Nasir and Matt welcome Mark Faggiano of TaxJar to discuss how business owners can comply with the various sales tax rules. They also answer, "I'm looking to incorporate in the next few months. How much should the tax consequences play a factor in my decision making?"
NASIR: All right. Welcome to our podcast. This is Nasir Pasha where we cover business in the news and answer some of your business legal questions, and we also have Matt here too, for once.
MATT: Yeah. You can just take over the entire show if you want.
MATT: You’d have thought, after a hundred episodes, we would have gotten a good intro by now but I guess that’s not the case.
We have a great episode today. We haven’t had a guest on in a while – at least it seems like it's been a while. But we have Mark Faggiano with TaxJar, the founder and CEO of TaxJar. Did I get your name right, Mark?
MARK: You did. Nice work. Good to be here guys.
MATT: Oh, yeah, thanks for being here.
NASIR: Yeah, thank you so much.
Yeah, so taxjar.com is a company in San Diego but what's interesting about what they do – and obviously Mark can speak more of it – is on sales tax and dealing with it, especially from a small business perspective doing online e-commerce. I know a popular business that seems to be kind of sprouting up probably the last few years – and, Mark, you can probably correct me if I’m wrong – is these kind of online sellers that are using Amazon to fulfill its shipment and basically uses a shopping cart instead of setting up their own website. It’s an easy process if you have your own product that you can buy at wholesale or something to that effect, then it might be a good way. But what about the sales tax implications in that? I think sales tax in general is just a mess of laws. I mean, because you have to deal with how each state applies the different taxes, depending upon where it's being sold and who it’s being sold to. So, Mark, this is something you deal with every day, right?
MARK: Yeah. So, to call it a mess is really an understatement. There's probably some more words that you don’t want to use to better describe it but you're exactly right.
So, you know, five years ago, if we were having this conversation, if you talked to an online seller, they would probably say, "I'm an eBay seller” or “I just sell on eBay" and what's really happened and where we’re at now is that folks are multichannel, right? They’re selling on eBay. They're also selling on Amazon most likely. They also have their own website and they're using a point-of-sale device. They’re using Square to go to a craft fair on a weekend or, you know, some kind of trade show. And what that’s done is dramatically change their sales tax complexity. And, using Amazon as an example, by the way, there's no barrier to entry, right? To do all those things.
MARK: It's not very hard to get a presence set up across the board on all those things. So, what's happening now is that there are so many sellers and they're competing, you know, head-to-head. One of the biggest differentiators for them is shipping. So, if you and I are selling a pair of Air Jordans, right? Just as an example, and you're offering next day – Amazon will provide this eventually – same-day turnaround and I’m providing kind of the traditional three to four day, I don’t stand a chance, right? So, that's why folks are using this Fulfillment by Amazon service because it allows them to compete much better and also the customers demand just quicker turnaround.
What happens is when they use Fulfillment by Amazon, they are literally sending all of their inventory to Amazon and then Amazon takes care of the rest. But what Amazon is doing is just distributing that inventory based on their kind of internal algorithm to say, "Okay, Matt’s selling Air Jordans. We know that those sell in a particular part of the country so we’re going to send everything to our warehouse in Fresno," just as kind of a high-level example.
MARK: Well, if you’re in Texas and your stuff gets shipped to California, California raises their hand and says "Hey, look, I don’t care if you've never been to California, I don’t care if you don’t have an employee in California or a storefront, the fact that your inventory is being stored here is sufficient enough connection to where you have nexus in California. Therefore, we want you to comply with our laws. So, we want you to get a sales tax license in California and we want you to collect sales tax on items that are shipped to customers in California."
MARK: So, what's happening is mom and pops – no matter what level of revenue they're at – are now having to comply in more than a dozen states, right? Instead of just kind of worrying about their sales tax in their home state.
NASIR: And I think which is crazy from a small business perspective and able to dodge all those kind of tax laws and so forth and understand them all. But, from a big picture, you mentioned nexus which is a legal term of art of course and comes to this aspect of how can a state regulate what would regularly be considered interstate commerce, right? And this goes back to our US Constitution and states rights versus federal rights and things like that, and that's why, if there's a nexus – and you use this word nexus as a connection to that state – then they're actually able to assign those taxes to those sales.
So, in your perspective, obviously each state has its own issues. Are there any particular states that are a little bit more complicated than others? Or is it pretty much the standard laws here and there?
MARK: That's a really good question.
So, the laws are pretty complicated throughout. Really, where it gets more complicated is on kind of the filing side of things and the work that somebody would have to do to get the data that’s required to be able to file of sales tax return in those states, and that's why we started TaxJar. But there are really crazy examples around taxability. Whatever item that you’re selling – let’s go back to our Air Jordans example – that may be taxable in one state and may be exempt from tax in another. Or you know…
MARK: This is kind of crazy but maybe the shoelaces are taxable in one state and non-taxable in another. So, that's where sellers are bashing their heads against the walls – not only, “Man, I’ve got to figure out if I have this nexus issue,” but, “Is what I’m selling even taxable across these states?” and there's no kind of clear cut answer to that always and, in a lot of cases, people have to go to lawyers or go to sales tax professionals to just tell me what I need to do to do the right thing because I want to comply but nobody is making it easy for me to get the answers that I need to do that.
