Sales Tax FAQs #5
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 type of documentation should a vendor collect from their customers that claim they do not meet the economic nexus for a specific state?
What is the best way to resolve sales tax collected in the wrong states?
Is it the seller’s or purchaser’s responsibility to make sure use tax is paid?
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 gonna go over some more questions that have been asked during our webinars.
But before we do let me introduce you to my co-host, Ellie Moffat.
Ellie Moffat: Hey everyone, great to be here. I think we really like this podcast style where we get into the webinar questions that we've
[00:01:00] gotten. But before we do that today, I will of course give our introduction. First and foremost, if you like our podcast, please like and subscribe.
It really helps us out. And we are Sales Tax and More. We are 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 or related needs. So we do a lot of sales tax returns, sales tax registrations, consultations, research, 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'd love to hear from you. And again, we would love to work with you.
All right, Mike. So first question we have here, what type of documentation should a vendor collect from their customers that claim they do not meet the economic nexus for a specific state?
Michael Fleming: Is this a trick question?
Ellie Moffat: Definitely, this is definitely a trick question.
Michael Fleming: I thought so. All right. Here's why I think it's a trick question.
[00:02:00] Number one, we never ever, under any circumstances ask our customer, if they have nexus in a state or not, when deciding to charge them tax or not.
We don't say, "Hey, if you have nexus in this state, I need to charge you tax. And if you don't have nexus in the state, then I don't have to charge you tax. So it's always based upon the seller. Wherever the seller has nexus, they must, they don't have any options. They must either collect the tax.
Or a certificate in lieu of the tax. So we don't care if the customer has nexus or not. Now, where this does play a factor is there are certain states out there if the purchaser is not registered in a state. And not required to be registered in that state. In other words, they don't have nexus. They may be able to use alternative documentation.
That's not all states. There are about 10 states where alternative documentation cannot
[00:03:00] be used. But in the rest of the states, you can use some type of alternative documentation if you don't have nexus. Now, it's not the seller's responsibility. They don't have to put on a detective's hat to verify that the purchaser, whether they have nexus or not. There are criminal penalties and interest as an addition to civil penalties and interest for the improper use of a certificate or the avoidance of paying tax. So if you tell someone that you're tax exempt or you don't need to pay the tax so long as you've accepted what they've given you in good faith.
They're generally gonna go after the purchaser, and there are those criminal penalties in addition to the civil penalties. Now, there's one exception here. If you yourself, have created an economic nexus. For example, say you're
[00:04:00] selling into the state of Illinois and you've shipped more than 200 items into the state of Illinois you yourself have created that economic nexus, and you should have known that you created the economic nexus.
So therefore, you cannot accept alternative documentation. State of Illinois probably a bad example 'cause they don't accept alternative documentation. So let's use the state of New Jersey, which does accept alternative documentation and they do have a 200 transactional limit or a hundred thousand dollars.
Whatever the state's economic thresholds are, if you yourself have shipped that amount into the state, then you've created the nexus and you should know that. So you should know that you can't accept alternative documentation from that seller. Now, let's say you did a hundred transactions or $50,000, it's not your responsibility to play the detective. You
[00:05:00] don't have to find out if someone else did the other a hundred transactions or the other $50,000 that's not up to you, that's on the buyer. They're supposed to keep on track of that and they can get in trouble for providing you improper documentation. That's why I say this is a trick question here.
Very important that you collect tax or a certificate in every situation. What type of certificate you collect is gonna be up to the borrower to give you. And if they're giving you the wrong, then the state in general is gonna go after the buyer rather than the seller provided everything has been done in good faith.
Ellie Moffat: All right. Thank you so much, Mike, and thanks for I guess it's good. I guess I expected you to catch this trick question. I guess it's definitely good that it was seen that way from the get go so.
Michael Fleming: It was a head scratcher.
Ellie Moffat: It's a little bit of a head scratcher, but I'm glad. Thank you for providing some clarity out there.
