Doug Houser:
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Remote work has become the new normal, and as a business owner, you can't help but wonder how this will affect your business during tax seasons to come.
Kathy LaMonica, principal, and Rea's SALT team is here to discuss the layers of remote work and what land mines you need to be aware of registering for payroll taxes in new states, and more. Welcome to unsuitable, Kathy.
Kathy LaMonica:
Doug, nice to be here. Thank you.
Doug:
Yeah. Great to have you. And I don't know that this topic has been at the forefront of a lot of people's minds at the start of COVID and everything. But certainly, people are paying more attention now because so much has changed with obviously the work environment and then how that's dealt with, with regard to taxing authority. So can you give us just maybe to start off, a high-level overview of where maybe some of the issues are and what we should be aware of?
Kathy:
Sure thing. As you said, I don't think this is unanticipated changes in the workforce and I think we've always had in the past people who might have a remote employee or deal with that kind of payroll registration. I would say since COVID, and most specifically in the last few months. I've gotten requests for payroll registrations over and over again from our clients like, "How are we going to go about this?" And I think it's brought to light all the issues that come with that, that people don't really consider. And from a SALT perspective, we haven't slowed down at all through this whole COVID and I think it's just exploded with issues that we've had to encounter and what it triggers for Nexus.
Doug:
Yeah. And so for those that aren't aware SALT, we're referencing 'State and Local Tax'
Kathy:
I always forget people don't know-
Doug:
That's the all-knowing moniker that we have certainly for Kathy. She's a tremendous resource and the one we go to in our firm for that. But at first, I know in the state of Ohio at least when everybody was sort of sent home initially last March, the state made a choice to keep everybody's "home office" in the same place that it was, right?
Kathy:
Exactly.
Doug:
But now there're some lawsuits if I understand. In terms of how we might deal with that going forward. Can you update on that?
Kathy:
Yeah. Absolutely. Ohio is a particularly difficult state anyway to deal with payroll issues and withholding because of the local municipality. And they did take a position and said, "Keep it at the working city." And as it progressed, there have been different lawsuits that have come up. There's been a couple of bills initiated to try to resolve some of those issues. And basically, it comes down to did your employee move because of COVID? Is your employee permanently moving? And that's going to make some differences. And what they referenced with the first action that they took was for the emergency declaration period.
So at ends, then there's a time up and then you still have to reconsider, is the employee going to stay there? Are they going to move back? How do you change it? Do your systems, can you handle them? But subsequently like outside of Ohio, when you have the same parallel issues with multi states, some of those states gave some Nexus Waivers. They're not for COVID purposes. But not all of them, I think I counted as 18 gave like Nexus Waivers due to COVID. But the rest of them didn't so you have that complexity too.
Doug:
Yeah. So much complexity there. If you think about it, you think through not just from the employer or employee perspective, but those states and municipalities, right. Particularly large cities. I would think that could just have a tremendous impact in terms of a reduction in their tax base if it acts elsewhere. Right?
Kathy:
Exactly. Cleveland...I'm up in the Cleveland area. Columbus, I know they both are struggling with that kind of concept because they would lose tremendous amounts of money if they had to shift their workforce or withholding to different localities.
Doug:
Yeah. And as you mentioned multi-state too, you may have people that are either that remote or were used to traveling and all those kinds of things. It's so much more complex. Let's go back a little bit to widely discussed a few years back, the Wayfair case and what that did in terms of business impact and obviously having nexus for a business in a number of states. What are some things to look out for there?
Kathy:
Sure. And I'll say because Wayfair's a couple of years... While we're coming up on three years now that it's coming out. It's kind of like a cataclysmic experience because the states were giving businesses some time to comply. Now you have COVID, now you have remote, where it's bringing back the physical presence [inaudible 00:06:36] of nexus to the business that was there anyway, but people could take a different position. But now if you have the economic nexus, you may behave a remote employee. There's no getting out of the fact that you have nexus [inaudible 00:06:51] the complexities of income tax, franchise sales tax, whatever apply. And I think because states have had time since Wayfair to kind of get up and running. We're already seeing an uptick in an audit. I had a client, he's a small manufacturer in Ohio, got a letter from California. His sales don't come anywhere close to the economic nexus. But the fact that he's even on their radar, for them to ask the question is remarkable. So it just shows how aggressive states get and how they go about finding those potential taxpayers.
Doug:
Yeah. it is amazing. I know we see that even at the municipal level. Dealing with a lot of construction clients that all of a sudden they've got a vehicle or a piece of equipment with their name on it that shows up on a job site, just maybe even for a short period of time. And certainly something they need to be conscious about in terms of those registrations.
Kathy:
And I've seen Wayfair and I know that states are making... They're starting to make some revenues that they hadn't had before and they're getting taxpayers who comply, but they don't seem to be backing off. They're still getting aggressive because they know they can. So it's challenging. And now you're dealing with clients who maybe have this other physical presence with payroll and out of it. But when you have to answer the question on the registration, when did you hit nexus? Or when did you have your first taxable sale? So to speak. It's harder to say, 'oh today', you have to go back and look, and that has other implications. Did you have exposure in the past? Opens a whole can of worms for some companies and what they have to do.
