Did you have a chance to listen to our podcast with Dave Pelton of Vertex?
If not, you can read the whole thing here:
Meagan Bryson: Hi everyone and welcome to another episode of EY Access. I’m your host for today, Meagan Bryson, and I’m filling in for Eric Young, joined today by Dave Felten from Vertex. Hi Dave.
Dave Pelton: Hi, how you doing?
Meagan Bryson: Good. How are you?
Dave Pelton: I’m doing fine, we’re busy here at the moment.
Meagan Bryson: You know what, I can’t tell you how much we have thought about you guys since the Supreme Court ruling came down. First of all, before we get into the nitty gritty of what we’re here to talk about, I understand you’re the Strategy and Product Management Leader at Vertex. Tell me what that means and what you do over there.
Dave Pelton: I’m really focused on a certain piece of our business around our calculation products and working on strategy, as well as ensuring strategy execution. So it’s actually a pretty exciting role.
Meagan Bryson: Yeah, especially right now, right?
Dave Pelton: Yes. Our world changed dramatically last week.
Meagan Bryson: So we’ve called Vertex and we’ve asked them to help us out here with this Supreme Court ruling and to shed some light on it. Vertex is our trusted sales and use tax automation partner. Do you want to just touch on briefly what vertex does and then we’ll kind of start talking about the case.
Dave Pelton: Sure, Vertex has been around for about 40 years now, through multiple generations of products. We do sales tax calculation, calculation of VAT and a number of other taxes. We have a global product. We also do returns, compliance on a global basis. We’re your kind of end-to-end transaction tax solution, as well as income tax. We have some income tax products as well.
Meagan Bryson: Okay, great. Now you know, taxes. I don’t think there’s anyone on earth that hasn’t heard about the Supreme Court ruling that just happened. Whether you’re a consumer or you’re a merchant, it’s going to affect you. As a consumer, I’m bummed that things are going to be more expensive. As an e-commerce person, I’m very interested in how this is going to affect all of us and how it’s gonna effect all of our merchants and how it’s going to change the industry. So let’s jump right in here. You know the Supreme Court just handled a case called South Dakota versus Wayfair, explain to me if you can, what that was all about.
Dave Pelton: There was a famous case back in 1992 that defined when a company had to collect tax in a state, and they had a physical nexus, which you could get physical nexus by having employees in the state, by selling enough times in this state through conferences. There were a number of items that gave you physical nexus. And the case was about economic nexus, which means it was really important for, for e-commerce players, because it was really hinging on, you should have nexus if you sell a certain amount of product in our state, even if you don’t have this physical nexus. And the trick about the nexus was, his term was if you have physical nexus, you had to collect and remit tax. So it was very, it was very interesting. There’s a lot of large companies in the country that’s set up operations so they have limited physical nexus, so they didn’t have to collect in those states. And many of them were doing a lot of business and a lot of states. And what the states were saying is, “Hey, there’s so many sales. By 2020, there’ll be 40% of sales in general will be the online. We can’t lose all that revenue.”
Meagan Bryson: Flowing right into my next question here, what’s the Supreme Court ultimately decide?
Dave Pelton: They decided that there was enough of a proportion of revenue that was starting to go through e-commerce sites, that they needed to change the view of nexus. So they really bought into this economic view of nexus as being a more up to date view that serves the current business environment a lot better. They decided to change the nexus, they’re still sending it back to the lower courts of South Dakota to redefine what they say economic nexus is. But South Dakota had said, “We think a company is doing a lot of business in our state if they either have 200 transactions or $100,000 worth of sales.” And the Supreme Court said, “Okay, that sounds fairly reasonable.” They didn’t say that that is the limit that they should apply, but what’s interesting is South Dakota is a very small state, you’ve got to be a fairly large company to get to $100,000 dollars in sales in South Dakota, so that $100,000 may vary by state. Which is interesting. The case isn’t done yet because it’s got to go back to South Dakota to kind of work on a little bit more. But this will end up rippling well beyond South Dakota.
Meagan Bryson: I’m glad you said that. How does this change the way that remote sellers are currently collecting tax and their responsibility to collect tax?
Dave Pelton: I think that will be the big effect. I think companies have tried to limit their physical nexus in the past and this will change. It could take them from collecting sales tax in five states, or ten states, to having to collect it all 45 states that have sales tax obligations. So they could very quickly have to … And the trick with sales tax is every state has different laws. Some states, clothes are tax free and other states are taxable. They have different definitions. In one interesting case that we always talk about, there’s a state that has a different definition of sales tax for a Twix candy bar versus a Snickers candy bar.
Meagan Bryson: Oh my gosh, you’re kidding.
Dave Pelton: No. And now, for companies to understand at that level, and it’s funny because we, cause we asked audiences when we’re talking about that, “Tell us why” and it takes a while….It’s actually the Twix bars to classify as a cookie. So that’s taxed differently than a Snickers.
Meagan Bryson: I would never know that.
Dave Pelton: So imagine an individual merchant having understand the tax laws across all the state and make change fairly rapidly as well.
Meagan Bryson: Yeah, yeah. It’s impossible. And that’s why we always recommend a tax partner to help stores with their tax needs, and don’t want merchants to just try and wing it and set it up themselves. I mean, you can get yourself in a lot of trouble quickly if you’re not properly collecting and reporting taxes and things like that. We kind of touched on it, we were talking about the candy bars and clothes. What type of businesses will this affect? And I think more importantly it’s not just, I think it will affect everyone, but it’s going to affect everyone differently. Like you were saying.
