How This Online Seller is Working to Simplify Sales Tax in the US

0:51

And my team grew from just me to, I think, Lauren and someone else, I don't think they're with us anymore, but it was me and then two other people, and now there's this huge team. And I moved out of the day-to-day managing of the filing and registration and consulting work, so Lauren and Haley are in charge of our sales tax team now, and we file about, I don't know, like three, four thousand sales tax returns a year. We serve small business owners, we love working with small business owners, and we keep getting questions on, where do you think this is going? It's so important for small businesses. Why doesn't Congress just make something that's uniform, and make everything simple?

1:53

And I listened to Kelly, she works for Bloomberg Tax, and she's the tax girl on Twitter, and she had an interview with Brad, where she interviewed him and he talked about his experience dealing with the Wayfair decision. And that's when I reached out to him and wanted him to come and talk to us and answer some of our questions.

2:12 Brad Scott

Well, thanks for having me with you today. It's been three and a half years of one twist and turn after another, and I'm happy to share my experience and hopefully help you help your customers to comply better. But also, at the same time, I'm hopeful that I can recruit you into some of our advocacy efforts.

2:37 Kexin Smith

Yeah, yeah. Because I actually have people reach out to me all the time asking if they can join certain organizations to help push this, just to have more influence and have people notice us. So I love to hear about that too. Can you give us a little background on you and your company?

2:55 Brad Scott

Yeah, so my in-laws started the company back in 1973. It was out of an anthropological interest in cultural things that my father-in-law got his hands on some African trade beads, and he took them to work, and rather than just showing them to everybody he worked with, he ended up selling them to everybody he worked with. And so he bought some more, and in a very short period of time, he and my mother-in-law started working on the kitchen table making jewelry, and then they would go to weekend craft fairs. After which point in time, they realized that they had something that was going to give them the freedom to be entrepreneurs, and they started the company. They incorporated in 1975.

3:43

I started working for them back in 2000, but my wife worked under the kitchen table as early as five and six years old. So it really is a family business. I got pulled into it 20 some years ago, and when I first heard that my in-laws sold beads, all I could picture was selling beads out of the back of a Vanagon bus. But it turns out it's actually a big industry. Beads itself isn't anymore, I mean, it is, but we're not really in beads ourselves anymore. We're more of a metalsmith company. But yeah, we've got 26 employees currently. We operate just out of Prescott, Arizona, but we sell to all 50 states, we sell internationally. We source about half of our goods domestically, the other half internationally as well. And so we're really an ecommerce company at its core definition.

4:29 Kexin Smith

When did you start selling internationally?

4:33 Brad Scott

Oh man, that predates me. My wife was interested in international business from a very early age, and she set her career path in college with the direction of going to get her MBA and an MIM, which basically put her into the international business pipeline. And because of that, my father-in-law started seeking international suppliers in the 1990s, so that he could help to lure her back once she was done.

5:03 Kexin Smith

The different paths in life, yeah. Okay, so what's your revenue like, just to give us an idea of how big the company is? I know you said 26 employees, selling nationwide and internationally. If you can give us a ballpark of where your revenue was in 2021.

5:24 Brad Scott

In 2021, we did $6.8 million.

Kexin Smith

Okay, that's really impressive. Has COVID helped you grow more? Because we've seen that in our clients as well.

5:38 Brad Scott

Yeah, COVID was a strange phenomena. Initially, when everything closed down, March of two years ago, our sales dropped by 75% in about 48 hours. It was terrifying. And then the next couple of months rolled by, and by about May and June, things started to return, and then they just kept growing. And so what we saw were basically 12 consistent months of our best months ever for that particular month on the calendar. And so COVID did help us. Unfortunately, I understand the consequence of that is that many other businesses that were our competitors are no longer around. So you've got the good and the bad of it. For personal reasons, COVID was good for us, but I think, ultimately, industry-wide, it was a pretty tragic occurrence.

6:21 Kexin Smith

Yeah, yeah. We've definitely seen, just among our client base, some clients are doing better, other clients are not, and they had to end their engagement or limit their services with us, just because they don't have enough cash flow.

6:40 The day Wayfair dropped and the 100 day scramble

Kexin Smith

Okay, so I want to start with, tell us about Wayfair. When it happened, three and a half years ago, what was your reaction? What actions did you take to get compliant with sales tax?

6:57 Brad Scott

Well, it's funny, because we were up the night before the decision came out. We'd been paying attention to it, and we were debating this, and I was saying, you know, there's no way the Supreme Court's going to go for this, it violates the interstate commerce clause. And then the next morning, our jaws hit the floor. And after a couple of, well, not minutes, but hours, storming around the house screaming, I can't believe this, I thought, okay, well, Congress is going to do something. And so for about a week or so, we waited for that notification in the media, or in the news, that Congress was going to address this, because basically the Supreme Court told them to. And Congress didn't.

7:40

And so we very quickly pulled together our leadership team, identified the areas that we had to address immediately. So, as a wholesaler, which is what we have been for most of our history, we didn't have a sales tax team, we didn't have a sales tax collection capability built into the company. We sell on our own independent website, and that's it.

Kexin Smith

That's hard.

