Sales Tax Research Dos and Don'ts
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…
Before making any decisions regarding sales tax, you should first acquire all the information you need to create an effective tax plan. However, it’s important to gather your information from the right sources when conducting your sales tax research in order to avoid common mistakes and pitfalls.
For example, the team at Sales Tax and More knows from experience that relying on verbal answers from states on issues related to taxability can have major consequences for your business. According to Michael J. Fleming of Sales Tax and More, this is just one of the many dos and don’ts of sales tax research.
In this episode of the Sales Tax and More Podcast, Michael J. Fleming is interviewed by his co-host, Ellie Moffat, about the best strategies for conducting sales tax research for your company. They discuss the common mistakes sellers make when gathering sales tax information, the right tools and sites to use for your research, and what you need to know about the taxation of services. Stay tuned.
Here’s a glimpse of what you’ll learn:
Michael J. Fleming shares what firms looking to carry out their own sales tax research should not do
Michael's advice on making phone calls to states to ask about taxability
Why you shouldn’t assume that the competition is doing it right
Michael explains why the Frequently Asked Questions (FAQ) page is not always authoritative
Should you trust your accountants when it comes to sales tax advice?
The tools companies and sellers can use to carry out their research
Michael's final thoughts on the taxation of services
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 Mike Fleming here, Founder of Sales Tax and More and today's co-host of the Sales Tax and More Podcast, where we talk about everyone's favorite topic, which is of course sales tax. Today, my co-host Ellie Moffat is going to be interviewing me about sales tax research. Very exciting topic. But before we get started, I'd like to introduce you to Ellie.
[0:49] Ellie: Hi everyone. Great to be here. Mike. I'm excited to talk about sales tax research today. And before we do a quick introduction for Sales Tax and More. So 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 your state tax and related needs. So we do a lot of sales tax returns, sales tax registration, 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 reach out to us in this episode, and in the show notes as well. So, Mike, we joke about the most common answer regarding sales tax issues being, it depends, we say it all the time and everything we do. However, when it comes to taxability, with each state having its own rules as to what is taxable and what's not, I can't think of a more perfect answer. Now people can hire firms like ours to do research. Obviously, it was in our name description that I just gave there. Do you have any advice for those who want to do their own research?
[2:03] Mike: Yeah, absolutely, Ellie. But before we get into it, I just want to give you a little bit of a hard time. You always give me a hard time about, it depends.
[2:15] Ellie: This is a firm-wide joke. Exciting group here.
[2:20] Mike: But truly, when we talk about research, it gets so granular, and it depends on the facts. In just small things can actually change it. And of course, it's different from state to state. So I've got a list of dos and don'ts. Let's go ahead and start with some don'ts. First, a big one, a 10,000-foot overview, when you're doing your research, if you're going through state website, if you're using Google, whenever you find what you're looking for, my biggest bit of advice is don't try to stretch it to fit what you want it to say. Because states are not going to look at it that way. They're not going to say okay, well, you're allowed to stretch this. It is or it isn't; generally, there are gray areas. But if you come into a gray area, don't stretch whatever you're reading, to try to fit your perfect scenario. Because invariably, if you get audited at some point down the road, the state's going to take an adverse position. Now the money that could have been coming out of your customers pocket, now all of a sudden, it's coming out of your pocket with the added insult of penalty and interest because you stretched something in the beginning. It is important when we're doing sales tax planning, which is what you're doing when you're looking at research for the most part. We want to take a conservative approach. Now, if we're doing sales tax research to defend ourselves in an audit, or if we're doing it to try to mitigate some past exposure. Before we pay money out in the VDA. Then we can stretch a little bit. Let's go ahead and see what we can. You know, how far we can stretch, we've got nothing to lose. Otherwise, we're going to be paying money. But when we're doing the planning, it's better to err on the conservative side.
