will shopify know to collect the taxes on states when the wayfair act takes place

welcome everybody to the webinar,i'm kathy stanton and i will,get the presentation started here and we,could go to the next slide,we're going to talk about the wayfarer,decision,and three years later what's old what's,new what's next for state and local,taxes,okay the agenda we're going to talk,about the evolving implications of,wayfare,where three years later a lot has,happened,not only in sales tax but an income tax,we're also going to talk about the,industry impact we're going to,give some insights on what we've seen in,certain specific industries and how they,have been impacted by wayfarer then,we're also going to look at,trends to watch in 2001 or 2021,sorry and beyond what are some of the,trends that we're seeing and what are we,expecting,so lauren i think you can take it from,here in the next few slides,sure thanks kathy so you obviously a lot,has happened,in the world of sales tax in the last,three years,and what we want to focus on today is,the,you know we're where we are and what,we've seen in the last three years so,if we can advance the slide yeah um,so the first thing that we want to make,sure everybody realizes that,even with all the changes with economic,nexus,the old physical presence test still,rules,so even if your company does not meet,economic nexus,if you have a physical presence in that,state you will still have nexus,so physical presence can be created,through,various means and various different,connections with the state it can be,from,offices employees in the state,representatives even independent,representatives,visiting prospects on your on your,company's behalf,keeping inventory in a state if you are,a,amazon fba seller and you've got,inventory located,at any of their warehouses across the,country that will be a physical presence,in that state,as well as customer visits so if you're,going on site just for a,customer goodwill visit or a customer,you're doing some services on site all,of those different activities,will create a physical presence and can,create sales tax,nexus and sales tax obligations on your,behalf,and while we're talking about physical,presence um i just wanted to take a,couple minutes to talk about,uh coronavirus impact on nexus because,this is really important and i can't,imagine any company,that has not been impacted by this and,the telework situation,so sales tax and income tax can be,nexus can be impacted by the,mobilization of the workforce,about 20 states have provided guidance,in the income tax area for corporations,mainly you don't even get the guidance,necessarily for pass-through entities,that nexus it won't be triggered just by,the presence of teleworking,employees and for sales tax about only,about 14 states,have provided guidance and out of both,income tax and sales tax,one of those states that provided,guidance was maryland and they basically,said we're not given any relief,so it's nice of them to let you know,that they're not giving any relief,um you have to be really careful you,want to look,at the specific state rules and whether,they do have,some alleviation during the pandemic,period,and the issue is that this guidance,isn't statutory necessarily it's just,the department of revenue guidance,and it's not always entirely clear,sometimes the state has to be under a,state of emergency,for that guidance to apply so you have,to look at okay well one did this state,of emergency lift,some states it's just general,telecommuting temporarily due to the,pandemic well what's temporarily we can,argue that's still,happening today so you really have to be,careful and look at that if you,if you do have employees in other states,where you have not been filing,and then recently i had read i think in,in forbes that 7 out of 10 jobs,are expected to be more hybrid work,work from home and work in the office,going forward,so we're going to have a lot of,employees working from their homes,potentially going forward and what does,that mean on nexus,and physical presence states generally,want to right away say you,have physical presence you have nexus,you don't even have to go to the,economic nexus,rules so you really want to look at that,and not only from a sales tax an income,tax perspective but from,payroll so and payroll has different,nexus rules or different reporting rules,based on income tax withholding,versus unemployment tax um and there is,interesting enough there is a,request at the u.s supreme court right,now from the state of new hampshire,suing massachusetts saying that,massachusetts is trying to tax,the telework commuters or telework,employees that are,sitting in new hampshire not entering,massachusetts at all,and massachusetts is withholding income,tax on them and new hampshire says,that's,not fair it's outside of your borders,you can't do this so,we'll see if the u.s supreme court takes,that that case will be interesting it,has further reaching implications,on some of the aggressive states uh for,payroll withholding such as new york,that withholds new york texas no matter,where telecommuters are located and,they've done that for years so a lot,going on there,just related to employees located,in other states you really have to look,at this,or look at all of those facts in the,nexus landscape,next time that's great great information,kathy,so now moving on from the physical,presence test,we wanted to touch on the economic nexus,requirements and,the the pace of adoption so wayfair was,decided,in june of 18. and we put these slides,together just so you can see how quickly,the states have adopted and kathy and i,have been working in state and local tax,for a long time,and i don't know that we've ever seen,any state,let alone collectively all the states,move so quickly to,jump on any bandwagon so this map,shows six months after wayfarer passed,the,green states adopted economic nexus,quickly,the next slide shows you six months,later,then another i think another six months,later you can see where the map is,almost all green then we've got almost a,year later,where's florida and missouri are the,holdouts,flip to the next slide here's today,we've got,florida who is upcoming in let's see six,days,economic nexus goes