Part 1: Most Helpful FAQ at Sales Tax and More
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
When it comes to sales tax compliance, it can be easy to get confused about the different rules and requirements. When should you register for sales tax? What is required for a complete registration? And what exactly is nexus?
These are just some of the sales tax questions commonly asked by businesses and sellers. However, it’s important to remember, failure to comply with sales tax regulations can lead to fines and penalties, and, in some cases, it can negatively affect the daily operations of your business. Therefore, it is very important to get the guidance you need on all issues related to sales tax and more.
In this episode of the Sales Tax and More Podcast, co-hosts Michael J. Fleming and Ellie Moffat answer their clients’ most frequently asked questions about sales tax. They discuss what you need to consider before registering for sales tax, the different types of nexus, how to register for resale certificates, and much more. Stay tuned.
Here’s a glimpse of what you’ll learn:
Do I need to register for sales tax?
What is nexus?
What is the worst type of nexus?
Do states care whether sales are taxable or exempt when analyzing economic nexus thresholds?
How do I register for a resale certificate?
Do I need to register if I have economic nexus but no taxable sales?
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax and More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now here is your host, Michael Fleming.
[0:26] Mike: Hi, I'm Mike Fleming, founder of Sales Tax and More and today's co-host of the Sales Tax and More Podcast, where we talk about everybody's favorite topic, which is, of course, sales tax. Today, my co-host, Ellie and I are going to do something a little bit different. We get a lot of questions, and some of them are very frequent. So we thought that we would take this episode and the next to go over some of those most frequently asked questions. There are 14 in total. Today, we're going to cover the first six, and we will do the next eight in the next episode. But before we get into these questions, I would like to introduce you to my co-host, Ellie Moffat.
[1:07] Ellie: Hey, everyone. Mike, I'm really excited for today's episode, we have tried to jam-pack it with really helpful information for everyone. But I do want to do a quick introduction for Sales Tax and More. Sales Tax and More is a full-service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling any of your state tax-related needs. So we do a lot of sales tax returns, sales tax registrations, sales tax audits, consulting research, and like our name states more. So if you have questions about our services, please reach out and ask. We will give you plenty of ways to do so. And I do want to just touch on one more housekeeping thing for today. We're not going to do the classic interview style, Mike and I will be reading questions and then giving you those answers. So it's a little bit easier to follow. And with that, Mike, let's get started.
[2:01] Mike: Okay, thanks, Ellie. And, you know, our first question is, and this is the biggest question, do I need to register for sales tax? I mean, we have lots of clients and potential clients who are calling in wanting to know when, where, how they need to get registered. So the first question is, you know, do I need to register for sales tax? Ellie, ss always my answer is, it depends. Four main reasons or four main issues we have to look at when deciding if you need to register for sales tax or not. And the first one is nexus, you know, and nexus just fancy word means link or connection. So, do you have some sort of link or connection with a state where the state could require you to go ahead and get registered to collect and remit sales tax, and this link, it can be physical, you know, we could be based upon having property in a state that could be real property could be tangible personal property, could be inventory. So inventory that's stored or consigned, or it could, you know, be based on having independent contractors or subcontractors traveling to a state on your behalf, or employees traveling. So lots and lots of different types of activities can create this nexus. But nowadays, since the Wayfair case, it can also be based on just having sales into a state. Some states have a, you know, 200 transaction threshold, other states have just $1 threshold, you know, could be $100,000, could be $250,000. So lots of ways to create this link or connection we call nexus. If you have nexus now you got to determine if what you sell is taxable. And one area that we see a lot of mistakes being made is digital products and services. Because a lot of people say, you know, hey, if I'm selling a widget, you know, widgets are generally going to be taxable. But, you know, if I have a digital widget, or if I'm selling services, a lot of people just assume they're not taxable. And that is just not the case anymore. I mean, taxability rules are changing all of the time every year, we see more and more states taxing more and more services. So the first thing we look at is do you have Nexus, the second thing we look at is what you're selling is taxable, it's not taxable. Most of our clients are going to decide not to get registered, but you got to make sure that it truly isn't taxed well and it's just not your opinion. Alright, so the third thing we look at is materiality. And by the way, this is what I believe, this is not what the states believe the states think that hey, once you have nexus, you know dollar number one, you should be collecting tax. I think we need to use common sense I mean, you know, 200 transactions is a pretty low threshold, if you're selling a $5 item that's $1,000 in sales, does it make common sense to go ahead and jump through all these hoops that the state says that you should, I mean, you'd be better off waiting for a state to track you down. Because, you know, it's actually cheaper to pay the state out of your own pocket plus penalty and interest, rather than jumping through the hoops of getting registered and then having to collect and remit the tax file the sales tax returns. So I think we have to use common sense, and only get registered when the exposure is material. And if it is material, I would think that you want to get registered sooner rather than later. You don't want the liability to continue growing. But so it's you don't want to get registered too early either when your sales are not material. And the last thing is you got to be responsible. I mean, if you're only selling on Amazon, or some other marketplaces, or a bunch of marketplaces, at this point, the vast majority is only three states that do not require the marketplaces themselves to collect the tax. If you're only selling at a marketplace, then you don't need to be registered. Because once a marketplace begins collecting the tax, it's viewed as their sale and not your sale for sales tax purposes. So no need to get registered. If you're already registered and only selling in a marketplace. Most of our clients are De-registering at this point. So le those are the four things, you know, do I have this link or connection called nexus with a state? Is what I'm selling taxable? and services are taxable in many places. Is my exposure material? And then again, are, am I actually responsible for collecting and remitting the tax or someone else responsible for it? So if you can answer yes to all four of those issues, then yes, you should get registered. If you can answer no to any one of those questions. You can wait.
