Developing a Cutting Edge Sales Tax Practice for Ecommerce

Learn how to build a productive and profitable sales tax practice for your accounting firm from Brittany Brown and Kexin Smith of LedgerGurus.

This is a machine-generated transcript. Therefore, you may find spelling errors or inaccuracies as you read.

Brittany Brown: [00:00:00] As CPAs were perfectly happy to kind of help people like juggle the compliance issues, but like things that are fraudulent that would get him thrown in jail and us thrown in jail and all that kind of stuff is kind of where we draw the line on that. And so we ended up telling him like, I'm sorry, but we will no longer be working with you if you are unwilling to resolve this issue. And he finally was like, Fine, whatever. Just do what you have to do. He was pretty mad about it, actually. Well, he's still a client [CROSSTALK] Of our client doing well ...

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Blake Oliver: [00:01:54] If you'd like to earn CPE credit for listening to this episode, visit Earmark CPE. Download the app. Take a short quiz and get your CPE certificate. Continuing education has never been so easy. And now onto the episode. Hello everyone and welcome to another episode of the Earmark podcast.

Blake Oliver: [00:02:19] I am your host, Blake Oliver. And today we're talking about a very important, complicated and profitable, potentially profitable service for your firm, and that is sales tax. And I'm very excited to have two experts in sales tax and specifically E commerce as well. And that's the area in which sales tax tends to get incredibly complicated. So we're very lucky to have these two guests today. They are both from the firm LedgerGurus. We've got Brittany Brown, CEO of LedgerGurus. Brittany, thanks so much for joining me today.

Brittany Brown: [00:02:55] Thanks for having me, Blake.

Blake Oliver: [00:02:57] And we've also got Kexian Smith, head of sales tax research and consulting at LedgerGurus. Kexian, great to see you as well.

Kexin Smith: [00:03:04] Nice to see you, too. Thanks, Blake.

Blake Oliver: [00:03:06] And I understand you're a little bit under the weather today.

Kexin Smith: [00:03:09] Yes, I am. You have to invite me back to the podcast again.

Blake Oliver: [00:03:13] And then. And then we'll hear your voice unimpeded. But I think you sound great. And you know what? Yeah, yeah, it's going to go great. We are very happy to have your expertise on the show and thanks for coming in even when you're under the weather.

Kexin Smith: [00:03:25] Yeah, of course. Excited to be here.

Blake Oliver: [00:03:28] So before we get into sales tax, I'd love to know a little bit about LedgerGurus and how you got into this whole area. So Britney, as the CEO, I'm sure you're the person to to talk about this. You know, what's what's your background in this and how did you come to it? And, you know, tell tell us a bit about Ledger.

Brittany Brown: [00:03:46] Gross Yeah. So we've been in business about seven years, almost eight years now. And when we had been in business about three years, we decided that we wanted to have a niche focus. And at the time, we had probably only three or four e-commerce clients. But we knew enough about the space to know that it was going to require a fairly high level of focus to be able to do a good job with them. And so I had heard someone at a conference say that if you're going to pick a niche, you should pick a niche that has like barriers to entry. And it was clear to us that E Commerce did, that there was a lot of complexity, that there was a lot of difficulty, that it was fundamentally different than other accounting in a lot of ways. And so we decided to focus on e-commerce. And as we focus on ecommerce, we discovered that there was really like three areas that we needed to get really good at and that we needed to be prepared to go really deep on. And those three areas were like the channel activity and the the things that were happening on the channels like Amazon and Shopify, being able to pull that data off the channels in a way that made a lot of things clear and transparent for the clients that we needed to be really good at cost of goods sold inventory, and that sales tax was something we had to be prepared for.