Doug:
yeah. And speaking of that, I think one of the great things that you do is really go through kind of that risk exposure and cost-benefit analysis. So talk a little bit about how you sort of deal with that on the front end. It's not always like, oh my gosh, she got this huge expense to pay all this tax. Talk about that process that you go through with clients.
Kathy:
So generally when we have a client they've usually heard about Wayfair or they know a little bit about economic nexus and they want to know how it affects them. And so we do a whole diagnostic process of where do they actually have nexus. We look at all aspects of [inaudible 00:09:22] activity, subcontractors, independent reps, whatever there might be physical. And then the economic, the thresholds, the hundred thousand dollars of sales, the transactions.
We take that, we figure out where they have nexus. And then we calculate a risk assessment. So if their nexus started a couple of years ago, what the tax implications from sales tax, from income tax, do they have exemption certificates for their exempt sales. We look at that and give them a sort of action plan of where the priority states are, where the needs are, and we can move forward and help them get compliant and go forward. So it gives us a more well-rounded view of where they might have issues. And I think one of the good things... I know there's software out there that will tell them if they've hit a target or whatever. But we look at everything they possibly could do that could trigger so that they're not getting just one thing, oh, our sales aren't that high, but yeah you've had reps in the state for 10 years so you have to look at that, so we do all-inclusive.
Doug:
I think that's tremendous. And then that way you give a client the ability to evaluate at the end of the day. Here's what we think, here's our assessment of your risk exposure. And so let's come up with a plan together to address that. So I know in addition as a follow-up to that. Then a lot of what you do is consult with folks on getting the proper process and procedures in place than to be in compliance going forward. Right.
Kathy:
Yeah. It's me specifically working technology a lot and implementing sales tax software for them. And a lot of times my clients are manufacturers and they think, oh, I don't have taxable sales. Well, it's not necessarily the sales tax calculation. It's managing the 10,000 exemption certificates that you protect yourself. And sometimes it's a simple process fixed, sometimes it's a much more complicated process depending on if they're selling through e-commerce, they're selling through reps. So we can look at the whole process and figure out what's works best for them.
But I think that most customers, most of our clients, just need to know where the holes are, where they need to be fixed, and then we can walk them through the next thing. If you tell somebody they have nexus in 46 states. They are not going to register in 46 states, right?. So we try to give them a phased approach, just do it reasonably. But these other things in place so that you're able to calculate the tax, you're able to track the certificates and have that knowledge then going forward.
Doug:
Yeah. And to that point, having that plan and putting in place those processes, do you find if that helps with the auditors when they maybe inquire about, Hey, what are you doing? Do you have these things to kind of show that you're making some attempt?
Kathy:
Yes, I will say yes, but I did have a situation. I spoke with a prospect actually in New York City, not too long ago and they're a billion-dollar company. So they had been spending the last couple of years trying to put in sales tax software because they knew they had massive sales tax compliance responsibilities. And they got a letter from California again before they were ready to go live or right around the time they started filing. Even though it took them two years to get the systems in place. California was still expecting their sales tax complied because of what they sell, a hundred percent tax. Well, they had a $5 million assessment from California alone. If every one of the states went back, it could put them out of business.
And they said, they went through the law channels. They went through every kind of way to approach it, to try to get California to sort of let go of the tax liability and California wouldn't budge. They would waive penalties and interest potentially and that is a liability. And you would think you'd give someone that much time to get, but California didn't see it that way. So it can be tough. So you want to get...I don't know that's an anomaly, but you definitely want to get ahead of it because you don't want to be dealing With that.
Doug:
So you mentioned obviously, California being aggressive. Are there other states that either A? Are you see being fairly aggressive or, B. Those are maybe overly complex in terms of trying to understand those issues?
Kathy:
Generally, The states that are our triggers are California, Illinois, New York, Pennsylvania can be difficult. It really depends. I don't even know if there's rhyme or reason. Pennsylvania is not that complicated as far as calculating tax, it's pretty straightforward. Whereas New York and California both have multiple hundreds of thousands of tax rates. So it can be really complicated.
Illinois just literally changed its rule. Like it used to be, if you were a remote seller, selling into Illinois, you had the one state tax rate to charge. Now they want you to collect on all the destinations. So it just complicated their calculation. For us, we were uploading hundreds of locations just to file a return. One of our clients returns is like 400 pages for Illinois. It should be a two-page document. So they went worse, made it even more complicated to do business. And you wonder why, but I think it's because all their localities want a piece of the pie and that's the only way that they Can do it.
Doug:
Yeah. We just keep talking about making things simpler and it seems that every turn we go the other way.
Kathy:
Oh, I know, and every day or every client, when is the federal government going to just put one state sales tax or one flat sales tax rate? And I don't think it's ever going to happen. [crosstalk 00:15:21] but it would make it a lot easier for everybody else.
Doug:
Yeah. Well, on the Ohio front, DC, is there anything in the legislature or anything that's coming down the pipe that perhaps we should pay specific attention to?
Kathy:
The municipality or?
Doug:
Any of that?