live and,one last slide missouri has passed but,economic nexus,does not kick in until 2023,so you can see that just the the speed,that the states have adopted this,the states are you know they're they're,looking at this as a great,opportunity to collect all that,uncollected tax that was,escaping through you know online sales,so,what does this mean and are we are we,close,are we close yet um,the economists say that only a fraction,of,the 2.1 million of online sellers are,actually in compliance so even with all,those green states there's still,almost a one billion dollar compliance,gap,so looking at the summary of state,thresholds you can see that,not every state defines economic nexus,the same,but you'll see some trends and we've,we've picked out the four uh kind of,common common thresholds so you can see,that most states have,adopted the same threshold that wayfare,was with,a hundred thousand dollars of sales into,a state or,200 transactions there's a number of,states that have used that same,100 000 of sales but don't have any,transactions,some states have lower or have have a,higher bar with 250 000,sales and three states which are the the,biggest states california texas and new,york,have a 500 000. now it's important to,note new york is 500 000,and 100 transactions,so you can see that there's a lot of,different states that look at,what those thresholds are differently we,have seen a lot of,movement with states going some some,have gone down and some have gone up,and i think what we'll see come moving,forward,is some continuous motion,i lauren's crystal ball i think that,they're going to,eliminate a lot of the the 200,transactions,where it's really based on sales,thresholds but,we will see and i think that brings us,to our first polling question,so polling question number one what,activities,may create sales tax nexus,a employees working in a state,b employees inventory stored at a third,party fulfillment center,c independent sales reps visiting,customers on your behalf,d passing economic thresholds and e,all of the above,so we'll give you a little bit of time,to answer these questions,and i think it's important to note that,this is a sales tax question,and what creates nexus for sales tax,is much different than what creates,nexus for income tax,hopefully you've gotten your answers in,and do we have the results,all right it looks like most,everybody got the answer correct because,it is all of the above,so if your company has any of these,activities,those will those can create sales tax,nexus,for your company so it's again very,important to be looking at,all the different activities that your,company is doing,so moving on to the next slide i thought,one of our our friends attack star put,this together,and i thought this was a great,information and they,uh they looked at the the country's,demographics,and how how the population is spread out,to really help people analyze and,understand,what do these what is economic nexus,what does that really mean,so looking at it from a transaction lens,if your company is selling a thousand,orders a month,that will likely give or create nexus in,12 states,10 000 orders a month you're looking at,27 states,and then from a sales perspective if,your company has five million dollars in,annual revenue,and that's not you know that's not a,large that's not a large company,but that will create nexus in about 15,states,and at 50 million you're looking at,almost widespread nexus,with 44 states so this is some great,you know takeaways to just really,benchmark,where your sales are and where your,current filing,situation is,okay i'll talk about some income tax,nexus for a few minutes here,um as lauren mentioned we have different,nexus standards depending on the type of,tax that we're talking about,and physical presence nexus that's when,you know i started my career,years and years ago it was always you,had to have some kind of physical,presence before that state can assert,its taxing jurisdiction over you,and i'm amazed at how many clients still,think that,or maybe feel that but income tax or,for income tax purposes economic nexus,which simply means not a physical,presence just enough,economic activity coming from the state,economic nexus has been alive and well,for,quite a long time since the west,virginia,mbna case in 2008,the west virginia supreme court said,that quill was a sales tax,case not an income tax case we don't,we're not bound by physical presence for,income tax,and the us supreme court denied cert in,that case and from that point forward,um a lot of the financial institutions,adopted,economic nexus standards and then i kept,growing and,states just actually started applying,economic nexus long before wayfair,it started off with mostly in the,licensing of intangibles if,if you've been in the profession for a,while you'll be familiar with the term,jeffrey and the jeffrey case,just the presence of jeffrey on the toys,r us stores created nexus,also financial institutions as i,mentioned,about 15 states have adopted some form,of a,factor presence nexus standard which,means if your sales exceed this,level you should you have nexus,that's significantly behind if you,remember the map that lauren just,clicked through,all the states that have sales tax have,now provided guidance,that if you have this many transactions,or this much in sales,you know you have a filing obligation,and that's actually a matter of good,tax policy you don't want to have,taxpayers guessing whether they have an,obligation or not i mean they want to,comply with what they're required to,comply with but they need clear guidance,in order to know that and on the income,tax side we've only had 15 states that,provided,a factor presence nexus and we've seen,states be very aggressive in economic,nexus wisconsin kind of stands out but,they're not the only one where,you know 20 000 is enough enough to have,to file an income tax return,and the states have been successful in,asserting that argument to date,i'm so the state's now under wayfarer,and with this u.s supreme court saying,that a hundred thousand dollars is,enough,uh the states are much more emboldened,to be more aggressive so the californias,that start,at 500 000 and above they still have,their