Episode Transcript
[00:00:05] Speaker A: Hey, everyone, and thank you for joining us on taxing poetic, as always. My name is Tim Howe, joined with my co host.
[00:00:12] Speaker B: I'm Jenny Carter.
[00:00:14] Speaker A: And we're here with our esteemed producer, JB. JB, how you doing, buddy?
[00:00:17] Speaker C: Good, how are you?
[00:00:18] Speaker A: I'm doing great, man. Awesome. And today we're actually going to take a little bit of a different spin. We're actually going to drop back and do a sales tax 101. Give you some basic knowledge of what it is that we actually do on a daily basis and who these people are that are actually speaking to you. So with that, I'm going to turn it over to Jenny for 2 seconds and let her introduce herself.
[00:00:37] Speaker B: Great. Uh, my name is Jenny Carter, and I'm the CEO of Synexis. I'm just kidding. That's Tim. Tim's the CEO. I'm a manager at Synexis tax Solutions. I've been doing sales tax probably collectively about six years.
[00:00:51] Speaker A: Well, you know what, and you forgot, you're now a podcast host, so.
[00:00:54] Speaker B: Oh, that's true. That is true. And I'm a CMI now.
[00:00:57] Speaker A: That's right. Pass the exam. CMI. Congratulations.
[00:01:01] Speaker B: Thank you.
[00:01:02] Speaker A: What does CMI stand for?
[00:01:03] Speaker B: A certified member of the institute, which is the institute of Professionals and Taxation.
[00:01:09] Speaker A: Oh, that's awesome. There you go.
[00:01:10] Speaker C: I'm getting Ohio State and Scientology vibes from the certificate for the institute.
Like what?
[00:01:20] Speaker A: You know, they get beaver up to aliens for like, you know, about 30 minutes.
[00:01:23] Speaker C: How many alien souls do you have in this stick?
[00:01:26] Speaker B: Well, now that you've mentioned Scientology, someone's going to come shut the podcast down.
[00:01:30] Speaker A: That's exactly it. Yeah, we're completely smoked. Tom Cruise, come abduct me.
[00:01:35] Speaker B: Exactly. Yeah, we'll apologize to them later. Or maybe not exactly. Yeah.
[00:01:40] Speaker A: My name is Tim Howe. I'm the CEO of. Founder of Synexis Tax Solutions. I've been doing sales tax for a lot longer than I'd ever want to admit. I've been doing it for over 20 years. And then also, yes, now I'm a podcast host, believe it or not. And I'm sitting here preaching to the, the masses about sales tax and the fun of it and hanging out with this goofy guy, JB. So, you know, JB, why don't you tell us a little bit about yourself? Who are you?
[00:02:07] Speaker B: Ooh, I'd like to know.
[00:02:08] Speaker C: So, I don't know. Nobody ever sees me, so. Cause I'm not on. I'm not on camera talent. I just am in the background and every once in a while, I chime in and make sure we're just staying on task and.
[00:02:19] Speaker B: Which is a full time job with Tim and I.
[00:02:23] Speaker C: So pretty much that takes up all of my time.
[00:02:27] Speaker A: I love it, man. So, Jenny, you want to kick us off with a haiku? As always, you want to turn around and do this?
[00:02:32] Speaker B: Okay. All right. This haiku is in the spirit of sales tax 101, going back to school, just like Billy Madison.
No dodgeball, though, please.
[00:02:44] Speaker A: What about snack packs?
[00:02:46] Speaker B: Yes. Snack packs are.
Yes.
[00:02:50] Speaker A: Thank you very much, Miss Lippy.
[00:02:54] Speaker C: Today I have devised the quiz. Oh, my gosh. And it's really just, like, on, like, terms that I feel like we've thrown out a lot and be like, what is that? And so we're gonna make sure that you guys know what you're talking about when you say these words that I don't know.
Okay.
[00:03:09] Speaker B: All right, so wait, hold on, hold on, hold on. Let's. Let's remind everybody where we are with the score.
[00:03:14] Speaker C: Of course, Jenny would like to remind everyone that she is.
[00:03:17] Speaker A: Gotta remind everyone.
[00:03:18] Speaker C: Or 11.5, rather, to tend to.
[00:03:21] Speaker B: Well, and just to be fair, I mean, I got smoked last season, so that's why I'm proud of myself.
[00:03:26] Speaker C: A couple of offers last year, killer in the scoreboard, and then really ended up running away with it at the end, and I stopped really counting. Jenny, first question is for you. What is a drop shipment?