8:06 Brad Scott

Yeah. So we had to build basically a sales tax collection tool into our ERP, and then integrate it with the SST certified service provider that we selected at the time, which was TaxCloud. We very quickly had to integrate our software with their software. So it was a couple of different things that we had to do. Under normal circumstances, we would give ourselves between six and nine months for a project like that, but we had less than three. Because between the date of June 21st, 2018, and the go live date for a lot of states, October 1st, there was only about a hundred days. And so we got it up and running by October 26th. We were able to go back all the way to the beginning of October and determine what our sales tax obligations were for all of the sales that we made in that interim period.

8:55 Kexin Smith

And then did you have to pay those out of pocket?

Brad Scott

Oh, absolutely. Absolutely. And then another thing that we had to really concern ourselves with, and this has been the most complicated factor of the entire ordeal, is the exemption certificate management program.

Kexin Smith

Because you're in the wholesale, resale.

9:14 Brad Scott

Exactly. So about 87 percent of our sales are wholesale, and as a result, 87 percent of our sales are protected by exemption certificates. But on June 21st, 2018, we only had exemption certificates for our Arizona customers. Which meant that we had to very rapidly connect with every single customer across the country, and in some cases internationally, and get those exemption certificates in-house, so that their sales would be defensible.

9:43 Kexin Smith

Were you able to gather most of them in that hundred day period?

9:47 Brad Scott

Well, as with a lot of wholesale businesses, not all of our customers are going to buy on a regular basis. So what happens is, we took a look at our customer base and we said, okay, who's buying on a regular basis? We prioritized them above all the others, because we did not want to disrupt service. And then as we brought those in, and we became compliant with those companies, we started going further and further down the line. And we were able to get a big majority of them taken care of by October 1st. And then the stragglers, basically, we froze their accounts until they took care of the exemption certificate, or they decided they wanted to pay sales tax.

10:23

And so, unfortunately, we've had some pretty difficult conversations with customers, because they get mad, they don't understand it, and all of a sudden our policies have changed. And not all of our competition are adhering to the Wayfair provisions as closely as we are, so it has created some strife.

10:41 Kexin Smith

Yeah, especially with Wayfair being so new, they probably weren't aware of all the implications, and why you are doing this when someone else is probably not charging them sales tax yet.

10:52 Brad Scott

Yeah, well, and the sad fact is, there are still a lot of businesses that don't know they have this obligation. And the liabilities that failure to collect and remit sales tax present are unique, in that if you're collecting it and not remitting it, you're committing a crime. If you're not collecting it and not remitting it, you're committing the same crime. And so that corporate veil that typically protects the owners and the managers from personal liability for failure to comply is pierced. So your house, your retirement, it all can be collateralized to pay off any assessments that the states may render. And so we like to sleep well at night, which means we follow the letter of the law.

11:36 What compliance really cost

Kexin Smith

Yeah, I definitely understand that. So in the podcast with Kelly, you mentioned that the compliance became a huge burden, and you spent thousands and thousands of dollars on just implementing the system. Can you tell us about that process?

11:51 Brad Scott

Well, initially, there are things within our ERP, we're on a Sage platform, that our in-house IT guy cannot access. So we had to contract with outside contractors to be able to make those modifications behind the scenes in our Sage platform.

12:09 Kexin Smith

Somehow I was under the impression that SST would help with that, and they won't charge anything. That's what it says on their website, that they would help implement the system, right?

12:19 Brad Scott

Well, I've actually had leadership from the SST out here to visit our operation and see what we had to go through, and they were floored by what their expectations of what was necessary were, versus reality. And so, yeah, they say they do that. I don't know what the pipeline looks like for it, because frankly, we had three months to do it, and that wasn't enough time to engage with yet another third party. And so we took care of it in-house. SST doesn't understand our software, and SST doesn't understand our operation. SST doesn't really understand anything about our business, other than we could potentially collect sales tax, and that's a very uninformed position from which to start any sort of project like that. So we worked with known partners that understand our business, to make sure that we could tightly integrate TaxCloud with our own internal checkout system. So we spent just short of $30,000 on that integration.

13:18

And it was a hastily done project, so there were months, about six months after we went live, that we were still working out the bugs and working out the kinks. And so there were additional costs there, but I rolled those into operational costs, as opposed to upfront startup costs.

13:31 Kexin Smith

And then now you have to hire additional personnel to take care of sales tax.

13:37 Brad Scott

Yes, we hired a lady to basically manage and oversee our exemption certificate program, because it is a huge amount of work. Every single month, she has to reach out to a set number of customers and make sure that their documentation is up to date, that it's verifiable, that it's validated, and that if we were to be audited by any of these states, that basically our processes are bulletproof from the audit perspective. So yes, we had to hire somebody in that regard.

14:09

And then we had to train a number of our employees on something that was fundamentally different than anything they'd ever done before. Our customer service department had to become cognizant.

Kexin Smith

Yeah, answer complaints.

Brad Scott

And, well, not just that. They had to be able to look at a customer and recognize whether or not their certifications were valid at that point in time.

14:30 Kexin Smith

So did you consider using a certificate management product, software?

14:39 Brad Scott

We have, and we still do. But it's one of those things, where do the costs outweigh the benefits? And we've talked to a number of companies that use those programs, and what we find is that the amount of work that they're putting into it really doesn't vary that much, or differ that much, from what we're putting into it. They're just paying an additional fee. And then there's a question of, there are companies that will do it, but do I want to keep the jobs in Prescott, or do I want to export yet another job to somebody else? Maybe in the state, maybe in the country, maybe not even in the country. And as a local employer, I would always prefer to keep my jobs in the area.

