need to dive into more of the sales part of it”, and there’s another piece of software or several software out there that you would recommend that a company says, “Hey, let’s take a look at this.”
Kathy: It varies like your needs. If you’re just an internet reseller selling through Amazon, there’s something small, it’s called TaxJar. It’s out there and it does a very basic same kind of concept. If you’re dealing with a massive manufacturing company with sales and use tax you’re going to look at a Vertex hard-coded system, and then there’s everything in between, and the costs…
Dave: Is it user-friendly?
Kathy: Some of them more than others, but …
Dave: Just like anything else.
Kathy: If you don’t set it up right, if you don’t implement it right, it’s garbage in, garbage out. You got to get it right from the beginning. You got to control the process.
Dave: A couple of things that … Again, I want to pick your brain a little bit on the software. It’ll help us talk about what is taxable for sales tax and what sales tax rate should be charged within the jurisdiction, which, again, sounds simple but I think we all know our clients have struggled with that or have charged the wrong rate.
Kathy: Right, absolutely. Happens a lot, and just sourcing issues. If you’re in Ohio and you’re selling to an Ohio customer, it’s sourced to where you’re actually physically located, not the customer. It’s an origin base. If you’re selling to California, it’s a destination base. If you have a manufacturing plant in California and a customer in California, it’s a modified origin. The software helps determine all of that for you so you don’t as the person have to make that decision as you’re putting an order through what tax rate should be …
Dave: You can get down to business instead of trying to figure …
Kathy: Exactly.
Dave: This out or guess, or just say, “Hey, I’m going to put it all in Ohio,” and I think that’s a good segue into another discussion is this is not a discussion about more tax. I think it’s about the same tax, it’s just spread over many different
Kathy: To the right
Dave: Jurisdictions, but I think what we both experienced is like in my case, we talked about that State of California is from 2014. Well, back in ’14, I think we had reported those sales as all Ohio sales, and depending on what state, even when we settle up with California, by the time it is, there’s no way we can go back to Ohio and say, “I want a refund.”
Kathy: No, because
Dave: Or other states. What we have statute of limitations that are expiring or could expire. The next few years it’s going to be a challenge, and of course, the software can help us.
Let’s talk about the compliance burden and how software and automation can simplify the filing process.
Kathy: A lot of these programs, we already talked about the forefront and it figures out the taxability and the jurisdiction and the sourcing law. At the end of the month you got to file. If you’re in 46 states and monthly filings, that’s 46 times 12 times ever and it can get really burdensome just getting the forms correct getting them out, but a lot of these softwares not only will help you get a PDF-ready form that you transfer the data, some of the software companies have actual people who will do the returns for you.
Rea can always do those kinds of returns for you as well. It gives you a report at the end of the month that breaks it down the way you need to report it for that state. It will free up time for those people that are spending hours trying to dummy up an Excel spreadsheet and try to make it work and …
Dave: Dummy up an Excel spreadsheet. That’s pretty good.
Kathy: And make it into the perfect format.
Dave: That line item that says “other” and there’s another in there and that makes it balanced to the general ledger. You mean that?
Kathy: That one. That one.
Dave: That one? Well, I’ve never done that.
Kathy: It definitely simplifies that reporting compliance burden. I think the other thing I want to mention, and I’ve told this to clients before, if you do sales tax correctly it shouldn’t cost you anything because it’s a pass through. It should go to your customer. You might have customers who are annoyed that they’ve got to pay tax now, but it should be something that’s a flow-through and works. You’re going to have a compliance where maybe you’re paying more for software than you ever used to, but you shouldn’t be paying the sales tax on behalf of your customers. You want to make sure that’s being flowed through properly.
Dave: I want to make sure I understand this correctly. When we talk about state and local tax compliance, the first thing that jumps out is the sales tax because of the Wayfair. That’s what everybody is thinking, but also there’s income tax, at both certainly the federal level, we know that, bu the various states and also the local level, the municipalities. The software stuff, the piece that you’re talking about and the consulting you do in that area will help with all levels of the taxation?