their standard,it's index for inflation but some other,states now,such as hawaii has adopted a hundred,thousand,uh amount for economic nexus,in hawaii and they actually adopted a,transaction number two,for income tax not sales tax so,that's very odd in how that gets applied,um but there are a number other states,and local jurisdictions as well,that are and i hope all the states,actually provide some kind of,threshold so small business gets some,certainty,but also in the economic nexus area,unless you're just selling tangible,personal property where you know where,you're selling it or you have real,estate where you know where the rest of,real estate is located if you're in the,technology industry or service industry,now we have an issue of how do you,determine your revenue by state,is it where your employees are working,is it where your customer is located um,in some states you have an odd cost of,performance rule where it's all or,nothing based on where the majority of,the costs of performance are being,um incurred so now we have this,this sourcing question of how do we,determine where the revenue is sourced,and unfortunately now that sourcing,question has to be answered,before you can determine whether you,have nexus,because depending on how you source it i,could have zero revenue in the state or,100,of my revenue in the state depending on,how the state sourcing rule works,so you have to answer the source in,question to determine whether you have,nexus,in the income tax area um if it's not if,it's not like boots on the ground or,you know tangible property where you,know where that activity is located,next slide the mtc the multi-state tax,commission had adopted,a bright line factor presence standard,back in 2002 and we're encouraging all,the states to adopt this to provide more,certainty to their credit,to give assurance to the taxpayers on,you know what creates nexus,um so this was back in 2002 so this is,well before,you know the the um mbna case,and long before wayfair uh so mcc,has been pushing for that and you know,it seems,the only really relevant one that it,seems to me is more on the sales side,if sales exceed a certain threshold,because once you have payroll once you,have property,i just don't unless we have a federal,law protection which we'll talk about in,a minute,um the state generally says you're doing,business in the state,if you have payroll property so i've not,seen those thresholds,protect many taxpayers in practice next,slide,i wanted to mention the pike balancing,test this,this came up in the oral arguments of,wayfare and i had never heard of it,before,many state tax practitioners had never,heard of it before and it's not even a,tax case,but basically what the pike balancing,test says,is that if there is such an extreme,burden,imposed on interstate commerce and on,taxpayers conducting business in,interstate commerce,that clearly exceeds the benefits,they're getting from the state,that it's going to be unconstitutional,or it's not going to hold,muster under this pipe balancing test it,was under the pipe case and,this case actually involved melons and,labeling of melons,and uh it and i'm forgetting exactly,which day it was but was it maybe,arizona,where they were growing these melons and,they,had a labeling facility in the state,just across the border,and in packaging facilities so they just,they picked all these took them just,right down the road which was in another,state they labeled them,and shipped them out well arizona i,think it was,and er i apologize to arizona if it's,not but they had a regulation that said,you have to package and label them in,this state,if they're grown in this state and i,guess they were really proud of their,melons,well in order for the taxpayer to comply,with that they would have had to spend,millions of dollars building a facility,so that they could label these melons,and so the u.s supreme court said that's,absolutely absurd the costs are,way in excess of what the benefit is you,can't,force them to build a new facility to,get your,you know just and that wasn't even a tax,that was just to get your labeling,occurring in the state,so how does that apply here i would say,in the,income tax area pike balancing,can apply if you have a lot if someone,has to file in,all states that impose an income tax say,you're only,you know a small 500 000 seller a,million dollar,seller and but it's all spread and all,the states come after you for income tax,you have to file 50 tax returns when you,don't even have income,i'm just wondering if that pipe,balancing can come into play,they did talk about it for wayfair but,because there was technology,and the technology providers were saying,yes we have technology to prepare all,these returns,it didn't help them in wayfarer because,technology solutions,apparently were available which we all,know,isn't always the case technology it's,getting better,all the time for sure but it's still an,expensive proposition,kathy i would think a lot of small,sellers would,really argue that even with technology,the best technology it is still a,sales tax compliance is still a huge,burden it's a huge burden and you know,it's really interesting listening in the,oral arguments that,i think it was justice um breyer,that said um okay i have an amicus brief,here that says,the cost of compliance is 19 and i have,another amicus brief from another party,that says cost of compliance is 250 000,and he's like what is it is it 19 is it,250,000 i mean they were frustrated and,just trying to get their arms around,what is the total cost of compliance,the unfortunately you have technology,companies that want to sell their,software,oh yeah it's easy and under streamlined,sales tax you can file your tax returns,for free,and you know and we all know it's not,necessarily the tax return it's getting,the right tax on the invoice,sometimes that you know is is more,expensive um but,unfortunately like i said u.s supreme,court just kind of bowed out of the,whole issue and unless we have congress,step in,we we have what we have um so also for,income tax i wanted to touch on federal,public law 86 272.,many people are not familiar with this,although it was a federal law that was,put in place in the 50s,and this