Why Physical Presence Matters More Than Ever For Sales Tax
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…
Many sellers are under the impression that they do not have to worry about the collection and filing of sales tax returns because they have not established a physical presence in a given state. This is, however, not the case. As sales tax expert Michael J. Fleming explains, economic nexus can still be established if the seller meets the threshold requirements of that particular state.
In recent years, some states have started to pursue and penalize the sellers that have defaulted on their sales tax. Although this was halted due to the COVID-19 crisis, these states will continue to reach out to sellers once the country returns to a level of normalcy. So what should you do to avoid back taxes, penalties, interest, and, in some cases, jail time? Michael J. Fleming has all the answers.
In this week’s episode of the Sales Tax and More Podcast, Michael J. Fleming sits down with his co-host Ellie Moffat to discuss why having physical presence matters more than ever when it comes to filing sales tax returns. Michael explains what sellers should do to reduce their amount of owed back taxes, penalties, and interest, and when it is appropriate to do a Voluntary Disclosure Agreement (VDA). Stay tuned.
Here’s a glimpse of what you’ll learn:
Michael J. Fleming gives his thoughts on why physical presence matters more than ever in terms of sales tax
Do states really want 10 years of back taxes, plus penalty and interest?
Michael’s advice for companies that find out they’ve had a physical presence but haven’t been filing their taxes
When is doing a Voluntary Disclosure Agreement (VDA) the best option for tax defaulters?
How to get in touch with the team at Sales Tax and More
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's 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, Ellie Moffat is going to interview me and our topic is going to be "Why Physical Presence Matters More Than Ever." So, Ellie, you want to say hi, before we get into the interview?
[0:50] Ellie: Absolutely. Sales tax is definitely my favorite topic, Mike.
[0:55] Mike: I know that.
[0:56] Ellie: Haha Yeah. Hi, everyone. Hi, Mike. It's really great to be here. I'll do a quick introduction for Sales Tax and More, and we will dive right into the meat of this podcast for you. 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 returns, registrations, consultations, research, and like our name states more, we will give you plenty of ways to reach out to us if you have questions about our services. And you can find that information linked in this podcast as well. So, Mike, I have heard you say to many sellers, that physical presence matters more than ever. Why does it matter more than ever?
[1:44] Mike: A couple of reasons, Ellie. And yeah. Great question here. Number one is that many sellers believe they don't have to worry about it anymore. And the reason being is you know, we've got these thresholds, you know, they're very clear. If you have over $100,000 in sales or 200 transactions, then you've got nexus. So they're thinking if they have less than that number that they don't have to worry about it. Unfortunately, this economic nexus doesn't protect you from any other type of nexus. You know, nexus fancy word means link or connection. So an economic nexus doesn't override anything. In fact, the exact opposite of physical presence is going to override an economic presence. So it still matters now why it matters more than ever, is because the states have already started. It's been two years since we've had this economic nexus and the states are starting to gather before this recession started before this crisis, this COVID-19 pandemic, the states had started, you know, coming after sellers. So they backed off during the crisis, but they're going to be coming again in lots and lots of states out there.
[3:11] Mike: Maine is especially aggressive South Dakota is especially aggressive, and Utah is. They purchase a list of people they think are over their thresholds, which again, are $100,000 or 200 transactions. They were effective January 1 of 2019. So they're going to be calling everyone on this list. They want people to be compliant. Now, here's why this matters more than ever, while the states are out there looking for people who are not complying with economic nexus. You know, the big states California and Texas. You know, you only got eight months of exposure, not too bad. In some of the smaller states, South Dakota, Maine, you have two years’ worth of exposure, or a year and a half worth of exposure and in the case of South Dakota, that's bad enough. But while the states are looking to find companies that are not compliant because of this economic connection, this economic link to the state, they're going to find all other types of nexus, this physical presence nexus. And the one that I fear most for companies out there is those who are using independent contractors or subcontractors, or anyone else to perform work for them or to perform services for them. Because you know, most people don't understand because it's not common sense that third parties can actually create nexus for you, if they're helping you to establish or maintain a marketplace. Excuse me, market. There are two U.S Supreme Court cases that relate to this one is Scripto. It's a 1960 US Supreme Court case and the other is Tyler Pipe to 1987 US Supreme Court case and even though this has been settled for quite a while, a lot of companies don't get this. A lot of companies’ advisors don't get this, you know, your accountants, your CPAs, because it just doesn't make common sense. How can a third party, someone who's a true third party, someone who's arm's length from you? How in the world can they create a requirement for you to collect and remit tax? It just doesn't make sense.
