Sales Tax FAQs #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:
What implications do states eliminating their sales tax transaction thresholds have for sellers?
What is a retail delivery fee? And do people need to be worrying about it?
What is the difference between an amnesty and a VDA?
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 we all know, of course is sales tax. Now today we're gonna answer some frequently asked questions. These are questions that have been sent on in by our clients or prospective clients.
But before we get to those frequently asked questions. Let me introduce you to my co-host, Ellie Moffat.
Ellie Moffat: Hey everyone. It's so great to be here [00:01:00] and I'll go ahead and do a quick introduction for our team at Sales Tax and More. In case you haven't listened to all our podcasts and haven't heard me do this before, we are a full service consulting and solutions firm.
We have a really great team here of experienced tax professionals that are very dedicated to fulfilling any of your state tax or 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 to us. We'd love to hear from you, and we'd love to work with you. And I'm a little late on it, but please also like and subscribe to this podcast. And with that, Mike, I'm gonna jump into our first question here.
Michael Fleming: Okay. Hey, you find it a little weird that we don't have our cameras on. I feel almost almost naked feel, I feel free. I'm talking with my hands. I feel so much freedom here.
Ellie Moffat: I'll have [00:02:00] Kennidy, who's our fantastic podcast editor, and works in marketing. Add some graphics, so if you're watching it on YouTube, they'll be looking at something here, but, and a little bit of incentive for just the audio listeners.
Go check it out.
Michael Fleming: Yeah we're having some technical difficulties, so no camera today.
Ellie Moffat: No camera today. Blessing or a curse. It'll, it depends on the viewer. But Mike with states eliminating their sales tax transaction thresholds, we see this more and more throughout the last year.
What implications does this have for sellers? What implications might this have for someone who's listening today?
Michael Fleming: As usual, the answer is it depends, and there are a lot of factors that it could depend on. We've had a lot of sellers give us a call and say, Hey, Mike. I want to deregister, and, if they're a current client, I'll say why?
Because they dropped the transaction threshold and we don't have more than a $100,000 of sales or $500,000 of sales. [00:03:00] I said last time we talked you had a traveling salesman or an independent contractor going into the state or inventory in an Amazon warehouse. And they said, oh, yeah I still have that.
A physical presence is going to when it comes to sales tax, not always for other taxes, but when it comes to sales tax, a physical presence is almost universally going to trump an economic nexus. So if you have a physical presence, it doesn't matter if the state drops the transaction threshold now.
If you are only registered in a state because of the economic nexus and you're not over the monetary threshold, you're only over the transaction threshold. You have to look at two things. One is what's the effective date because there's trailing nexus on some of these. So do you have to stay registered for a full year and once the year is up, you can deregister
[00:04:00] or like the last couple of states that did this, can you deregister right away? What's the effective date? Maybe it's July 1st. And this is currently April. You want to wait until July 1st before you deregister. But if you no longer have a link or connection with the state, whether it be physical or economic. Because they've dropped the transaction threshold, then deregistration is the way to go. Now, if you are close to the monetary threshold, or if you plan on having some independent contractors traveling to the state, or you plan on hiring an employee in the state, I would just stay registered because getting registered is a process.
Getting de-registered is a process and you, it's expensive and time consuming to get registered registered, de-registered. Even though you may not have nexus, it still may be better to stay registered if you plan on doing something different in the future, [00:05:00] which would cause you to have nexus again. So to sum it up Ellie, you gotta make sure that you don't have nexus for other reasons. You don't have a physical nexus, or you're not over the monetary threshold. You have to make sure what the effective date is and whether there's a trailing nexus or not. And you have to look at your future plans.
And if you plan on doing something in the short term that's gonna require you to register again, then you stay registered. If you don't have nexus and you don't plan on doing anything in the short term, go ahead and give to you registered.
Ellie Moffat: Thank you so much, Mike. If you have any follow up questions about this, I'll just say, reach out.
Let us know. We'd love to hear from you. Like I always say. Mike, next question here. What is a retail delivery fee? And do people need to be worrying about it? This is something I think that pops up from time to time. We hear about states, different states talking about changing it or implementing one.
Should [00:06:00] people be worried about a retail delivery fee?