says that states and it only,applies to income tax states may not,impose a net,income tax if the only business activity,in the state is solicitation,for the sales of tangible personal,property you also have to ship it from,outside the state into the state,and there's not a whole lot of guidance,you have the federal law and you have a,u.s supreme court decision the wrigley,decision out of wisconsin that gives you,some definition of what,solicitation means but if you are a,seller of,just tangible personal property,you potentially have this protection so,a seller's on amazon,if you're just selling from a website,shipping intangible property,you may not owe income tax so this is,something you don't want to forget,however there's been some activity in,this area that i want to make everybody,aware of next slide,the mcc multi-state tax commission which,is kind of a quasi-governmental,organization a lot of the states not,quite half the states are members of,of the mtc they'd love to have everybody,be a member,but the big ones like new york texas and,california are not members they like to,make their own rules,but the mtc provides some really good,uniformity for states to adopt and try,to help taxpayers not have to comply,with all these different rules but bring,some uniformity,so that compliance is eased,the this federal law public law is over,60 years old so the mtc,is revising its guidance they provide a,statement of information providing,guidance on,how public law 86 272 is going to be,interpreted by the member states,and a lot of other states will use it,too even if they're not members because,all these states got together and said,hey we think this is a good idea,they've updated in the past before but,this update i think,is extremely significant much more,significant than any of the other,updates and they they're looking at okay,we're conducting,activity business activity completely,differently now it's all over the,internet,so they're actually looking to identify,business activities that are occurring,in the state,regardless of whether it's in person or,over the internet,so what is that activity in the state,that's kind of what it comes down to,um and if that business activity that's,occurring in the state,exceeds solicitation immunity is lost,so i want to caution people because this,is something we brought up and the,working,or practitioners not me personally have,brought up on their working committee,calls,that you know a lot of these activities,we used to do over by,by telephone in the past before,computers were ever invented,it was always protected there was never,any issue well the states now are saying,an mtc saying well you know maybe that,wasn't the right answer so even things,that you're doing over the telephone,although they're not giving clear,guidance with regard to that,they have decided to not comment on,whether,conducting activities over the telephone,creates nexus so next slide,so here are activities that they,consider that defeat the federal law,protection,any post-sale assistance provided by,electronic chat,or website email okay um that's,you know a chat on how to,how to buy something through the cart,would be okay because you're just still,buying the property but any any question,on the product anything post,sale now you don't have public law,immunity,which over the telephone in the past is,people can call you up we never,considered that,as losing immunity uh solicitation of,online,applications for branded credit cards,you know you get interest income from,that it's not sales of tangible personal,property,receiving online employment applications,for non-sales positions so if you have a,website,you're receiving applications uh for new,to fill roles,and it's not a sales position rule that,state says you have no public law,immunity yeah under this guidance now,this hasn't been formally accepted yet,that's expected to happen in august,uh where it's at right now it's sent out,um to survey all the states to get the,feedback but,i highly doubt it would not pass so i,think it's gonna,it's gonna be adopted in august,um dropping cookies for purposes other,than solicitation of sales,or activities ancillary to solicitation,so if you're,you're gathering that information from,customers for production scheduling to,develop new products,anything like that use of data analytics,you don't have any protection,also remote repair and upgrades,transmitting code,offering and selling warranties presence,of inventory,no protection streamlining of videos and,music,so you can see that the states are,really looking at trying to really,gut public law because they know that in,today's economy,you really want customer satisfaction,and differentiate yourself from your,competition,and that involves really customer,service and connection,and and and also data analytics you want,to improve,your process improve your business all,those things they're going to be able to,gut federal law protection basically,under um this thinking and i will note,that,under that last bullet the commission,did acknowledge,that this could extremely affect small,business,right the negative impact of small,business and they're encouraging states,to look at that,factor presence nexus standard if they,have not adopted it,that they should be looking at that,because again you get,to really harm all these small sellers,so next bowling question,physical presence still plays a major,role,in determining income tax nexus true or,false,so physical presence still plays a major,role in determining,income tax nexus i'm emphasizing income,tax as opposed to,sales tax so we'll give you some time to,answer this question we don't want,anybody to miss the cpe,if they had to run out of the room for a,minute so we're,allowing a few additional moments for,you to come in and answer this question,and yeah so i i would just say,you know if you have a lot of sales,what's a lot that's subjective but,if you're selling to customers in other,states you're not filing,really every year you need to look at,nexus you need to look at if you haven't,done a deep dive on your sourcing,if you're not if you don't have a simple,sourcing,issue such as like tangible property or,real estate you really need to look at,the sourcing