[00:03:41] Speaker B: Oh, wow. I just had to study these for the CMI exam. It's not an easy topic. So, um, drop shipment is when I order, say something online, say from Alabama, but then say the inventory is based in South Carolina. So they're going to ship the item from, um, South Carolina to me in Georgia. So it's like a triangle of seller, buyer, wholesaler. So the drop shipment is the item coming from the, um, fulfilling state where the inventory is.
[00:04:13] Speaker C: Right. And then. So who pays the sales tax in that scenario?
[00:04:16] Speaker B: It depends. It always depends. Yes. Always depends on who has nexus in which state. So there's all sorts of different scenarios.
[00:04:24] Speaker C: Yep. Correct.
[00:04:26] Speaker B: Yay.
Are you listening? Ipt just nailed that.
[00:04:31] Speaker C: The definition I have written down is a drop shipment is a transaction where a seller accepts an order from a customer, then places the order with a third party supplier, typically a manufacturer or wholesale distributor.
[00:04:44] Speaker B: Okay, so that sounds much better than my explanation, but, yeah.
[00:04:46] Speaker C: That way, if somebody wants a short one, you did get it right, though. It was longer.
[00:04:50] Speaker B: That's weird that I made something longer than it needed to be. That's. I don't ever do.
[00:04:54] Speaker A: Shocking. I mean, completely blown away.
[00:04:57] Speaker C: No. As somebody who has to edit a lot of the things that we talk about, I can't believe shots fired. Okay, define Nexus.
[00:05:05] Speaker B: Oh, geeze. He gets Nexus and I got drop shipments.
[00:05:09] Speaker C: We say it all the time.
[00:05:10] Speaker A: Actually, that's. Yeah, that's. That's pretty awesome. For the layup, Nexus can take multiple forms, but it's basically the legal obligation for a company to register, collect and remit sales tax.
[00:05:19] Speaker C: Do you know why they chose Nexus for this word? Just feels very spacious.
[00:05:24] Speaker B: I think it's, it's actually, I thought I could be totally making this up. Is it latin? It's. It's Latin for connection, the definition that.
[00:05:32] Speaker C: I have written down. So Tim is obviously correct, but the definition of nexus is the level of connection between a taxing jurisdiction and its entity. Okay, Jenny, nonprofits like churches, schools and charitable organizations are always exempt from sales tax.
[00:05:48] Speaker B: That is false. Incorrect.
[00:05:50] Speaker C: And then obviously on this podcast, we're an information podcast. So to get the full point, you have to tell me what? Why. Quiet.
[00:05:58] Speaker B: Oh, so now a true or false isn't good enough. Now I see how it is.
I don't know why aren't they otherwise always exempt?
[00:06:07] Speaker C: Going to be half a point. If you don't know why.
You know why.
[00:06:12] Speaker A: Why they're not always exempt?
[00:06:14] Speaker C: Yeah, why wouldn't.
[00:06:15] Speaker A: I mean, frankly, like, when you're actually looking at the statutory guidance or whatever in a particular state, they really don't care about the federal designation of a 501 c three. They basically look at it and they say, hey, if you're out generating a sale or, you know, conducting a sale to a customer, you're going to be considered a retailer regardless of whether you're a nonprofit or not. You're exchanging. Transferring title of a good. You're exchanging in consideration, and with that comes the legal obligation to actually collect a tax based off of that transaction.
About your business form, I was thinking.
[00:06:47] Speaker B: About purchasing and not selling because also, yeah, obviously 501 c three is also sell.
[00:06:52] Speaker A: Yeah. And the big thing is around, it's typically around sales.
[00:06:55] Speaker C: Okay, who was Tim, who was the first state to enact a sales tax?
[00:07:01] Speaker A: West Virginia.
[00:07:03] Speaker C: Um, so, yes, but if you go on Wikipedia, um.
[00:07:08] Speaker A: Oh, the most trusted resource on the Internet, please.
[00:07:12] Speaker B: There is a dispute on this and.
[00:07:14] Speaker C: There is a dispute. So, Jenny, I'm going to give you a chance to steal your half point back. Who does Wikipedia say?
[00:07:21] Speaker B: I. If I had to guess, I'd say Mississippi.
[00:07:25] Speaker C: Yeah.
[00:07:26] Speaker B: Yeah, because that is in the sales tax.
IPT materials, too.
[00:07:32] Speaker C: About that, there's like this like, kind of which one was actually first. So was it?
