Mark: Welcome to unsuitable on Rea Radio. The unique financial services and business advisory show that challenges your old school business practices and traditional business suit culture. On this show you’ll hear from industry professionals who will challenge you to think beyond the suit and tie culture while offering meaningful modern solutions to help you enhance your company’s growth. I’m your host, Mark Van Benschoten. Most business owners, operators are hopefully aware that they have a responsibility to collect, calculate, report, and remit sales tax. If this concept is new to you, you can give me a call. I’ll put you in touch with Lindsey, but you need to have a talk with somebody. Figuring out your tax payment should be relatively simple if you only do business in your home state and in one local jurisdiction, but we’ll talk to Lindsey and she’ll tell us it’s not that simple. My experience, it’s not that simple, but if your business dealing spans state line, for example, the process can get a little hairy. The connection your business has with the entity that’s going to do the tax collecting is called the nexus. I’m sure Lindsey will explain that to us. That’s what we’re going to talk about today on today’s episode of unsuitable. Today’s guest is our state, and local, and franchise tax compliance and consulting expert Lindsey Monek, who’s a manager in our Marietta office. Welcome to unsuitable, Lindsey.
Lindsey: Thank you. It’s great to be here.
Mark: I was doing a little research on you and I saw that when you were younger you wanted to president of the United States. Have you given up on that dream?
Lindsey: I think at this point in my life I have given up on that dream. I think Hillary might beat me to it, being the first woman president.
Mark: Well, you could still be president. You don’t have to be the first woman.
Lindsey: That’s true, but as a goal growing up that was my goal, to be the first female president, yeah.
Mark: First woman, right? This is being taped before the Ohio primary, so we’ll be anxious to see a week from now what the results will be.
Lindsey: Yes, I’ll be waiting with bated breath.
Mark: Also, you noted that if you weren’t doing this you might be an event coordinator.
Lindsey: Yes. I love planning events. I loved planning my wedding. It was one of the highlights of my life.
Mark: Hopefully your husband says the same thing.
Lindsey: Well, I’m not sure when the bills started rolling in.
Mark: Do you think that sales tax compliance is similar to event planning? Getting people to do things when they’re supposed to do them?
Lindsey: It can be a challenge in that way, trying to get people to be compliant and follow up on obligations for sure. Sales tax and the income and franchise tax in terms of operating in various states can be very cumbersome and daunting to business owners who are not familiar with the laws and the regulations in any specific state. That’s why we’re here to help.
Mark: I like your attitude, here to help. We’re from the government, we’re here to help. We started out, I said something about being simple. You said, “Oh, you have to collect sales tax.” It’s simple, but it’s really not that simple is it?
Lindsey: No. It’s absolutely not that simple. There are various types of state taxes. Sales and use tax is one specific type of tax where if you are operating in various jurisdictions, you need to really pay attention to the laws of the state that you are potentially performing services in or selling tangible personal property to, to know whether or not you are subject to sales and use tax in that state or income franchise tax. Each level of nexus is different for each of those taxes, so it can be very challenging to distinguish.
Mark: That’s another buzz word we talked about, nexus.
Lindsey: Yes.
Mark: In about thirty seconds can you describe nexus?
Lindsey: Sure. Nexus is really the minimum taxable connection that you have to have with the state in order for a state or any legal jurisdiction to impose a tax on you.
Mark: Minimal what? Minimal?
Lindsey: Minimal connection.
Mark: Minimal connection. Okay.
Lindsey: Yeah. Generally speaking for sales tax purposes, though every jurisdiction is different I will caveat, but generally speaking if you have a physical presence in a location, you’re probably going to be subject to sales tax if you’re providing services or selling property into that jurisdiction.
Mark: Physical presence, own a building? Have a sales person?
Lindsey: Exactly. Own a building. Have payroll. Any type of, even temporary presence in that location. Having presence even for one day out of the year will give you nexus for the entire year, so it’s-
Mark: Hardly seems fair.
Lindsey: I don’t make the rules. I just help enforce them.
Mark: I see. You’re from the government. I see. Well, that seems pretty daunting. You said temporary, so let’s say that, I’m trying to think of an example here. Rea and Associates was going to go down to Augusta, where we’re going to have a business providing tax return services for the Master’s Tournament.