rules and they change,as well so maybe we can see true,um this maybe was a trick question,because i'm going to say,you know the right answer here really is,false,because physical presence in income tax,remember i i mentioned that,economic nexus is was alive and well,long before wayfarer,so it doesn't really play a major role,anymore,it's it's economic nexus do you have,enough revenue coming from the state,where the state says you have nexus here,and,remember only 15 states provided a,threshold,so the majority of states don't even,give you a threshold but they say if,you're earning income from sources,within the state you have to file a tax,return,so that's why public law 86 272 comes,into play,on that protection if you could qualify,for that protection,okay moving on what if you,owe back taxes i would say that probably,many many,attendees of of this on this call their,companies probably,owe taxes in states they're not filing,is what we're generally seeing,so what do you do well first you want to,find out what is the exposure,applying the right sourcing rules and,everything else there are voluntary,disclosure agreements,that you can apply for you usually want,to go through a professional like a,cherry becker to do that because you do,it on an anonymous basis,you could go through a managed audit,process where you kind of audit yourself,or you could just file returns in the,sales tax area you can register,with the date you started and pay you,know the back tax returns and pay the,penalties and interest,what you want to look at here is what is,the liability,if the penalties on the liability are,more than say 10 000 or even 8,000 then you want to consider probably a,vda or some kind of remediation,if the penalties are you know less than,that the penalties are smaller,you could just file and then you know,pay pay the penalty,i will say remember if you don't file,a tax return there's no statute of,limitations,if you don't do a managed audit or,register or,register to the beginning date of nexus,or do a voluntary disclosure,voluntary disclosure the benefit is it,cuts off all old periods you can,generally limit,the amount you pay to three years uh,some states can go,exception would be six but the average,is three,and you don't have to pay any of those,prior years that's the benefit of,voluntary disclosure agreements,because if you get audited they're gonna,want returns for all of those years some,states practically may stop at six or,ten years,but some states i've had states go back,years and years and years and then just,even if the tax is small,the cost of preparing the tax returns,for all those years is significant,uh so you really don't want to bury your,head especially if you want to sell your,company at some point,and due diligence teams going to come in,it's just better to just get it cleaned,up,and and i always say,you know that if you want to pay the,least amount of money,get it all cleaned up and comply yeah it,may cost you a little bit more right now,but i guarantee you if you wait the,longer you wait it's going to cost,more to clean up okay next slide,look thinking about exposure from a,sales tax economic nexus point of view,we're now,three years past and three years is a,long time where a lot of liability can,creep up so,if certainly look at your exposure and,look at voluntary disclosure agreements,as a way to remediate,so now looking at we wanted to touch on,a few different industries,and really the impact of kind of this,lifestyle,life cycle of wayfarer adoption and,we look at it maybe in three different,categories,kind of that first initial stage of why,why do i have to file,in these states you know just really,understanding understanding,wayfarer and the impact it has,and then kind of the heavier lift i,think is more the how,okay we understand we have to collect,sales tax,how are we actually remote sellers are,actually in compliance,um it certainly varies from industry to,industry but we're,we're starting to see a lot more,traditional e-commerce sellers,you know understand their obligations,keeping track of them,and now moving into how are we going to,do this efficiently,and where we're seeing the biggest,challenges and if you can,go back one slide for a second,if you can where we're really seeing the,biggest challenges is really around the,platform integration,and making sure that all your systems,are talking to each other,so your your shopping cart and your,platforms,and your marketplaces are all talking to,your tax engines,everything is set up correctly so all,your systems know,what to collect tax what rate to collect,tax,and how to file your tax returns and,everything's working,seamlessly but as i mentioned now moving,into the efficiency the sellers are,really starting to see that,ongoing burden of the compliance with,new nexus and new products and new,platforms and new marketplaces,so it's not a well we we got set up,correctly,and we're done it's this constant,evolution,and starting to see a lot of notices,come from states and that's,putting a burden on the sellers because,just a,time you know a time suck for their,sales tax compliance,and then you're really looking for more,ways to be the most efficient in this,area,okay for amazon fba sellers,and others that might have the same fact,pattern i,i just want to make you aware that you,know in the past,having physical presence that inventory,in the state inventory in amazon,warehouses where you still hold title,that creates nexus it creates nexus for,income tax creates,nexus for sales tax now for sales tax,purposes we now have marketplace,rules where amazon has to collect and,remit the tax but if you have your own,website sales,obviously you're you're subject to rules,um but that has alleviated some of the,burden if you're only selling through,amazon for sales tax you get some,alleviation,of that burden uh but for income tax you,have inventory in the state,um california is being extremely,aggressive in this area,which really is unfortunate because,california he even has adopted,the mtc threshold where they say,if you don't have more than 50 000 of,property in the state,you're below the threshold and you don't,have to file but california,is saying that that threshold doesn't,apply