Sales Tax FAQs #7
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 are the most aggressive states conducting audits right now?
Why is Artificial Intelligence (AI) a bad idea for sales tax?
What is the connection between marketplaces and economic nexus?
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. Now today we're gonna go over some of the questions we've been asked during our webinars. But first let me introduce you to my co-host, Ellie Moffat.
Ellie Moffat: Hey everyone, it's really great to be here and we're excited for this podcast episode, but I'm gonna do a quick introduction first. So first, for Sales Tax and More, we are a full service
[00:01:00] consulting and solutions firm. So 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.
And Mike, I guess ready or not let's do this, huh?
Michael Fleming: Okay.
Ellie Moffat: Yeah. So Mike, what are the most aggressive states conducting audits? We bring this up in passing a lot but let's just really address this question head on. What are the most aggressive states right now conducting audits?
Michael Fleming: Head on. That's such a loaded trick question. I guess the most aggressive states conducting an audit is the one that's just found you. So that's usually the most aggressive one in my book. Couple of different ways to do this, and under different
[00:02:00] scenarios it's different states.
For example if you're getting registered prospectively, that means registering with a going forward date, a current date or some date in the future. And that may be something you need to do 'cause maybe you just crossed nexus threshold and have to get registered going forward. But a lot of companies say I'm not gonna take care of any of the past liability, which is what the states want you to do, and they just register prospectively.
So there are a number of states out there that have decided that they are going to let you get registered, but then they're gonna audit you and they are auditing everyone. So the most aggressive states in that scenario are gonna be Illinois Wisconsin, Arizona, Arkansas. It looks like Maine has backed off a little bit since they did away with their 200 transaction threshold, but they were up there, so that's a very small state.
But they were,
[00:03:00] questioning everybody and going after everybody. So those are some of the states right now, and I expect more states to join that list because we've got roughly 50% of the companies out there that are not compliant when it comes to economic nexus. And the states know this, so as people register, they're gonna be asking more questions.
And the states that I mentioned the Arizonas, the Arkansas's, the Illinois, the Wisconsins, they're letting you get registered and letting you go two, three years down the road. And then they're going ahead and they're gonna audit you. And we had one company in Illinois they got registered back in January of 2019. They should have gotten registered in October of 2018, and the state wanted those three months. This company had been registered for years in collecting and paying tax, but the state went back to the date
[00:04:00] that they thought they should have been registered. So if you've never been registered and you've never filed a return, there is no statute of limitations.
So it's not like the periods close out. Those are gonna always be open and the state can always go back and we see a number of states doing it right now, and I think that state's going to increase. Now in general, who are the most aggressive states? It's gonna be your bigger states with more auditors.
The more auditors you have, the more audits you're going to do. So a state like California, a state like Texas, a state like New York, these are big states, they hire a lot of auditors and therefore they're gonna be doing a lot more audits. Now, I've heard some people say Mike, Texas is gonna spend their money to come out and look for me.
I'm all the way out here in the state of Washington and I'm a pretty small company. They're not gonna look for me. When last I checked, Texas had over 600
[00:05:00] auditors. More than 100 of them were spread throughout the country.
They lived outside the state of Texas. They worked outside the state of Texas. So it's not like they're flying someone up to your neck of the woods in order to audit you. They got someone within driving distance more than likely who's gonna come out there and audit you. The bigger states, the ones with a lot more auditors are gonna be a lot more aggressive. In a smaller state like a South Dakota, they're gonna have a whole lot less people in that state than they are in a state like Texas or California. Does that make sense?
Ellie Moffat: Yeah. I think you successfully maneuvered around this little bit of a trick question here and gave some people some very helpful information, so thank you for that.
Michael Fleming: Yeah. And, but here's the thing. I was joking around in the beginning, but what's the most aggressive state? It's the one that just found you.
Ellie Moffat: Absolutely, yeah.
Michael Fleming: Because all states have discovery units. They're looking for companies that are not registered. And even
[00:06:00] if they only have three or four auditors, if you end up on their radar and you get chosen for audit, does it really matter how aggressive they were or not?
The likelihood is of being found is greater in these other states, but you can still be found by any state out there. They are actively looking for you. Every state. They just may not get to you. And some companies are lucky enough to go their entire existence without ever being audited.