Brittany Brown: [00:05:00] Now we don't do income tax returns, alleged gurus. And so getting into taxes was something we kind of avoided for a long time as a CPA. I did spend some time at a at a local CPA firm doing taxes. And I really cried every day at my job. So I knew that that wasn't the future I wanted for myself. And so we had always really avoided taxes. But as we had more and more clients ask us for sales tax and we began to understand like what a need it really was for this particular client group. And more importantly, we actually tried partnering with some firms that specialized in sales tax and we just did not have good experiences with them. And we felt like if we were going to make referrals to our clients, we wanted to be able to really stand behind those referrals and we found that we just didn't have an option that we could stand behind. And so we decided to jump into sales tax and that's actually Cashion was hired by our company specifically to do sales tax. And especially back then, I think this was probably what, 2000, 1816. How long have you been with us?

Kexin Smith: [00:06:02] Yeah, summer. Summer of 2018.

Brittany Brown: [00:06:05] Yeah. So you couldn't, like, just go out and hire a sales tax expert. Like, it was not a big enough deal at the time where there were people who actually had a lot of experience with it because of the changing landscape of sales tax, which will I'm sure we'll end up talking about as part of this podcast. Sales tax was either something that, like really large organizations had internal support that was doing it, or there was like professionals who might be filing in one or two states for for other companies. But there wasn't this, hey, we need somebody who can file in almost every state, register in almost every state, understand all the tools, like manage really complex parts and pieces and moving pieces. So I'd love Cashion to talk about like what her previous background was, but basically we hired her and said, We want you to build a sales tax practice. And that was what all of the initial interviews were around and what all the discussions were around was this thing that doesn't exist right now. And, you know, we'll find your resources as they're available, but you're really going to have to be self taught and create a practice from nothing. And she turned out to be the perfect person for that role because not only is she a very competent accountant, but she's also a. Momentum creator. And so sales tax very quickly became our fastest growing practice.

Blake Oliver: [00:07:18] So you were doing tax, income tax. You didn't like that you decided to go off and start your own firm and specialize in ecommerce because it's difficult, because it's barriers to entry. Right. That's that's an interesting idea. Like I, I like it, but it seems kind of counterintuitive. If you're going to go start a niche, you would think, oh, I should get into an easy one. But true, you chose the hardest, arguably.

Brittany Brown: [00:07:44] Arguably. Right.

Blake Oliver: [00:07:46] I mean, I think very arguably. Right. Like, would you I mean, in terms of like all the different stuff you got to handle, all the different compliance you got to do for all these states. And sales tax is one of those things. E-commerce for big sellers can be really difficult. And then you realize there was a need, they had this need. And so you you tried to find other people to do it and you couldn't, so you built it yourself.

Brittany Brown: [00:08:08] Right. That's exactly how that played out.

Blake Oliver: [00:08:10] Okay. Awesome. So so now you're doing one of the most difficult niches and one of the most difficult services to provide. And Kashin was your hire to build that. So yeah, I'd love to hear because, you know, like, like what was it like coming in and, and building a sales tax practice from scratch?

Kexin Smith: [00:08:26] Yeah. So Brittany and I actually went to the same school. We both got our Bachelor and Master's in accountancy, and I specialized in tax. I actually really liked tax even in school, like, because, you know, like how you talk about in your other podcast in school they always ask you pick a pick, either audit or tax. There's like no other options. And I didn't want to do audit. I didn't want to always have a confrontational relationship with my clients. I'd rather be on their side and help them navigate and make decisions. So I picked tax and I followed the normal route of any accounting student. I worked for Deloitte in London and I studied U.S. tax there. So any like big companies that have a US filing or reporting requirements, I was there to help them, like with European companies and funds. So I still worked on U.S. tax even though I was in London, but I never had to do any sales tax or VAT tax for for that part. But but we had we had a baby when we're in London and after three years of living there, we're like right in the center of the city. We take the tube every day to work. I just couldn't keep up with that lifestyle anymore after having a baby. And that's when we decided to move back to the States. And I still wanted to stay in tax, so I started reaching out to different companies, and I think it was an existing employee at LedgerGurus. That told me, okay, we have a hiring freeze, but maybe just send a message and see what happens. So I went to let you use website and I hit that contact me little, little button and I kind of just put like a three sentence of my experience and I said, Please reach out to me whenever there's position open. And Steven called me back and I think he pretty much gave me a job offer before I even talked to Brittany.

Brittany Brown: [00:10:35] So I think that is how that happened.