[5:28] Mike: But unfortunately, you know, when states find you, they're going to say, Hey, you know, this has been our rules forever. And, you know, where the economic nexus, maybe only two years old, you may have had these relationships for 5,10,15, 20 years. And states routinely go back 7,8 or 10 years and they're not limited to that. You know, Texas usually goes back seven years, but sometimes, you know, we had a case where they were trying to go back 12 years. That's why physical presence matters now more than ever, because the states are that much active, you know, they're going to be coming anyway, because of this economic nexus coming out of recession. The states always step up their discovery efforts, their auditing efforts. So I've been calling this the perfect storm, you know, you've got states that not only is it a recession, but because of the COVID-19 and the extension of tax due dates. States are really hurting for cash. And they were coming for companies anyway. So they were already gearing up for this. So this is a perfect storm, they're gonna be out there. They're gonna be looking for sellers who are not registered and they believe they should be. It's one of the fastest ways they're going to be able to fill their coffers and start getting back to normal revenue levels. So They're going to be finding a lot of companies and you know, it's not going to be good if they find you for economic nexus, but you can live with that it's these longer periods of time that can actually put companies out of business.
[7:12] Ellie: And Mike, I'm just gonna try to read all of our listeners' minds right now. Do states really want 10 years of back taxes, penalty, and interest?
[7:23] Mike: Depends on the state. So you know, our favorite answer, it depends. The most common periods that states go back are either seven years, eight years, or ten years. So I don't know of any states that go back nine years. I say they generally go back to what I mentioned earlier. You know, we had this one type of company that kept all of their receipts in a shoebox, type it most CPAs don't like working with a real simple man in his the best year ever he did $70,000 and didn't understand that what he was doing was taxable in the state tried to go after him for 12 years. Now, if you're keeping your records and shoeboxes, I mean, how hard is it to get your records going back 12 years. So when he contacted us, we beat the state back to seven years, which is their normal look-back period. But the reason why I talk about this story is you know, just because the state says we generally go back seven years, doesn't mean they can't go back to the date that your nexus, this link or connection first appeared in the state. And you know, nowadays, these states don't usually negotiate with you. You know, some states will still let you do what's called a voluntary disclosure agreement after they find you, specifically, the state of Michigan and the state of Florida, to name two big ones, but most states if they've ever contacted you before, and they considered contact a telephone call, a letter, and email, you know, a nexus questionnaire, then a lot of these mitigation programs are just off the table and they want, either they're ten years worth of back tax plus penalty and interest, or they're seven years or they're five years. Excuse me, or they're eight years, it could be only five years because they can't go back further than the date that your actual link or connection began. So maybe it is only five years, maybe it's four years, but it' you know, yeah, they do go back ten years and a lot of people say, Well, I'll just negotiate with the state once they find me. Generally, the state's not gonna budge.
[9:41] Ellie: Okay, so, Mike, what, what should a company do then if they find out that they've had physical presence forever?
[9:49] Mike: Well, they need to make a decision. You know, there are programs out there, like a voluntary disclosure agreement. There are amnesties out there. There are what we call historical registrations. That's where you get registered with the date that your Nexus actually began and then file all the back returns. With the penalties and interest, you can also ask for a penalty waiver. And then there are prospective registrations. And this is not what the states want you to do. But in reality, a lot of companies say, hey, I want to stop the bleeding. I don't want to continue building my liability up every day. But I don't have the ability to go back and pay all these states, you know, all of this back tax. And these types of companies decide that yes, I know what my risks are. I want to stop this bleeding. I can't let my exposure continue to build and I am going to just register on a prospective basis. Now, a lot of states just can't do that. A state like Maine at this point is going to be auditing everyone back to July 1 of 2018, when their economic nexus begins, a state like South Dakota is going to put the screws to you during the registration process. And they are going to require anyone who had Nexus prior to the date they're using on their application to go back to November 1 of 2018. But as of now, in some states you know, you can fly into underneath the radar. Now, I'm not suggesting that and that is definitely not what the states want you to do. However, I'm telling you about reality. This is what a lot of companies are choosing to do. So that's one thing. But what the states want you to do are either historical registrations managed audits, the amnesties, which are generally few and far between, and then of course VDAs.
[12:01] Ellie: So, Mike, you talked about VDAs here, and I think most people have heard of them is, is that always the best option? Is it even a good option for people?