for some reason they're saying,it's just doesn't apply,they have a statute that's broader or,actually in the same,section of the statute there's a broader,application that if you engage in a,transaction you have nexus,uh so they're saying that even if you,only had 200,inventory stored in the state you have,to file a california return,and for the small sellers you would,think you know why why do we chase them,down but they get 800,minimum franchise fee um from all of,them,so you have online merchants guild has,brought suit,in california pennsylvania and there's,probably some other suits as well saying,that the small amount of inventory,that the seller doesn't even control,it's amazon that controls it shouldn't,create nexus,but as today i've never seen a state,give on that issue so it'll be,interesting to see if anything happens,there,so moving into technology industry,uh i feel that the sellers,most companies are still in that y stage,there's a lot of,a lot of companies that just don't,understand that wayfarer,affects them and i think the reason is,because wayfarer,seemed to be a traditional e-commerce,e-commerce related issue but when you,really look at what the impact is,it affects any company selling over,across state lines and that includes,most,you know software sas and digital,product sellers,so we're finding that they're still in,that why stage and,not being compliant with wayfair and,really needing remediation,so for them first we have to get,we have to get this industry to,understand the why,and then the how becomes even a harder,question,so with technology some of the,challenges,revolve around characterization of the,product and services,especially with complex products so we,spend,a lot of time really looking to answer,the question,what is it that you're selling are you,selling a,sale of a technology solution or are you,selling a technology enabled service,and sometimes that characterization is,really the challenge an assembling block,to understand,if your product is even taxable in a,state in which you have nexus,the second issue is sourcing so sourcing,like kathy mentioned for income tax it's,a it's a huge issue for,sales tax as well is where where is the,customer,getting the product or the service or,where's the benefit,received um you know we had we had a,a situation where we had a client that,sold electronically downloaded,software but the customers was in one,state,but it was downloaded on the amazon,server in a different state,and really having to understand the,whole fact pattern,to understand what state was the,jurisdictional,control for that transaction and,even the massachusetts supreme court,recently,ruled that the transfer or possession,is really it's very challenging,especially when,when products and services are used by,multiple users in multiple states,so sourcing is just a really complex,area that,when you start getting into the,nitty-gritty and of course the,devil is always in the details it,becomes a,big challenge for the technology,industry,and then the third area is,when you have bundled services where,you're mixing both taxable items,and non-tax elements together for one,price so,you can see that that how you know how,we're going to collect tax,and really it boils down to what we're,going to collect tax on,is a really it's a challenge,and where you're gonna report it exactly,exactly yeah and this is um i think the,saddest slide,actually in the whole deck,um and the ones honestly i i just wanna,i'm not a state i'm a practitioner but i,just wanna apologize,i just wanna apologize to everybody in,the technology industry,because you are a casualty you are a,casualty both on the sales tax side you,are a casualty on the income tax side,this is arguably the the most negatively,impacted industry in the area of,economic nexus especially those emerging,technologies,where you're just getting started you,don't even have profit yet you're,growing,but you have users everywhere and,i mean the this is where i get to the,kind of the pipe balancing is this you,know really,really burdensome and it just doesn't,make sense and it shouldn't be allowed,but you know here technology that,sourcing of revenue,you have different rules on sourcing it,for sales tax than you do for income tax,they're completely different sourcing,rules,and more than half of the states now are,market-based sourcing or some form of,market-based sourcing,whereas lauren mentioned you're looking,to where where is the benefit received,or where is the service delivered,but even those rules vary greatly state,to state,and then some stage you only look to,where the services are actually rendered,and what if it's technology it's not,really services you know i mean,there's just so many questions in the,sourcing of revenue and you have to,determine the sourcing of revenue again,as i mentioned previously,before you can determine whether you,have nexus and then the one last point,on this,is that then you know technology,companies the goal is to build the,technology and sell it,well if you sell it you make multi,millions of dollars,then all these states may be that okay,i'm not going to worry about,these other states where i may have had,nexus a small amount of revenue because,i didn't really have a lot of profit,well that year of sale you have a huge,profit and all of those states are going,to want a piece of that,and how do those rules work and there,are ways to minimize that,and to plan for that i mean it depends,states have different rules but,but it literally i think can be a state,feeding frenzy,when that huge multi-millions of dollars,a gain is sitting out there for a,technology company where you have users,everywhere,so the last industry we want to touch on,is the manufacturing industry,and again i think they're still in the y,stage,really understanding the impact that,wayfare has on them,now wait manufacturing does have a,little bit of carve out and a little bit,of relief,with some states do provide a,exemption for filing and registrations,if it's wholesale only companies,but if you're a manufacturer selling to,an end user,you really have to understand all the,economic nexus,guidelines and for manufacturers,what we're seeing are some of the the,bigger challenges