[7:15] Ellie: Mike, I want you to say digital widget 10 times fast.
[7:20] Mike: digital widget digital widget
[7:22] Ellie: Yeah, Mike, you kind of already touched base on this. But the second question that we get a lot is what is nexus and, you know, when I first started working at Sales Tax and More, I remember googling sales tax nexus and it gave an incorrect definition and I brought it to a meeting and was quickly corrected, and hopefully, I'm on the right course now. So yeah, a lot of confusion around the definition of nexus, and we did already touch on it. But as Mike said, it's a fancy word that means link or connection. In tax, it's a link or connection that must be present before a state can require you to do anything, like collect or pay tax. This link or connection can be physical, or economic. Economic just means selling into a state can create nexus. Physical can be created by owning or leasing property in a state, having employees and a state and what some people find kind of surprising is even utilizing independent or subcontractors. So hopefully, this is in your head now. I know Mike touched on it, and I'm touching on it. And we'll probably continue to do so. There you go. There's your definition of Nexus Mike.
[8:39] Mike: Ellie, you did a great job. But we're not going to give you a hard time here. So you've come a long way. And yes, you're square on it. You hit the nail on the head here. So Alright, so the next one we hear, again, relates to this, what's the worst type of nexus? And I was going to use an analogy, but I know Ellie will get mad at me if I use an analogy. I get myself in trouble all the time. You know, if a state finds out that you have nexus, it doesn't matter what type of nexus it is. So when we say what's the worst type of nexus generally, I think it's those types of nexus that you're not aware of. It's anything that you didn't know could create nexus, in my opinion, is actually what the worst type of nexus is. And right now, we have you know, in a recent survey done by Avalara, they say that one out of two people are not compliant with economic nexus. This is the newest type of nexus we have. It's only you know, two and a half years old. But it's two and a half years old, you would think we were to have better compliance in the states are going to be coming out very aggressive as we start getting back to work coming out of these pandemic-related shutdowns. So economic nexus, very, very important. It's very new. Some companies don't even realize they have exposure at this time. So, you know, we've got a salesforce here, they're reaching out to people, they're even reaching out to different accountants. And people are just not aware of this. So economic nexus, big issue. You know, as Ellie was saying, it can be created by just having sales into a state and that's a huge change. I mean, everyone for years has been saying, well, you have to have some sort of physical presence. Well, the US Supreme Court threw that out in the, you know, South Dakota versus Wayfair case. So economic nexus, perhaps one of the biggest out there if you want to call that worst. Okay.
[10:52] Mike: You know a lot of people aren't aware of it. So economic nexus number one, I'd say third party nexus is number two and, you know, third party nexus, you know, it just doesn't make common sense. How can a third party someone who isn't even related to you, you know, you don't control their hours? I mean, it's a true arm's length transaction. It could be a subcontractor, could be an independent contractor, how in the world, can they create nexus for you? Well, unfortunately, the US Supreme Court twice, has come down on the side of the states and said, yes. One was all the way back in 1960. It was the Scripto case in, you know, the state of Florida said, hey, these 10 independent contractors, you know, create nexus and Scripto said, you're out of your mind. How in the world, can these people who don't even, you know, work for us? How can they create this, you know, connection with the state that, you know, you're calling a significant nexus? And the US Supreme Court said, hey, it's constitutionally insignificant as to what you call them, and they're doing the same job. And then this is tested again, in 1987, with Tyler pipe, and, you know, out of that case, we got some really important language. The Supreme Court said, you know, hey, this matter what you call them, doesn't matter how you pay him, doesn't matter if they represent you exclusively, or if they represent multiple parties, it doesn't matter if they, you know, do it on a full time or a part-time basis, here's what matters. Are they helping you to establish or maintain a marketplace, and if they're helping you to establish or maintain a marketplace, good chance that is going to be nexus creating. And the reason why that language is so important is because so many states took that language, incorporated it directly into their statutes, their rules, their guidelines. So very, very important, you know, doesn't make common sense. So a lot of companies out there are unaware of this, even a lot of, you know, trusted advisors are not aware of this, because again, it just doesn't make common sense. But while the states are out there looking for this economic nexus, they're going to stumble across this third-party nexus. And over the years, this has been probably the number one issue that I find that companies are most unaware of. So that's why I think this ranks up there is number one, or number two, as the worst type of nexus.