[4:20] So that's where I want to start. Let's talk about what a lot of people do. A lot of people just pick up the phone and call the state. Unfortunately, some states have good people answering the phone but some people are not very helpful at all answering the phone. Sometimes you can call the state three times in a row and get three different answers to the same question. Call it 10 times in a row you get 10 different answers to the question. So, we don't want to just call the state and take the state’s word for it, because we may be getting a wrong answer, even though it's coming from the state. If you get audited, at some point in the future, the auditor is going to say, Well, it's great that you called the state. But did you get it in writing? A lot of states have it right on their hold system that verbal guidance is not binding upon the state. We're going to talk about what to do. We call state sometimes too, however, it's after we've already formed our opinion. And we want to check it to see if our opinion is correct. First, we have used other sources to get to our opinion, and we want to call the state and see if it makes sense. It's usually not the first person that answers the phone. But you want to talk to someone, talk to someone who can comment on policy. So now, if they agree with us, you say, okay, we were thinking along the right lines. But if they disagree with us, now, we got to go back and say, okay, where did we miss this? So calling the state without having done the footwork first, can get you in trouble. If you're just taking verbal guidance, very, very troublesome. Now, I'll skip to a “Do”. If you do call the state, here's what you want to do. You want to ask them if there are any publications or any statute that they can steer you to, that will support what they're saying. This is very, very important. You don't want to tell someone, hey, I don't believe you. Instead, say hey, that's a great answer. You just saved me a lot of work, but my boss is a real stickler, and he's going to say, “Well, where's it in writing?” So, is there any way you can help me out? Anything you can point me towards to read. Because a lot of times it contradicts what they told you.
[7:05] Calling a state is a tool. But just like any tool, you want to use it in the right situations, and you want to use it properly. If you use it improperly, or in the wrong situation, that tool can do more harm than good. So verbal guidance from states not binding gets more people in trouble than it helps. The other thing that we don't want to do is assume the competition is always right. We use a case study in a lot of the webinars where there's a camera company who was leasing commercial-grade camera equipment, into the state of Massachusetts. Massachusetts audited one of their customers. They found them. They called this company and said, how long you've been doing business in Massachusetts? They said, oh, we've been doing business here forever. They said, okay, we want the last eight years’ worth of back taxes plus penalty and interest. This company said, oh, no, we can't be doing it wrong, our camera equipment doesn't create nexus. The state of Massachusetts said, Yes, it does. They said, well, our whole industry does it this way. The state of Massachusetts and said, okay, give me the names of all of your competitors. We'll go after them. So this gentleman gave it to them and said Massachusetts called all their competitors, we actually got a code. The way we found out about this is we got a call from one of the competitors. They said, hey, my competitor just turned me in. Is this true? Do I owe tax to Massachusetts? For this company, it was a good thing, because not only did they have exposure in Massachusetts, we helped them mitigate it. They had the same type of exposure in every state out there. Owning inventory in a state is a nexus-creating activity or owning tangible personal property in a state is a nexus creating activity. If you own something that you're leasing, you own property in another state, if it's going across the state lines. Don't just assume the competition is doing it correctly. A lot of times, it's a case of the blind leading the blind. Here in Texas, the people who are doing website design, they're looking at the enumerated services and website design is not an enumerated service. They stop there, they don't dig deeper. Even a lot of accountants make this same type of mistake in Texas knows this. They target specific industries because they know the whole industries are getting things wrong. So you can't just assume the competition is doing it correctly.
