Scotty Z: ... our sales tax and risk assessment, our nexus studies cover all tax types. So we'll look at all the rulings and unfortunately each tax type has a different ruling too. So it's definitely all areas to look out for now.
Doug Houser: From Rea & Associates Studio, this is unsuitable. A management financial services podcast for entrepreneurs, tenured business leaders, and others. We're ready to look beyond the suit and tie culture for meaningful measurable results. I'm Doug Houser. The state and local tax climate continues to experience a rapid rate of change, since the South Dakota versus Wayfair ruling states across the country have taken South Dakota's lead one-by-one.
For those of you who do business across state lines, your days of paying taxes in a single state are likely over. Welcome to the new way of doing business. Today Scotty Z, a state and local tax manager and indirect tax expert with Rea is here to provide us with an update on what the state of business looks like since the Wayfair case.
What businesses can do to comply with these changes and how business owners can protect themselves moving forward. Welcome Scott.
Scotty Z: Thanks. Good to be back.
Doug: Glad to have you here today. So talk to me a little bit about the Wayfair case. We're now one year on roughly since that decision came down and what does that mean for folks out there?
Scotty Z: So Wayfair rolling came out June 21st of 2018. So fairly new still, but big impact from the states. Everybody's still talking, but prior to the Wayfair case, it's a big sales tax case that affected a lot of businesses and prior to the Wayfair case there was about a handful of states that had sales thresholds, holding remote sellers require the file tax there.
The Wayfair case, what they did was remove physical presence requirement to file in those states. So a year and a half later there's about 40 plus states now that are on board that have these sales type thresholds that just require you to file sales use taxes.
Just being a remote seller, if you have a business in Ohio for example, and you're selling in 30 plus other states, they might have a bright line or a sales tax threshold or a transaction threshold that will require you to file their taxes in that state. And then on top of that, that state's going to require you to file state income tax, other taxes types.
And so it effects all types of organizations, companies, industries anything. So anybody thinking about selling outside your home state, there's other and implications to think about other than prior to the Wayfair ruling.
Doug: And now I hear this concept about nexus. So if I'm a company and say I have a couple of crews of people, maybe I send, and they're going to go take care of a customer in Indiana or Kentucky or somewhere. Beyond the revenue threshold, what should I be aware of in terms of establishing the so-called nexus in another state?
Scotty Z: So nexus is basically just a business connection, enough with that state to require you to file their state taxes. You make a presence in that state. So the Wayfair rolling, it does add another layer to the nexus and removes the physical presence requirement. It doesn't eliminate it.
So if you had physical presence, you're sending employees into other states, Connecticut, wherever, they may have that physical presence still. So if you had physical presence prior to the Wayfair ruling, you would still be required to file back until then.
Doug: Got you.
Scotty Z: But if you're just selling remotely from Ohio say, or your home state and you're just selling and nothing else is going on, this Wayfair would affect you to that Wayfair ruling or whenever to state's effective date is.
Doug: Sure. Now you mentioned this concept prior to us coming on air about autogration. Talk to me a little bit about that automation plus integration. So kind of a mashup there. What is that?
Scotty Z: That's a little a sale term we came up with. It's implementation of client software. Their existing software sometimes work, sometimes they get too big and this Wayfair's impacting a lot that they're requiring to file in 30 plus states and the software they use is just simply not user friendly or it doesn't do the right work. So we shop around.
We have a preferred software that we use for bigger clients or more states, but there's different softwares out there that could automate the process. We could implement it, audit it up to their existing software. And then ongoing compliance because that's the biggest issue for these clients is, how are we going going to file 50 states by ourselves?
Doug: How are we going to keep track of it all.
Scotty Z: I couldn't even deal with one state alone. So this software will help you automate the process. We'll implement it. Once it's set up properly, where we come in is we set up their processes properly and implement it into their current system or get a new system. And then going forward, it could track your taxable sales versus exempt sales. It could retain exemption certificates.
So once you make a sale, you have that exemption certificate on file. That sale will be exempt to that customer. So it's just more efficient for these clients that are all of a sudden having to file in 30 states.
Doug: Sure. So the idea is, from a team perspective, we try to come in and provide sort of a risk assessment up front and then help them implement the right processes and procedures so that we're not, in essence, living there. In other words, they can do this going forward and comply with the different rules and regulations. Correct?
Scotty Z: Exactly. Sometimes we do bring the bad news up front. We tell them where they have nexus. You don't just have nexus in your home state, you have nexus in 20 plus states. Then next we tell them how much your exposure is. And then our next phase is, how can we fix this?
These are the options to fix. Whether it's a big liability going back, we could do something about that. If it's just going forward compliance, we can help them with that. But ongoing? I mean, that's a huge, huge advantage to implement or get these nexus and risks assessments done because a lot of these states are getting more and more aggressive and they're now talking to each other, while past years they'd never even talked to each other.