[00:07:37] Speaker A: West Virginia is like originally on alcohol, isn't that right? Like it was something like a beer tax or like something weird.
[00:07:43] Speaker C: So what I have written down is that sales tax started in the US when West Virginia initiated the first official statewide sales tax. So maybe this is a statewide thing versus a county thing. Who knows? It was during the Great Depression. But then Wikipedia says the first broad based general sales tax were enacted by Kentucky, Mississippi in 1930, and then Kentucky took them away in 1936 and then came back. So I'm gonna give Tim that, that point.
[00:08:11] Speaker B: Do I still get my half point though?
[00:08:12] Speaker C: Yeah, sure.
[00:08:13] Speaker B: Sweet.
[00:08:14] Speaker A: What? Come on.
[00:08:16] Speaker C: Illusion.
Okay, Jenny, who is the final state to enact the sales tax?
[00:08:23] Speaker B: Oh, yeah, Tim, um, I think we've talked about this before. I'm sure Tim knows this too. I'm going to say Colorado.
[00:08:33] Speaker C: All right, what is it? I'll give you half a point steal. We're doing half point steel day.
[00:08:37] Speaker A: Let's say Hawaii.
[00:08:39] Speaker C: It's Vermont, 1969.
[00:08:42] Speaker B: Really? I almost said Hawaii too, Tim, but then I thought, well, that's a grocery seats tax, so I wasn't sure if that would count.
[00:08:48] Speaker A: Yeah, if it really counts as a sales tax. Yeah.
[00:08:50] Speaker B: Yeah, but Vermont, I never would have.
[00:08:52] Speaker C: I mean, you know how, I mean, Vermont and New Hampshire are just sort of just like always hanging. And so maybe they were just like, we're gonna what? We're gonna see what New Hampshire does. And then New Hampshire never did anything. And they're like, all right, well, New.
[00:09:05] Speaker B: Hampshire never did anything. Still happens.
[00:09:06] Speaker C: We were just like, nah.
Yeah, I love it. Okay, Tim.
What? Why are sales taxes often referred to as regressive?
[00:09:17] Speaker A: Basically regressive taxes because they, they basically tax everybody the same. They pass tax all the way down to, you know, every single, you know, type of transaction or nature of transaction. And, you know, I don't know, it just causes them to be regressive in nature. So.
[00:09:33] Speaker C: Yeah, so what I've written down is that it? And Jenny, you can, you can tell me if he's right, because I think he is.
It does not change based on your income.
[00:09:42] Speaker A: Income level, correct?
[00:09:43] Speaker B: Yes.
[00:09:43] Speaker C: He never said income level, but I still think he was kind of in.
[00:09:46] Speaker A: Tax everybody the same. Yeah, it's uniformity. Right.
[00:09:50] Speaker B: Right.
[00:09:52] Speaker C: Okay, that does make it 13 and a half, Jenny. 13, Tim.
[00:09:57] Speaker B: Oh.
[00:09:58] Speaker C: Got ourselves what they call a ball game.
[00:10:01] Speaker B: Might be a photo finish.
[00:10:03] Speaker A: Told you. I'm clawing my way back, folks. Watch out.
[00:10:06] Speaker B: Okay, after that quiz, which I did not sweep, let's take a quick break and we'll be right back.
All right, we're back on sales tax 101. And just want to wrap up, you know, kind of consolidate a few things from our quiz and everything we've talked about so far. You know, if you want to impress your friends with how smart you are. And here's some. A few things I learned about sales tax.
If you want to, you know, consider yourself a nerd like Tim and I and JB to an extent.
You know, just remember that sales tax is a consumption tax on the sale of all goods and services.
Sales taxes, a percentage of the retail cost at the point of purchase. And there's also not just statewide sales taxes. Many states also have local, uh, which is county and city sales taxes. So just know that too, which pile on top of the statewide sales tax. So then you're paying a lot more tax. Tim, this should be a quiz question. Just real quick. What are nomad states?
[00:11:04] Speaker A: New Hampshire, Oregon.
What's the next one, Jenny? Montana, and then Alaska, which is technically a little bit incorrect.
[00:11:12] Speaker B: I know there's always some dispute. People email us angry emails, uh, about Alaska. But the reason why Alaska is a nomad state is because it doesn't have a statewide sales tax. Correct. They just have some local. Yeah, levied sales taxes.
[00:11:27] Speaker C: Less gnomed doesn't sound good.