Next question and
[00:06:00] this question comes with quite a bit of context as well. It again, is a webinar question. What is the best way to resolve sales tax collected in the wrong states? My client collected sales tax in 27 states last year to the tune of $75,000. States they are not registered in and do not have economic or physical nexus in.
This was due to incorrect settings and QBO. I think that's QuickBooks, correct?
Michael Fleming: Yes. QuickBooks, yeah. QuickBook online to the exact.
Ellie Moffat: QuickBooks online. I am assuming refunding the tax to the customer is the correct approach, but the client feels uneasy about telling his customers he messed up.
Could you please weigh in? So a lot of information there. Excuse my mess ups here. And Mike, could you weigh in?
Michael Fleming: Yeah, absolutely. And number one I would question the assumption here that in these 27 states
[00:07:00] that there is no economic or physical nexus. $75,000 in tax is not a small number.
You gotta figure the average tax rate out there is somewhere in the neighborhood of 8%. So I can't imagine that there's not an economic nexus in at least some of these states. So that's the first thing you want to do is make sure that you don't have an economic nexus 'cause the worst thing that can happen is you give all this money back and then the state comes after you and you had collected the tax and now you gotta pay it outta your pocket. So you've just taken a bad situation and have made it worse. So , that is the first step. Make sure have someone double check that you actually don't have any economic nexus or physical nexus. A lot of people don't realize third party relationships can create nexus for you.
Inventory can create nexus for you, so you wanna make sure you don't have an economic
[00:08:00] or physical nexus in any of these states. In any of the states where you do have the nexus, you would definitely want to, in my opinion provided what the exposure is in each one of these states, do a voluntary disclosure agreement.
Because when you collect and don't remit tax, there's the potential for criminal penalties and interest in addition to civil penalties and interest. And in a lot of states, they'll waive both the criminal and the civil penalties. Interest in most states, there's about seven or so states that will waive some or all of the interest.
Texas is one of the states that waives all of the interest. Oklahoma waives 50% of the interest. But most states, the majority of states out there don't waive any interest whatsoever. So in states where you do have nexus, I think that what you want to do is a voluntary disclosure agreement if the exposure is material. If the exposure is not very
[00:09:00] material for example, maybe it's only six months, then maybe you want to do some historical returns.
It's a lot less formal process. You can still ask for penalty waiver. And you can go from there. Now, if you don't have nexus and you don't wanna return that money to your customers, most of the states are gonna want that money turned into them, plus they're gonna want the penalty and interest.
It used to be a lot easier to be able to return, get something to the state on an anonymous basis. It is tough to get that done nowadays. Most of the states are gonna want you to register, get that turned in, and then go ahead and if you truly don't have nexus, you can deregister after the fact.
So again, if your exposure is material and you don't want to give it back to your clients VDAs are probably the best way to go. The second best way would be to look for, depends on how long this is, but look
[00:10:00] for any amnesties that are available out there. In general, VDAs are better than amnesties.
Under certain circumstances, amnesties are better than VDAs. So you wanna look at your VDAs, you wanna look at your amnesties. But historical registrations a lot less formal than a voluntary disclosure agreement. So therefore in a historical registration, you use the actual date that you started collecting the taxes and then are going to want to remit them to the states.
You're gonna ask for a penalty waiver. Just to let you know what a VDA is, it's a voluntary disclosure agreement. And as a reward for stepping forward voluntarily, the states are going to limit the lookback period. If you did have nexus and in most states, they're gonna waive the penalty.
Sometimes because you've collected the tax, they may waive only a portion of the penalty, but some part of the penalty usually gonna get waived. And in most states, you're gonna pay the
[00:11:00] interest also. So was there another part of that question?
Ellie Moffat: There's a lot of parts of this question, but I do think we covered it.
Michael Fleming: Okay, I was gonna say the thing that you don't want to do is keep that money that's generally referred to as what we call unjust enrichment, which is a nice way of saying the state thinks you're fraud because it's never really the seller's money in most instances.