15:20 Kexin Smith

That definitely makes sense. And I could tell that they're outsourcing a lot of their work to overseas employees, because they are accessing our clients' accounts in, like, the middle of the night, when it's probably not the middle of the night where they are. And that definitely makes me wonder the quality of their work, and if people are adequately trained or not to handle things that I thought they would be able to.

15:56 From desperation email to testifying in Congress

Kexin Smith

So tell us about your experience at the Congressional hearing. How did you get to that point? From realizing it's such a big burden, how did you start the advocacy program?

16:09 Brad Scott

Well, early on, we had some issues with our compliance. The CSP that we were using, there were some glitches with our connection with them, and so some things were going awry. And I still don't have a good explanation for what happened, but I know that it was unacceptable. And so we were getting notifications from SST states that we weren't reporting, that we weren't remitting, that we basically weren't doing what we were supposed to do. But we had a contract with an outside provider that was supposed to be doing all of those things.

16:39 Kexin Smith

Yeah, they're supposed to act as a shield in between you and the SST states.

16:46 Brad Scott

Yeah, well, it's supposed to be there, but when you call the Department of Revenue in any one of those states, they say, our relationship is with you, it's not with that CSP, you need to address this. And so it just became my job, and it was really frustrating. You know, when you get a notice from a Department of Revenue that you're going to be assessed, it doesn't really matter what the amount is, and if you don't pay, they're going to potentially put a lien on your property, or even go so far as to seize your property. It's pretty anxiety causing. And so, recognizing the liabilities, the challenges just in understanding what our obligations were, and how small our business was, is, and the resources that we had at our disposal, it was causing my wife and I a lot of stress, and we spent a lot of 2019 discussing whether or not we just wanted to close the business.

17:33

So around mid-April of 2019, out of a sense of desperation, I emailed all 90 legislators down in Phoenix, so that's 60 representatives and 30 senators, and then I also emailed the governor's office. And I basically said, hey, Wayfair is causing us a lot of grief, we need some help, what can you do? And I heard back from one senator. So I had some meetings with him, and he helped me meet some other legislators, and basically I found that Arizona legislation is not going to do anything to help Halstead Bead in navigating the demands and obligations of the other 49 states, or the District of Columbia, or Puerto Rico, and really what I needed to do was go to the federal level.

18:16

So shortly thereafter, I went to an SBA meeting in Phoenix, and I was the weirdo in the crowd. Because when you go to an SBA meeting, what you're basically saying is, I'm having trouble with this particular federal office, or it's a federal problem. And I raised my hand and said, hey, Wayfair is, it's not, my problem is because of 50 states. It's not because of the federal government, but I need the federal government to step in and say, hey, 50 states, you need to operate under these particular guidelines. And they said, well, we can't help you.

18:54

And so I contacted our local representative, I contacted our state senators at the federal level, and I said, we need to have a meeting. And I got a meeting with our local representative, and he basically said, you need to go to DC, and you need to talk to members of the House Judiciary Committee and the Senate Finance Committee. Those are the committees of jurisdiction, those are where you're going to be able to get legislation to address this. And then he helped me orchestrate some meetings with a few offices that he had a relationship with, and I went to DC in July of 2019.

19:27 Kexin Smith

And you did all of this while having to deal with sales tax.

19:32 Brad Scott

Oh yeah. So I went to DC, I had meetings with a number of offices, and I got, basically, oh, this is terrible, something needs to get done, who is the legislator that is addressing this? And I said, well, nobody. Nobody. So I came home. I had five meetings on that first trip, and they were all with Arizona delegates. I then went back to DC in October, three months later, and I had, I think it was 24 meetings over four days, with offices that could potentially do something, and I got the same message. This is terrible, who's running the legislation? I was then invited to go back in November to a Bloomberg forum, and because I was in DC again, I set a bunch more meetings, I think I had 10 or 12. And again, a bunch of, oh, this is terrible, something needs to be done, who's running your legislation? It became a pattern.

20:28

But by about October of that year, I started reaching out to other industry groups. And one in particular was ACMA, which is the American Catalog Mailers Association, and they had been quite vocal about this. And another one, which was the Online Merchants Guild, which is also vocal about this, but they look at it from a slightly different perspective, in that they are focused mostly on income tax assessments. And so I reached out to these two groups and started collaborating my efforts with them. I also was working with the National Federation of Independent Business, NFIB, for those that are aware of the acronym. And I started finding out how DC works, which is not like how a small business works.

21:10

And so, basically, in that period between July and the March hearing, I probably had about 50 or 60 meetings in DC, or over the phone with offices in DC. And one of those offices, which was Representative Steve Chabot's office, he was the ranking member, or, he was the chair of the House Small Business Committee until the election went through, and then he was the ranking member. And actually, no, he was the ranking member, I'm sorry, it all kind of blends together at a point, that's a long time ago. But basically, his staff level people in the Small Business Committee staff worked with the Democrat side to put together that hearing, and I was the minority witness.

21:58

So I showed up in March, right before the world shuttered because of COVID. We did our hearing, and we were gaining some traction. There was actually supposed to be a Senate Finance hearing not too long afterwards, but because of COVID, it was canceled. And basically, in terms of legislative progress, we've stalled out. Which really, in DC terms, means we've backslid. So, there have been, I have to date had more than 200 meetings with offices in DC, and it's always the same. Yes, this is terrible, who is going to be running your legislation? And finding a champion has been pretty difficult. So we're still working on that.

