The sales tax implications of the South Dakota v. Wayfair, Inc. United States Supreme Court decision are far reaching — perhaps even more than accountants and bookkeepers realize! Blake and David sat down with sales tax experts Dena Oberst and Diane Yetter at Accountex USA in Boston to get an overview of the Wayfair decision, what it means for our clients, and what it means for our own professional services firms. You may not realize it, but the way you sell software and services via engagement letters could create "nexus" for your firm in many states, which might result in a burdensome compliance requirement. Tune in to learn more!
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- 00:53 – Meet Dena Oberst, CEO of Gable Tax Group
- 01:45 – Meet Diane Yetter, president of Yetter Tax, and founder of the Sales Tax Institute
- 04:11 – Diane gives a brief overview of the South Dakota v. Wayfair decision | AICPA
- 05:26 – According to South Dakota, a business’s physical presence is less important than its economic presence
- 06:50 – You gotta get up pretty early in the morning to go hang with the Supreme Court crowd!
- 08:37 – Most states, except Kansas, have adopted the $200k/200 transaction threshold | TaxJar
- 09:55 – If a company sells through Amazon, or other major marketplace platforms, there's nowhere to hide.
- 10:45 – To be registered, or not to be registered – that is a huge question right now
- 14:50 – States are attempting to ease the burden on smaller sellers through Marketplace Facilitation laws | Bill Track 50
- 17:10 – With the constant changes to the sales tax laws, which can vary state by state, it’s imperative to constantly monitor thresholds, and transaction counts
- 21:47 -- Who has to file? Who doesn't? Who knows? All states have yet to reach a consensus regarding the particulars of the new sales tax laws
- 25:38 – While it’s a mess right now, Diane believes things will start falling into place in the next five years.
- 26:21 – Business is definitely booming for sales-tax specialists, and firms, such as Gable Tax Group as CPAs scramble to help their clients meet these new and ever-changing sales tax requirements
- 28:39 – Diane doesn’t foresee any interference from the federal government, because it would only cost them more money to jump into the fray
- 32:06 – While the states are mostly self-policing the workings of the sales tax laws, there are some states that still want to forge their own seemingly senseless paths
- 33:46 – Economic nexus applies to all companies, not just sellers of physical goods
- 34:35 – Accountants and bookkeepers might want to exercise some caution with add-on products and bundling, as it can create additional confusion, and taxation
- 38:22 – With the shift from a manufacturing to a service economy, states are on a mission to replace lost revenues
- 39:57 – As accounting and bookkeeping practices continue to expand services, education, and understanding of the sales tax laws is critical
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Diane Yetter: Here's the thing that you have to remember - economic nexus is not just for online sales, and it's not just for sellers of tangible personal property, it is for all companies; even a company like Dena's and mine. We have to monitor, because I have clients all over the country; I think you have clients all over the country. So, we have to monitor - do we exceed the economic thresholds?
Blake Oliver: You're saying that I have an accounting practice. I'm in the cloud. I'm serving clients everywhere. I have to start counting, too.
Diane Yetter: Yes.
Blake Oliver: Oh ... Welcome [00:00:30] to The Cloud Accounting Podcast. I'm Blake Oliver.
David Leary: I'm David Leary.
Dena Oberst: I'm Dena Oberst.
Diane Yetter: And I'm Diane Yetter.
David Leary: Thanks for joining us. We're at Accountex USA in Boston, here to talk sales tax. Do you wanna introduce yourself? Basically what firm you're with and some background, and then we'll jump into sales tax, sales tax sales tax ...
Blake Oliver: We wanna learn. So, how about you go first, Dena?
Dena Oberst: Ok, great. Well, I'm Dena Oberst. I'm the CEO of Gable Tax Group. We're a sales tax outsourcing provider. [00:01:00] What we do is we do multi-state sales and use tax returns for businesses, and we mostly support CPAs. We're usually working direct with accounting firms and bookkeepers to be their in-house sales tax department.
Blake Oliver: Got it. So, I have a client that does e-commerce in like 20 states. I do not have the expertise to do those returns, so you guys will take care of those for me?
Dena Oberst: Exactly. Usually, CPAs may do their sales tax return for the one state that they're in, but once you go multi-state, most CPAs say, "I hate [00:01:30] sales tax returns," and we love them. I've been doing this for 28 years.
Blake Oliver: Gotcha.
David Leary: It's like outsourcing your payroll, in a way.
Dena Oberst: It's like outsourcing your payroll. Exactly. We handle all the payment processing, journal entries, everything; just like as if you had it in-house, but outsourced.
David Leary: And Diane?
Diane Yetter: I'm Diane Yetter. I am the president of Yetter Tax, and the founder of the Sales Tax Institute. I am the sales tax nerd. We provide sales tax education and resources through our Sales Tax Institute division, including [00:02:00] online classes. In fact, later this month, we're launching our next round of Sales Tax Jumpstart, which is a nine-week online live class. Accountants that need to know more about sales tax, that's a perfect venue for them to learn about that. Then we have tons of free resources on our website all about this economic nexus that I know we're gonna talk about, white papers, and things like that.
Then, through Yetter Tax, we are an advisory firm. We don't do compliance, like Dena does. We help people [00:02:30] understand where they have to collect tax, what's taxable that they buy and sell. We can negotiate settlement agreements, help with audit defense. Then, we also our technology partners with the largest providers of sales tax technology. We partner with them and help our clients find the best solution for them, not just a one- we're not just a one-person or one-firm partner.