So one audit, some states are just issuing audits for all types of taxes. So just once you register, some states are just making you file a questionnaire with it. So exposing you to other areas. It's a big deal, so knowing upfront where you have at before the states come and find you is a big advantage.
Doug: Sure. So in essence, you want to ... Again, you want to get ahead of it and try and assess the risk if I'm a business owner. So I understand where my risks lie and then then try to address that proactively rather than reactively as you as you suggested.
Scotty Z: Absolutely. So sometimes, unfortunately it has to do retroactively. But we're trying to push science to get these up front. Maybe we don't find much and you're at ease, then going forward. But if you're just sitting out there waiting for them to come get you, they most likely will find you because they're talking ... If one of their customers gets caught, they're looking at who the vendor was, to supply them or their vendors. So vice versa. So there's all kinds of areas that they could find you now.
Doug: Sure. So up and down the food chain I have to worry about not only my own business, but my customers who I'm doing business with and also my suppliers as well. And I know we don't want to get too deep into the weeds here, but there are things such as exemption certificates and things like that that you can help clients with. And again, setting up those processes and procedures so they're aware of of the risk.
Scotty Z: Absolutely.
Doug: So one of the other things I hear, this is a big item in due diligence for businesses that are looking at some type of liquidity event, whether it's a sale to a third party or internal or whatever. Somebody wants to assess the risk that the state and local tax might have. So is that a big part of what you guys do as well?
Scotty Z: It's a lot of we warn clients if you're looking to sell because a lot of our initial meetings, they'll say, "We're thinking about selling in a couple of years. We'll deal with it then." But little do they know that sales tax follows whoever purchases it. So you're not getting rid of that liability.
So doing the due diligence up front, you're going to get a better cost or better sale price on your business because you did that and you don't have any lagging liabilities out there. The other side is going to be doing the same thing on your company, the one they're purchasing. They're going to want to know is there any risks to buying this company?
It's going to drive the sales price down if there's a bunch of liabilities out there or the sale might not go through. So I think if you're thinking about selling, then getting at least a nexus risk assessment. Just knowing what you have out there, what the exposure is would be advantage too.
Doug: Yeah. Again, as part of that due diligence process. At least knowing where your risk is and you can then choose to make a business decision in terms of how you deal with it, but punting it down the road and leaving it undefined ... Because I've heard that some business owners just say, "Well, I'm not going to worry about it. I'll worry about it if I get caught."
When you go do some type of transition with your business that is not going to fly. Somebody's going to want to define that risk, right?
Scotty Z: Exactly. Unfortunately that is a lot of cases that they just ... They see a big number up front, but they don't know the longterm impact of if they deal with it now, it's going to be a lot less than if they deal with it later or somebody catches you.
Doug: Yeah, absolutely. So are there particular industries that seem to be more vulnerable than others? I mean, myself dealing with the construction industry. I know that's one, but what about other industries? Manufacturing, distribution, where do you see a lot of the risks?
Scotty Z: I would say the biggest risks areas is like you mentioned, the construction contractor area and the manufacturing areas are the biggest ones. Obviously every industry does still have those areas, but the most exposure is those two areas just because they're buying such volume of materials, using it in a variety of ways. And sometimes, for example, manufacturers think, "Well, there's some manufacturing exemption. Don't we qualify for everything in there?"
And same thing for construction, "Oh, we're oil and gas. We're doing oil and gas, but we're just buying like a coffee table or an office trailer." So those things aren't exempt and manufacturers think everything they purchase, whether it's ... Whatever they purchase is exempt. So that's the biggest area is just knowing what actually qualifies for these exemptions.
Doug: Sure. So, it goes beyond really just thinking about your own business. It's all about all the tentacles that you have within your business, and where they touch, and who they touch, and all those kinds of things. It can go as far as even where you source your materials for example. Is that true?
Scotty Z: Yeah, sourcing is a big issue because just in Ohio alone, they have three different sourcing methods based on if you're selling just TPP, if you're selling services or if you're selling a combination of both. They have different sourcing methods.
A lot of companies just say, "Oh, we're going to do destination sourcing, all our sales." And they get caught in a state that doesn't have destination sale, they're going to be held for a big liability. So sourcing is a big issue out there.
Doug: Okay. So what are some of the other pitfalls that you see that companies run into particularly, that that are closely held businesses that we typically do?
Scotty Z: So the biggest issues, the more clients that we deal with is the manufacturing construction contractors. It's, there's a lot of different items out there that different ... Especially Ohio has a fixture rule that if you're installing something permanently into a foundation that might not qualify for real property services or construction contract because it's specific to that business. And that's the biggest mess in most of the areas we look at is they don't know the difference of those two items is whether or not it actually is a construction contract or just considered TPP.
Doug: So by TPP you mean tangible personal property.
Scotty Z: Tangible personal property.