22:46 The Louisiana lawsuit and 12,000 jurisdictions

Kexin Smith

Okay. So tell me why you sued Louisiana.

22:52 Brad Scott

So, we didn't really want to. Litigation is kind of a terrorizing double-edged sword.

Kexin Smith

From my experience with Louisiana, I feel it was hard, then easy, then it was hard again. They changed the whole, like, direct marketer versus dealer, and you can't collect at the flat rate anymore. That's what I've seen with our clients.

23:18 Brad Scott

Well, so, Louisiana is unique in that you have parish level compliance obligations. Colorado was similar, in that you had county and local level compliance obligations. But Louisiana's situation is particularly difficult, because it is constitutionally authorized, and it requires a constitutional override to change. When you're dealing with Louisiana, you have to understand what your obligations are to each parish, as well as to the state. And unfortunately, when you start dealing at the parish level, it becomes information overload. I believe it's a thousand and four pages that you would have to comb through to understand what your obligations are, just to be compliant within the state.

24:02 Kexin Smith

Now, if you're a remote seller that does not create any physical presence in those parishes, to require you to register and file with them, isn't everything essentially administered for remote sellers?

24:17 Brad Scott

Right. Well, the central administration doesn't do away with the localized regulation.

24:23 Kexin Smith

What are some examples of the local?

24:28 Brad Scott

Yeah. So if I'm selling into a parish, you would think that the parish rules are pretty straightforward, and when we do this, we do it to the nine-digit ZIP code. Now, that parish level information, oftentimes, or the control of that parish level information, oftentimes ends up in the hands of the local sheriff, or some other local office that is not a tax collector. And they're, I mean, they're sometimes splitting their time between two different parishes. And so compliance becomes enormously complex.

25:04

And I wish, the problem with the lawsuit is that it kind of nips around the edges of the overall problem. You know, we are talking about one specific state, with one specific set of criteria, and one specific gripe, and we're trying to remedy that. But the overarching problem is that there are 45 states, the District of Columbia, Puerto Rico, other outlying areas, the Alaskan Municipal League, and each of these different areas has their own set of expectations. And basically, we're talking about a parish in Louisiana, but we're really talking about 12,000 different taxing jurisdictions.

25:43

And then it's not just sales tax anymore. So Wayfair opened up Pandora's box. California has now adopted the MTC's language on income tax assessments, and is basically saying that a company that has an interactive website, or will assist their customers after sale to help with the product, they're now basically establishing physical presence in that state. So now we have a sales tax collection obligation to all of California, all of Louisiana, all of these other states, and now these states are reaching out and saying, well, by the way, because now we know that you're selling into our state, we're going to figure out how to work the language in our laws so that you also have an income tax obligation at the same time.

26:31

Because they have been able to export their sales tax policies without any regulatory control by the federal government, they're getting away with income tax, they're also getting away with consumer protection and consumer privacy. And so, yes, what we're facing is this ever expanding set of rules that we have to follow. And those sets of rules are dictated by 50 different states, or 12,000 different local jurisdictions, or basically some unimaginable number of directives that we have to be able to address, and oftentimes they're conflicting. And so it becomes really difficult to ship a package out of here knowing that, yes, it's right for Hawaii, but is it right for Massachusetts? Or it's an acceptable transaction for South Dakota, but is it an acceptable transaction for Kansas? And you have to dive into each one of those states, and in some cases municipalities, which is why Louisiana is so challenging. You have to understand so much information about each parish.

27:35

And so, from the small business perspective, really, there is no way for us to get into federal court to directly address the Wayfair decision. At the same time, I think what they did in the Wayfair decision is what really needed to happen. They did need to say to Congress, hey, online sellers have an unfair advantage over brick and mortar sellers, because they don't have a sales tax compliance obligation. But what they did as a solution was, they took the most complex solution they could possibly imagine and said, this is it, figure it out. And so we're put in this position now where, okay, we sue Louisiana. It's not the only state I'd like to sue.

28:22 Kexin Smith

Yeah, and then you should sue Colorado after Louisiana.

28:26 Brad Scott

Well, and I don't want to sue a state. I would rather the legislature, Congress, look at this and say, okay, we've got a real mess on our hands. It's going to impact lots of small businesses across the country, not just in other states, but in my home state too. And look at it and say, what is the right solution to deal with this? How do we make this manageable by the companies, and also successful for the state Departments of Revenue, to create a fair playing ground for all businesses on a nationwide basis?

28:55 Kexin Smith

That nationwide question, that's impossible now, you're talking about that, and that is not really realistic in the US. But there are some solutions that different states have done that make, Alabama's really good.

30:48 Four fixes that would actually simplify sales tax

Brad Scott

Well, so, stepping out of tax for a moment, sales tax specifically, and going into fuel tax. The International Fuel Tax Agreement was something that was crafted back in the 1980s, and basically what it did was it allowed long-haul truckers to take all of their mileage that they drove in every state and every local jurisdiction, plug that into a central clearinghouse database, and then that central clearinghouse database said, okay, here's what each jurisdiction should receive, based on those miles, in the form of fuel taxes. The central clearinghouse takes care of the math, the truckers just supply basic information. So that right there would clear up a lot of what we're dealing with, but that's not been done.