Michael Fleming: They're really a pain in the neck more than anything. The states that have passed these have passed it, number one, to save the environment. Yet they're gonna send you out 15 reams of paper explaining what it is. So I don't know how serious they are about this, but they're supposed to, be green initiatives and also supposed to help with infrastructure.
So the two states right now that are active are Colorado and Minnesota. Colorado, when they first came out, it was pretty onerous. You could not pay it on behalf of your clients. It was relatively small amount. And everyone was subject to it, but they came out a year later and they changed that.
They said you could pay it on behalf of your clients. And the reason why that was a problem, a lot of people couldn't reprogram their software to collect it. In Colorado, they went [00:07:00] from everyone being subject to it, to, you had to have $500,000 of sales into the state of Colorado, so a lot of people didn't have to worry about it anymore.
And, they keep raising the numbers every year. They keep ratcheting up, but it's, I think, 27 cents right now. Don't hold me to that, but it's some nominal number like that, and you're allowed to pay it on behalf of your customers. So that's in this, in the state of Colorado. In the state of Minnesota, it's a million dollar threshold. So how many sales do you have to have into Minnesota to cross a million dollars? So a lot of people are not subject to this. Minnesota, it's a 50 cent fee. You can pay it on behalf of your customers and there's a whole boatload of exemptions on what type of transactions you don't have to include [00:08:00] this. It's really an administrative nightmare, in my opinion. So if you're subject to it if you have over a million dollars in sales, then it's something that you have to take care of it. Because the states are fairly aggressive in pursuing companies that do this.
So you don't want to get jammed up over some fairly minuscule numbers. It's the time and the headaches generally that take precedence over the actual, the amount of money that is being spent. So does that sort of answer the question?
Ellie Moffat: Yeah, I think so. And Mike, we can cut this part out if you want, but in defense of Colorado where I live seventies infrastructure is quite expensive.
It's quite a treacherous road. There's always issues. There's a lot of safety precautions. There's a lot of avalanche mitigation. There's so much work. And that road is always so scary and constantly being repaired. So I will just defend it [00:09:00] and say it, it is for the safety of everyone involved.
Michael Fleming: The stated purpose is important, and I agree with the stated purpose. The problem is, do the funds actually get where they're supposed to be? Just 'cause you say, this is for infrastructure repair. Does that money actually get spent there? If it does, okay. I'm with you. Let's do it. How do we raise money?
However we need to raise it. The problem is whenever a government gets involved, there's so many fingers in the pie. How much of it actually goes to the intended purpose?
Ellie Moffat: It's true. And, we're probably getting a little bit away from what people wanna know about, our two, our 2 cents about it, both the best.
Michael Fleming: Okay. I'll give you 4 cents if you got time.
Ellie Moffat: We'll keep it at two for now and then we'll start another con podcast. That's our 4 cents our opinions about the sales and tax laws that exist. But okay. [00:10:00] Are you ready for the next question, Mike?
Michael Fleming: Sure. Throw it in, let's go.
Ellie Moffat: It's something that we talk about from time to time here and that we still pretty consistently have questions and clarifications around it. But what is the difference between an amnesty and a VDA?
Michael Fleming: Besides the number of letters?
Ellie Moffat: Besides the number of letters.
Michael Fleming: All right. First of all, they're both mitigation programs, so that's where they're very similar. And amnesty though is a little bit misleading. It's generally not a true amnesty.
You still have to pay the back tax. Where the amnesty comes in is on the penalty and some or all of the interest. And amnesty is a fairly informal program. They're offered few and far between maybe every two or three years for a period of 30 to 60 days, sometimes every 10 years. [00:11:00] There is no rhyme or reason to how often they are offered. Whereas a V-D-A a Voluntary Disclosure Agreement is a type of mitigation program that is going to always be available. Now, you may not be able to take advantage of it because of certain reasons, and we'll get into those in a second, but it's always available. And it's pretty formalized. The main benefits of a VDA is that it limits the lookback period. So if you owe let's use California as an example.
If you owe eight years worth of back taxes and the state finds you, they're gonna want you to pay eight years worth of back taxes plus penalty and interest. But if you are proactive and you reach out to the state. And enter into their voluntary disclosure agreement program, you only have to pay three years.