MATT: Yeah. I can see how it’d be very complicated, I mean, like, we’re two attorneys here dealing with nexus, it’s a legal term of art and it’s getting complicated. I was just reading through your site. It’s pretty complex for sales tax. I can’t imagine for business owners. So, I mean, other than this big nexus issue, what in your opinion are sort of the biggest concerns for these business owners that are selling these items online?
MARK: Nexus is probably far and away the biggest one. The other thing comes down to time, right? At the end of the day, the sales tax issue just gets in their way of growing their business. It’s an administrative hassle and burden so people just can’t stand it and, if they want to do it, they just can’t understand it and that's typically what we see.
NASIR: Yeah, because it’s not just the actual payment but it’s also the reporting of it aspect too because this reminds me of this whole independent contractor versus employee issue where it is such an easy grab for states. It's a moneymaker so, of course, they’re going to enforce it. If they can, they will. Even though reporting requirements are different, right? I mean, even if you’d made money, some sales in one state in the past but don’t in the future, some of them may even require reporting that made zero, right?
MARK: Yup! This is where it gets even crazier. Certain states, if the taxes are variable and it’s based on where the item is being shipped to, when you go to file a return in those states, they want to see sales and taxes subtotaled for every jurisdiction that you made a sale to.
MARK: So, for example, in New York, if you're complying in New York and you’re paying let’s say quarterly, you can’t just go to them and say "I collected $500 on sales tax in Q3. Here you go." And the reason is the state doesn’t know how to divide up that money, right? They don’t know where you made the sales. So, they need you to report out and say, "Hey, look, out of the $500, $100 of it went to Manhattan, $100 of it went to Buffalo County, and $100 of it went to…” – I’m running short on my knowledge of New York locations but you get the point, right?
MARK: So, you’re having to do that level of work and, to go back to our original point, if you're that multichannel eCommerce seller which is so common today, you’ve got data in eBay, you’ve got data in Amazon, you’ve got it from your own website, how on earth can you easily take all of that, put it together, and then go line by line to compile it to say, “I made a sale in Buffalo. I made a sale in Manhattan.” And to know the taxes that apply to each of those so you can just file the return, that’s a pretty time-intensive burden that people do not like to do it all.
NASIR: Yeah, I can imagine. But I think we've heard about some bills and legislature to kind of standardize these rules and especially regarding Amazon but I don’t think that ever really took hold. What's your understanding of how things are going to be going in the future – both on a state level or even a federal level?
MARK: From a state perspective, it's kind of a perfect storm. You kind of alluded to it but, look, the reality is that they are getting more desperate, right? They need additional sources of revenue. This is one that's been on the books for a long time but is under-enforced so they’re getting more motivated to do that. The other attractive thing for states is that it allows them to maybe go out and tax out-of-state residents more so than in-state residents so they don’t have to get bad press to say, “We’re raising taxes on our citizens.”
MATT: I understand
MARK: “But we’re going to enforce on all the other folks that have nexus here.” So that's one tailwind, for sure.
NASIR: But, in a way, it does because, a lot of times, I think everyone's experienced this where you buy something online and sometimes you pay a sales tax or sometimes you don’t and I think, in some cases, these sellers may eat that cost or their margins become very thin because they didn’t realize that they needed to pay sales tax on that.
MARK: True. You know, from a federal perspective, there's been legislation that has been brought up for more than ten years now – maybe even longer. There is legislation pending now in the house, it’s called the Marketplace Fairness Act and it’s been tacked onto the Neutrality Act which is due to be decided here in early November and this is the closest there’s ever been to some sort of federal legislation. Whether or not it goes through, your guess is as good as mine, but the kind of general consensus is that it's coming in one way, shape, or form – it’s just a matter of time and will happen soon.
NASIR: And is that coming in the form of some kind of federal sales tax or some kind of standardization of how it’s taxed?
MARK: Unfortunately, neither.
MARK: Actually, what it does in my opinion is it actually takes this and makes it probably a hundred times more complicated. So, if you thought what we've been talking about was complicated, this law will actually make it a lot worse, and the high-level reason is because it will destroy typical nexus definitions and what it’ll say is, if you're above a certain threshold of sales, regardless of your nexus, you will have to comply in every single state.
NASIR: And that's basically a target of Amazon it seems like, right?
MARK: Yeah, Amazon is actually the biggest driver behind this bill. They actually want this to go through because they want everybody else to have to comply. They’re being pressured so much to comply and it's costing them so much money to fight it. They’re like, “Let's just ram this thing through.”
NASIR: Because it's going to happen.