Kexin Smith: [00:10:37] We kind of bypassed her a little bit. So I started in August of 2018 at Leger Guru's, and I used what I learned from school, what I learned from public accounting. It's I think it's that that I wasn't afraid of learning new things and putting in the time and effort. I think that really helped me to know that this is something I can do. Sales tax is complicated, but it's but I've done other hard things. I've done the big floor. I can do this and it's more fun, it's more flexible. And and I actually get to work with business owners instead of, you know, working through my manager is senior manager, director, partner, and I never get to talk to the client. So, so I've really enjoyed it and I could see an impact that our services have had on them that it really like relieved them of like they can sleep at night, they know their taxes are being collected and filed and now we have a really big team. So I'm actually not technically on the team anymore. I'm doing like consulting projects. And if there's a big question they asked me and I do my research. So that's why my title is consulting and research, but I haven't filed a tax return in a while and I kind of miss it.

Blake Oliver: [00:12:02] Congratulations. I'm not sure there's a lot of people that would say that they miss it. Although, you know, I got my start in bookkeeping and I do I do kind of miss doing recs. I like I like doing my reconciliations.

Brittany Brown: [00:12:11] They're fun. It is very. Satisfying.

Blake Oliver: [00:12:14] Right. Especially when it all ties out in the first try.

Brittany Brown: [00:12:17] Oh so setting and that reconcile now button that turns green it's just like so sad.

Blake Oliver: [00:12:22] Beautiful, right? Yes. So you mentioned coming back to the US because where are you located?

Kexin Smith: [00:12:28] I'm in Utah as well.

Blake Oliver: [00:12:30] Okay. And Britney, you're in Utah whereabouts?

Brittany Brown: [00:12:33] Exactly. Yes, I'm in American Fork because she actually lives about 10 minutes away from me. But another thing about Cashion, she's actually she actually grew up in China and she's a fluent Chinese speaker. So she's just a very, very capable person. And and one of the reasons I wanted her to tell her stories, because I think one of the purposes of this podcast is talking about like building a sales tax practice for your own practice. And we really did build it with someone who had no experience there previously into what it is today. So I wanted it to be clear that it really is like something that anybody can really achieve if they're willing to put in the time and effort to learn the ropes.

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Brittany Brown: [00:14:59] So when we first started this process, that was really the question we had for Cashion, which was, you know, we didn't need her to be a sales tax master of any industry and we didn't need her to be able to consult and literally any direction. But we needed her to be able to nail this one space. And one of the first things she figured out was what were the things that she would need to understand and to be able to do successfully in order to really achieve what we were asking her to achieve. But I think that one of the things that we should touch on as we go into this is how the legislative laws of the country change to make a sales tax practice so urgently needed and how how the landscape changed to make this such a growing opportunity, because that was really the starting point, was understanding how Nexus rules had changed and how it literally changed everything about a sales tax practice.

Blake Oliver: [00:15:56] Yeah, I remember when that this was a Supreme Court decision came through that basically expanded allowed states to expand their definition of nexus to the point where, like almost anything is nexus, it seems like at this stage. Right. Let's let's talk about that. Yeah. What is the current situation now for sellers?

Kexin Smith: [00:16:18] Yeah, for ecommerce sellers, we are still telling them first and foremost they need to think about where they have physical presence. So physical nexus is still should be top of their mind, people and property, but that also includes any contractors, any company vehicles and FBA warehouses that can all count as their physical presence. And on top of that they need to layer in economic nexus which came out of the Wayfair decision saying if you have enough economic activity into my state, that creates a strong enough connection, which is another word for nexus for us to ask you to collect and remit sales tax on behalf of the customers.

Blake Oliver: [00:17:03] So and two things you said there, FBA, that's Amazon's fulfillment and services. So I'm a seller and I can ship my products to Amazon and they'll fulfill meaning they'll distribute them for me, they'll hold them in their warehouses all over the country.

