Avoiding Hefty Fines When Doing Business Out of State

Pictured Above: Rex Collins, principal at HBK CPAs & Consultants, and Tim Berman, former dealership owner and now the innovation manager for Constellation Software, sat down following Collins presentation at the GIE+Expo in Louisville, Ky., to dissect what the Wayfair ruling and economic nexus are and how they impact dealers who sell and service equipment across stateliness.

Rex Collins, Principal, HBK CPAs & Consultants

Tim Berman, Innovation Manager, Constellation Software

Editor’s Note: Dealers are already familiar with legislation regarding paying state sales or income taxes when they have a physical presence in the state. However, a Supreme Court ruling on June 21, 2018, added the concept of economic nexus in the case of Wayfair v. South Dakota. The ruling was intended for internet sales and required state sales tax to be collected in that state on $100,000 in sales or when transactions reached 200.

Rex Collins, principal at HBK CPAs & Consultants, and Tim Berman, a former dealership owner who is now innovation manager at Constellation Software, discussed the issue when they met up recently at GIE+Expo in Louisville, Ky.

Tim Berman: You have always presented interesting topics and the Wayfair ruling is something I’m interested in. Can you give me the “10-thousand-foot view” of where are we today?

Rex Collins: If you sell to or service out-of-state customers — which many dealers do — you need to know about this term: “economic nexus.” Not knowing what that means could cost your dealership tens of thousands of dollars in fees for non-compliance for state, county or city legislation regarding paying state sales and income taxes.

After the Wayfair ruling last year, virtually the next day, other states enacted similar legislation with differing dollar amounts and transaction thresholds. The result is that any business that does business with out-of-state customers is affected.

“States are already enforcing the legislation as it amounts to $52 billion in lost revenue for the states. Many of the dealers I talk with don’t think the legislation applies to them because they don’t have locations in different states. I then ask if they ever send a service tech into another state. This is actually physical nexus…”

What makes the matter even more complicated is that states define differently when sales or income taxes need to be collected and paid. For instance, Kansas requires state sales tax to be paid on the first $1 sold. Plus, municipalities are adding on their own taxes. And, “trailing nexus” applies in certain states, covering transactions for as long as 60 months from the first transaction. Today, there are only 5 states that have not enacted Wayfair legislation.

Berman: As a dealer, we received some letters about the legislation, but it was too early on and nobody was enforcing it. Being the devil’s advocate, is this really going to be enforced on a widespread basis?

Collins: Absolutely. States are already enforcing the legislation as it amounts to $52 billion in lost revenue for the states. Many of the dealers I talk with don’t think the legislation applies to them because they don’t have locations in different states. I then ask if they ever send a service tech into another state. This is actually physical nexus. Many dealers have either been unaware that this move created physical nexus or have ignored it in the past. The states are stepping up enforcement in this area. Economic nexus goes beyond this, in that the dealer may never step foot into a state, but still could have nexus simply by selling to customers in that state.

Berman: Or, did you ever pay to have an on-staff driver to deliver equipment out of state? That happens all the time.

Dealers Should Follow These Best Practices for Compliance to Wayfair Legislation

Rex Collins, principal at HBK CPAs & Consultants, advises dealers to follow these practices to ensure they have the proper documentation when conducting business out of state. These practices “put a fence” around the transaction, defining exactly where and when the out-of-state business occurred in case you are questioned or audited by a state department of revenue or other taxing entity.

1. The first step (every dealer should do this immediately) is to have a line on the sales document that indicates the time and place where the delivery or service took place (where ownership was transferred) as well as a signature line for the customer.

2. To limit liability, hire a third party transportation company or set up your own transportation company.

3. When providing your own delivery, ask your driver to take an image on their mobile phone of the equipment at the location listed on the sales document.

4. Have the driver make a small purchase (such as a pack of gum) at the nearest gas station and save the receipt. This helps further prove the driver was at the delivery site at the time stated on the sales document.

Collins: Depending on how it was done, that’s correct. We’ve put together some best practices for the dealers and one of the first things to do is add information to your sales documents that define where the delivery is taking place or where ownership is going to transfer, such as whether it’s at the dealership or the customer’s location. Also, if you’re going to deliver into other states, use a third-party transportation company or form your own transportation company.

If you use your own transportation company, ask your customers to sign a document stating when and where they took delivery. In addition to that, your driver should take a photo (on their mobile phones) of the equipment on the trailer at that location. After delivery is complete, they should buy something from the closest convenience store and save the receipt.

Berman: So they can prove they were there.

Collins: Yeah. It’s time and date stamped that way. The state departments of revenue have the attitude that you are colluding with your customer to defraud the state of revenue. So you are guilty until proven innocent.

Berman: How are dealers going to do that consistently? It’s difficult to get employees to ask for an email address let alone do this very intricate, multi-step process consistently.

Collins: It can get even more complicated because let’s say the customer has an ag exemption. The ag exemption rules are different for each state. My recommendation is to get two ag exemption certificates completed, one for your home state and one for the destination state.

Berman: That’s what we did.

Collins: Then, there is equipment, like mowers, trimmers, chainsaws and so forth that can lend themselves to consumer use. To protect your dealership, ask the farm customers who are purchasing that kind of equipment to sign a document stating they are using it for food production and how.

Also, dealers need to know that the statutes are written so that it’s a 365-day look back or even longer. So, if I sell a piece of equipment today, does that get me to the threshold for that particular state or municipality.

“You can’t do it, from my experience, outside of the system. Dealers that have an e-commerce site as well as dealers selling through Craigslist, eBay and Facebook Marketplace are going to be affected. No one is going to be able to fly under the radar of this legislation…”

Berman: And, it’s easy to achieve that with just one tractor sale.

Collins: Yes, because of the dollar amount. But, you have to also look at the same scenario for parts sales. One of the things we’re exploring is actually dividing the dealership into two companies, one for the parts department because that’s going to be triggering these high-volume of transactions. Unfortunately, the dealer management systems haven’t caught up and haven’t paid enough attention to the Wayfair ruling.

Berman: That’s where 100% of this process has to go. You can’t do it, from my experience, outside of the system. Dealers that have an e-commerce site as well as dealers selling through Craigslist, eBay and Facebook Marketplace are going to be affected. No one is going to be ab le to fly under the radar of this legislation.

Collins: And, the reason you’re not going to is because the states look at the businesses selling expensive products. Dealers have a chance of being audited more frequently because they have a higher sales volume than businesses selling other products.

Berman: That definitely underscores the need for software. It’s probably going to cost a software company several hundred thousand dollars to develop such a system, so software providers and dealers need to work together to make it cost-effective to develop and purchase.

Collins: The legislation is constantly changing, and currently, dealership management systems do not have the functionality to keep up with the potentially thousands of tax codes, although development efforts are underway.

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