Lindsey: Yeah.
Mark: Obviously, we don’t have an office in Georgia or Augusta.
Lindsey: Correct.
Mark: We could, depending on the laws of the locality, we could have sales tax?
Lindsey: Absolutely, and income and franchise tax nexus as well in terms of providing those services in that state. You would have payroll in that state for that day and you would have the benefit being received in that state. That would possibly create nexus for us there.
Mark: Is nexus for sales tax in state, and local, and franchise taxes, is it the same threshold or it could be, this is your threshold from nexus for sales tax and that’s different than for the state franchise tax.
Lindsey: It is different. For sales and use tax, generally speaking the line is that if you have physical presence in the state, you generally have nexus in that state for sales and use tax. For income and franchise tax purposes, I’ll separate them out. Income tax purposes, if you have physical presence you likely have nexus. However, if you have a salesman traveling to a state and that’s a frequent occurrence with a lot of our clients, they have salesmen who are traveling around.
Mark: Or saleswoman.
Lindsey: Or saleswoman traveling around. If they are spending time in that state and they are strictly soliciting business for their company, that activity could actually be protected under something called public law 86272. That’s a federal law that-
Mark: Say that again.
Lindsey: Oh, public law 86272.
Mark: You’re not making that up are you?
Lindsey: I am not making that up. I promise. It is a federal law. It was passed in 1959 and it was put in place to promote interstate commerce, so that states could not unfairly tax businesses that were traveling into their state just to solicit sales. There is potential, even if you have a person there, you may not have nexus depending on what your salesperson is doing. Then, it’s going to get even more complicated. For franchise tax purposes, a lot of states impose a franchise tax on the privilege of doing business in their state. That actually is not protected under public law 86272. If you have physical presence there, you’re probably subject to franchise tax in that state.
Mark: Wow.
Lindsey: Is your mind just totally blown?
Mark: Yeah, pretty much it is. Yeah. Holy shmoly. I’m not going to ask you your age because that’d be inappropriate, but how did you learn all this?
Lindsey: You know, I’ve been doing this for several years now. Just contact with clients and questions coming my way. It’s been definitely a journey and I will say, every state is different. There are general sort of thresholds, but each state decides to impose its own spin on thing, so it can be very complicated. I don’t know it all, but I know where to find the answers and I think that’s the important distinction there, is that I can listen to a client’s situation and if I don’t know off the top of my head I can definitely help them.
Mark: And research and get the answer.
Lindsey: Exactly.
Mark: You hear the discussions about changing, you know, what’s going to be subject to sales tax. You hear professional services in the state of Ohio and there’s other states that are doing that. Any thoughts as to why they’re trying to do that? Is it just a money grab?
Lindsey: Yeah. I would say that states are generally always looking for ways to increase their revenue. Taxing services or additional types of property and things that may have previously been exempt would be a way to increase that tax base and obviously generate more revenue for their state.
Mark: You know, you say services. Haircuts? I mean, isn’t a barbershop, isn’t that subject to sales tax? Right?
Lindsey: It depends.
Mark: It depends, right. Then, landscaping.
Lindsey: Right.
Mark: It’s just very, to keep it all straight, I can’t imagine how one does that.
Lindsey: I think that the important thing to know is to know when you don’t know, and know when to ask for help because no one person can know it all. Being a business owner is very challenging. You’re not just dealing with taxes, federal, state, and local. You’re dealing with your operating people, and your sales people, and you’re trying to actually grow your business usually. Your mind is usually focused on other things. You’re not so worried about, well gee, we made this sale into Michigan, I wonder if we really need to charge sales tax there. You don’t have time to deal with all of that in most cases. That’s where you have to step back and say, I really don’t know this, let’s call the professionals and see if they can help us out.
Mark: It’s not that the business is paying sales tax. As you mentioned, it’s collecting the sales tax.
Lindsey: Right. That’s correct. The sales tax is actually imposed upon the ultimate consumer of a product. The way that the systems are set up is that the businesses are there to collect sales tax from the consumer and remit it to the state. It’s their obligation to do that. Also, if you were to buy something online, let’s say, and you’re not charged sales tax, it’s really your obligation to remit that as a use tax to the state.
Mark: As an individual?
Lindsey: As an individual. There is a place on your return where you are supposed to claim how much you bought.