Kexin Smith: [00:17:19] And some states think of that as having a physical presence in their state. Even though we have so many clients telling us it's out of their control, where their products are being shipped and stored. But like Amazon in Pennsylvania, they've given a list of sellers information to Pennsylvania Department of Revenue so they know exactly whose inventory is in their state. So now they're sending notices and letters to those people asking them, How do you have a sales tax return? Do you have an income tax return because having property in their state triggers income tax next to. So I know it's it's very unfortunate.

Blake Oliver: [00:18:03] And then you also.

Brittany Brown: [00:18:04] And the reason.

Blake Oliver: [00:18:05] Well you also mentioned economic something economic and that means like I sell into the state just even selling products, right.

Kexin Smith: [00:18:12] And selling products into the states from out of the state. And fulfillment can be out of the state. Orders can be processed out of the state. If your sales revenue or number of transactions into a state exceeds a certain threshold, then after you hit the threshold, you are obligated to start collecting a remit. So if I am a e-commerce seller in Utah and I sell to customers in Arizona, I don't need to collect any sales tax on my first transaction. But if I sell over $100,000, then my next sale, let's say it's to you somehow on your order, you won't need to pay sales tax.

Blake Oliver: [00:18:58] Gotcha.

Brittany Brown: [00:18:59] And part of the reason why this was such a game changer for the industry is because previously companies who had Nexus and maybe one or two states because they had a warehouse in Utah and maybe a couple of employees in Arizona suddenly had a situation where they they crossed Nexus thresholds within like 50 states overnight. I mean, they might go from only having Nexus in two to having Nexus in 50, because what it did is it made it so every state could decide for themselves what created Nexus. And every state was like, Well, you know, we're going to change this. So you no longer have to have just a physical presence now if you do enough activity in our state. And so if you had sellers that were selling, say, over $10 Million a year, which is not hard to accomplish if you're an E commerce seller right out the gate, you probably are crossing thresholds in 15 to 8. State's minimum. And so it created a huge compliance burden for clients like literally overnight.

Blake Oliver: [00:19:53] And the burden is on our end and opportunity to help solve it. Right. Help to help them to deal with it. So, I mean, that's that's the opportunity, right? That's what we're talking about is any e-commerce seller with significant operations is probably going to have like what's the average number of states that like a seller with over $1,000,000 in revenue has to report into?

Kexin Smith: [00:20:15] Over a million. It mostly depends on like where most of their customers are because like we're talking about, Arizona has the $100,000 as the threshold. But bigger states, California, Texas, New York, their thresholds are 500,000.

Blake Oliver: [00:20:32] Okay. So you said 10 million. Like let's say it's a bigger seller, right? Like, is it really like half the states I might have to file in?

Kexin Smith: [00:20:40] I think 10 million. You're probably around 15 states.

Blake Oliver: [00:20:44] Wow. Okay.

Brittany Brown: [00:20:45] And 30 million, you're probably in all 50, mostly.

Kexin Smith: [00:20:48] All the.

Brittany Brown: [00:20:49] States. So somewhere somewhere between 10,000,030 million, you're crossing thresholds in virtually every state.

Kexin Smith: [00:20:55] Because it's also like on the number of transactions as well. It's an either or test. So it's pretty easy to sell 200 transactions into a state.

Blake Oliver: [00:21:07] Yeah, that always when I read that originally, that surprised me that the transaction volume was so low because if I'm selling $5 widgets, you know, I could hit 100 and 200,000 transactions pretty easily.

Kexin Smith: [00:21:20] Yeah. And that's what we keep telling business owners, too, that it is a business decision you need to make. So when we do a Nexis study for our clients, we calculate out their exposure. So you might have 200 transactions into that state, but if everything is $5, so you sold $1,000 and 8% is then average tax rate. So you probably owe $80. It's worth it to register or are you okay to pay $80 if a state comes after you tomorrow?

Blake Oliver: [00:21:54] That's an interesting calculation.

Brittany Brown: [00:21:56] Yeah. So that would be the first thing that we would say is the first thing you need to master is you need to be able to have this nexus conversation. Like what's creating Nexus? Do you have Nexus just because you have Nexus, should you be registering now? Because she and I are both CPAs. So we're like duty bound to tell you you should register literally everywhere that you have Nexus. However, I'm also a business owner and Kitchen is also a very reasonably minded person. Therefore, what we really talk about is like the the tradeoff here between cost of compliance and cost of noncompliance. You know.