29:45

And then Texas created another beautiful option. Texas basically said, for a remote seller, at the time when you start collecting sales tax, you can elect to collect at a single weighted average rate for the entire state, or you can collect at the municipal rate for all of our 1,500 jurisdictions, or whatever it is now. For a business of our size, we're going to elect to collect at that single weighted average rate. Does that mean we're collecting more in some places than others? Yeah, probably. Less in some places than others? Yes. But the overall administrative burden placed on our company as a result of that simplification measure is enormous, which means that we don't have to increase our cost to pay for our compliance department.

30:28 Kexin Smith

Yeah. So, ideally, do you see, hopefully, more states will adopt a model like Texas or Alabama, to make it easier for remote sellers to comply?

30:45 Brad Scott

I don't know. I don't know.

30:48 Kexin Smith

If you can wave a magic wand, what would be the ideal scenario for sales tax compliance for US sellers, sellers that are selling into the US, that are remote sellers?

31:00 Brad Scott

Well, okay. That central clearinghouse option for communication, that is one thing. It allows for a streamlined communication, not just from the business to the Departments of Revenue, but also it allows the Departments of Revenue to funnel their information back to a central clearinghouse, to then be dispersed out to the businesses across the country. That single weighted rate that Texas does is pretty amazing.

31:24

For manufacturers, distributors and wholesalers like ourselves, right now we have an exemption certificate management program that is extensive, because it is so complex. If there was a compliant purchaser program, whereby we could accept, from any state, from any customer, a single form that says, yes, I'm a reseller, and then put the onus of the defense of that exemption certificate on the provider, as opposed to on the recipient, as it currently stands, that would dramatically simplify things.

31:55

Now, one of the problems that we have, if you take a look at the South Dakota decision, South Dakota's threshold is a hundred thousand dollars gross receipts. Now, for a manufacturer, a wholesaler, a distributor that's dealing in B2B business, where the consumer is then going to turn around and sell it again, so they're not the end consumer, there's no reason for that compliance demand. The threshold should be based on taxable sales. That would simplify a lot. I know several businesses right now that are doing zero dollar filings to most of the states they deal with, simply because that threshold is based on gross receipts. So those are the four simple things. There are a lot more that we had discussed in some of the legislative efforts that we're making, but really, if you want to do it quick and dirty, and have the biggest bang for the buck with the least amount of disruption to both the states and the businesses, in my opinion, those are the things that could be done right away.

32:55 Kexin Smith

I agree with the gross sale part, because it's actually what our internal process does. When we do a nexus analysis, we don't stop at, okay, you have nexus in this state because you passed the thresholds. We look at what part of your sales are taxable, what part of your sales are not taxable, to give businesses their actual tax exposure to this day if they were to get audited. Because, like what you said, if they need to register in South Dakota, and everything is a wholesale, resale situation, then their exposure is zero dollars. Then we leave it to the business to make a decision on whether they want to register and comply in that state, and keep filing those zero dollar returns. So sometimes I wonder, if the states, if they like processing those zero dollar returns, or they just want the information, to know, okay, there's a business selling into my state that's out of the state, but all of their sales are exempt.

33:55 Brad Scott

Well, and I think it goes to what California just did. California knows that I sold $65,000 worth of goods into the state in December. They also know that only $2,500 of that was taxable. But because they know it's $65,000, they can then turn around and say, you've got an income tax obligation. So if they know your gross receipts numbers, they know better how to inform their Department of Revenue on how to assess you as much as they possibly can, for a tax that really Public Law 86-272 is supposed to prevent.

34:32 Kexin Smith

So do you see that trend going into other states? Like, income tax adopting the same Wayfair method of thresholds and requiring businesses? I know Pennsylvania is already doing that. Pennsylvania, Hawaii, California, but I haven't seen other states. But I can see it happening, states' legislation somehow change the language, or change their interpretation of the existing language, to enforce this obligation on remote sellers.

35:08 Brad Scott

Well, I think, just looking at it from a revenue standpoint, let's say I'm the Department of Revenue in Arizona, and I historically know that I'm going to receive, let's just say for argument's sake, 10 billion dollars in revenue from my corporations across the state. Now, if California weighs in and says, hey, Arizona corporations, I expect a half a billion dollars from you, then Arizona necessarily is short by half a million dollars. So how does Arizona make up for that shortfall? They look at what California is doing, and they now go to California and say, hey, California, I need that too. So, just from the devil's advocate, you could use the prisoner's dilemma argument with this. If Arizona is losing income revenue from businesses because of assessments by other state governments, then Arizona then has to turn around and assess businesses out of the state of Arizona with a similar type of tax, just to make up for that shortfall.

36:12 Kexin Smith

And if all the states start doing that, that creates compliance for all the businesses. It's like a big fight, and the small businesses are the victims.

36:23 Brad Scott

Yeah. Well, and I mean, we've been filing with Florida since their law went into place a couple of years ago. And when we registered with them, we registered for sales tax collection and remittance obligations. The Florida Department of Revenue's website is not a place I'm familiar with. Our registration was botched. They assumed we had physical presence in the state, and I got an income tax assessment from them a few months ago. So I went to my CPA, not knowing that I should have done it differently. I went to my CPA and said, I need to have an income tax statement drawn up for Florida, so that I can file correctly what was a zero dollar filing, because I didn't have an income tax compliance obligation to Florida. But because it was filed late, they then sent me a penalty.