It's either the customer's money or the state's money and the company is collecting it in trust for the state. So when you keep that money, the state says you unjustly enriched yourself. You needed to either get it back to the customer, you need to get it to us. And if you don't do that, we're coming after you.
So yeah, the worst thing to do is keep that, you gotta get it to the state in some way or form or back to the customer.
Ellie Moffat: Exactly. And we talk about that often. That's a
[00:12:00] huge mistake and something you definitely wanna avoid so.
Michael Fleming: The cardinal sin of sales tax collected, not remitted.
Ellie Moffat: Yes. Okay, thank you Mike. So last question on this episode for us is it the seller's or purchaser's responsibility to make sure use tax is paid?
Michael Fleming: What's my favorite answer?
Ellie Moffat: I'm gonna go with it depends.
Michael Fleming: Yes, absolutely. Ding ding. Got the right answer. As is so often, the answer is gonna be it depends and it depends on a number of factors.
In this instance, it's gonna depend on the state. So in most states, it's the responsibility of both. So the seller may have a responsibility to collect the tax, but if they don't collect the tax, then it's the buyer's responsibility 'cause just because the seller doesn't collect the tax doesn't mean it's a tax free transaction.
You're supposed to self-assess that text
[00:13:00] and remit it to the state directly as a consumer use tax. What can happen if buyers and sellers aren't talking to each other? The taxes only due once. And either the buyer is gonna pay it directly as a consumer use tax or it could be collected as a sales or a use tax from the seller. But if it's not collected when the state comes out, if you are not communicating it could be collected in both places. So that's why we say when you get audited, you want to contact your vendors and your sellers to make sure that a tax was not paid through someone else's audit 'cause it's legally only due one time. But it could be the responsibility of both companies. Both the purchaser and the seller to pay that tax. One or the other has to pay it. And if the seller doesn't do it, then the buyer's supposed to do it. And if that's not done, then the state can come after the buyer as well
[00:14:00] as the purchaser.
Now, states don't go after individuals in general. I've seen it happen in very limited instances, but they do go after businesses. So if you're a business, make sure that you are paying your consumer use tax. That is the number one reason for large assessments when you don't have a responsibility for collecting resale certificates.
If you have a responsibility for collecting resale certificates, that's the number one cause of large assessments when it comes to an audit, but the number two or number one depending on your facts and circumstances is gonna be use tax. So if you're the buyer, you gotta make sure you're taking care of that.
If you're the seller, you cannot contract it away and say my agreement says that the customer's responsible for it. That doesn't work. The state doesn't care about that. You had a responsibility to collect it. The state's gonna come after you also. Now, when you get notified of audit, you can send
[00:15:00] out what we call an X, Y, Z letter.
And it asks a series of questions, one of which is going to be, did you self-assess and remit this tax? Another one is gonna be, did you pay this through an audit? And if you did, then you got to know the return. It was remitted on or know the audit period that it was remitted through. And generally the state is gonna let you off the hook 'cause it only needs to be paid once, but the responsibility can go to both parties.
So if you're not talking, it could be collected twice. State's never gonna volunteer that it's been paid. They may know it's been paid by one party, but they're never gonna volunteer that they're gonna fall back on the, oh hey, that's personal information and we're not allowed to share that.
Ellie Moffat: Thank you so much, Mike. And if you have questions, please write in for this podcast. If they're complicated, a consultation may be better fit. We have live webinars where you can maybe can find some answers as well, and a lot of other free resources on our website. And if you have questions, again
[00:16:00] you can reach out to me directly at emoffat, that's E-M-O-F-F-A-T@salestaxmore.com or visit our website salestaxandmore.com. So thank you so much everyone for joining us.
Michael Fleming: Thank you everyone. We hope that you enjoyed this episode of the Sales Tax and More Podcast. And we hope to see you on the next installment of the Sales Tax and More Podcasts.
Bye-bye