[00:11:29] Speaker B: Right? I know you got to have a good anagram. So, um, and then Delaware does have a gross receipts tax, but it is not a statewide sales tax.
[00:11:37] Speaker A: I feel like I got gnomed last night with a bottle.
[00:11:44] Speaker C: Something completely different where I'm from.
[00:11:46] Speaker A: Exactly.
[00:11:47] Speaker B: And one important thing to know, again, that you can show off to your friends is that the United States is very unique to the rest of the world and that we do have individual state sales taxes most. Pretty much. I think every country in the world, they have value added taxes, which Tim is going to touch on in a minute. So, Tim, take it away.
[00:12:07] Speaker A: Absolutely. Yeah. Thanks, Jenny. Yeah. VAT value added tax system is, you know, obviously what the rest of the world prescribes to. And it's basically taxes on the value chain of, you know, anything that occurs, every transaction that actually moves through the value chain, you have a certain type of tax or a tax, excuse me, that will get applied at that specific point. Right. So if you think about like when a guy goes and buys lumber and he's going to use that to make a chair, he's paying input VAT on the lumber and. And items that he purchases, and then he's collecting output VAT when he actually sells the tear to the customer. And the whole idea is he nets the two together, he nets his input versus his output, and the Delta is ultimately what gets remitted to the country. Right. So the correct tax has basically been applied throughout the entire value chain of a good. That's the whole conceptual idea with VAT.
Great in premise, very difficult to kind of administer. It's a very documentation intensive administration form of taxation.
But it's much easier to calculate the taxes as opposed to what we have here in our domestic system, which is 45 different, quote, unquote, countries that are having their own rules and doing their own things, and we have to manage our own exemptions and all this other stuff, which just makes our system very convoluted and complicated. However, the one thing that we're not doing is we're not funneling money to our federal government via our consumption tax system, right. Where the rest of these countries are all getting money from VAT, our federal government's not. We have 20. What? What 20? Is it 26? $28 trillion in debt now. Right? Is what. And counting. Okay.
The Congressional Budget Office has done a number of studies on this in the past, and the most recent one said that, like, I think within 18 months of enacting a VAT, and we're talking like a 4% VAT across the board, a general service tax or goods and services tax, if you will. At the us federal level, we generate, like, $4 trillion in 18 months.
[00:14:13] Speaker B: Oh, wow.
[00:14:14] Speaker A: So try to not sell that to a politician to actually pass.
[00:14:18] Speaker C: Yeah. I was going to ask, is it like soccer and football where, like, you know, one side is definitely right. Like, it's obviously, it's called soccer or it's Europe. Right. On this one with the VAT.
[00:14:30] Speaker A: Um, I don't know, it's. It's like asking about the imperial system versus the metric system. Right. And that's the problem that we have, is all of this sounds so amazing.
It's going to be so difficult to unwind our system and to shift gears. First off, you're going to have constituents that are just going to go nuts. Right. I think if you tried to impose a 4% VAT across the board, across the United States, you're going to have people that are going to want to burn Washington to the crowd because it's another 4% regressive tax that they're just not going to be paying on every single thing that they purchase.
And by the way, not to bring politics into this, because Jenny knows that I love talking politics, but at the end of the day. What really bothersome is that you're going to have people that are going to go, well, why don't we just stop incurring debt? How does that sound? That sounds like a really good idea. Why don't we just trim our spending and start reversing all these trillions of dollars instead of having to ask constituents to pay 4% and funnel all this money in? I think what we're ultimately going to have is someone is going to come up with a plan and an idea to enact a fair tax or a flat tax aVAt across the board. And it's going to have to be.
[00:15:47] Speaker C: When it comes to sales, not income tax, but, like, sales tax.
[00:15:50] Speaker A: Yeah.
[00:15:52] Speaker B: First of all, again, we're America. We eat five donuts in a sitting, and we are not going to stop spending.
[00:15:59] Speaker A: You know, I ran the peach tree road race yesterday, and people were handing out donuts and beer.
It's 93 degrees outside, and you're gonna hand me a cold beer while I'm running? Like, I mean, it's a great idea, but I'm gonna die.
[00:16:12] Speaker C: Yeah, go back to the imperial versus the metrics. I remember reading this quote on Thomas Jefferson, and he said that they were like, we should switch to the metrics. And he's like, we should. It is better, but it'd be too expensive. That was Thomas Jefferson when they just had, like, 40 wood signs and he's like, we can't. So imagine, like, now trying to change, like, every mileage sign or something to, like, kilometers, all these things.