David Leary: Got it. I randomly- not randomly ... I consciously go and I pick people that I wanna bring on to interview on the podcast, but, apparently, you [00:03:00] two knew each other from the past already in your career.
Diane Yetter: We did.
Dena Oberst: We did. We both- Well, I don't know if you started at Arthur Andersen, but ... I didn't start at Arthur Andersen. I started at Arthur Andersen as an experienced hire doing sales tax, because back in those days in the SALT group, there weren't a whole lot of sales tax people. Maybe did state income tax, but not SALT. Yeah, Diane and I go way back. We actually used to train on software together for a software provider back in the '90s.
Blake Oliver: I'm gonna make a big ask of you, Diane-
Diane Yetter: Sure.
Blake Oliver: -which is David [00:03:30] and I had a brief episode/interview, post-Wayfair, like the week after that decision came out. Since then, we haven't talked about sales tax.
Diane Yetter: Oh, gosh. You guys have missed out a lot.
Blake Oliver: I know. I'm wondering if you can ... I know you just did a three-hour class, and we don't have three hours, but if you could kinda give us - for the uninitiated - what is the landscape of sales tax in the United States, post-Wayfair?
David Leary: Or, even just talk about what the Wayfair decision [00:04:00] was. I think people have heard about it, but, even in those days, when we brought in somebody to talk about that, we had 200 downloads at the time. We have lots of new ears and new listeners and maybe they haven't heard of it yet.
Diane Yetter: Briefly, what the Wayfair decision did is ... How I describe it is it turned the sales tax world upside down and inside out. Prior to June 21st, 2018, companies were required to collect tax where they had physical presence. That physical presence could be through their own people, through independent contractors, [00:04:30] through paying commission payments, or referral payments, through ...
States had enacted what we called click-through nexus. A lot of people referred to it as the Amazon tax, because it was the Amazon model that they would pay people that referred people to buy things off of Amazon. They would pay them a commission. That's what the states went after. That started in 2008, in New York. But you had to have physical presence. Things like having inventory in a warehouse, which has caught a lot of Amazon FBA sellers with physical presence. That [00:05:00] was the rule - over two major court cases going back to 1967 - that you had to have substantial physical presence.
Blake Oliver: So, for example, I'm selling something out of my house in California, and I'm shipping outside of California. In the past, as long as my operations were all in California and my inventory was there, I didn't have to deal with collecting sales tax from Wisconsin or something like that-
Diane Yetter: Correct. You'd collect for California, but that was the only state you had to worry about-
Blake Oliver: That was it. Okay.
Diane Yetter: What happened in the Wayfair decision is [00:05:30] South Dakota passed a law in 2017 that said, "We don't think physical presence is a requirement. Rather, it should be economic." So, South Dakota passed a law that said if you make more than $100,000 of sales or 200 transactions into the state of South Dakota-
Blake Oliver: Which, are very different things, right?
Diane Yetter: Very different. Exactly, exactly ... That constitutes substantial presence. They said, "We don't think physical needs to be part of that." The [00:06:00] way the South Dakota law was written, it was able to be fast-tracked, so we've saw the fastest movement from a law being passed to a U.S. Supreme Court decision. The other kind of little nerdiness of it is the case is South Dakota v. Wayfair - most tax cases are taxpayer v. state, because it is the result of an audit. The South Dakota law required a proactive registration, as of May 1 of '17, and anybody that did not register that South Dakota believed met that threshold, South [00:06:30] Dakota sued. That's why the case is the reverse, and it was initiated-
Blake Oliver: Because they sued Wayfair.
Diane Yetter: They sued Wayfair for not filing that proactive registration that was required.
Blake Oliver: Gotcha.
Diane Yetter: So, the Supreme Court, fast forward ... I was at the oral arguments; didn't get to see the whole thing.
Blake Oliver: That's still super cool.
Diane Yetter: I got in line at 4:30 in the morning, and I was seven people too late to get in for the whole thing. I saw the first two minutes and then just hanging out and doing [00:07:00] all that. It was quite fun to be there. It was exciting-
Blake Oliver: So, you tailgated-
Diane Yetter: I did, I tailgated. Hint: if you wanna go, you can actually pay homeless people to go and get in line. So, next time, I will go find a homeless person and pay them a hundred bucks to go get in line at midnight. But what the Supreme Court came out, June 21st - it was actually in the middle of our Basics of Sales Tax class, which was kind of exciting - what they said is the Commerce Clause, which is what it's based on, [00:07:30] actually does not have the word physical in it. It requires substantial presence.
Blake Oliver: So, what is that? Yeah, that's the question, right?
Diane Yetter: Exactly. What the Court said is, "We believe that South Dakota's law meets the Commerce Clause requirements." So that has now become the standard of $100,000 or 200 transactions. There's some other nuances, like no retroactivity and not an undue burden on taxpayers. There's been a lot of discussion about what [00:08:00] is an undue burden, and then, also, as you compare state sizes from South Dakota to a state, say, California, New York, Texas, is $100,000 or 200 really equivalent in those states?
Blake Oliver: Right. Wisconsin just picked that as the threshold.
Diane Yetter: That's what most of the states picked was the $100,000 or 200, coming out of the gate, correct.
Blake Oliver: Okay, and the Supreme Court ... They didn't weigh in on whether that was appropriate or ...?