around compliance,is around exemption certificate,management because,even if you are registered in,all these different states and have,exempt sales that is a huge burden to,collect exemption certificates,in 40 some states so collecting,validating storing renewing,that does become an extreme burden put,on the tax department,the other area that we're really seeing,manufacturing,industry impacted is with customers,customers requesting credits for supply,and delayed exemption certificates,so you're a manufacturer you have nexus,you start collecting tax,your customer has not provided you an,exemption certificate,you know when you started collecting tax,they provided two years later,now you have to deal with the process of,issuing refunds so that is that is a big,compliance challenge for manufacturers,and then on the purchasing side,certainly,other other challenges are around supply,chains with new suppliers most of them,all charging tax,knowing knowing that you're purchasing,department,or procurement department needs to get,exemption certificates to,to those new suppliers because because,they're collecting tax because of,wayfarer,it just becomes a another issue for,manufacturers to understand,to make sure that they are taking,advantage of all the different,exemptions out there,by giving those exemption certificates,to their suppliers,and then of course the contraction of,workforce and,sales tax responsibility shifting within,personnel,there's usually a lack of training lack,of procedures,and of course just increased complexity,with with,this rapidly changing sales tax world,and then finally of course increased,audits with,registering and filing returns in more,states there are going to be more audits,so,another another wayfarer burden,yeah and i've seen some auditors just be,really unreasonable i know laura and you,have to,and you know it used to be you could be,kind of reasonable,and work back and forth and there were,it seemed to just have be better,relationships in the past,now it seems like everything's just,rubber stamped denied everything's,denied,and they really go after the low-hanging,fruit yeah and if you're a big company,obviously they're going to park out and,live there,but anyway on the income tax side the,importance of public law 86.272,if you're just manufacturing product and,shipping it you want to make sure you do,an analysis,and document how you're abiding and,falling within that even set tax,policies for sales reps if they can only,do,certain things and not do other things,because really it's the state's feeling,right now that,no one really qualifies for protection,because everyone's doing something over,the internet let me reiterate,you're doing anything over the internet,with your client or accepting online,employment applications for non-sales,positions,any industry you're doing any kind of,activity over the internet,that state says you have nexus so,you know unless it's a really small,amount it's unconstitutional and that's,judgmental in the states having given,thresholds,so you real you really have to look at,the nexus area in income tax,there are some specific industry,sourcing rules government contractors,uh sometimes there's single sales factor,election specific rules on doc sales,throwback sales means that if you're not,taxable in the state where you're,shipping it to,it gets thrown back and included in the,state for apportionment purposes from,where you're shipping it from so that,changes the amount of income tax,so it's always beneficial to make sure,this be only small manufacturers because,most have nexus in more than one state,but you always want to make sure you,have nexus in more than one state,otherwise you can't even apportion so,you want to make sure,you're not protected under public law 86,272 and at least one other state so you,can apportion,uh generally if you're a c corporation,or owners of a pass-through entity live,in a non-taxing state,they'll be benefit for you there next,slide,polling question manufacturers are most,impacted by the wayfarer ruling,for both income and sales tax so again,is that true or false,manufacturers manufacturers are most,impacted most more impacted than other,industries,by the way fair ruling and for both,income,and sales tax true or false and i know,we're going to,run over a few minutes but we won't go,over an hour i promise but we'll be able,to get through,some additional information here,okay give you a few more seconds and,we'll be closing that out,again we're trying to be generous to,people that might have stepped away for,a second,all right and our answer is,false very good you've been listening,technology industry,i think personally i'm sure there's,other industries they would argue but i,think technology is the one,most impacted okay moving on,so the next area just to talk about,quickly are international sellers and,you know unfortunately i think you know,international sellers think oh well i'm,international,still uh wayfair does not affect me but,unfortunately,they are for sales tax they are still,subject to all the same laws and,regulations economic nexus,as a domestic company so same compliance,requirements,same penalties for non-compliance,how about income tax kathy yeah so for,income tax it's very interesting because,international sellers,may not be subject to income tax for,federal purposes under treaty protection,because they don't have a permanent,establishment,many states will allow that treaty,protection but treaties apply only at,the federal level not at the state level,so states don't have to abide by the,treaty and there are states that,will impose income tax even if you don't,have a federal income tax,obligation so you may have to do a pro,forma federal return,to file uh or to prepare an income tax,return so there there is uh there is,some,negative impact certainly for,international sellers,so then just looking at what's what's,coming up,so some trends that we want to see is,and certainly all the states have an,economic crisis,the state budget shortfalls but they're,very reluctant to,impose additional taxes so the movement,of choice is really going after,non-compliance sellers,so looking at um,sending out nexus questionnaires we've,seen a lot of states