[13:31] Mike: The next one that I want to talk about is remote employees. Because of this COVID-19 pandemic and the closures. We had a lot of people working from home now most of the states have come out and they've said, Hey, while we’ve have these forced closures in this forced working from home, you know why we're still in this crisis. We're going to suspend you know, our remote employee nexus creating, looking at that as a nexus creating activity. But some companies have decided that having employees work from home is a good thing. And they're giving their employees the option to stay working from home. And that could be an issue because most states you know, depending on what that employee is doing in some states, but some states like Michigan or Arizona say hey, having an employee in the state for any reason is going to be nexus creating so remote employees is a big one. Owning tangible personal property in the state is often overlooked. You know, whether it be inventory. You know, a lot of FBA sellers say hey, you know, I didn't put the inventory in the state so, therefore, it's you know, not creating nexus for me. But it doesn't say you have to put it there. What it says is owning tangible personal property in a state and inventory is tangible personal property. Some states go further and say, having inventory in the state, whether, you know, you put it there or whether it's consigned inventory, that is going to be nexus creating. If you're leasing, if your equipment or any type of property that you're leasing, that's crossing a state line you can you now own property in another state. So owning tangible personal property in another state, big, big issue. And oh, by the way, just because Amazon is now collecting the tax for FBA sellers, if you're selling on more than one channel, you know, if you're selling on Shopify, and in addition to Amazon, Shopify is not a marketplace, you're responsible for collecting the tax on Shopify, in that inventory to an Amazon warehouse can still create nexus for you. Some states like Texas and Arizona have changed their thinking on that. And depending on you know, if it's being in between Amazon warehouses being used to fulfill an Amazon sale versus, you know, Amazon does fulfill sales for other channels. That will give the answer as to whether it's nexus creating or not. And the states that have changed are Arizona and Texas. And then a virtual office. Last thing I want to talk about right here. So many people nowadays, tell me, well, Mike, my business is in the cloud and therefore, I don't have a location anywhere. And unfortunately, the states just don't look at it that way. You yourself or your client is the one who is creating this link or connection anywhere you live or operate your business from. You're creating a link or connection with that state.
[16:50] Ellie: Yeah, Mike we poll people about this and every webinar, we have almost what the what is the worst type and nexus and just like you said, most common economic or third party and lots of confusion surrounding that. So a very helpful frequently asked question. So the next one we have here is, do states care whether sales are taxable or exempt when analyzing economic nexus threshold? Do they look at total sales? Or just taxable sales? And not for the last time, the answer is, it depends.
[17:27] Mike: Not only my favorite, answer, now it’s becoming your favorite answer too.
[17:30] Ellie: Yeah, it will. It will always be the most common answer at Sales Tax and More, there are just so many variables when it comes to seemingly everything. But essentially, some say some states say total sales, including exempt sales, other states say only taxable sales, some states exclude sales for resale but include exempt sales. Some states exclude marketplace sales, while others include them. So you may already be confused. That's okay. On our website, we actually have a free chart that details all of this, we have a lot of great feedback about it. And it details what's included, what's excluded, as well as economic thresholds, their effective dates, and a lot of other useful information. So I would take a look at this. States are really continuously updating their information and as they do, we keep the chart updated as well. So it's called economic thresholds, nexus thresholds. And I will link this in the show notes, as well as you can also pretty easily find it on our website. So there you go.
[18:41] Mike: Alright, Ellie, and that is a great resource when states first come out and announce their economic nexus, very little details. And you know, over time, more and more information is released. So like Ellie said, we're constantly updating that chart. So whether you're wanting to figure out what your own economic nexus footprint is, or whether you are helping your clients figure out what their economic nexus footprint is, it's an invaluable tool. And by the way, there are a lot of software companies out there that now come up with this economic nexus software. And, you know, unfortunately, you usually just don't get as granular with that software, you get a lot of false positives, sometimes false negatives. So if you don't want to be out there, you know, needlessly registering in states. I suggest, you know, if you're going to use the software, that's just the first pass, then you got to look at what's actually included in those thresholds, because you may not cross a threshold if you back out those things that are excluded. So software, great at a lot of things, figuring out nexus is usually not one of those things. All right. So Mike, I Just want to register for a resale certificate. Can you help us with that? Or how do I do that? That's the next question. And generally, you can't. I mean, that's the quick and easy answer. I only have you ever thought I was gonna give you a quick and easy answer?