Diane Yetter: What they said was, for South Dakota, it was appropriate.
Blake Oliver: Oh, South Dakota, okay. So, for South [00:08:30] Dakota, it was appropriate, but they didn't actually say it's appropriate for every other state. They just said it's possible-
Diane Yetter: Correct.
Blake Oliver: It's possible, now, to do this.
Diane Yetter: Correct. What most of the states have viewed, except for Kansas, is that that is the threshold. You shouldn't go below that threshold.
Blake Oliver: Okay, but that threshold can be very low, if you're selling $10 widgets.
Diane Yetter: Correct.
Blake Oliver: 200 of those is not that many- not that much volume ... Not that much in terms of dollars.
Diane Yetter: Correct.
Blake Oliver: So, that's creating ... I'm [00:09:00] thinking to myself, if I have- if I'm selling a low-dollar-value item, maybe I just stop selling to those states, because I'm not making enough money to pay for the compliance. I guess, Dena, we can talk about this - how much it actually costs now to comply.
Dena Oberst: Right.
Blake Oliver: The big-picture implication of all this is, now, I'm a small seller in California, and I'm selling to people in every state. What [00:09:30] do I do? It's overwhelming, right?
Dena Oberst: It is overwhelming, and a lot of businesses that are selling in multiple states, whether it's just e-commerce ... Sometimes, that's just one of the revenue streams - it's not their only revenue stream - is to use one of the big marketplace platforms. But the number of transactions, like Diane said, that has come out, a lot of people are like, "How do I comply with that, and what happens if I don't?"
Now, if you went back prior to this last- I would say the last 12 [00:10:00] months, the states had the list of inventory. They knew exactly where Amazon's customers were. Those customers were actual- those businesses were getting letters, so they knew who they are. It's not like you can just hide. Again, you sell whatever, 200 coffee mugs-
Blake Oliver: So, people who are using Fulfilled by Amazon, I understand that's where Amazon takes your inventory and distributes it around all of their warehouses. There's like 26 states, or ...?
Diane Yetter: It's growing. Missouri, [00:10:30] Idaho, and Oklahoma have warehouses that just opened or are due to open in, and those are three brand-new states that had not had warehouses before.
Blake Oliver: Basically, if you used FBA and you wanna be compliant, you kinda have to ... You were already filing in pretty much all those states [cross talk]
Dena Oberst: Well, that's-
Diane Yetter: You should have been filing.
Dena Oberst: That's kind of the confusion. That's where people like Diane and I come in and say the economic nexus, the revenue threshold, is the newest thing since the Wayfair, but the physical presence is not dead. If you were selling on Amazon and had goods and inventory, [00:11:00] you still have to register. It has nothing to do with the number of threshold- the number of transactions.
That's where a lot of businesses are confused. They call me all the time ... "But, Dena, maybe I have 200 ..." I'm like, "Yeah, but you had physical presence there. You need to register. There's a lot of other nuances I won't even get into. You don't have time. I'll talk about the Marketplace Facilitator law, which adds even another layer of confusion to businesses. But I would say, on the compliance side, for sure, the volume of returns for any business has grown [00:11:30] substantially, and I would say probably by 2020, most of those companies should be filing in every state.
Blake Oliver: You touched on, or you mentioned the risk of noncompliance. What are those risks, if I just ignore ... I'm in California ... What's South Dakota gonna do to me?
Dena Oberst: Well, this is what I tell, and then definitely let Diane opine on it ... I always tell businesses, all the time, "Do you wanna lose 10 percent of your gross revenue in taxes that belong to your consumer?" They're like, "Well, no!" I'm like, "Well, you [00:12:00] are now taking the responsibility for it. Why not just find a solution to implement a process, whether it's technology and outsource, and collect it from the consumer?" It's a consumer's tax. These businesses shouldn't be absorbing that as a liability, and it's really risky. If they're not gonna do it, I always say, "You better prove something on your books ..." because 2020 is- we're gonna be a second year into this, and it'll be really interesting to see how the states enact-
David Leary: You wanna basically build the [00:12:30] proper system and have the proper system procedures, so all you're doing is you're just collecting the tax and passing it on. You wanna eliminate the burden. It's not your tax, as a small business owner. It's just, you just have to create a process to move that money through, and when you do that-
Blake Oliver: Remit it properly.
David Leary: -you just can forget about it.
Diane Yetter: Correct.
Blake Oliver: But that's not- that's easier said than done, right?
Diane Yetter: It is.
Dena Oberst: Well, that's true, but that's why there's-
David Leary: That's why there's cloud accounting, right?
Dena Oberst: Yes, that's why there's platforms out there that can help. There's a whole host of them, as Diane mentioned. They do a lot [00:13:00] of implementations. There's definitely a lot of options out there for businesses, large and small.
David Leary: I think I've seen some of the e-commerce conversations where people are- they're worried about the big companies, like Amazon, turning over data to the agencies or being forced to collect it on their behalf. It gets very, very messy, because then, if you're shipping some stuff on your own, and some stuff through Amazon, Amazon can't file your return for you. It's very complex-
Dena Oberst: Some of it can, right? I know [00:13:30] Diane's gonna have a whole topic on it this afternoon about the Marketplace Facilitator, and how Amazon and some of those other platforms are now gonna be required to collect and remit tax on behalf of the sellers. Being on the business side, I don't have one client that just sells on Amazon.