MARK: Yeah. Plus, my personal opinion is that this allows them to go build warehouses wherever they want to build them. They don’t have to negotiate state by state deals.
NASIR: That's true, yeah.
MARK: They can be done with it and then they can provide same-day delivery to a majority of the population which is what their end goal is anyway.
MATT: All right. Well, we do usually do a question every episode and, actually, Mark, you’ll be at least answer from the sales tax perspective, but let me go ahead and read the question here.
“I'm looking to incorporate in the next few months. How much should the tax consequences play a factor in my decision-making?”
I assume the person that wrote this was thinking more the taxation of the entity itself but, since we have you here, Mark, and this question I think was asked a little bit earlier in terms of if there’s a state that's more advantageous that others in terms of the sales tax at least in compliance or I guess in your experiences, should this make a big difference to a possibly new entity looking to incorporate in a different state?
MARK: So, I mean, if you have the ability to incorporate in a state that didn’t have sales tax, I guess that would be an advantage. But, if you are not located in that state, you’d still have nexus in the state where you are physically located.
NASIR: That's right.
MARK: Typically, what we see and hear tax professionals advise, when you're getting started at the very least, get a sales tax license in the state where your business is being run out of and validate your business first before you then decide to go to comply in all the others state which you probably have nexus in.
NASIR: Yeah, I think that makes sense and, when it comes to incorporating of which state you have to incorporate, when you have a nexus with a state, it's pretty much the same definition. I mean, they use different factors depending upon which states laws but this nexus concept, if you have nexus with California then most likely you have to incorporate there too. It just depends upon the extent you are involved in that state – like, if you have bank accounts and you have an office or employees there. Whereas, in the sales tax perspective, I think it's even much looser than that. Like Mark mentioned, even going through Amazon Fulfillment Center could possibly create a nexus with that. But how much should the tax consequences play in deciding incorporating? From my perspective, taxes is pretty much one of the only perspectives that I really focus on because, whether it's incorporation or an LLC, where you actually incorporate, we can always adjust it. In other words, we can make a corporation look just like a LLC from a structural perspective or vice versa, and taking the tax consideration with that. I just wonder if there's going to be many opportunities to take advantages of your state if you’re operating in eCommerce site or selling online nationally and being able to comply with other states laws anyway.
Mark: Yeah, it’s really a good question. The reality is that this is going to get more complicated and the states, they’re just motivated to enforce the laws more because it means more money in their pockets. Allocate simple approach and comply where you know you absolutely need to comply, validate the business like I said, and then be ready to comply in those other places before they find out that you should be in compliance.
NASIR: Very cool. One of the reasons we got Mark on is because TaxJar, I haven’t personally used their site because I'm not a seller, but I'll tell you this. If they make this whole thing easy for you – and I think that's what TaxJar does – this complication can really be simplified. Mark, do you mind telling us a little about what your site does and what services you offer?
MARK: Yeah, I’d be happy to. Basically, everything that we've been talking about, our goal is to eliminate all of that. So, if you're eCommerce seller – or even a small business or a retail seller – we realize that this is a burden that you shouldn’t have to deal with and probably don’t want to deal with because you just want to grow your business. So, we offer a compliance service. It's a software as a service meaning it's web-based. You manage it through the website. You connect where you’re selling to TaxJar and we have a 30-day free trial. You connect just a single time and what we do is through modern technology of APIs. We download your sales and tax data on a daily basis and basically do your tax preparation for you on a state-by-state basis. And then, when it comes time to file your returns, we'll remind you when you need to file, then you have the option you can file the returns on your own using the data that we've prepared for you or we can file all those returns directly to the states. So, it’s a service that is 100 percent customer-driven. It’s all been around trying to solve these pain points and we love getting people's feedback on where we should be headed with the product. My team and I have built and sold a series of similar products over the last ten years so this is not the first thing that we've done and we are pretty motivated to build a really big business that just totally eliminates this headache for small business.
NASIR: Very cool. I feel like just selling stuff online just so I can use the service, make it easy for me.
MARK: Yeah, go check it out.
NASIR: Can non-sellers use it? Just to, like, play around and have fun with it?
MARK: Yeah, I mean you could.
MATT: That's the lawyer’s desire.
MARK: We love it, especially if you did that and paid for it but it would be more fun if you actually had some data to put in there. So, if you're not making any sales, there’s probably not much fun to be had. You know, one of the really cool parts is that our customers have traditionally been online sellers. We just did an integration with Square.
NASIR: That's huge, yeah.
MARK: Almost a month ago. And what's been really cool is that, you know, we’re seeing coffee shops and pizza shops and taxable service-based businesses now using us because, at the end of the day, they have the same exact pain, right?
MARK: And they don’t want to deal with this stuff. So, we're all too willing to be able to help them out as well.
NASIR: Okay, very good. Mark Faggiano from TaxJar. Thanks for having us or thanks for you having… Thanks for having us on your phone call there.
MARK: Thanks guys. I appreciate it.
MATT: Yeah, keep it sound and keep it smart.