[20:16] Ellie: No, no, but I'm sure you're gonna expand on that a little bit so.
[20:22] Mike: Of course, so, you know, in most states, in the vast majority of states, the process for registering for a resale certificate is actually registering to collect and remit tax. So that's the process you go through. And as a result of being registered to collect and remit tax, you in some states get a pre-printed resale certificate, like in the state of Florida. In other states, you just download the certificate off the state website, or even doing a Google search. And then you write in your sales tax numbers. So that's how your register for resale certificate. State of Illinois is the one major exception that I know of. And if you don't have any taxable sales in the state of Illinois, and you're not required to collect and remit tax, then you actually can register for what we call a resale certificate. And it's a little bit tricky, you got to be careful, you're not registering to collect the tax. But if you don't have a responsibility, this is something you may want to do. If you have to issue a lot of resale certificates. Your vendors may be asking for it, you can give them exactly what they want, and have no responsibility to collect tax. But Illinois is an exception rather than the rule. Now, this is often a little bit of a tangent. But once you're registered in your home state, you know, which is where you generally want to start to register first. A lot of states accept home state certificates or even if they don't accept a home state certificate, they may accept their own state certificate with your home state number. So we call that alternative documentation. But alternative documentation can only be issued if you don't have nexus in the state. If you do have nexus in a state, this link or connection we were talking about, then you have to be registered in order to issue a valid certificate. Alternative documentation is only okay. If you don't have a responsibility to collect and remit tax. How's that for adding onto an answer?
[22:46] Ellie: Yeah, thank you so much, Mike. I think that was incredibly useful. And I'm going to jump right into the next question here. So do you need to register if you have economic nexus but have no taxable sales? So I think the first thing I need to do here is making some clarifications. If all of your sales are exempt, then you do need to make sure you are collecting a valid exemption certificate on all of your sales. When it comes to registration, some states do not require a company with 100%. I mean, 100% exit exempt sales to register. However, other states do require you to register and file a zero-dollar return. So the risk is when you're not collecting a completely filled-out exemption certificate on the correct form. However, in general, most of our clients, they don't register in this scenario, unless there's a really specific reason to do so. Mike. So, Mike, I could have started this up by saying it depends, but I think those clarifications are very important.
[23:51] Mike: In speaking of clarification, one thing I do want to say, is that in most states any penalty or interest is based upon the tax that is owed. So if all your sales are exempt, there's no tax it's owed. So, you know, even if the state tells you to do something, to me, that's just a recommendation. I mean, you know, there are no teeth there. You know, if they come in and say, Hey, you were supposed to be collecting tax, you say, oh, my bad, and there's no penalty or interest. There are a handful of states that in addition to those normal penalties and interest, they've put in, you know, something along the lines of if you were supposed to be filing a return and you didn't file a return, then there's a $50 penalty. So a lot of people get scared about that. And they say, well, we're going to do it, you got to remember that, you know, if you're paying someone to do your returns, you know, you still have to pay them I don't know $25, $50 you know, whatever that per return fee is. So a lot of times it's a wash. So most of our clients You know, if they don't have taxable sales in the state, they're not going out and getting registered.
[25:07] Ellie: Yeah, thank you so much, Mike. We did it. We did the first six questions here. So please join us for the next episode, we will, we'll do eight more of our most frequently asked questions and they're all incredibly useful. So if you have sales tax needs, we do offer a lot of solutions and services, you can just reach out to me directly if you have questions. My email is emoffat@salestaxandmore.com. We also have a lot of resources on our website, including the economic nexus threshold chart. Our website is salestaxandmore.com. And in addition to our services, we do have a series of free webinars, we have paid resources, we have a lot of really helpful information and services out there. So thank you, everyone. And yeah, thanks.
[26:05] Mike: And I really want to thank everyone for joining us on today's episode. We would like some feedback, did you find this format which is a little bit different than we've done, Do you find it helpful? And would you like to see more of these sprinkled in? And also, we'd like to solicit some, you know, ideas for topics that you'd like to see covered in the future, whether they be interviews with certain types of people that we work with, or whether they be more along this with frequently asked questions with Ellie and I answering those questions. Please submit your feedback to us. Let us know what you would like to see or hear. And again, we hope to see you on the next episode, where we're going to cover the next eight frequently asked questions. Thanks, everyone. Bye Bye.
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