Blake Oliver: Yeah, how does that even work?
Dena Oberst: They sell on their own website, and they have other platforms. If it says $100,000 in gross sales, that's gross sales; that's not taxable sales. We go back to that discussion, right, Diane? Is that really [00:14:00] gross sales, meaning the marketplace sales, and including the ones that you have from your own website? I tell my clients, "Yes, if you've met the threshold on gross sales, completely, whether or not Amazon's reporting on your behalf and you have the remainder, you need to register." Again, do you wanna lose 10 percent of your revenue? I don't think so.
Diane Yetter: The states are starting to come out ... On our website, SalesTaxInstitute.com, we've got a couple of great remote seller charts, and economic nexus charts. We are [00:14:30] tracking whether or not the state has enacted Marketplace Facilitation laws. What that is, is it is the state's attempt to reduce the burden on the very small sellers. So, sellers that exclusively sell on marketplaces - Amazon, Etsy, eBay, Walmart, Google, all of those platforms - that the states are saying, "Individual seller, you don't have to be the one to register and collect. The marketplace will do that." They file a [00:15:00] single return for all their sellers. It lessens the confusion of the consumer.
If you go on Amazon, and you buy the same thing, you could have three different situations. You could be buying direct from Amazon, in which case, they're collecting tax in every state. You could be buying from a third-party seller that does FBA, so they're registered in a number of states, or should be; or you buy from somebody that self-fulfills that maybe is only registered in their [00:15:30] home state. You can buy the same thing from three different vendors and get three different tax results. Confusing for the consumer, right?
Blake Oliver: Yes, right.
Diane Yetter: What the states are saying is if you're selling through Amazon or any of the other marketplaces, the marketplace will take that responsibility. If you're a seller, you go on to the marketplace. You can't even turn those marketplace states on or off. Today, we're up to 37 states that have passed that.
Blake Oliver: The market- So, Amazon is gonna collect ... When does that start? Is that already happening?
Diane Yetter: It's already happened. Of the 37, there's 14 [00:16:00] that are not yet effective. We got a bunch coming on 10-1, and we've got a couple January 1. A bunch just came on July 1. That is gonna reduce the burden, but where the complexity comes in is, just as Dena was talking about, if you're multi-channel, which many sellers are - you sell through Amazon, eBay, Etsy, Walmart, and your own website - when you're figuring out if you've exceeded that threshold, what do you include? Some of the states say you have to include everything, like Washington. But there's [00:16:30] some other states that say ... For example, Arizona says if the marketplace is collecting, you exclude those, even though they otherwise say your gross sales.
Now, as long as you can confirm - which all the big players have lists on their website that show, "Here's where we're collecting as of what date" - you get to exclude those sales. Now, if you're below the threshold, in Arizona, they go into effect 10-1; they're the only ones that's doing a phase-in for 2019. It's $200,000 in [00:17:00] sales, no transaction count. Exclude your marketplace. If you're below that, you don't have to register. In January, it drops to $150,000. In 2021, it will drop to $100,000.
It's an ongoing exercise to continue to monitor your transactions, especially as we've seen a number of states ... We've had seven states change their thresholds. We had six of them originally enacted with a transaction count and then realized they caught a whole lot of [00:17:30] tiny sellers, so they've eliminated the transaction count and now just have a dollar threshold.
Blake Oliver: That's good, because that transaction count seemed ridiculous to me.
Diane Yetter: Right. We're seeing that. Big states, like California, Texas, and New York are all at $500,000. Texas and California are dollars only. New York has an "And" test. So, it's $500,000 sales and 100 transactions." They're saying if you make one $500,000 transaction, you don't have to register. You still have to have 100 transactions in New York. But most states are an "Or" test.
David Leary: If I'm [00:18:00] selling ... Amazon's gonna now remit and pay my sales tax for me, for some portion of my business. Is their official ... I know this is not the right analogy, but a 1099 ... It's kind of standard, right? You're gonna get a 1099, and it's very clear of what you need to do with that on your own personal income taxes or your business income taxes. Is there kind of that equivalent, where if Amazon pays this on these different states, you're getting a real form, or is it just gonna be like, "Here's the report ..." "Amazon - I'm doing air quotes here - Amazon created this [00:18:30] special sales tax report," and that's kind of what you get, and now you've gotta backwards figure that in? Maybe this is a question for you, Dena-
Dena Oberst: Well, in the Amazon Marketplace platform, when you run the reports to do your tax returns, it'll actually list which transactions were reported by Amazon-
David Leary: It's broken down by each state, or ...
Dena Oberst: Right. They still wanna know the revenue. A business still would wanna know their revenue. They still need to know their products. From the tax perspective, in that column, it'll say Amazon reported the tax on behalf of the seller. Then, there's the other states [00:19:00] that still have tax turned on. Because, like Diane said, this is kind of a rolling thing, this Marketplace Facilitator law. It's not all states now. Some are in October, some are January 1, 2020. It's not all states, but probably by next year this time, it'll be all the states. I can't imagine not. It's actually listed on the report the sellers can see.
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Blake Oliver: Even if I'm exclusively selling on Amazon and some of these other- all these other marketplaces that are now going to collect and remit on my behalf, I still have to register in the states where I have exceeded the threshold?
Diane Yetter: Maybe-
Dena Oberst: I was gonna say, maybe. If it was a gross receipts state, maybe.