[00:16:34] Speaker A: Thomas Jefferson would have still been measuring things in, like, axe handles.
[00:16:38] Speaker B: Exactly.
[00:16:40] Speaker C: Almost two days. We can't do it.
[00:16:46] Speaker A: Well.
[00:16:47] Speaker B: Well, Tim, would there be any discussion going back to, like, the 4% tax? You know, it seems like almost, if that were going to be a thing where we would not burn Washington to the ground, would it have to come out maybe, of the state sales tax? Like, could you even it up like that? Like, actually the 4% get rid of everything else.
[00:17:06] Speaker A: Right. You would know.
[00:17:08] Speaker C: Oh, you're saying.
[00:17:08] Speaker B: Oh, no.
[00:17:09] Speaker A: I mean, no, no.
[00:17:10] Speaker B: That's what he's saying.
[00:17:11] Speaker A: Like, it's get rid of it. No, cannot get rid of state sales tax. And the reason is because of what? Jenny? You know this, right? IPT, why can't you get rid of state sales taxes?
[00:17:20] Speaker B: Because. I don't know. No, I don't know why.
[00:17:23] Speaker A: It's. Well, it's basically because of, number one, the dormant commerce clause.
[00:17:27] Speaker B: Okay?
If you're gonna go to the constitution.
[00:17:30] Speaker A: And also and the Bill of Rights, I mean, the Bill of Rights basically says that, you know, and this is where we've kind of migrated away for. It's really weird. Certain issues we've migrated away from and other issues we don't. Great example, wayfair, right? When we talk about the economic nexus thing, and you read the Supreme Court, you know, Supreme Court's decision about Wayfair, and, you know, Justice Kennedy basically blasted everyone and said it's because of Congress's inability to act and the states to be able to figure this out on their own. We're just going to remand it back to the states and say, hey, states, you guys need to go and deal with this. This is your problem. You need to go figure out what the economic nexus standard is and, you know, figure out how you want to administer your own nexus rules. The Fed can go ahead and pass their own tax. You're never going to be able to tell the states that they can't because.
[00:18:17] Speaker B: States rights, we're just, well, states rights as an american history geek, we're just obviously built on. The only reason why we were able to have this union of states was so that the states had a number of inalienable rights.
[00:18:35] Speaker A: Each of the colonies were drastically different. Right. And what those colonies focused on. Right. You had industrial colonies versus agricultural colonies. And we didn't want to disrupt that fragile kind of interaction between these colonies and also their ability to administer and conduct their own business and also conduct their own governments and have their own situations where they need to because it was just going to get too big. This is a big deal. Our federal government's debt is a massive deal, and it's something that needs to be taken care of. Just reversing the trend and saying, hey, how about we stop incurring debt? That's not the answer. You still have to pay it down. Right. It's one thing to be able to cut up your credit cards. It's another thing to be able to pay the bank back the debt that you've incurred.
[00:19:18] Speaker B: I hate that part.
[00:19:20] Speaker A: I know, right? Like, it'd be really great if you could just cut your credit card up and congratulations, debt just evaporates.
[00:19:24] Speaker B: That would be so, so great.
I don't know. I don't know what the answer is, Tim. It's pretty.
[00:19:31] Speaker A: I know we're predicting that we're not.
[00:19:33] Speaker C: Going to see any.
[00:19:34] Speaker A: I think the answer is a nationalized vat of.
It's something that I believe needs to happen. We just cannot just keep incurring all this debt and not paying it off.
[00:19:45] Speaker C: It kind of seems like an, you know, obviously it's well, it's on top of more taxes. It's kind of an easy way.
[00:19:51] Speaker B: Yeah.
[00:19:52] Speaker C: To be like, hey, 4 trillion.
[00:19:54] Speaker A: It is really easy until you start getting to certain income levels, that 4% is going to change back for them.
[00:20:03] Speaker B: Absolutely. Very regressive.
[00:20:04] Speaker A: Very regressive. 100%. Right.
[00:20:07] Speaker B: Well, Tim, thanks for taxing poetic on all these issues. There's so many complex ideas and theories with sales tax and VAT tax. It has been a lot of fun to discuss, and we'll do it again in a future episode. So, yeah, as we close out here, just a reminder, you don't have to listen to any of our episodes in order and just continue to listen to us on your favorite podcast platforms. And we look forward to having you next time. Thanks so much, nerds.