Mark: I’m familiar with it. If you want to just go ahead and give it to the listeners as to where they might find that, that’d be great.
Lindsey: On the Ohio return.
Mark: On the Ohio return? It’s on the Ohio return?
Lindsey: Yup.
Mark: There’s a line for you where you can put your purchases and calculate it?
Lindsey: That’s right. I mean, that’s something that-
Mark: Does anybody do that?
Lindsey: I don’t really think so.
Mark: Okay. Probably if you’re making a big purchase?
Lindsey: Yeah, absolutely. Those businesses, you may say, well gee, it was their responsibility to charge me sales tax, but that’s not necessarily true. If you are living in a state where they don’t have nexus, they’re not obligated to collect that sales tax. The system-
Mark: Still as the end user you have an obligation-
Lindsey: As the end user you are the obligated party in that situation.
Mark: Who will have to pay that?
Lindsey: Yes.
Mark: Have you heard of anybody ever getting audited?
Lindsey: For use tax as a personal?
Mark: As an individual, correct.
Lindsey: As an individual, no I have not.
Mark: Doesn’t mean you should take the risk.
Lindsey: That’s right. Obviously, you should try to comply as much as possible. I realize that it can be very cumbersome, but generally I’ve not heard of anyone. That doesn’t mean there isn’t anyone who was audited.
Mark: Okay. Wow. That’s a lot of stuff here. Let’s say that I have a business and I don’t collect sales tax on something that I should and then I get audited. Can I go back to those people that I sold to and collect, and say, you should have paid it?
Lindsey: Generally, we don’t see that happen. Most of the time businesses realize that it was incumbent upon them and they chalk it up as a cost of doing business. They don’t want to destroy those customer relationships by doing something like that. If it was a significant purchase, perhaps they would contact. I’ve seen one instance where somebody came back to the consumer and said, “Hey, we should have charged you sales tax. Can you please remit that to us now?”
Mark: Do they have an obligation to pay?
Lindsey: No. I mean, as far as the state’s concerned, it was the businesses responsibility.
Mark: To collect?
Lindsey: Yeah. It’s very, very interesting. You know, another thing is, you mentioned being audited, but often times clients find that they should have been paying and they weren’t. It comes to their attention and then they wonder what can I do to make this right? Generally speaking, most states have something called a voluntary disclosure agreement program, where you can come forward voluntarily and let the state know, hey I made a mistake. I had nexus. I should have been filing. Here’s three years or four years’ worth of back taxes and I’ll file going forward. That way the state gets a little bit of their money. Then, you’re compliant going forward, so everybody sort of wins because if you never file a return, then there’s never a statute of limitations running. The state could go back-
Mark: As far as they want?
Lindsey: As far as they wanted. Where, if you come forward voluntarily and say hey, I made a mistake, here’s three years, let’s just move forward, then you’re good going forward and there’s not that black cloud hanging over you wondering if they’re going to come after you.
Mark: Does the state have to accept the VDA?
Lindsey: They do not, but I’ve never seen a state turn down a VDA. They may change the terms of the agreement, but I’ve always seen them accept the VDA.
Mark: That’s good to know. You mentioned use tax at the individual level. I assume that also applies to businesses.
Lindsey: It does. There is an obligation from each business owner. If you’re not being charged sales tax the same perhaps the company selling to you doesn’t have nexus in the state, so you would have that same obligation of paying the use tax into Ohio or wherever you’re operating.
Mark: That’s also kind of scary to know. In Ohio is that a separate filing for the use tax or is that the same filing for the sales tax when you were…
Lindsey: They’re separate filings.
Mark: Separate filing?
Lindsey: Yeah.
Mark: That makes even specialer right?
Lindsey: Of course.
Mark: Something else to think about.
Lindsey: Depending on your level of liability, you may have different filing deadlines. You may be a monthly filer, a quarterly filer, an annual filer, it gets very complicated.
Mark: Wow. You don’t have any gray hair.
Lindsey: Oh, you’re not looking close enough.
Mark: Now, this also applies to exempt organizations. They could have a responsibility to collect and remit sales tax right?
Lindsey: That’s correct.
Mark: I think a lot of people don’t see that. Well no, I’m not here to make a profit. I’m a not for profit. I’m tax exempt, so that doesn’t apply to me, but that’s not true.