Kathy:
I'll apologize, cause I'm not incredibly knowledgeable on that, but I know there are two bills that are trying to sort of sort out how that would work from payroll people from next. But as far as Ohio, just general tax rules for sales tax or changes. Not so much, I'm seeing a big tick in other states starting to text services more than they ever have in the past, which is unusual because usually, that was kind of like the protected thing. If it's a professional service and they're not really targeting professionals as much, but like software service or digital products where it used to be, if you bought a movie, you'd pay the sales tax on it. If you bought a DVD, you'd pay the sales tax. But if it was electronically transferred, you didn't have that sales tax on it because it was not tangible.
Now they're saying if you're streaming, which obviously during COVID, everybody started watching Netflix a lot more. They want to make sure that [inaudible 00:16:44]. So streaming services, digital project products, software as a service. Meaning basically like the application that you're logging into LinkedIn is a software as a service where it's an informational thing, but you're logging in on a cloud-based [inaudible 00:17:00] states are coming up with rules to tax that more. And in Ohio, they've always been pretty aggressive on the computer side of things on kind of thing. So, I think they're just furthering that along, but it's interesting to see the states do that.
Doug:
And now in Ohio, of course, we've had the CAT tax here for some period of time now kind of replace that old franchise tax type of thing. I go back and date myself there. Do we see any movement nationwide to kind of simplify and go to that type of system?
Kathy:
There are a couple of states that are doing that or have done that. Oregon passed a similar grocery seeds kind of taxed that and Manhattan has had one. Some of the thresholds are really high for [inaudible 00:17:51] unless you're physically located there. Your sales are significant, I think the band is 4 million. It's a pretty high threshold. Although, I just read something today about Oregon. Like if you have an employee there over $50,000 of payroll in that state, you will effectively hit that. And I hadn't read that before. So that was new. I was thinking it may not apply. So there are things like that.
I think when you're registering for payroll tax, you have to consider the sales tax, income tax, and then franchise taxes, like the Texas franchise. You don't even have to apply for it, you can apply for a sales tax permit. And a month later you're going to get a letter from Texas saying, Hey, by the way, you have franchise tax too. And I think there are other states that are very similar. Like you might not have high sales there, but because you're just considered doing business and those are going to hit as well.
Doug:
Yeah. The more I learn, the more I become convinced the less I know when it comes to stuff because it's just so different from state to state and I just caution our listeners to be wary of what you read. I mean, you read some of these things where this state is, there's no income tax for example, but they get you in other ways. Right.
Kathy:
Absolutely.
Doug:
Just don't assume that your cost of doing business there is zero or very cheap.
Kathy:
There are five states that don't have a sales tax, but I think all of them have an income tax or some sort of component or property taxes that get you in a different way. And the one thing I wanted to mention is on the Wayfair to like Florida and Missouri, where there are outliers who still don't have rules based on the economic nexus thresholds. So both of them have bills, I think that is progressing finally. So I expect Mid-year they're going to probably have their rules in place too. And those will be the last two.
Doug:
Good to know. I think the lesson for me and all this, what I've learned is dealing with Kathy and our SALT group. Get them involved upfront either if you want a risk assessment because of your current business practices, or if you're considering expanding as well and looking at what the costs are to make sure that you're compliant. One last thing, Kathy, and we've been involved with a lot of M&A deals, and this comes up in transfer business, right. The purchaser wants to know, Hey, what's my potential exposure here that the company may not have been dealing with at all. So you do that too.
Kathy:
Yeah. And we generally have been on the side where the company wants to sell and their purchasers looking at what we have done or vice versa, but yeah, due diligence for that is extremely important. We had someone who was selling and they had an excess everywhere. They hadn't been collecting exemption certificates. We came up with pretty significant liability for both sales tax and income tax. If the buyer was going to withhold a couple of billion dollars off to make sure it was covered if things came to light. And we actually went through and did some voluntary disclosures and help them clean up the system and the buyer actually reduced the amount that they were withholding for that exposure. So it really did help them.
And I think people don't realize when you're buying a business, the successor liability rules that transferred to you, you think it's done and clear, but it doesn't necessarily disappear. And it doesn't even matter if you have it written in a legal document, the state's mills still follow up and try to assess that liability to you if you're the new owner.
Doug:
Yeah. That's great stuff. Just so much to know. And to be aware of. The idea here is to get the experts involved, make sure you understand what your potential risks might be, and then develop a plan to deal with that over time. It doesn't have to be certainly a fire drill or any kind of panic thing. But the key is to understand your risk and have a plan.
Kathy:
Absolutely.
Doug:
That's great stuff, Kathy. And thank you so much for being on. For super insightful and look forward to having you on again soon.
Kathy:
Awesome. Thank you, Doug.
Doug:
Yes. And if you want more business tips and insight, or to hear previous episodes of unsuitable, please visit our podcast page at www.reacpa.com/podcast. And while you're there, sign up for exclusive content and show notes. Thanks for listening to this week's show. Be sure to subscribe to unsuitable on apple podcasts, Google podcasts, or wherever you're listening to us right now, including YouTube I'm Doug Houser. Join us next week for another unsuitable interview with an industry professional.
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