37:14

So I got on the phone with Florida, which is what I should have done in the first place, and they said, yeah, there was an error in your registration. You need to submit a letter stating that this account was opened in error, and have it go back to the date at which the account was open, so that they'll just wipe everything clean. But in the meantime, I've spun my wheels. I've wasted, you know, a couple hundred dollars getting a Florida income statement drawn up. I've spun my accountant's wheels, wasted his time. And all of this because it's not clear to me, as an Arizona seller, how I need to work through the Florida website.

37:49 Kexin Smith

Yeah, that's very unfortunate. A lot of times the states would just automatically register you for all of their business income tax accounts, and hope that you would file. Sometimes, when we go to file our clients' returns, they would have so many accounts open, like, besides sales and use, there's also the business income tax, and it's saying that it's overdue. And we usually just call the states and explain to them that our clients are remote sellers, they don't have any physical presence, they don't have a filing obligation, and have them close that account. But yeah, that's definitely frustrating.

38:30 Advice, advocacy, and team Q&A

Kexin Smith

Okay, so I want to leave some time for my team members to ask you questions. But before we go, what are, if I ask you to give three advice to other ecommerce business owners, what would you tell them, that are trying to get compliant with sales tax?

38:52 Brad Scott

First, you can't do it alone. It is an unbelievable research project just to get up to speed with it, and every single legislative cycle, the rules change. So you can't do it alone. You really do need outside help. If you are not compliant yet, the best thing you can do is reach out to a firm that is going to help you do your nexus audit, and they're also hopefully going to help you do back tax statements. Because the states, when you register with them, they're going to say, well, have you been selling into our state since the go live date, whatever it might be? So for a lot of the SST states, it was October 1st, 2018. For Hawaii, it was July 1st, 2018. For Florida, it was last year. So you need to be able to do that look back, and do it correctly, and that's going to need some help. And then the last thing that is really challenging is understanding that the costs of doing this are going to be great, and that you're going to need to figure out how to price that into your product.

40:00 Kexin Smith

Okay, thank you so much for those three advice. Can you tell us about the advocacy program, and how we can help small business owners?

40:10 Brad Scott

So there are a couple of different avenues you could go. The American Catalog Mailers Association, it's an online association for sellers that historically were catalog mailers, but now they're ecommerce sellers as well. They're a little larger, we are the smallest business in that organization. Another group that frankly needs to hear from as many voices as possible is the NFIB, National Federation of Independent Business. And then the Chamber of Commerce, your local chambers, and the US Chamber. Each of these organizations has a lot of input on what happens on Capitol Hill, the NFIB and the US Chamber specifically, because they are enormous organizations. And unfortunately, there is a lack of awareness with a lot of small businesses, and they're not able to, or unwilling to, communicate with those different groups about what's going on.

41:09

I do think, if you could only do one thing, that would be to email or call and set an appointment with your local US representative. Because every time I go to meetings in DC, they say, we're not hearing from enough people. Well, that's because they don't know, or they don't know how to deal with it. You know, the last thing most people think about when they're dealing with sales tax for Alaska is contacting their Arizona delegate. But it is Congress that has to address this. And so the more voices that our local representatives hear in DC, the more they're going to have to recognize that there's a real problem brewing, and that the costs and the consequences to the small business environment, who they routinely spout are the backbone of the American economy, are, yeah, they're breaking our backs.

42:02 Kexin Smith

Okay, I will. Well, I'm not a citizen, but maybe I can get someone to contact the Utah ones.

42:11 Brad Scott

Well, you don't have to be a citizen to own a small business.

Kexin Smith

Oh, that's true.

42:18 Brad Scott

So, as a productive member of the community, you still have not only influence, but you're going to have a direct consequence for the way that community is being impacted by legislation from the federal government, or from other states. And so, reaching out, I don't know that your citizenship should really be relevant.

42:42 Kexin Smith

That's true. Yeah, I'll do it. And I will let our clients know that there are these avenues to protest and to have their voices heard. And on our YouTube channel, we have lots of subscribers that have small businesses, so I'm sure a lot of them share the same sentiments and are willing to help as well. Okay, so I want to open the floor up for any questions that our team has. So, who has any questions for Brad?

43:25 LedgerGurus team member

Well, I'll start first. Thank you so much for coming and talking to us. It's really insightful to hear everything that you have to say. We work with so many clients who come to us, you know, the first encounter we have is when we do a nexus analysis for them, and usually when they come, it is because they are desperate for help. They are so overwhelmed. And they really fall into two different camps, from what I've seen. Those who want to be really, really compliant, and those who are stone cold, bad, do not want to collect taxes, do not want to be compliant, and they come into our meetings saying, well, why should we be compliant, none of our competitors are. So for me, it's really interesting to have you come and talk to us. Are you a hundred percent compliant? When you hit that threshold, are you collecting and remitting everywhere that, you know, quote-unquote, you should be?

44:24 Brad Scott

Yeah, so 100% compliant, I don't even know if that's possible. So, when we hit threshold, and we look every single month, we become compliant when necessary. That being said, we haven't had to turn on a state in a long time, because the states where we've been compliant are the states we do most of our sales. Now, when I say it's not 100% possible, there are so many variables that you have to take into consideration that I don't know how anybody could be 100% compliant.

