Sales Tax FAQs #11: Rates & Sourcing (Part 2)
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…
Mike Fleming and Ellie Moffat answer some of your frequently asked questions about sales tax.
Here’s a glimpse of what you’ll learn:
Which rate should someone use when collecting tax? And do states and local jurisdictions have the same rates?
What the difference between origin based and destination sourcing?
Where are tangible personal property (TPP) and digital property sourced? Are there differences between how they are sourced?
Connect with Michael
Episode Transcript - Audio Version
[00:00:00] Welcome to Sales Tax and More your go-to resource for all things state tax related. Now here is your host, Michael Fleming.
Michael Fleming: 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 everybody's favorite topic, which is of course sales tax. And today we're going to continue answering some of the questions that we got during today's webinar about rates and sourcing.
But before we get onto it let me first introduce you to my co-host Ellie Moffat.
Ellie Moffat: Hey everyone. It's so great to be here and thank you for listening to our podcast. Thank you for attending our
[00:01:00] webinars. Thank you for finding us, however you found us. Please like and subscribe to this podcast. It really helps us out.
And that being said, a little introduction for Sales Tax and More. We are a full service consulting and solutions firm, and 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 registrations, consultations, research, audit defense, exemption certificate management, and like our name states more.
So if you have questions about our services or you'd like to work with us, please reach out. We would love to hear from you, and we would love to work with you as well. Mike, let's just jump right in here. Part two of these questions did you shoot, which are, for the most part about rates and sourcing.
I'm trying to trip Mike up today, but question one here, Mike. Does every state have a local tax rate and what factors can influence whether or not a
[00:02:00] local tax rate is charged and which type of tax would require local tax collection? Mike, break that up however you want to. Maybe we wanna throw out a reminder as you answer each part of that, but take it away.
Michael Fleming: All right. Let's start easy. Does every state have a local sales tax rate? And the answer to that is no. I'm having a brain freeze here. I was trying to stall because I can't for the life of me, remember the exact number. But it's somewhere in the neighborhood of 15 or so. So there are roughly 15 states that do not have local rates in those states.
They make it very easy because no matter what you're just charging one rate. It's the rest of the states that make life hard for us. What is going to influence whether a local rate is charged or not? Obviously the state, if state doesn't have a local rate, then you can't charge a local rate.
Or you could charge a local rate is zero, and the state rate plus
[00:03:00] zero would be the state rate. But we digress. The type of tax is going to be a big influence on whether a local rate is charged or not, and it's gonna depend on the state. For example, a sales tax you're almost always going to charge the local rate if there is a local rate. And it'll be added to the state rate and be shown as a single rate.
Local rates can consist of the city rate, the county rate, any special district rates. So they're all lumped together. And then that number is added to the state rate and it's shown on an invoice as a single rate. So if it's a sales tax, generally it's all going to be added to the state rate.
And if there is a local rate, it will be charged. If it's a use tax, like a vendor's use tax or a seller's use tax, or a retailer's use tax, it's
[00:04:00] gonna depend on the state. And historically, use taxes often did not require the collection of local rates. Only sales taxes did. But that has been blurred starting in 1977 when we had Complete Auto Transit and then blurred even further. And in 2018 when we had the Wayfair case, which ushered in economic nexus. And that blurred the lines even further. If the state has a local rate, sometimes if it's a use tax, you now have to collect the local rates. Whereas in the past, you did not. In other states when there is a use tax and you're signed up for the use tax, you still don't have to collect the local rates.
So sales tax, pretty much if there is a local rate, it's gonna be collected all the time. Use tax, it's gonna depend on which state it is as to whether the local rate needs to be collected or not and the
[00:05:00] circumstances. Do you actually have nexus in the state? And if you have nexus in the state, then depending on which type of use tax you're registered for you may or may not have to collect it. So it gets a little bit more granular when we're talking about use taxes.
Ellie Moffat: Okay. And you know what, Mike what I'm realizing here is Kennidy, our fantastic podcast editor, she's going to hear me say this as she is going through.
She put together these questions for us today and she did a great job, but it looks like three questions. But really we have about 12 questions for you here today, Mike. So it's a little bit of a trick. Each question is multiple questions to keep you on your toes.
Michael Fleming: I can handle it. I'm ready. I'm willing. I'm able. It's sometimes hard to remember the third question by the time I get through rambling through the first two but.
Ellie Moffat: Yeah, or if you listen to the last podcast episode, I tried to skip right past part of the question. We're on our toes today. We're giving you guys a lot of
[00:06:00] information and we're really glad for it. And thank you Kennidy, for putting this all together for us today. Mike, second question, which is actually three more questions here for you.
How do local tax rates affect remote sellers and what determines whether a remote seller will be subject to it, and are there any exemptions?
Michael Fleming: Okay. Local tax rates make life a lot harder if you're a remote seller. If you have a single location, someone comes into your store, they pay the tax, you collect the sales tax at that one location.
Fairly easy concept. But if you are selling, say online, you're a remote seller, you're selling to the entire country. And there's 7,000 to 16,000. We just use 13,000 as a number of different taxing jurisdictions out there. So obviously that can make it a lot harder. You charge the rate where the sale is going to be sourced.
And sourcing simply means which state has the right to tax it. When we're talking about
[00:07:00] tangible personal property, it's generally gonna be where the purchaser or a representative of the purchaser takes possession. Really where it's being shipped or where the purchaser is coming to pick it up.
So that determines whether a remote seller is gonna be subject to it. In addition to that, the type of tax. So if I'm registered for a seller's use tax, I may or may not have to collect a local tax depending on which state it is and whether I have nexus in that state or I've registered voluntarily. So there's a lot of moving parts to that.