Diane Yetter: The states are starting ... If I can just answer your question quickly, some of the [00:21:00] states in their Marketplace legislation require like a 1099 form, though it's a certificate. Think of it as almost even a reverse exemption certificate that the marketplaces will need to provide to the sellers. That is one of the things that the states are putting in there.
There's a lot of crazy liability issues that are being worked through. There's a task force that the Multistate Tax Commission has put together on marketplace facilitation. I'm on that task force. We had our first call last week. We're [00:21:30] working on trying to figure out how to come to a happy medium between the states, and the sellers, and the facilitators, in terms of shifting that liability and responsibility, and who will have to issue certificates or not. All of that is kind of evolving.
What the states are seeing is, now, to your question about do I have to file if I'm strictly on a marketplace and they're collecting? Some [00:22:00] of the states say yes. A state like Washington that you have to file the Business and Occupation tax, which is their gross receipts tax on the same form, they definitely want you there. Some of the states want you to include the sales, and then there'll be a deduction line.
Some of the states- New Jersey has come out and said if you're strictly a marketplace and it's collecting, if you're already registered, we're gonna put you on inactive status. Then, if you start making sales that you need to collect, just call us, and we'll make you active again. Some of them are saying cancel your registration and then [00:22:30] re-register. We have the same question if you drop below the threshold - what happens? The states are figuring it out, but they're ending up with a lot of zero returns, or very low dollar returns that are very expensive for them to process, so the states are still figuring it out [cross talk]
Blake Oliver: It's expensive for the businesses to file-
David Leary: It's a burden for both sides, right? It's expensive for both sides to track zero-
Diane Yetter: Right, it is. It's a burden for both sides. Exactly.
Dena Oberst: Which I would say is why it's the greatest change, I would say, in the sales tax since I've been doing it. This has been the greatest change where it happens- probably every week, every month, there's some change. It's really hard to advise [00:23:00] clients. Like we were talking about earlier, you get clients to register because they met the threshold, and then they come up with a Marketplace Facilitator. Now what? They're already registered. What do you do? Some states say you can cancel your registration. Some say you can't.
Blake Oliver: Yeah, and do you have to file separately? Like, I sold everything on Amazon. They're gonna report/remit. Do I file my own sales tax return, too?
Diane Yetter: In some of the states, because the states want to see the revenue, and then, you take your deduction.
Blake Oliver: Oh, you [00:23:30] take a deduction, got it.
Diane Yetter: You take a deduction. You file a zero return, but it's a way for the states now to get data that, when they go to audit the marketplace, they know these are the sales that should have been reported, because they're getting it that way. It's a lot of data analytics that the states are trying to use the information for-.
Blake Oliver: But not every state does it that way. They're all different. Okay-
Diane Yetter: But not every state does it that way, exactly.
David Leary: Is there an end to this? Every month, every quarter, somebody's discovering something - "Oh, this is kind of broken in this new system," and they're adjusting, changing the laws ... Is this gonna- three years down the road, things ... Is this gonna stabilize [00:24:00] here?
Diane Yetter: I think it will. We're definitely getting- we're getting close. We have all but two states that have enacted economic - Missouri and Florida. Florida has all already pre-filed legislation for next year. Kansas came out with an administrative; they tried to pass it twice. It got vetoed by the governor because it was bundled in with some other issues that she didn't want to sign. Kansas came out, administratively, and said, "Under our existing law," which a number of other states did, "we're [00:24:30] going to impose it, except we do not believe we can authorize thresholds, because that would be granting an exemption which requires legislation." So, Kansas has a zero threshold, starting October 1. People have appealed to the attorney general. The attorney general of Kansas has said that they will come out with an opinion before October 1, when it's effective, so we'll see on Kansas. But otherwise, Missouri and Florida are the only ones.
The marketplace, as I said, we've got 37 that have passed it. The only two that are possible, yet this year, are [00:25:00] Michigan and North Carolina that have it proposed, but they're still in legislative session. Most of the legislative sessions have ended, so were waiting til next year to see what's gonna happen. But we do have cleanup. We have administrative rules. Illinois passed some goofy rules that go into effect next July. Switching the sourcing rules; how they wrote it, it's unconstitutional, under the Illinois Constitution. We're hoping there'll be some cleanup legislation in the [00:25:30] veto session this fall; if not, early next year, if there'll be ... There's coalitions of people getting ready to file a lawsuit against Illinois. Right now, yes, there's a lot of turmoil. It's hard to stay on top of it, but I think it'll slow down after next year. Then, I think the next stage will be as audits start happening. So, three to five years out, we'll probably now see some of the administrative things get worked out a little bit more.
Blake Oliver: So, Dena, [00:26:00] your business must just be booming at Gable.
Dena Oberst: It is booming.
Blake Oliver: To me, this resembles payroll. Like David said earlier, a lot of firms used to do payroll for their clients. Pretty much everybody that I talk to has gotten out of it and outsources that now to a payroll provider. So, do you see that- is that where sales tax is headed?
Dena Oberst: Well, absolutely, because small companies ... It's the small businesses, the e-commerce businesses that are impacted the most. The ones that are well-established are already filing sales tax [00:26:30] returns everywhere, based on physical presence, and they just don't even have a tax department, let alone, sometimes, an accounting department. You're usually working with the CEO or the founder and some salespeople. They're never gonna have that in-house. Yeah, it's definitely been a good solution for the e-commerce businesses to have an independent, because, quite frankly, people like me usually sit in the Big Four accounting firms, and it's kind of untouchable for a startup company to have a sales tax compliance team. Yeah, we've definitely been [00:27:00] popular in this last year.