44:53 LedgerGurus team member

That is absolutely true. One thing I've noticed is, when you call the states, depending on who you talk to, you will get a different answer. I mean, the lack of education is not just out there for accountants, but even at the state level, the agents don't necessarily know the laws, or can't give us the best answer.

45:13 Brad Scott

Oh, and a lot of times the language is so difficult to read. I mean, taxable sales in one state is not equal to taxable sales in another state. And so when you start having to not just understand the rules, but also be a rolling vocabulary and dictionary master, it becomes challenging. Because you can't apply the same set of rules to one state whose vocabulary is different than, say, another.

45:37 LedgerGurus team member

Oh, absolutely. When we look at our nexus analysis, and we've gone through state by state, trying to understand and make sure that we understand, you know, how are penalties calculated in this state, and how is interest in the state, it becomes mind-boggling, the number of hours that goes into just trying to understand what each state is saying. I mean, the level of compliance is absolutely crazy. What I've noticed too is that, you know, businesses that are under a million dollars, their compliance cost is very minimal, they're not going to be hitting a lot of thresholds. But it seems like it's businesses between 2 million and maybe 7 million where they're hitting thresholds all over, where they're big enough, and yet they're not really big enough to have a full-time accountant. It just doesn't make sense business-wise, to me it seems. That's where the burden of pain is. Because with sales tax compliance, there is a limit really to the costs that most companies would pay, and as you get bigger, the percentage of burden is just going to continue to decrease. I really feel for companies that are your size, because the burden is the heaviest on you.

46:49 Brad Scott

Yeah, well, it's interesting that you say that. So I keep numbers all the time, and through the end of March, we've spent about $330,000 in compliance. We've collected $144,000 in sales tax. We're spending about two dollars and thirty cents for every dollar we collect. Now, like I mentioned, the ACMA, I'm actually the chair of their tax committee, and so I get to talk to a lot of bigger companies on a regular basis, and I get to hear their numbers just like I hear ours. And one of the companies on that committee is a billion dollars a year, and they've spent a half a million dollars on sales tax compliance. So when you start talking about the effective rate of compliance cost, it's significantly greater for us.

47:30 LedgerGurus team member

Absolutely, yeah. Well, I'll see if anyone else has any questions.

47:38 LedgerGurus team member

I don't have a question, just more, I am really impressed that you went from being a business owner, and looking at everything that you have done for other small business owners, to really improve, or try to improve, the processes. I mean, I think there's a lot of business owners that are seeing the same things you're seeing, but they're not doing nearly the work that you're doing. I think that's awesome.

48:02 Brad Scott

Well, thank you. I think, two things to say to that. First, my wife and I run the business, my wife is the president. Because of that tandem that we have, I'm able to free up more time than a lot of small business owners are, and so because I'm able to do so, I feel an obligation to step forward. And the other thing is, and this is, I think Wayfair in many ways was probably the greatest thing that ever happened for me on a personal level. And that's because up until the Wayfair decision, I took for granted Halstead Bead. It wasn't my parents' company, it was my wife's parents' company. I took for granted the small business environment. I took for granted basically all of it. And I think when it was all put in jeopardy, I started to appreciate just how amazing the small business environment and the small business community is. And rather than sitting back and washing my hands of it, I thought, you know, this is a place where I can maybe make a difference, where a lot of people don't have the time to. And so, like I said, I've got to find the good in it, because otherwise it just becomes a lot of spinning my wheels for what gain?

49:11 Kexin Smith

Thank you. So on the call with us is Kelley. She actually is our content manager. Kelley, you're not involved in sales tax day to day work. What did you think of what Brad just shared? Does it make you want to do sales tax, or not?

49:31 Kelley Birrell

It's astonishing, actually. I mean, the only real experience that I have with sales tax, because I don't do it all the time, is I edit the content that comes through, and we just created a sales tax course, and I thought that was complicated. But really, I'm looking at this and thinking, oh my word, it's so much more even than I imagined. So I take my hat off to you. Holy cow.

49:59 Brad Scott

Well, and we haven't really touched on this, I kind of danced around it at one point. The lawsuit that we filed in Louisiana, the lawsuit that I might file anywhere else, and I'm not saying I'm going to, but we really would prefer to be in federal court, because this really is an interstate commerce issue. And it is the Tax Anti-Injunction Act that almost prevents companies like ours from being able to access due process. It is incredibly expensive to get into court in the first place, and there are a lot of constraints that are put onto taxpayers to basically keep them out of federal court, and just run up the costs.

50:35

So the Tax Anti-Injunction Act was developed back in the 1930s, and the idea behind it was to prevent multi-state companies, corporations, from taking advantage of the Departments of Revenue in various states. At the time, Departments of Revenue were pretty small. They're a lot bigger and a lot more powerful now, and so the TIA is no longer doing the job it was meant to do. It's actually constraining businesses from being able to gain access to the court system. So there is a group of people that's working on something called the Fair Coalition, and the Fair Coalition is working on reforming the TIA at the federal level, to bring more tax cases into federal court, to give greater access to due process to companies like ours. So I didn't mention that earlier, but I think, in addition to the ACMA, the Online Merchants Guild, this is another group that is really worth looking at. And I can share all of that information with you at the end of the podcast, so that you can put it in the notes.

51:36 Kexin Smith

Yes, we'll do that. Questions, comments? Noah is our newest member of the team, so I'm gonna pick on him. Noah, what did you think, and do you have any questions?