So right away you save yourself five years worth of back tax, penalty and [00:12:00] interest. Then in that three year period, you get to waive the 10% penalty. So it's a great program. It's a great tool. However, like all tools. It's not a one size fits all tool. I'll give you an example. Avalara says Hey, if you owe more than $500, you need to do a VDA.
And by the way, we charge $3,500 per VDA, but why in the world would you pay anyone $3,500 to remit $500, just is ludicrous. There are cheaper ways to handle some of that back exposure. So you wouldn't want to do a VDA if there's an amnesty available at that time. Amnesties are usually a lot cheaper than VDAs.
They're a lot less formal. So if there's an amnesty, then you would want to go their amnesty. If there's not an amnesty, you would wanna look at historical registrations for a small number like $500. [00:13:00] But we've had people come to us, they had to pay, for 40 VDAs, they were paying $110,000 plus before they paid a penny of back tax.
That's absolutely ludicrous. And maybe they only owe $60,000 in back tax. So just like any tool, it's not a one size fits all tool. As a rule of thumb, we say that you gotta be saving at least as much money in the VDA as the VDA costs. Otherwise, it just doesn't make sense. Now, we charge for VDAs, we also have a program, we call it a VDA cost benefit analysis, and we'll go through and we'll tell you where the VDA makes sense and where it doesn't.
I think that you gotta be able to get up in the morning and look at yourself in the mirror. I don't know how some of these salespeople out there do this. So anyway, if I had my choice between the two programs, [00:14:00] generally I'm gonna choose a VDA. The reason why is that one of the prime benefits of the VDA is that limited lookback period.
I'm dropping in the example we just used, I'm dropping five years off of the that VDA back tax. In most amnesties, notice I said the word most, in most amnesties, there is no limitation on the lookback period. So you may have to go back that full eight years. Now, you may get more off in the penalty and interest, but you're gonna go back further. So VDAs, if you can participate, usually the best option. Now, every once in a while, a state will come out with an absolutely awesome amnesty program, and it does have a limited lookback period. So you gotta read the fine print in all of these. If it does have a limited lookback period, then that amnesty is gonna usually be the better option than a VDA.
But [00:15:00] in general, most of them do not have that limited look back period. The other issue is if the state's ever contacted you except in the state of Michigan and in the state of Florida, if the state contacts you, you can still do the VDA in general. But most of the time once the state contacts you and whether it be by phone or by email or by letter and they keep great records, once they contact you that VDA is no longer an option.
With the amnesty, that's not an issue. You can generally do an amnesty even if the state has contacted you already.
So, depending on what your specific facts and circumstances are the amnesty may be the better bet for you. But in general, most companies that I'm working with they would do better with a voluntary disclosure agreement rather than an amnesty.
So did we talk enough about the differences there? Ellie, do you think we covered that one?[00:16:00]
Ellie Moffat: I think so. Is there anything else you wanna add in about any of it?
Michael Fleming: No. I mean, if we had a couple hours here. I don't wanna bore people, but I could talk forever about this stuff. But I think we got enough for today.
I think we covered all the the basics and if anyone has any follow up questions, send them on in, and we'll use them on one of our future frequently asked questions.
Ellie Moffat: Yeah, and if, if they wanna hear us talk for more than an hour straight, go to one of our webinars, we do 'em live.
You can hear us talk, live on one of the webinars and learn a lot and get some CPE too. So there's options.
Michael Fleming: Most people say 30 minutes is more than enough. So why, what are you trying to subject me to? 90 minutes? Are you outta your mind?
Ellie Moffat: It's a dream, it's a dream come true for those learning about sales tax. And Mike, I'll just, I'll close this out here a little bit, if that's okay.
Michael Fleming: Yeah, absolutely.
Ellie Moffat: Yeah. So if you have sales tax needs, we offer many solutions and services like we've mentioned. We have free resources, like the webinars that we host, we [00:17:00] have these podcasts. Our website has a ton of things going on.
If you have questions, you can reach out to me directly at emoffat@salestaxmore.com. That's E-M-O-F-F-A-T@salestaxmore.com, or visit our website salestaxandmore.com.
So thank you so much for joining us. We really appreciate having you here.
Michael Fleming: Thank you everyone. Thank you for joining us today, and we hope to see you on the next episode of the Sales Tax and More Podcast. Bye-bye