Kathy: Yes, most of the software that I talk about is sales and use tax driven. The income tax side, there’s definitely an income tax compliance burden that comes along with if you’re now registered for sales tax you might likely be registered … or you might have a compliance burden for income tax. Income tax software has been around for a lot longer and is pretty manageable. When I talk about the sales tax, it’s that software is mostly sales tax.
Dave: Let’s go back to your Excel example or a calendar example. These states in the sales tax have different due dates, different periods when you file, and so, again, you’ll put in a system that helps manage …
Kathy: Manage that.
Dave: That.
Kathy: Most sales tax returns are due between the 15th and the 20th every month, and if you’re on a monthly frequency and there’s no like … you can’t extend it. They’re due, and so managing that, especially if you have multiple entities and getting all those returns done by those due dates, because they’re pretty strict and they come around pretty quickly, is you have to have something that can help manage that.
Dave: Those returns are due monthly unless you have to file quarterly or semi-annual …
Kathy: Or annually
Dave: Or once a year depending on your sales divided by two and-
Kathy: Depending on the state.
Dave: It can create quite a burden on your accounting staff.
Kathy: A lot of the clients that I work with, they don’t have a big tax department, they don’t have multiple people to do this. They have maybe an accounts receivable lady who has to do all this as well, too. It’s a lot of burden to say, “Now you got to do it not just Ohio but 15 more states,” and …
Dave: Accounts payable lady?
Kathy: I’m sorry.
Dave: Is that proper terminology.
Kathy: Accounts payable person.
Dave: Yes, there you go. Well, you know what? We have to be gender correct here.
Kathy: I know, I’m sorry. That just slipped out.
Dave: No problem there. Software and processes improvements can … again, I’m looking for the word. Audit-proof a business, is that maybe … am I on the right track here?
Kathy: Yeah. I think a lot of people with … it’s not just the software, the sales tax management, but there’s also process improvements that you can do just on your payables. When you’re buying things, are you paying use tax? How is that process accomplished? Is it just by one person checking off “these vendors don’t charge us tax? How do we self-assess for these?” Or, is there a process coming in? You’re getting a download of all the purchases you didn’t pay tax on and here’s what I need to assess.
We can look at things from an overview and see, how can we do this better and faster and more accurately to protect ourselves? With the exemption certification, just having a software that’s tracking the exemption certificate, is tracking when they’re valid, tracking when they need to be updated is a huge compliance protection to prevent audit problems going forward.
Dave: One of the things that we’ve run into collectively when you start talking to clients, you say, “Well, what about your exemption certificate?” They kind of look at you like …
Kathy: “What’s that?”
Dave: “What is that?” The accounts payable lady keeps track of the exemption certificates.
Kathy: Usually in a box or a binder in the corner and …
Dave: In a warehouse.
Kathy: They haven’t been updated for 10 years …
Dave: With a leaky roof.
Kathy: Exactly.
Dave: How often do those exemption certificates need to be obtained?
Kathy: Some of them … it’s a good practice to update them every three to four years, but in reality, a lot of people don’t do that, but there are some that expire every year. Florida expires every year, and I think it’s Arizona that expires every year. Not only that, but you could get an exemption certificate from a customer in California and they gave you a permit number and it was good at that time, but like two years later they closed that, got a different number. You have the wrong number on your certificate. It’s no good under audit, and you won’t know that unless you’re actually …
Dave: Under audit.
Kathy: Updating or under audit, and then you find out and that’s not fun.
Dave: Well, you had mentioned earlier that a lot of states are hiring or subcontracting a gunslinger to come out and find folks and do this, so again, audit-proof is pretty good and …
Kathy: It’s huge.
Dave: And having an audit trail. The audit trail certainly would be … one would be the exemption certificate, the software, the trail, the invoices, the consistency.
Kathy: I think with sales tax, and there’s a ton of gray areas from state to state over how to even determine what something is taxable or not. Having that audit trail, having a document that says, “Okay, I don’t know if this software should be taxable in this state or that state, but I’m going to make a decision and we’re going to do it like this and have a solid process behind it”, so that you can say to the auditor, “This is our thought process. Tell me why it’s wrong, tell me how we can correct it, but this is what we were trying to do and we were trying to it right.” I think if you leave it to chance and you have to come up in the back end and say, “Well, we think we did it because of that”, it’s never going to fly.