Other companies not so lucky. And once one state finds you. Generally they're sharing some information and it's not like all the states are gonna come, but six months after the first state, you may get calls from another two or three states.
Ellie Moffat: All right. Thank you so much, Mike, for covering that and if you have more questions, as always, I'll take this moment to say, reach out.
We're happy to hear from you. Happy to work with you, like I said before. So Mike I think that this is an important question just because we can't turn anywhere without seeing
[00:07:00] AI pictures, information. You can't do a Google search without AI giving you a summary. And I want to ask you, why should people not trust that AI summary that they might see when they're searching a go something in Google?
And we know that AI summaries are helpful in some circumstances, but why is it such a bad idea for sales tax? And I know this is a big question. So yeah, have at it.
Michael Fleming: Have you ever heard the saying, garbage in, garbage out?
Ellie Moffat: Yep.
Michael Fleming: It's like that. AI, at least the versions that we use, aren't really thinking machines in the sense that they've got this vast internal knowledge.
They're just going out. They're really good at reading what's on the web. And I heard it said a long time ago by Abraham Lincoln that 90% of what on the web is just not truthful. That's what AI is doing. It's going through
[00:08:00] the web at super speeds and gathering all of the information about this topic.
But who's to say that's the right information? How does the AI if Joe Blow out there is disseminating a lot of incorrect information, but it's what people think should be the truth and it's a very popular website. How does the AI distinguish between that source and actual reputable source?
For example, me, maybe I've got an answer out there, but not many of you has looked for my answer as they have for Joe Sixpack's answer out there and he's got the wrong information, so therefore the AI is going to be presenting the wrong information. Garbage in, garbage out. It's just gonna look at what's available.
It can search the web faster, but when you've heard me talk about research, generally we say don't even utilize a chart. And a chart's prepared by a sales tax
[00:09:00] company usually. It's a great tool.
Ellie Moffat: We even have charts.
Michael Fleming: Yeah. We have charts great starting spot.
Exactly. So AI can be a great starting spot, but it can't be the be all, end all. And I was talking to a guy on the phone the other day. I charged $595 for an hour's worth of personal consultation. This guy was using ChatGPT, and he was saying, ChatGPT says that. I said what the heck?
That's free or whatever. Why are you paying $595 to ask me my opinion? When you got an answer from ChatGPT. He said I wanna make sure that I'm right. Okay, then. Here's the correct information. So a lot of people, it's a great starting point. It could point you in the right direction, but you definitely don't want to use it as a be all, end all.
You have to actually do the digging, and that's with any type of chart or research or whatever else. You gotta make sure that your fact pattern actually
[00:10:00] fits the answer that's being provided. This is a little bit on point, but you may have heard me use this before. I had a guy call me up and say, Mike I want you to do some research.
I want you to see if this chart's correct and that software as a service is actually taxable in these 20 states. And because I'm selling software as a service and therefore I wanna make sure this chart's correct. And well if you ask AI that question, it's gonna tell you the state's where it believes software as a service is taxable.
Here's the catch. Whenever we do research, I ask them to explain in their own words exactly what they're selling and what's important. I ask them to provide me an agreement, any type of agreement that they have, and then a copy of an invoice. So they send these three things over and I'm looking at it, and in the description, he is saying, the most important thing when you get our software is to download it.
Well,
[00:11:00] downloaded software is not software as a service. And if there's a big portion that's downloaded, states are gonna look at this differently than software as a service. The agreement they sent me was for downloaded software, and the invoice they sent me was for download. So if I ask AI, where is software as a service taxable?
It may tell me, but just like this other gentleman, he incorrectly assumed he was software as a service and he wasn't. He was gonna be, once an auditor sees all of that, they're gonna say, you're not software as a service, you're gonna be taxed as downloaded software. And there are a heck of a lot more states that tax downloaded software than there is software as a service .
So you gotta be careful. There's a lot of tools out there. But even calling a state, we say that you can't just do that. You can't take what someone at a state tells you at face value. 'cause you can
[00:12:00] call a state three times in a row and get three different answers. So there's a lot of different ways to gather information and you can't just put all of your eggs into one basket.
Charts, they're prepared by our research sources. But I gotta check the answers on the charts all the time because generally it's not the most highly compensated person who's preparing these charts at these companies. It's not the one with the most experience. And I'll be looking at the answer that the chart says, and then I'm looking at the underlying citations and say, this is a direct contradiction of each other.