[9:53] You can't rely on an article where you don't know who wrote the article. You don't know if things have changed since the articles have been written. You don't know if the person who wrote the article truly did understand what was going on. Now an article can alert you to an issue. It can say, hey, I better do some deeper digging into this, but you want a more authoritative source than an article to base how you're going to tax items on a going-forward basis. Some people think, well, a chart was put together by a company that does sales tax research. Charts are a great place to start. They're going to point you in the right direction, they can give you a lot of information very quickly. However, you don't want to base any final decisions on a chart. Because sometimes the chart is prepared by the lowest paid worker at the firm or the least knowledgeable worker at the firm. Sometimes they get it wrong. Even from our research sources we use charts, but we don't make any final decisions there. A lot of times, I look at the underlying citations, which, by the way, if you're going to use your chart, look at the citations listed in the chart. Sometimes I'm looking at the actual statute that the chart is pointing me towards and where they supposedly got the answers. And it's the direct opposite of what the chart is saying. So, again, a chart is a tool, it's a great place to start. But you got to check the citations. Where is the chart is pulling its information from how old is the chart? Things are changing very rapidly, charts are sometimes outdated on the day that they're actually released because the information they're relying on is older. States don't wait until January 1 every year and make all their changes. They're changing things throughout the year. So a great tool, just like all of these things are great tools. But you got to learn how to use it correctly.
[12:01] So no final decisions on charts, it's a place to start. Frequently Asked Questions page are not authoritative at all. To give you an example, here in Texas, when they passed the marketplace collection statutes, they came out and said that for economic nexus, you don't have to count sales through a marketplace. On the Frequently Asked Questions page. However, in the statute, it looked like you didn't need to collect it. So we were telling our clients, hey that pointed out this frequently asked questions page, we said, that's not authoritative. They can just pull it off their website when it's not there anymore. You got to look at the statutes, you got to look at the rules, you got to look at the regulations In this case, about three months after, one of our clients, pointed this out to us that the state of Texas went in and they removed it. And now they said oh yeah, this was wrong. So you can't rely on a frequently asked questions page. It's just not authoritative. So another thing and I know we do have a lot of accountants who, listen to us on this podcast, but you can't blindly trust your accountant. There are some accountants out there who are very, very good, and who do understand sales tax. And then there are a bunch of accountants out there who, they everyone's a sales tax expert since we've got economic nexus, people who had never done sales tax before all of a sudden, our sales tax experts, so it's not hard to say your sales tax expert, it is hard to deliver on the services that your clients need. And I'll tell you this, whenever anyone's come to us with a big problem, whether it be an audit, or they're looking at doing a bunch of VDAs, because they have a bunch of past exposure. They always say this is how this conversation starts out. Well, my accountant told me this, or my accountant told me not to worry, or my attorney told me this. So, accountants are trusted advisors, we tend to believe everything they say. So if you are an accountant, and you do have a firm grasp of this, great, but if you don't, don't use your clients as guinea pigs. I mean, go out and get the education and become an expert before holding yourself out to be an expert, because you don't want to be those ones that your clients are coming to us later on and saying, hey, my accountant screwed me. I mean, because it just doesn't end there. They usually, I read enough, they may have litigation against you or whatever. So do the work if you are an account. If you're not an accountant, ask your accountant how they're staying top of all the changes. I mean, accountants have so much to stay on top of just with the normal services they're offering you. Now with Wayfair, you may have the potential to file in all states, or all states with a sales tax 46 Plus, Washington DC. So 47 jurisdictions. That's like almost a full-time job. So how are they staying on top of everything they need to in order to help you? Maybe they have a SALT department, maybe they hired someone who is a SALT specialist. SALT stands for state and local taxes. So accountants, again, they can be a great resource, a great tool. But you gotta ask the tough questions. That one of the dos has your accountants how they keep current? So we talked about the dos being, do as the state where to find the documentation, ask your account and how they're staying current, how many clients they do have that are multistate clients, how long they've been doing this. What are the underlying citations on a chart. So Ellie, may be a little bit long-winded here. But that's my list of dos and don'ts for people who are going out there and actually doing their own research.
[16:33] Ellie: Well, thank you so much, Mike. I think this is really great advice here. So let's talk about tools. Are there any tools that sellers can use?