Blake Oliver: [00:22:30] It's a fair it's a totally fair question. And everyone I've talked to who deals with sales tax says, I tell my clients, look, here's what you should do according to the letter of the law, and then here's what is going to happen if you don't. And it's up to you as the business owner to decide where we register and file. I mean, what else can you do? Right. You can't force them to do it. So, I mean, it's sort of like in California, I didn't even know this for a long time. And I'm from California, but like there's a state reporting requirement. There's like a state 1099 or. No, no, a state new hire report that has to be filed for every new hire. And a lot of people don't even know this exists. There's also like a 1099 kind of thing, and the penalties have not been adjusted for inflation for years and years and years. So it's incredibly low. So basically, you know, hardly anybody complies. Right. Because the cost of compliance exceeds the cost of the penalty. Right. And that's the world we live in. Right. So we have to be realistic, I think. And that's what it sounds like you're saying.

Kexin Smith: [00:23:32] And I think a lot of ecommerce business owners and entrepreneurs are very like minded, like Britney and I.

Brittany Brown: [00:23:42] We we fight a lot if we're being totally honest. We fight a lot with other CPAs within our firm because CPAs run the gamut of being like very business entrepreneur minded, like Cassie and I both are, to being very black and white about things. And we intentionally hire people on both sides of that spectrum because we feel like it gives us a better balance. But some of the biggest knockdown drag outs we've had within the organization have been times when our perspective was not appreciated by other perspectives and vice versa. And we've gone to the carpet multiple times over, things like this, basically. So but I think like from just a reasonableness perspective when you're saying like what is the cost of compliance? And as a general rule of thumb, we tell our clients it's going to cost them about $100 per filing, $100 per state per year to be. No, wait, what do you say? It's like 1000. That's right. Yeah. $1,000 per state per year to stay compliant. And so if you're looking at a potential sales tax liability, that's less than that, plus all the penalties and fees being significantly less than that, then it really does make sense to roll the dice and say, if the state finds me, I'll just cough up the money I would have paid.

Brittany Brown: [00:24:51] Because it's not like they're going to throw you in jail. I mean, there are things you can do around sales tax that will get you thrown in jail, like collecting money that you're not registered in that state and that you never remit that is illegal and can get you thrown in jail. But just not registering and being compliant is something they'll just like, fine you for and ask you to pay the sales tax that should have been collected. And so having this conversation is a very valuable thing that an accountant can add to their clients is helping them. So we do this full Nexis analysis for our clients where we say, Here's all the states you have sales in, here's the state you've crossed thresholds in, here's the actual sales tax that you would have collected in these states. Here's the penalties and interest that would be associated with this. So you can see exactly what your exposure is in every single state so that they can make like an educated, informed decision. And we I mean, we could build an entire practice around that service and that service alone just doing because it is such a valuable.

Blake Oliver: [00:25:48] Information, just doing those. Nexis What did you call it? A Nexus. Nexus analysis. Nexus analysis. I love that. And it's a it's a deliverable. It's a report. And I imagine that you start most of your engagements by kicking off with one of those, right?

Brittany Brown: [00:26:03] Yes. Right.

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Brittany Brown: [00:27:52] Analysis.

Blake Oliver: [00:27:53] Analyzes how do you how do you do that? Like I'm a sales tax. I'm not in the sales tax cellar. I'm an e-commerce seller. And, you know, I come in. Do you do you value prices? Do you I mean, I imagine at the beginning it must have been sort of like guessing what these are worth.

Brittany Brown: [00:28:09] Yeah. So and it was initially there was a lot of guesswork and a lot of manual time. I don't know. I mean, Cashin did a lot of our early Nexus analysis and it took her a lot of time. We actually have a flat fee now that we charge a $100, but it's because one of our employees, one of our super accountants, her name is Rachel Walker, she built a whole spreadsheet that basically automated this process for us. And all we had to do is drop in reports from the different channels and it pulls it all in and calculates everything out and produces a really beautiful PDF that makes it really easy. So we can we can basically fix fee value, price it now because it has been built out to make it so much easier. And kudos to Rachel, who is extremely competent and an a total Excel whiz.