Here's what the chart says. It says it's taxable. But everything else that I'm reading in the statute and the rules and the regulations say it's exempt. So someone made a mistake here. So same thing can happen with AI. It's just gathering what's out there. You gotta dig below the surface. You can't just rely on that surface information, which is
[00:13:00] what most of the AI that I know of does.
It's that surface information. Now, there are a lot of the research companies out there that are touting AI within their research. Now, instead of pulling from the entire web, it's pulling from their research database. That's gonna be a lot more effective use of AI than AI out on the website, but still this company that created the chart now has this AI. So if you don't ask the question correctly or even if you ask the question correctly, you may get wrong answers because there's a human element in there, and you gotta do the checks and balances. Just the chart, it's gonna read the answer on the chart and you're gonna get the wrong answer.
It can't go in to the actual citations and distinguish that the citations are contradicting what the chart says. At least to the best of my knowledge,
[00:14:00] utilizing the AI that's available today. Now, in the future, that may change. We're in the very beginning here of artificial intelligence. So that may change, but at this point it can be a great tool, just like a chart can be a great tool, but it can't be the be all end all.
You can't base any of your final answers just on what AI tells you. Because in general, there's gonna be too much money at stake here. And you gotta get to the right answer, not a quick answer, which is what AI is gonna give you. It's gonna give you a quick, easy answer. Gonna boil it down, perhaps, make it easy to understand. But that doesn't necessarily mean it's the right answer.
So be careful. It's a great tool, but it has limitations, especially based upon the versions that are out there today. Does that make sense?
Ellie Moffat: Yeah , Thank you so much, Mike. I think it's a good general rule of thumb for all the questions we have for AI, but yeah, we
[00:15:00] know it's helpful.
But like what you said, Mike, I think was great. The quick answer. Okay, Mike one more quick question here.
Can you, and we're totally switching gears, Mike, can you talk a little bit about the connection between marketplaces and economic nexus?
Michael Fleming: Okay. From what angle should I approach this? Do we have any further clarification or should I just go from the big picture on in and answer what I think you're asking?
Ellie Moffat: Let's answer big picture and if there's a lot more and people are interested, we can do a full podcast episode. But let's take a big picture right now.
Michael Fleming: Alright number one, marketplaces can have economic nexus. So if you could be deemed a marketplace, you gotta worry about economic nexus. But I think what this question is asking is do marketplace sales actually count an economic threshold?
And the answer is, it depends. My favorite answer. It's gonna depend on the
[00:16:00] state. Because some states think that yes, marketplace sales, whether it be their dollar threshold or whether it be their transaction threshold, they believe that marketplace sales do figure into that.
And you need to count them. And that's why there's a lot of companies out there if they're relying on a company like Shopify. And Shopify is telling them when they have economic nexus, they're not running their marketplace sales through there. So they may actually have an economic nexus and not realize it 'cause they're only basing it on their taxable sales.
And some states, they only base their thresholds on taxable sales. Some states exclude sales for resale. Some states include sales for resale. Some states exclude all exempt sales. Some states exclude sales for resale, but include all other exempt sales. So each state has their own idea as to what should be included in those economic nexus thresholds.
[00:17:00] And there are quite a number of states who do believe that marketplace sales should be counted in those transactions. And then you have, at least one state out there, that says for the dollar threshold they should be counted. And for the transaction threshold, you don't count them. So go figure.
So that's why it depends, Ellie, it depends on the state.
Ellie Moffat: I think that's a great broad answer, Mike. And, if people wanna know more, let us know. Maybe we'll do a full episode, answer a few more specific questions in there, really pick Mike's brain. But that's all we have.
And so I wanna say really quick before you say goodbye, Mike. Just a reminder if you have sales tax needs, we have a lot of solutions and services and you can reach out to me directly about them. My email is emoffat, that's E-M-O-F-F-A-T at salestaxandmore.com. Or you can visit our website salestaxmore.com.
And if you haven't seen them, we have a whole series of free webinars that offer CPE credit. [00:18:00] There's a lot of resources on our website directly. And there's more podcast episodes than this one. So listen to 'em all and thank you so much.
Michael Fleming: Thank you everyone. Thank you for joining us today and we hope to see you on the next installment of the Sales Tax and More Podcast. Bye-bye.