[16:45] Mike: Yeah, absolutely. So believe it or not, Google is probably one of the most cost-effective tools out there. It's a great place to start, you can google some questions or some items. They'll take you right to the state website, and the answer will be there. Other items, not so much. So if you're going to be doing a lot of research, I suggest you like us, we subscribe to a number of research sources, such as CCH which is a Wolters Kluwer company and Bloomberg, which is BNA. You've got Thomson Reuters, you've got TTR, which was just acquired by Avalera in the last week or so. But all of these companies have, excellent, research libraries and tools that make your life a whole lot easier. Now, they're not cheap, they're going to range anywhere between $5,000 and $10,000 or more per user. So, if you don’t have a lot of need for sales tax research you might need to stick with Google and if you can't find the answers on Google reach out to someone like us. But if you have a lot of questions, and you're going to be doing a lot of research, one of these sources out there is an excellent source. Now, we've also got an offer from a source out there, yeah, we call it our Salt Vault. Inside of our Salt Vault, we have quite a number of proprietary charts, lots of other great information. We share some of the charts from our actual research sources. So all in all there's close to 100 different charts in there at this point. Plus other tools that we make available in special webinars. So in the Salt Vault, I read a comment from one of our users the other day, they said it is now their best research tool, and they spend all their time in it. In addition to these other sources, there's my New York accent kicking in again. You've got our Salt Valt.
[19:08] Ellie: Thank you so much, Mike. Let's wrap it up here. What are your final thoughts?
[19:16] Mike: Yeah, absolutely. When I think about research, they don't think about services because they don't, they just don't think that services are taxable. But every year more and more states tax more and more services. As of now, I don't know of any state that doesn't tax at least some services. Well, there are some states that don't tax anything. So they're not going to tax but other states that actually have sales tax services are taxed in each one of them. Now, some states tax practically all services, while other states just tax some services. So don't forget about services. When you are doing your research. I spoke to someone this morning and they were telling me they said, well, Mike, what about rush sales? Do we add on fees like this. Some states, something like that is going to be taxable if you're charging tax on the actual item itself, because, like a rush fee in many states is going to become part of the sales price. So if the sale… would be taxed as part of this, the sales price, even though it's separately stated, so very important to look at services and how they're going to be taxable on a state by state basis. Don't just stay on the surface, you gotta dig deep. A lot of times, when I'm training people to do research internally here, they'll come to me and say, okay, I got the answer. They bring me something that was either superseded or is just a little bit off our fact pattern. There's something better out there. A place where a lot of accountants and a lot of companies make mistakes is services, for example, we started talking about website design earlier, in the state of Texas they had their list of enumerated services, website design, website, hosting is not one of those services. So if you're quickly reading the headlines, if you're reading the statutes, and Texas says, hey, we only tax enumerated services, which means listed services, ones we're telling you about. You look at all these services, and you don't see website design there, then you go and tell your client’s hey, website design and website hosting is not taxable. However this is where the research sources come in. Because if you look at the rulings or the publications that the state has put out the guidance that the state has offered the court cases, you'll see that for the last 30 years, Texas has considered website design and hosting to be data processing. Now I don't think that of website design and hosting. If I didn't know this, I wouldn't think oh, that's data processing. But once you start digging deep, that's where you find this out. So you can't just, go with the first answer. You see, you got to dig a little bit deeper, see if there's anything that contradicts what you originally found, and you'll save yourself a lot of trouble in the long term if you take this approach… Ellie?
[22:33] Ellie: Yeah, Mike, I was just going to thank you for some really great information here and give everyone a little bit of information on how to reach out to us as well. If you need any solutions or services, we offer a lot of them and you could reach out to me directly. That's emoffat@salestaxandmore.com, all spelled out. You can also get on our website. We have a lot of resources there as well, that's salestaxandmore.com. And we have a whole series of free webinars that provide CPE credit and free resources as well to go alongside our Salt Vault. So Mike, anything else you want to add in here that I'm missing?
[23:19] Mike: No. Thank you for joining us for this episode of the Sales Tax and More podcast and we hope to see you again in the future.
[23:28] Outro: Thanks for listening. Be sure to click subscribe and check out all of the resources we have out on the web.