Are there any exemptions? Yeah, there's always an exception to every rule, but in general remote sellers are going to have to collect the local tax rates in today's environment. That hasn't always been the case. If we go back before 1977, they rarely had to collect it on interstate
[00:08:00] sales. And after 2018, that got blurred even more. So nowadays, be prepared to collect the local tax rates.
Ellie Moffat: Thank you so much, Mike. And, let's move to this third question. Just a couple parts of this question here, but how can someone figure out the state and local tax rates and what are good and what are bad resources to look into? Let's give some people direction if they need it.
Michael Fleming: I don't think there are any bad resources. I think there are good resources and better resources, but I don't think there are any bad resources. And a lot of it has to do with the size of your transactions, the frequency of your transactions. We have some clients that may do 10 sales a year, but their sales are $5 million each or $10 million each.
And if your sales are infrequent like that, call the state or go to the state website. Most states
[00:09:00] have their rates out on the website. And if you only have 10 sales a year, it doesn't take too much of your time to go into a website or even pick up the phone and call the state in order to get the rate.
So that's one way to do it. There are also free rate lookup sites. If you're only doing 10 transactions a month or 10 transactions a year, you have the time to go out and look up each one of these manually. Now, if you're doing that rather than going to the state directly, there's a couple of issues.
Number one most of the free rate sites are based upon sales tax. And sometimes rates can be slightly different for use tax than they are for sales tax. So if you're supposed to be collecting a seller's use tax or a vendor's use tax, you may not be getting the exact right rates.
The other thing is these free rate websites. You get what you pay for. They're usually not
[00:10:00] as current as a service that you're paying for. Now, even some of the services you pay for aren't always 100% up to date, because as soon as they updated it the state came out and or local jurisdiction came out and changed their rate.
So sometimes 10 minutes after it's updated, it's already outta date. But in general, they're gonna get you fairly close. The automation, if you're selling online or if you're doing hundreds of transactions a month or a day even, you can't take the time to go out and look it up individually.
You've gotta work with some type of automation. Now, there's a couple of different ways to do that. There are rate tables. Again, rate tables are usually zip code based. And they are based on sales tax. So a couple of limitations to that. Sometimes you can have four or five different counties in a single zip
[00:11:00] code. And what do you do at that point?
Or different cities within a different zip code and all those rates could be different. So there are limitations of using zip code based rate tables. Now one of the good things is if you have an older accounting system and you can't tie into any of these others, you may be able to upload a rate table.
So you can still have automation. It just may not be the best solution out there. Then you have the software companies, and not all software companies are created equal. A company like TaxJar, they're probably gonna be the cheapest out there. They're currently owned by Stripe. They're probably gonna have more errors in their rates than anything else.
Cheap is often the enemy of good. But if you're not doing a whole lot of business, then any of the problems you have are gonna be smaller problems. So that's a trade off. The next company out there that I would look at would be an Avalara. They are gonna be able to connect to
[00:12:00] a lot more platforms and say a company like Vertex. Vertex I think is a much better solution than Avalara. But they're limited as to if you've gotta develop your own software in order to integrate your accounting platform to theirs, in other words to integrate the two systems if you gotta build out a connector.
Avalara is easier to use. But by far, Vertex has been around a lot longer. They're the Cadillac or were the Cadillac of the industry. Or they can still be the Cadillac of the industry. They're a very good service. But they do have some limitations.
They don't have as many connectors as a company like Avalara. But all three of those companies also try to provide services and a lot of their resources go into trying to develop their services, which is a losing battle because they're just not set up to provide services. I think that when they stick to what their core competencies are, which is
[00:13:00] the software, the provision of the rates, obviously some are better than others, but that's what they need to stick to. When they start doing services, that's where they get in trouble. And they don't have all of the resources to keep their software updated as well as they should. Now, my favorite company is a company by the name of CereTax, and they're a relatively new company because they're newer, they've got the most recent technology out there. Vertex, they can upgrade and everything else, but they've been around 50 years at this point. Avalara even has been out there and they've got a bunch of different systems that are patchwork together. They're more about putting on band-aids than using entire new technology to connect to all of their systems.
So CereTax has the latest technology out there, so that's the number one reason I like them. And number two, that's all they do. They concentrate on their software. So any of the resources they have
[00:14:00] go into continuously making their software better. They don't do any services, so they're not distracted by these services.
So those are the two main reasons why I like CereTax. The drawback to CereTax is because they're newer they have less prebuilt integrations than some of these other companies, but they're quickly adding more and more platforms every month. My number one choice would definitely be CereTax, followed by Vertex, followed by Avalara, and followed by someone like TaxJar.
Ellie Moffat: All right. Thank you so much, Mike. And thank you everyone for joining us for today's podcast. If you have questions that you'd like us to answer on these podcasts, please send them over. We're open to receiving those. We love doing a Dear Mike series where we get to answer some questions. And if you have other needs for state tax related, we have a lot of solutions and services as well. So you can reach out to me directly at emoffat, that's E-M-O-F-F-A-T at
[00:15:00] salestaxandmore.com or go to our website salestaxandmore.com. And we hope to hear from you and Mike, anything you wanna say to close this out?
Michael Fleming: If you're sending us questions, I like simple questions. You can ask as many questions as you want. Let's just keep them in one question. These compound questions are killing me. Each question is actually three or four questions don't be cheap with the numbers.
Just say it's four questions rather than one question with four parts. It's a lot easier for me to organize my thoughts. But no matter how you do it, we're gonna try.
Ellie Moffat: The tune is changing. He said he could do it, and now the tune has changed. But send them over either way
Michael Fleming: I can do it. It just taxes my brain. Oh, pun intended. We're going to get to all of your questions. Just send them in and we'll have a good time while answering your questions. And we hope to see you on the next installment to the Sales Tax and More Podcast. Thanks everyone. Bye-bye.