51:55 Noah

Yeah, I just want to say, I really appreciate your expertise and this whole experience. Like she said, I'm new, so I need this as much as anybody else. And as far as questions go, this is maybe a relatively more simple one. But just as I've started filing for clients, I've noticed that a lot of states' websites for their Department of Revenue use kind of a similar template, but other ones are vastly different, or outdated. Do you see more and more states adopting the same template to file? And is that a good thing, or no?

52:37 Brad Scott

The template, so yeah, I've seen what you're talking about. Some states have the [unclear] mechanism, other states have a different one. What I have found is that the way those templates are developed and designed within each state vary to a degree. And so, what I've basically done is I've replicated the templates that I work in on a regular basis in Excel, and depending on how complex it is, some of those Excel sheets are pretty simple, others are pretty complex. I would like it if they were all the same, but there's no way they're going to all be the same unless there's uniformity and simplification demands put on the states, by either a coalition of states that say, we're just going to do it this way, or by the federal government. In terms of training and the ability to learn those websites, if they were uniform it'd be significantly easier. But earlier I mentioned the central clearinghouse. If there was a central clearinghouse, then they would be uniform anyway. So it just depends on how you want to approach that nut.

53:44 Noah

Thank you.

53:46 Kexin Smith

Okay, I have one last question. Are you using the SST to file your returns now? Are you part of the program, or you are not anymore?

53:55 Brad Scott

Not anymore. So we registered with the SST in September of 2018. The CSP that we used was filled with complications. I got 36 notifications from states where they were supposed to be filing or remitting on our behalf, of failures to file and under remit. And in each of those instances, I had to involve the SST to help get it resolved. Now, Craig Johnson is the national director at the SST. He's a good guy, I think his heart's in the right place. I think he's limited right now, in that since the Supreme Court decision, no more states have joined. And so it was 24 states on June 21st, 2018, and it's 24 states today. And most of the states are smaller states. We don't hit threshold in all of those states. And because of the complications we had with the CSP, and the fact that really, to gain the benefits with the SST, you have to be registered in all 24 states, we disengaged entirely, and we've been operating independently since January of 2021.

55:03 LedgerGurus team member

[unclear]

55:08 Brad Scott

It's going to go back to what your threshold, your nexus results look like. So, unfortunately, there is no pat answer. There's no yes, there's no no. There's always, well, it depends. And that's a useless thing for me to say right now, but it's the truth.

55:25 Kexin Smith

Yes, we have to say it depends a lot, and I don't love that answer. What was your question?

55:33 LedgerGurus team member

So, you briefly mentioned your Excel spreadsheets. Does that mean that you're calculating each of your returns yourself?

55:42 Brad Scott

So we use an outside firm to give us the tax rates. All of that information is fed, basically through a number of communication tools, into our website, into our ERP, and then that information is kicked out to me. And then, at the end of each month, first, all of our reports go through my exemption certificate manager, so that she can make sure that all of our transactions are assigned the correct designation, and then they come to me. And yeah, I go through and I make sure that we've got the right numbers. And typically, what I do, we've been pretty good for the last year and a half, because the system that we have is pretty well firmed and cemented at this point in time. But basically, I take that information, it comes to me, I put it into the state websites, and if I get a variance, then obviously we've got a problem. And I don't get variances very often anymore, but I have got to figure out where they came from.

56:40 Kexin Smith

So why not use a software? Why do all of that manually?

56:47 Brad Scott

Because I have found that it's actually pretty easy for me to do internally. And, let me rephrase that, pretty easy is in the eye of the beholder. I am very confident in Excel. And because of our experience with the CSP, I don't necessarily trust what we got out of them. And so I have trust issues, and I don't know that I want to trust that to an outside firm unless I've already gone through it all and done it myself. So we file with only seven states, okay? We file through an outside firm with another 14. And so we're compliant within 21 states. I manage 100% of the relationship with seven of them. I manage 98% of the relationship with the other 14. And if I'm sending that information on to that filer for us, I want to know, when I go to bed at night, that I'm not sending the incorrect information to the states. And the only way to do that is for me to verify myself. And I have an accounting background, so, you know, I'm not the typical small business owner that's wearing all of the hats, and just, oh gosh, I've got to do the accounting. I don't put it off. That's the first thing I do each day.

58:00 Kexin Smith

I am so glad that there is a small business owner with your level of detail and passion for this, because that really is rare. I mean, I don't see that that often in my day-to-day. So hats off to you, that's really great that you're doing that.

58:17 Brad Scott

Well, that just comes down to my training. I went to school, I got a degree in finance and accounting, so it was a natural progression for me. There are a lot of small businesses out there that are amazing at machining. I couldn't touch a machine. If you gave me a machine, I would just look at it. So, you know, there is an innovative element to small business, and each of us can draw upon our own personal expertise to basically create the economy that we have in this country. And so we're fortunate in that this is my background, but I mean, that was kind of luck of the draw, really.

58:54 Kexin Smith

Wow, that's really great. Yeah, we should all tell people to marry accountants before, like, you start your businesses, [unclear]. Okay, well, Brad, thank you so much for your time, and if there's anything we can help you with, let us know, and we'll stay in touch.

59:15 Brad Scott

All right. Well, thank you, everybody. I appreciate the conversation.

59:18 Kexin Smith

Yeah, thank you so much. Have a good day. Bye.