Blake Oliver: I know you're working with CPA firms. I'm a CPA. I have clients that have nexus, all this stuff, and I wanna pass it off to you guys. You guys will take care of that. Do you also work direct with a lot of businesses [cross talk]
Dena Oberst: Oh, absolutely. Absolutely. Yeah, we work direct with businesses all the time, but really, since the Wayfair decision last summer, we've just been focused on working with the CPAs because that's where all the businesses go. They go to their bookkeeper and their CPA, saying, "Help, what's going [00:27:30] on with Wayfair?" or, "I got a letter. How do I comply?" Most CPA firms, again, don't specialize in sales tax, so where do they go? Are they gonna go to their competitor and refer their client to a competitor? No, they're not. Gable Tax Group is gonna be the sales tax guru for them to go to keep the competitors out from poaching their clients-
David Leary: So, I can pretend I have a sales tax department. I'm like, "Oh, great, I have a sales tax team. We can handle this ..."
Dena Oberst: That's right.
Blake Oliver: It's just like I handled payroll for my client, right?
Dena Oberst: Right.
Blake Oliver: To them, I'm doing it, but really, it's [00:28:00] a payroll provider that I'm working with.
Diane Yetter: Exactly.
Dena Oberst: That's right.
Blake Oliver: Here's a question - what do you think the odds are that the federal government ever gets its act together, and Congress unifies the states? Why can't we have a system where we just file with one-
David Leary: That's called the Avalara Short. They were short on Avalara, and then pushed for that decision?
Diane Yetter: Yeah. I get asked this question all the time. There are, I think, it's three [00:28:30] current federal bills pending. Dena, object if you disagree?
Dena Oberst: Nope.
Diane Yetter: Don't hold your breath.
Dena Oberst: Yeah, that's what I would say.
Diane Yetter: It's not gonna happen. At this point, a couple of things to keep in mind. If the federal government is going to eliminate a revenue source for the states, the federal government must reimburse the states for the lost revenue. All but two states ... Well, we've got three that come on 10-1, but basically all but two [00:29:00] states already have a revenue stream. So, to repeal something that is already in place is not gonna happen.
The only other time that I've really seen that happen is the Internet Tax Freedom Act. When that came out, there was legislation that said states cannot tax internet access, if they didn't have it in place at that time. There were eight states that were grandfathered in when the bill went permanent, under [00:29:30] President Obama. It gave them until 2020 to eliminate it. We've got a couple of states that that's their legislation to eliminate it.
That's really the last time we've seen the federal government go in and take a wholesale change to that. But keep in mind, that bill was passed when the internet was in its infancy, and when you paid AOL to have online access. Today, [00:30:00] it's kind of- it's your phone bill. It's a general commodity. I almost feel like the Internet Tax Freedom Act and no tax on internet access is almost not needed today, but that's in place. So, no, I do not think ...
The other reason that I don't is the states all came together in setting that threshold, setting the $100,000 or 200 transactions and not going retroactive ... Nobody [00:30:30] has made it effective earlier than June 21st of 2018, other than a couple of-
Blake Oliver: Knock on wood.
Diane Yetter: Well, there's a couple of weird things called [cross talk] cookie nexus, but we won't get into that today.
Blake Oliver: Is that with the internet browsers, like an internet cookie?
Diane Yetter: It's a digital cookie. You guys drop cookies on all of your listeners' computers so that you can track them, and they come back.
Blake Oliver: Oh, no. this is [cross talk] This is the problem with podcasting is it wasn't designed to track well.
Diane Yetter: You don't.
Blake Oliver: Other than people [00:31:00] downloading, you have no idea-
Diane Yetter: That people are listening.
Blake Oliver: Yeah.
Diane Yetter: I drop cookies-
Blake Oliver: Yeah, every website, pretty much-
Diane Yetter: Every website. That was considered physical presence, because in the states that did that, which were Massachusetts and Ohio, that was a physical presence. What is happening is the states all said, "We don't want the feds to get involved. We gave the feds ..." There has been federal legislation pending since- I remember the first one in 1988, and it goes back even [00:31:30] before that. The federal government has done nothing to that, and what the states are saying is, "We are doing this in a measured, appropriate way." There's arguments as to what is appropriate, "but we're being somewhat consistent; we're being reasonable. We're not going retroactive. Feds, stay out of it."
What Kansas has done, that's kind of tipping the apple cart a little bit. Hawaii attempted [00:32:00] to go back to January 1 and, within days, got slapped down by all of their fellow states, changed it, and said, "We'll make it July 1." The states are self-policing on that, and the bills are getting passed. The only really goofy thing is New Hampshire with no sales tax. They've passed a law that now any state that wants to require a New Hampshire business to collect their tax must apply to the New Hampshire Department of Justice to be certified that [00:32:30] they're not putting an undue burden on a New Hampshire business.
Blake Oliver: The state's having to register with another state.
Diane Yetter: Right.
Blake Oliver: How does it even work?
Diane Yetter: It's crazy-
Dena Oberst: Yeah, it's crazy.
Diane Yetter: It's crazy. We haven't seen how that's gonna work.