Doug: Okay. Yeah. So yeah, having those definitions very well-defined and understood. If I'm a company that that's where we can again help assess the risk and make sure that they're consistent in how they treat and apply things across their business.
Scotty Z: Yeah, and I think there's just several questions to ask yourselves as a business owner. Is where do I send my employees? What type of customers do I sell to? What suppliers do I buy from? What materials do I buy from? What type of services do I do? Things like that.
What do I sell? Where do I sell? What states do I go into? Things like that. Any question? Most of those, if you answer yes. Like, if you sell out of state, do sell out of state? Yes. You probably have exposure there. So any question you answer yes to, you most likely have something to look at.
Not saying you necessarily have a liability, but it's a concern that you should be looking at just to make sure that there's nothing there
Doug: And that's where you're obviously a big part of our state and local tax group and you guys will just come in and do that initial assessment for people and help them understand, "Okay, here's where we see risk."
Scotty Z: Yeah. So we actually created templates or tools that we looked at every single state, all the questions that they'll ask and look at. And we'll sit down with a client or go through their books and determine where they have exposure, because of why ... Things like that. So there's a number of things that people overlook.
Just for example, trade shows. If you're just attending trade show one day in a state, sometimes could trigger that nexus.
Doug: Right. Interesting. Now are some states more aggressive than others? How about Ohio for example, since that's where the bulk of our clients lie?
Scotty Z: Ohio is getting aggressive. They tend to audit a lot. They're more lenient in the audit process. But again, they look at more detailed than other states. Other states are more aggressive than Ohio, PA, New York, California, Louisiana, things like that. But Ohio definitely is a area that's picking up their aggressiveness.
Fortunately sometimes is the state has limited resources to audit. So that's why we're trying to get in before these states come looking for our clients. So there's a number of areas to look out for.
Doug: And that way the client is prepared and all that. Again, they want to know where their risk is. If they're more prepared like that, then they're in much better shape obviously than if they're coming in after the fact screaming help. That's never good. You know? Lack of planning is not a good thing in this case for sure.
So talk to me a little bit about ... We don't have a ton of clients that are solely online type of businesses, but a lot of them have a presence online. Maybe they sell excess material or they'll kind of get rid of some of their scrap or do things like that. I mean, is that the kind of thing that they also have to look out for that can lead to exposures in other areas?
Scotty Z: Absolutely. That's the biggest question we get. We'll just tear down or brick and mortar store and we'll just sell online. That may have worked in the past prior to that Wayfair ruling. That's why a lot got into [inaudible 00:18:52] online, they're going to sell across all 50 states. Just have a home spot in Ohio and just file there. This eliminates all that.
So there's costs associated with obviously having a brick building and all that overhead, the maintenance of it. But even on the online you got to deal with the web design maintenance of it and then designing it, user friendly so your clients could use it.
And then once you sell the other states, now you got all these other states issues to look at too. Tax implications, things like that. So you're creating nexus in a number of other states.
Doug: And as you indicated it, the thing to think about is it goes beyond just the sales tax. All of a sudden you've got to think about maybe that state has franchised tax that you now have to file or some other type of tax. Whether it's like an Ohio CAT tax or, I know Texas has a different taxing method. Things like that. Is that that part of it too?
Scotty Z: Yeah. So franchise tax wasn't a part of this Wayfair ruling. It was solely a sales tax case, but everybody knew that the states are like, "Well, they're getting sales tax. We want our piece too." So we're seeing slowly and slowly that these states are coming out with amended franchise tax rules that are similar to the sales tax thresholds.
Or some states already have that bright line tax nexus for income tax. So they're moving towards that. There's probably a handful of states that came on board since the Wayfair ruling for franchise tax as well. So the other taxes are following. Sales sax obviously was the leading factor in this case, but it's going to effect businesses for other types of taxes as well.
Doug: Yeah, good to know. And ultimately best practices to have someone like you or our team obviously do that risk assessment. I mean if I'm a business owner, that's what I'd want to know. Right? Where's my risk?
Scotty Z: Yeah. And our sales tax and risk assessment, our nexus studies cover all tax types. So we'll look at all the rulings and unfortunately each tax type has a different ruling too. So it's definitely all areas to look out for now.
Doug: A lot to keep track of, that's why we have a lot of experts.
Scotty Z: Right.
Doug: Well, that's good. Well, I appreciate it, Scott. That's great information. And if I'm a business owner, I surely want to talk to Scott and the team to figure out where I stand. So if you want more business tips and insight or to hear previous episodes of Unsuitable, visit our podcast page at www.reacpa.com/podcast.
Thanks for listening to this week's show. You can subscribe to unsuitable on iTunes or wherever you'd like to get your podcasts, including YouTube. And while you're there, leave us a review. I'm Doug Houser. Join us next week for another Unsuitable interview from an industry professional.
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.