Dave Pelton: It really depends on what they’re selling. We have clients that sell everything, so it affects them in a big way. If you’re selling a smaller subset of product, you might be able to kind of find a way to handle it, but what are the values? Basically a value of automation like we have, is that we’ve got one large content team looking at all the laws across all the states and putting that into one system and constantly updating that. So when it changes, you’re not thinking about the tax, you have to collect it, you have to remit it, but it’s really a pest. But doesn’t that add any value to your business. So it’s really a little bit of a headache to manage.
Meagan Bryson: Oh, gosh yeah. And if I’m an e-commerce business owner, what do I need to be doing right now and what do I need to know in the next six months, next year? What’s the road-map look like for me so I can stay compliant with what these new laws are gonna be?
Dave Pelton: It kinda depends on how quickly the states react. There’s about 10 states that currently seem to have laws in place today that align to South Dakota’s laws. So merchants could be saying, “Oh my God, I’ve got to expand my taxation for those 10 states,” but we expect over the next 12 months that to grow, every state is looking for more revenue. So we expect that that will 45 states, 12 months from now. Which is going to be challenging without some way of automating.
Meagan Bryson: What’s something that people should be doing right now to stay compliant?
Dave Pelton: Frankly, I think the first place that a lot of the customers and merchants will turn into their accounting firm for their advice on, “Well what should I do? This is a problem. I think there’s going to be a problem for me. Can you help me understand what I should do?” And I think in most cases they will end up … It really depends on their stocks. If they’re under a certain size that they’re not going to hit the threshold like this South Dakota set up. It’s not every mom and pop that has an e-commerce platform, It’s definitely getting down into the small and medium sized businesses though. So our phone is starting to ring off the hook. People are coming to us saying, “What do you have and what do you need help with?” And you really need to be able to calculate the tax at the time of checkout. And then at the end of the month or the end of the quarter, you need to comply by sending in returns as well. It’s possible to automate that entire process. You set it up, it takes a little bit of the cycle to set it up and then it’s automated.
Meagan Bryson: A solution like Vertex is going to do just that. It’s going to automate the rates on certain items. It’s going to help with the monthly returns. Can you kind of get into that a little bit more and help us understand?
Dave Pelton: You basically connect our system into your shopping cart, depending on your e-commerce software at the close time and at the checkout time. And we keep our content, our tax rules and rates constant. We have a process every month where we send out a new update of any changes that take place. And then at the end of the month, there’s different, depending on the size of your business, you might have to file monthly or quarterly, so depending on that, we could put together the filing for you, even the payment for you. I mean some of the educators advise, like the candy bar instance I gave you before, is many, many retailers or merchants sell like school supplies, and a lot of space in August or July, they will have as a tax free holiday on certain things like pencils and paper and erasers and computers. So for this two or three week period, you have to change your tax. You have to say, “Okay, these all these items aren’t taxable in Alabama and Georgia, oh, they’re still taxable in Virginia and Kansas,” and our tax automation software will do that automatically. So the produce the right result and file the right software.
Meagan Bryson: I think the big thing that I take away from all this is it’s too complicated and there’s too many niche areas of it and there’s too many different moving pieces and parts to try and manage it on your own and really if you’re selling a good amount of volume online, you really need to find a trusted partner to help kind of walk you through all of this so that you can stay compliant and you can stay on top of things.
Dave Pelton: We have companies of all sizes, but we find sometimes the state auditor’s contact a company, they’re interest in doing an audit, and they find out that they’re using a software to stay compliant and then the state decides not to do the audit. So in some cases, it might scare away an auditor. We’ve heard about, anecdotally about situations like that. And I’ve got to imagine this states are probably in the process of trying to figure out how they can hire more auditors to get out on the streets and get after more companies that aren’t collecting tax.
Meagan Bryson: Especially with all this additional tax revenue to be collected. So just sort of wrapping up here, I know things are obviously still playing out. Where is a good resource for merchants and consumers and everyone to sort of stay on top of the news. I know you said that the case really isn’t complete yet, does Vertex have a resource center that merchants can check in on and sort of see updates and status of things?
Dave Pelton: Yeah, Vertex does. If you just go to our website, it’s on our home page. One of the biggest things that’s happened in the sales tax world in a long time. We’re at www.v-e-r-t-e-x-i-n-c.com.
Meagan Bryson: Okay, great.
Dave Pelton: The information we also have … we keep up to date on other experts in the field, as well, so you can probably find information about what other people are saying as well.
Meagan Bryson: Awesome, awesome. And Dave, I know you guys are going to be hosting a webcast soon. I know I plan on tuning in and so do some of the other team here at EY Studios, can you give me some details about the webcast and we’ll also include a signup link in the post?
Dave Pelton: Sure. It’s on July 10th at 2:00 PM eastern standard time. We’ll have several Vertex on the panel, along with myself.
Meagan Bryson: I so appreciate your time today. You know, us and everyone else who’s kind of going through this change will be looking at partners like you to sort of help us through it and lead the way. So I really appreciate it. I know you’re running around with your hair on fire and love that you could call in today and give us some information.
Dave Pelton: Thanks for the opportunity to tell the world about this. This event is going to affect a lot of people, a lot of companies out there. I appreciate the opportunity just to kind of share some of my knowledge.
Meagan Bryson: Thanks so much, Dave, and join us next time for another episode of EY access.
Join Vertex for their webinar on July 10th at 2pm.
You can sign up here: https://go.vertexsmb.com/wayfair_impact_webcast