Blake Oliver: Can they do that to ...? [cross talk] the constitutional question, right?
Dena Oberst: That is the question.
Blake Oliver: So, more court cases coming, I imagine-
Dena Oberst: Yes.
Blake Oliver: How are we doing on time? Because I have one more big question, I'd love to-
Diane Yetter: I'm good.
Dena Oberst: Yeah, I'm good.
Blake Oliver: Okay, so, tax on services ... We've [00:33:00] been talking about ... I think we haven't said explicitly, but mostly about goods, right? That matters to our clients of CPA firms, but CPA firms, and CPA-firm owners are probably very interested to know what's going to happen.
David Leary: Well, especially our Cloud Accounting Podcast listeners, because a lot of them have cloud-accounting-based practices and they're having clients now in multiple states.
Blake Oliver: Yeah. We had clients, when I was in practice, in like 26 states, and not to mention, different countries. What do we have to look forward to, in [00:33:30] terms of the states passing ... Well, I guess, how many states collect tax on CPA services, or accounting services, or bookkeeping services?
Diane Yetter: One, it's South Dakota-
Blake Oliver: South Dakota is the leader, here.
Diane Yetter: Yeah. Here's the thing that you have to remember is when ... Economic nexus is not just for online sales, and it's not just for sellers of tangible personal property - it is for all companies. Most of the states use a gross [00:34:00] sales threshold. There's a few that use taxable sales, and a few that use retail, which means if you're a wholesaler, you exclude your sales for resale. Even a company like Dena's and mine, we have to monitor because I have clients all over the country. I think you have clients all over the country. So, we have to monitor do we exceed the economic thresholds? Now, in most states-
Blake Oliver: Let me hold you there, just for a second. You're saying that I have an accounting practice. I'm in the cloud. I'm serving clients everywhere. I have to start counting, too.
Diane Yetter: Yes.
Blake Oliver: Oh ... I [00:34:30] feel like a lot of accountants and bookkeepers don't know this.
Diane Yetter: Don't realize it.
Blake Oliver: Yeah.
Diane Yetter: Here's why - most accountants don't just do accounting services. In my workshop, yesterday, I had a mix of people that say, "I'm a reseller of QuickBooks Online, Xero ..." name your platform - because a lot of them do that, so that they get an additional revenue source. They are a reseller of cloud applications. There's a number of states that tax cloud software, and cloud applications-
Blake Oliver: Oh, wow ...
Diane Yetter: Now, if it's [00:35:00] a gross sales state, you have to include your professional services revenue to see if you're above the threshold, and then you have to tax those. In my business, I've stayed out of selling on-demand webinars, because those are considered digital audio/visual, and that's taxable in a bunch of states.
Blake Oliver: Wow. I did not know this. This is [cross talk]
Dena Oberst: -about 12 or so states-
David Leary: This is why we aren't gonna charge for The Cloud Accounting Podcast. It's too much work.
Blake Oliver: Let me get this straight. This could [00:35:30] change, depending on how I structure my engagements, right?
Diane Yetter: Exactly.
Blake Oliver: Let's say I purchase the software. Let's say it's QuickBooks Online. Then I just bundle that with my services, but I'm not explicitly charging the client for that subscription. I own the subscription, and I'm just ... That's different than if I resell-
Diane Yetter: Resell it.
Blake Oliver: So, I get the subscription; Intuit charges me; and then I resell to the client, and it's as if it's their subscription-
Diane Yetter: Correct.
Blake Oliver: That's two different situations-
Diane Yetter: It is.
Dena Oberst: Be very careful about bundling, right? [00:36:00]
Blake Oliver: Yeah.
Dena Oberst: Because if you bundle things that are not taxable with things that are taxable, the whole thing could be taxable, so just be very careful.
Blake Oliver: I wanna own ... I don't wanna be reselling software, really, if that's not my main business, I wanna be owning-
Diane Yetter: Turn it into a commission. Get a referral fee, something. Let the software company do it, because the trick also becomes if you buy it, and then you provide it as part of your monthly recurring fee, Intuit has to charge you the tax on that, and they have to [00:36:30] know where your client is, because if you're giving your client access to that QuickBooks license, or subscription, then they need to know. So, they're gonna charge you the tax based on where your customer is.
Blake Oliver: I don't think they do that [cross talk]
Diane Yetter: But that's what they should be doing.
Blake Oliver: That's what they should be doing.
Diane Yetter: But here's the thing, if they don't, because they've considered it to be you, and you're in California, and California doesn't tax SaaS, but you're having a client in Washington use it, you now potentially owe Washington use tax on that, because you're using it- [00:37:00]
Blake Oliver: Yeah, yeah-
Diane Yetter: -in Washington. It adds a lot of complexity.
Blake Oliver: Washington use tax is no joke, I understand.
Diane Yetter: It is not. It is not.
Blake Oliver: There are some hefty fines if you don't comply.
Diane Yetter: A 39-percent penalty Washington imposes if they catch you.
Blake Oliver: Wow.
David Leary: This could be a session you guys should do at one of the future conferences - just a how to be sales-tax compliant in your own [cross talk] and what's the best strategy for bundling, doing webinars, if you're doing bar work, any of that.
Diane Yetter: Yeah.