Blake Oliver: [00:28:52] You can build like a software company based on that spreadsheet, right? Just come here, get your Nexus analysis report. Just pop up in your data.

Kexin Smith: [00:29:02] Yeah, yeah. A lot of software is actually like a Valera. You've probably heard of them. They actually offer a free version of the Nexis analysis, but it's a very they don't go into as much detail as an accounting firm would like. They don't take into account of different products taxability in different states, because we want to give our clients the information for them to make decisions. So to know how much money they would owe, they don't need to know the gross amount of gross revenue. They need to know the taxable revenue into those states. So and I think that's the part that's hard to automate is like with people selling things. So like across the board and all the states treating them differently, I think involvement is still very necessary.

Blake Oliver: [00:29:56] Yeah. And you mentioned states tax specific products very differently. Some don't tax them, some tax them, some tax them at different rates, I imagine. So you really have to look into the mix of the products they're selling and what is going where. And an automated tool, a fully automated tool isn't going to be able to ask, just like with income tax isn't going to be able to ask all the detailed questions or go in and pull the information itself from your E Commerce store.

Kexin Smith: [00:30:24] Yeah. And we have clients that just come for the next analysis and then they would take the information and do the compliance themselves. Or we have clients that after this they want to follow, engage us to move on to the next steps, and then we'll continue to manage their sales tax compliance.

Blake Oliver: [00:30:43] Well, you're off. I don't know if this is. Go ahead, please.

Brittany Brown: [00:30:46] Oh, sorry. I was going to say, I don't know if I'm allowed to talk about this on the podcast, but we we actually launched a sales tax course specifically for this because we had a lot of accountants that were like, I don't even know where to start with this. And so one of the pieces.

Blake Oliver: [00:30:58] Tell us.

Brittany Brown: [00:30:59] About it teaches you how yeah, it teaches you how to build out a full nexus analysis and it teaches you how to do all of the parts and pieces that are necessary for building a sales tax practice, which would be like consulting, creating a Nexis analysis, consulting on it, registering all the states, filing in all the states, setting up tools like Tax Starr, Taxify, Cavalera, and basically managing the cadence of the filing. So it goes through all of that stuff pretty in depth. But in my personal opinion, the Nexis analysis portion of that is the most valuable part of the entire course because it is the most complex piece, and an entire practice could be built around that in that alone.

Blake Oliver: [00:31:40] But it kind of it's a great lead generation tool. So it benefits you to also then help with the compliance after. Because if I'm selling these for, say, 1500 dollars and a decent sized client has 15 states they now need to report in, they can hire me to do that for $1,000 a year per state. Now that's a $15,000 a year engagement. And I imagine that's where a lot of the long term revenue comes from out of this whole thing. Right. It's not just selling the one off analysis. Yeah.

Brittany Brown: [00:32:12] Yeah. That's the great thing about this practice is it's an ongoing recurring, repeatable activity kind of thing. And so it's not like income taxes where you engage with your client one time per year and maybe do like some tax tax consulting with them. But you're actually engaging in something that you you repeat every single month and therefore it's scalable. You can hire other people to help with it. You can set up tools to automate it, but you can build your client every single month for the compliance piece of it. And so it it fit in well. Part of the reason I've avoided income tax as a practice for us is because, well, first of all, it makes me cry. But also because it is like it's really hard to staff. Yeah, it's really hard to staff. Incredibly difficult.

Blake Oliver: [00:32:57] And it's also the busy season of it because it happens, right? Like once a year. Right. And there's this this cyclical nature to it. And it's. So how do you staff it? Because you staff it properly. Then you have too many people the rest of the year. But sales tax, it's all year long.