there's,about eight eight hot states that are,really getting very aggressive with,remote sellers,those states are california,massachusetts,minnesota pennsylvania washington,wisconsin illinois and maine they are,all being very aggressive going after,non-compliance sellers,the other thing that we're seeing quite,a bit of is when companies register,there's a lot of scrutiny to make sure,that that,registration date is the true date,that they should have registered,otherwise red flags will go up,a lot of states are getting data mining,from other tax types,arizona is really arizona is one of the,leaders in this,and they are bringing in data analytic,firms and,just really all the states are getting,data from outsized sources,just to find find all the non-compliant,sellers,typically the first move is to send in,uh,send in a friendly nexus questionnaire,but there then the friendly nexus,questionnaire,will quickly turn into a real unfriendly,nexus questionnaire,if it is not responded to remember the,good old days lauren when everyone would,just throw away those nexus,questionnaires and,you know you might not ever hear back,from the state anymore,now you do that and you will get an,arbitrary assessment and they will do,not,throw away nexus questionnaires yeah,they'll lean they'll lane your bank,accounts,and it ends up really really difficult,trying to get rid of those liens,um income tax nexus litigation i'm just,expecting litigation you know what is,what is the threshold for income tax and,not only in the area of nexus,but interpreting those sourcing rules,the sourcing rules got more complex,not easier it used to be kind of where,are you performing the service you know,where that is,where the people are located um but now,uh with market-based sourcing you can,come up with all kinds of different,arguments on sourcing um so we're going,to see a lot there so the next the,question is no longer do i have nexus,but what is protecting me from nexus,if you have a revenue coming from that,state what protections do i have from,nexus,we're going to see those aggressive,challenges,as the states start adopting the new mtc,statement of information congress can,act,and they can override in a lot in this,area they can,definitely control interstate commerce,or taxation of interstate commerce but,will they ever act,probably not you have various interests,involved and then you have congress just,so divided on,everything anymore it's hard to get,anything passed,but hopefully and i will still always,continue to push,to get some movement to protect small,business we,really really need protection in the,small business area,yeah so i know we're running out of time,so just want to touch on a couple other,issues,so the expansion of marketplaces,certainly this is an,area that everybody needs to keep their,eye on,some of the hot topics are really the,definition of a marketplace,and then the kind of the,the audit support or what happens in,audit so who's responsible for providing,audit support who's liable for inc,incorrect,tax compliance and who pursues refund,claims so,we're going to see a lot of evolution,with the marketplaces but certainly it,is,it was great to help small sellers but,not without a laundry list of issues to,consider,the other area to really focus on for,sales tax is the expansion of the drop,shipping business model,certainly a very complicated fact,pattern with,various different states and what,exemption certificates,can prevent double taxation so if your,company,is in the drop shipping business model,certainly this is something that you'll,want to pay attention to,and then the last area is just really,the expansion of the tax base,with new technology,new new sources of revenue taxing,and you can forward the slides taxing,software as a service,information services data processing,all not every state taxes these so the,states that don't currently tax,technology and digital goods we will see,some movement in that area,as well as evaluating current exemptions,and,the last topic which we'll have to say,for another day,is local tax simplification and how to,handle the,pesky colorado louisiana,alabamas of the world so rain time to,get to the last polling question here,so what are your biggest wayfarer,challenges understanding,the nexus footprint implementing systems,to comply,just not enough resources to file all,the tax returns that are needed or,all of the above and lauren we have a,couple questions i think you can answer,real quick while we're waiting,uh the first question is if you have,economic nexus for sales tax with a,state but your revenue stream is not,taxable do you still have to register,no not necessarily you need to look at,state-by-state guidance but if you are,not selling anything that is,subject to tax that was never subject to,tax in the first place,then in most states you do not have to,register for sales tax,and we always say there's always the,exceptions and there's always,so look if you have a lot of sales in,one state and the other one is are the,thresholds for e-commerce,cumulative since you started business,no and that's a great question it it of,course it varies from state to state but,most states will look at,a calendar year basis so if you hit that,threshold in a calendar year or the,previous year,some states are a rolling 12 month,period,so it's important to actually understand,what what that,time period is that you have to count,and we have,charts that tell you exactly what that,threshold is i believe on our website,right lauren,yes we do tell you what what the,thresholds are,and that would be on the cherry becker,website and you would just i think,search for sales tax nexus yep,yes okay i have everyone,get a chance to answer well there is one,more question i wonder if we could just,get real quick you touched on,international sellers paying u.s sales,tax,but will you do a webinar okay on,domestic business selling,internationally whoa that's a great,question,um and we will give that to our,international team because i think that,would be,very valuable so we want to just really,thank everybody for joining us,we really appreciate it i'm hoping that,you found the information helpful,you

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