[12:13] Mike: No, it's not always the best option. Let me go back to your previous question by the way. The worst thing to do is nothing. You have to do something you can't let all of this exposure continue to build because it's not going away, every day it's going to get worse. So if you choose to at the very least stop the bleeding, get registered on a prospective basis, do it. If you choose to do one of these other methods then do that, but you cannot do nothing. I implore you, it's gonna get worse and the states are coming as they've never come before. So I just want to make sure that everyone understands that now VDA. VDA is a tool just like any tool, there's not really a one size fits all tool. Depending on what your facts and circumstances are. They may be a perfect tool for you. But I'll give you an example. Someone came to me the other day and one of the software companies was telling them whenever you owe more than $500, then you should do a VDA. Now, this company happened to be charging $3500 for VDA, let me ask you this. Does that make sense? Why pay someone $3500 if you only owe the state $500? It does not make sense, but the software company is certainly getting a lot of people to do VDAs when they only owe $500. I mean, to me, that's a travesty. You'd be a lot better off just paying the state $500 I mean you're paying an extra $3,000 to a company so some salesperson can get a commission. I mean, that's ludicrous. You know what we say here is, you know, you gotta be saving at least an amount of money that equals or exceeds the cost of the VDA. Otherwise, why does it make sense to do the VDA, where it is a lot cheaper than $3500. When we do VDAs, our cost is $1975. But the concept is still the same. If you only owe $500. Why pay us $1975 to do a VDA, you're a lot better off, just getting registered to do a historical registration, telling the state hey, here's where my nexus began, and doing the back returns, it's going to be a heck of a lot cheaper for you.
[14:48] Mike: You're going to save money in the long run even if you have to pay the penalty and interest. So no a VDA is not always the best option. You've got to look at what your potential exposure is. You know, if there's a tax collected not remitted, and it's a smaller amount, okay. You know, there are additional penalties there. Sometimes there may even be what we call criminal penalties doesn’t mean you go into jail, it just means that you know, it's an extra black mark against the company. And it does come with, you know, much increased penalties. And in theory, you actually could go to jail. If it's blatant and, you know, the amounts of money involved are very high. I mean, if you google sales tax jail in Florida, you're going to see that Florida puts a lot of people in jail. But it's usually convenience stores, restaurants, used car lots, things like that, where you have cash businesses, and people are actually cheating on their taxes. But in general, you don't, you know, want any of these criminal penalties. So there are exceptions to every rule, a VDA even with a small dollar amount if you have tax collected and not remitted, might be the best tool for you. But in general, the longer your exposure, I mean, if you have, you know, ten years of past exposure, VDA may be a great tool for you because it's gonna limit your lookback period and is a benefit for stepping forward voluntarily. The state's going to say, okay, we're only going to look at the last three years, or we're only going to look at the last four years worth of taxes, anything older than that we're willing to forgive. So let's take a state like California, if they find you, they're going to go back up to eight years. But if you step forward and say, hey, I want to enter into your Voluntary Disclosure program, they're going to say, Okay, thanks, then, you know, as a reward for not making us track you down. We're only going to look at three years. So right there you say five years worth of back tax plus penalties and interest. So that's a great benefit. But you still have to pay three years back tax so make sure that you can pay the three years of back tax or you can work out a payment plan with the state of California.
[17:10] Mike: They're also going to waive the penalty. So California waves penalty, their penalties generally 10% so you also get that waved. Now. Hardly any states. There may be a handful 5,6,7 that do something with the interest state of Texas for example. They normally only go back seven years. We mentioned how they were trying to go back 12 years but normally if they find you will only go back seven years. Their VDA is four years. So you're only saving three years of back tax, penalty, and interest, but they waive 100% of the penalty and 100% of the actual interest which can add up over a four years period. So VDA is a tool. Sometimes it makes great sense to do it. Sometimes not so much. So, you know, if you need help determining the best way to move forward, go ahead and reach out. You know, you can speak to you know, one of our salespeople, we call them team members, they'll walk you through this, or schedule a consultation with me and I'll be happy to help and answer your questions and draw out a plan for you. Any other questions, Ellie?
[18:33] Ellie: No, but Mike, if people want to reach out if they want to schedule a consultation or speak to one of our team members, how could they go about doing that? What's the best way to get a hold of us?
[18:46] Mike: Yeah, the website is going to be the best way to be the website. The address is salestaxandmore.com all spelled out. So www.salestaxandmore.com. There are lots of great resources there. There are a lot of free resources on there. We encourage you to go and see all of the free stuff that we have and also our webinars. We offer a series of webinars that do provide for CPE credit and we're constantly updating them. I think we offer maybe seven different webinars at this point. And we're constantly doing them on a live basis, you know, two to three times a week. So the website is great for resources, you can schedule a consultation with me directly on there. If you want, you can ask to speak to a team member. You can also see all the different services that we do offer. If you want to skip the website, you can always reach out to Ellie directly and you know, she'll either get your question answered, or point you in the right direction. Just remember some questions aren't very simple. It's like peeling an onion and a consultation may be required. So Ellie can be reached at emoffat@salestaxandmore.com. That's emoffat@salestaxandmore.com. Well, we appreciate everyone's time today. Thanks for listening, and we'll talk to you soon. Bye Bye.
[20:15] Outro: Thanks for listening. Be sure to click subscribe and check out all of the resources we have out on the web.