Blake Oliver: You mentioned only South Dakota collects a [00:37:30] tax on services-
Diane Yetter: On professional services-
Blake Oliver: Professional services-
Diane Yetter: -accounting services, but [cross talk] lots of other states tax computer-related services. If you're doing installation of software, you're doing a training on software, digital goods ... D.C. and Iowa just started taxing those products, those types of digital services, effective January 1. I think that's where we're gonna see more movement, because states went from taxing physically delivered software. Then, when it was electronically [00:38:00] downloaded, it was like, "Oh, it's exactly the same thing." I go into the store, and I buy QuickBooks on a disc, taxable everywhere. I go to QuickBooks Online, and I downloaded it. I install it on my computer, not taxable everywhere, but moving ... California, it's not taxable. Now, I'm accessing QuickBooks Online, it's taxable in fewer states.
You've got the exact same product sold in different mediums taxed differently. We're seeing states kind of move [00:38:30] along that continuum to start charging or start imposing tax on more of those types of things, more services ... The economy has shifted. We used to be 70-percent manufacturing. Now we're 30-percent manufacturing and 70-percent service. The state revenues are plummeting, so they're trying to figure out how do we do this? Economic nexus is one way but broadening their tax base is the other. They can't raise the rates higher than they are.
Blake Oliver: Do you think that professional services, that it's inevitable they'll get taxed someday? I feel like ... I mean, NASBA, AICPA have [00:39:00] been doing a good job of clamping down on that and stopping the legislation before it ever gets to a vote, most of the time, along with other professional groups, but to me, as we move more to a services-based economy, a digital economy, it seems kind of inevitable that the states won't try to grab that money.
Dena Oberst: Well, I know, because California, right? I mean, California comes up all the time. They wanna know-
Blake Oliver: Yeah, every year it seems like there's an effort-
Dena Oberst: They wanna know ... Really, let's just see the impact of the Wayfair. This is just my opinion on it, but as the states are trying to even deal with new businesses registering and [00:39:30] all the tax that they're gonna get from the product sales, I just think service is gonna be a little bit further out there right now. Not to say that it's not gonna happen. People [inaudible] comply. States need revenue. They're gonna tax it. But professional services is definitely- it's not off the table, but I'm just- I can't see in the next 12 months at that [cross talk] That's just me, but [cross talk]
David Leary: So, our listeners have 12 months ...
Dena Oberst: Well, I'm just saying, the Wayfair ... It'll be ... Wayfair, the decision will be two years old by then.
Diane Yetter: I think what's important for [00:40:00] your listeners to keep in mind is, I was in the keynote this morning, and Dan, Gary and Jeannie talk about how the accounting firm of today needs to diversify and start doing more than straight compliance business. So, as you move into doing different things like providing education, providing different sorts of things, those are not necessarily accounting services. If you are in the technology space, and you are doing [00:40:30] analytics; you're building RPA; you're doing different sorts of artificial intelligence-
Blake Oliver: Technology consulting, implementation work-
Diane Yetter: That's taxable in a good number of states-
Blake Oliver: Really?
Diane Yetter: So, as you start expanding your practice to start doing different things, you have to be aware that it's considered a different thing under state law, and you need to know what you're doing. If you're an accountant, and you're not doing your taxes right, kind of can impact your reputation, you know? [00:41:00]
Blake Oliver: Yeah, and you can't exactly claim ignorance-
Diane Yetter: Right. Exactly, exactly! Dena works with a lot of CPA and bookkeepers. We do, too; not on the compliance side, but on the advisory side and help them help their clients understand what they need to do. Then we refer to people like Dina, when they're like, "Okay, now we need help doing the returns. What should we do?" Because we just don't do that.
Dena Oberst: Like Diane mentioned, if you're an accountant or a trusted advisor, and you're not doing your own taxes correctly ... But [00:41:30] the one thing that I will say that comes up a lot is - and I'm not an income tax person - but what happens on the income tax? Now that these businesses are registered for sales tax everywhere, have they just increased their income tax footprint? Just something-
Diane Yetter: A whole nother topic.
David Leary: Another ripple-
Dena Oberst: -that CPAs ... For you guys to make sure that you cover.
David Leary: So, I'd love, if there's a major decision, to try to get you guys back on again to educate us, but we're kind of running out of time today. Anybody who's listening and wants to get a hold of you, Dena, what's the best way?
Dena Oberst: You [00:42:00] can just email@example.com.
Blake Oliver: What's your website?
Dena Oberst: It's Gable Tax-
Blake Oliver: GableTax.com?
Dena Oberst: Mm-hmm.
Blake Oliver: All right-
Dena Oberst: Or SalesTaxGurus.com, if that's easier to remember.
Blake Oliver: SalesTaxGurus ... Gotcha, and Diane?
Diane Yetter: The best way to find all of our great resources, SalesTaxInstitute.com. We have a special landing page for Accountex - my presentation. So, if you're not here, and you wanna see what I talked about, you can go to SalesTaxInstitute.com/accountex2019. We've got a lot of our [00:42:30] resources pooled together there. We'll have my PowerPoints for my presentations. Once this is up, we'll put that out there, too.
David Leary: We'll get it in the show notes, all the links-
Diane Yetter: Yes, definitely.
Blake Oliver: All right. Well, thank you both so much for joining us. It was a real pleasure, and I learned a lot today. Thank you-
Dena Oberst: Thanks for having us.
Diane Yetter: Thanks for having us.
David Leary: Thanks a lot.
Dena Oberst: Bye-bye.
Diane Yetter: Bye.