Brittany Brown: [00:33:13] Yep. Exactly. And we have a little bit of seasonality with like because some some states are filed monthly, some are state filed quarterly, some are filed yearly. And so at quarter end, our team has to kind of go the distance. And at year end, it's even more intense because some states that we don't file all year long, we have to file at the end of the year. But still, it's it's a significantly different cadence than income tax returns. And it produces a very sustainable, predictable income. And that that's easy to staff. And it's easy. Well, not easy. It's easier to staff and easier to build a practice around, for sure.

Blake Oliver: [00:33:49] And fewer clients because you're you're getting more revenue per client, since I imagine somebody who has just one state to deal with probably would say, Oh, you know, I'll do it myself. But if they've got half a dozen, they might say, okay, that's is this is not worth it for me to do.

Brittany Brown: [00:34:04] Right? And it also comes with it like a pretty a pretty big pain point for for noncompliance, potentially. One of the things that's interesting about sales tax is that if you're compliant with it, the only thing it's going to cost you is like the cost of compliance, like hire somebody to do this for you. But if you're non-compliant and you get found by the state and they audit you and you're doing several million dollars a year of their state, your potential exposure is so huge because they're going to come to you and they're going to say you have to pay all the money that you should have collected in sales tax and you didn't, plus the penalties and interest. And that's money that's actually coming out of your pocket and it really has no ceiling on it. So as opposed to, you know, income tax returns where, you know, are you able to, like, maximize your your or minimize your taxable income and your deductions? Right. With income tax returns, it's like if you got audited by the states where you had a lot of cells, you you it could completely put a business total and completely out of business by having to cough that money up out of their pocket. So it has a major pain point associated with it as well for for noncompliance.

Blake Oliver: [00:35:13] And that creates a ton of value for you to reduce that risk. Take away that risk who we talked about staffing. Who do you hire to do sales tax at LedgerGurus? What kind of what kind of accountants are they? Accountants are they do they have are they CPAs? Are they anybody that you can train off the street like how do you do it?

Brittany Brown: [00:35:34] So our sales tax team has several CPAs in it, but those people are typically leading the practice like Cashion. And a lady named Lauren right now is leading our sales tax practice and she is also a CPA. But besides, like a couple capable people who understand how it should work, you know, like being able to have that discussion about, you know, like we we offer one service that we audit every single return that goes out the door where we basically, like pull all the reports from the channels, compare what was actually collected to the returns that are being remitted. It's a really great safeguard for companies where their exposure is potentially high because they're doing a lot in sales. And also like it's a capped compliance cost because of worst case scenario, you only have 50 states that you possibly even have to be compliant in. And so like our teams have to be able to discuss those things and talk to those points and run those reports and know what to include and exclude. But beyond that, the actual process of registering and remitting and setting up the tools and setting up the channels is definitely something that can be taught because I mean, what would you say is the makeup right now of our sales tax seem like what percentage of them are higher level and what's their skill level?

Kexin Smith: [00:36:45] And I think we want people that either have very strong Excel skills or they've had experience in tax. So that's what we were looking at when we're hiring people. Right now we have about nine people on our sales tax team. So besides the leadership team, the management that reviews the returns and manage like do the people management part, a lot of people on the team that are doing that day to day, I guess month to month filings are we have some new grads that they they are really good at learning things they know Excel really well. And we have a couple of bookkeepers that used to be on the client facing team that wanted to learn about sales tax. So they transitioned to the sales tax team.

Brittany Brown: [00:37:45] Got it? Yeah. Like one of the girls. Oh, sorry.

Blake Oliver: [00:37:47] Go ahead. No, please continue.

Brittany Brown: [00:37:49] One of the ladies that's on our sales tax team, she handles almost all of our registrations. She doesn't even have an accounting degree. She's just she just learned how to do it. It definitely is not something that requires an accounting degree. It's a very repeatable process. And I mentioned that we have this fully audited return service, but we also have another service. That's what we call the managed return service, which basically means that we set up the tool and we make sure the tool is remitting the taxes, but we're not auditing all the amounts that are going out. And that's really a matter of that's a technology role, really. That's like, do you know how to set up the tool? Do you know how to like make sure that it's doing what it's supposed to be? Can you kind of audit the performance of the tool and audit the settings of the tool? But really that is much more technology than it is accounting. We're really in that particular service. We're really trusting that the tool is doing its job. It's significantly less expensive than the audited return service, but it's also like for clients who their exposure isn't high, they're trying to keep their costs down, but they're not doing enough in cells that if the tool was wrong, they'd be like, toast. So I'd say it's a it's a mix. You can definitely hire people who have no previous experience and teach them. And you also need some people on the team who can troubleshoot and and talk shop, you know.