Dave: I can think of one of our listeners out there is kind of thinking, “Oh, okay.” They’re ones that say, “Okay, let them catch me. I’ll start that next year.” We heard that the last two years, but here we are, it’s the middle of 2019. The thought would be, “Oh, I’ll just wait and start it fresh January 1, 2000, or 2020.” You can start that process today, is that right?
Kathy: Yeah, absolutely
Dave: If you wanted to?
Kathy: And I think states, because of the Wayfair laws, because they’re still being talked about and addressed and changed, we’ve seen the states take the transaction rule, the threshold of 200 transactions and get rid of it in a couple of states because they don’t want to punish the little guy who has a bunch of transactions but their sales are low. I think there’s some leniency. I was just asked this question this morning because I said, “Is there a window where they’re going to really start cutting down and get”… I think there is. I think they want people to get ahead of this as soon as possible.
Dave: If they do get caught, is there any amnesty?
Kathy: Not a lot. I
Dave: I’m just thinking ahead …
Kathy: I would …
Dave: I’m just thinking ahead here.
Kathy: Even because of the economic nexus rules that have gone into place, I can say if you’re only hitting it because you hit the economic nexus. Right now, what, you got three months, six months of exposure? If they don’t do anything, I use that same risk assessment. Instead of going seven years back, I go seven years forward. If you don’t do anything, this is what you’re going to owe in seven years and that’s … they have to keep in mind because you can wait, but here’s where your exposed and if you haven’t started the statute, you’re going to have …
Dave: Where you come into play as a consultant is is you really kind of talk with our clients to help them get started. Not that you’re going to do everything and make all the entries, but you will help them get started, help them understand, develop a process. Maybe come in and check the oil every now and then to make sure they’re doing it correctly.
Kathy: I also do, and I’ve done this a little bit with one of our larger clients, I’ve helped with the taxability. They’re doing an implementation right now with Avalara and they had another contractor that had a direct relationship between it so I wasn’t doing the connecting of the computers systems or anything like that but I’m reviewing their taxability to make sure that it’s been set up. We can do different levels of that.
Dave: Different phases?
Kathy: Right. I have the unique talent of being able to talk to IT people and tax people and put it together …
Dave: That is unique.
Kathy: So that they can actually understand what the other one needs.
Dave: How about marketing? Can you talk to marketing people?
Kathy: I’m not a marketing …
Dave: Well, that’s a strange breed, isn’t it? It really is.
I want to kind of wrap up here. A couple of takeaways that we have, certainly the software can simplify the tax calculation. That’s probably number one. The compliance burdens, and if you try to do it yourself I think is just going to eat you alive, and so a software solution is certainly there. Audit-proof a business, get your audit trail, and the last thing is, man, give you a call. We want our listeners to give you a call. Just have a brief conversation to see if … to get this thing implemented on the right track.
Kathy: Absolutely, and don’t be afraid of the cost. I think people are so afraid that it’s going to be out of their realm of reasonable and I think these softwares have come down a bit and to try to capture this.
Dave: Well, the old saying goes, “If you think the cost of compliance is high, wait until you get caught.”
Kathy: Exactly.
Dave: I think the message is you’re not getting caught for one year. It’s multiple years, and it hurts.
Kathy: And penalties
Dave: And it hurts, and it hurts. Our guest today has been Kathy LaMonica with Rea & Associates in our Cleveland, Ohio, office. It’s been interesting to learn about the various types of software solutions that are available to help businesses with today’s tax challenges. Thanks for sharing your expertise and insight, Kathy.
Kathy: Thank you.
Dave: It’s a great job.
Kathy: Great to be here.
Dave: Listeners, if you’d like to learn more about some of the solutions Kathy mentioned today or would like more insight into the Wayfair case, we’ve got you covered at www.reacpa.com. You are also welcomed to reach out to Kathy directly. Her contact information will be included in today’s episode notes, or you can simply call one of Rea’s 12 offices throughout the State of Ohio.
One more thing before I sign off. Have you subscribed to unsuitable yet on iTunes, iHeartRadio, or YouTube? What are you waiting for? You can also give us feedback or share episodes with your friends and colleagues. Remember, sharing is caring.
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 the 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.