Lindsey: Right, and it depends on the types of activities that the exempt organization is doing as to whether or not they may be subject to collecting sales tax or not.
Mark: Wow. We’ve covered a lot, this term nexus and it’s the minimum-
Lindsey: Connection.
Mark: We talked about sales tax. Talked about use tax. Talked about franchise tax. For our clients, obviously our for profit and not for profit clients, can I have some parting advice? I mean, it sounds like be aware of it. Know what you know.
Lindsey: Right. That’s probably the most important thing. Know what you know and know what you don’t and when to ask for help.
Mark: It’s probably not one of those things where your growth strategy is to limit your sales tax. That’s probably not a good business advice.
Lindsey: Probably not. I would say just call in somebody who can help and get you through it and get you compliant.
Mark: You hear the IRS, the number of auditors are down. They’re kind of in a state of disarray. I’m not asking you to make any kind of comments on Ohio, but is Ohio a little more organized? I mean, do they have sales tax auditors?
Lindsey: Yes. They have sales and use tax specific auditors. They have auditors for the CAT tax, so they auditors in each of the different divisions that they administer.
Mark: They’re not just sitting back taking the forms, collecting the money? Somebody’s aggressively looking at this?
Lindsey: Yes, absolutely.
Mark: Not something to play around with.
Lindsey: Yes. Definitely don’t take it for granted that they won’t come knocking at your door.
Mark: Do you have any success stories as to maybe doing a VDA for a client, obviously don’t divulge any specific information, that you can share with us?
Lindsey: Yeah. I mean, I’ve done several VDA engagements and one of my clients they had been operating in Tennessee for a number of years and didn’t really realize all the facts, so they ended up realizing they needed to do a VDA. We went to the state. It’s generally not a very painful process.
Mark: Were they nervous? I would think when you submit that you’re a little slightly nervous, then you get accepted.
Lindsey: Yeah, you’re a little bit nervous, but we try to calm the nerves. As I said before, states are really willing to negotiate with you because you’re going to become a tax payer going forward, so that’s a source of revenue that they didn’t have.
Mark: Good point.
Lindsey: Also, they didn’t have to go after you through an audit process to get you to become compliant. From their perspective it’s a win. From your perspective, it should hopefully be a win because you’re limiting your liability going back all those years.
Mark: The exposure and the nervousness.
Lindsey: Exactly.
Mark: That’s a good point. Do all states have VDAs that you know of?
Lindsey: I’ve not come across a state that does not have a VDA program, but that doesn’t mean that one doesn’t exist. I’ve done several multi-state VDA engagements, but there’s not one that I’ve seen yet that doesn’t have a VDA program or some version of it.
Mark: Something to take advantage of.
Lindsey: Yeah.
Mark: Well, you’ve been very enlightening today. Kind of scary all the compliance out there that needs to happen. We’re here to help, right?
Lindsey: Absolutely. I mean, please don’t be afraid and don’t be afraid to pick up the phone if you don’t know something. Always happy to help.
Mark: That is as a personal. You helped out a client of mine on a situation and much appreciate that, so thank you very much.
Lindsey: Yeah. Not a problem.
Mark: Before you wrap up, there’s a question we ask every guest. If you could have one super power, what would it be?
Lindsey: Oh my goodness. I would saying being in more than one place at once. I have two little ones at home. Trying to be a mom, and a professional, and-
Mark: It’s hard.
Lindsey: Getting everything done is very hard. If there could be about three of me, that would be just perfect.
Mark: That’d be a great super power. If we could bottle that and sell that that’d be great.
Lindsey: Yes, absolutely.
Mark: Thank you for joining me today, Lindsey. Listeners, I hope you were able to find some answers in this episode and not just more questions. I don’t know if we accomplished that today. With that being said, if you do have more questions about this or any other business related topic, I’d love to hear from you. We’re always accepting your questions and feedback and podcast@reacpa.com. Until next time, don’t forget to visit our website at www.reacpa.com/Podcast to learn more about this topic and more. Finally, I want to once again encourage you to subscribe to unsuitable on Rea Radio, on iTunes, or on SoundCloud. Until next time, I’m Mark Van Benschoten encouraging you to loosen up your tie and think outside the box.