Blake Oliver: [00:39:04] So I'm interested in talking more about these two services. So you said you have this what was the first one? The the more intense one.

Brittany Brown: [00:39:12] So it's a it's a I think we call it sales tax, full service. And it basically we we do the filings, but we also audit every filing that goes out. It's it's designed to basically protect clients who have relatively high exposure because they they're selling a lot or clients who have a very low risk tolerance. They just want to know that if they got audited by the state, they would be 100% good to go. And so what we do is we don't just trust what the tool says. We pull down all the reports from the channels they're selling on. We verify what should have been collected, we verify what was collected, and we file returns based on that process, fully audited every return that goes out the door. And so it just gives a very high level of confidence, but it's also more expensive. Yeah.

Blake Oliver: [00:39:59] The other one is you set up the tool. It's plugging into their sales systems and filing the returns and you're not then auditing it again. You're not auditing the work that it's doing.

Brittany Brown: [00:40:11] Yeah, we're basically making sure that the filings are happening, but we're saying we're trusting that the tools numbers are correct, and if they're not correct, then the client is bearing the risk of of that. And we typically recommend that for clients who their exposure is in that. Great. So if the tool was off, it might be off by a few hundred dollars versus if you're selling millions like $30 million in the tool is off. It might be off by hundreds of thousands, you know.

Blake Oliver: [00:40:40] Yeah. So let's talk about the tools. I love talking about the technology that you're using. Yeah. Like you mentioned, Ava. Lara, is that is that in your toolbox?

Kexin Smith: [00:40:51] Yeah, we are. Our clients use all kinds of software and we support all of them. So Ava. Lara for the bigger clients, for sure. But we also have clients using texture taxify, sophos and some of them like, like you said, like we actually still have clients that just file in one state and we manually filed for them in that one state.

Blake Oliver: [00:41:15] It's interesting. Like I take it the fact that you have these two services, the one where you just set up the tool and manage it, and then the one where you actually like audit the tool indicates that the tools are not 100% accurate. So like how right. And I get it right. We have the same issue with income tax software, right? The software doesn't always get it right and we have to go manually override stuff and fix it. And it's really the same everywhere. Like how accurate is the software if you just set it up and run it?

Kexin Smith: [00:41:44] I think it depends on it's it's really hard to say. Ava Lara prides itself in the rooftop geolocation of each ship to address. So if you're working with Cavalera, they want you to always put like the ship to information needs to have street street number and they want if you can provide a nine digit zip code instead of a five digit, they want that as well. But some other software like texture, when you upload transactions, if it's not connected already with your shopping cart, if you just want to up upload some transactions, you can leave it as the city level.

Blake Oliver: [00:42:29] Or.

Kexin Smith: [00:42:29] Just put in that zip code. So it's it's the level of detail that you give. And it's also how comprehensive their database is.

Blake Oliver: [00:42:38] So well and and and I know I know that some states they have like these hyper local sales tax jurisdictions in California. California. So that's why you can't just go based on the five digit zip code because even within a zip code, you might have different rates because it crosses the city line.

Kexin Smith: [00:42:59] Mm hmm. Or like Colorado, Colorado is a very complicated state, and they have home cities that the boundaries are all very blurry. So you it's really hard to tell.

Blake Oliver: [00:43:12] So what's the what's the most difficult state for sales tax? Is it Colorado, California?

Kexin Smith: [00:43:17] I would say Colorado. California. But we actually me personally, I hate Missouri because Missouri OC so I don't know if you heard of this, but there's like this term with sourcing. So that depends on like what the rate you should be charging. So if they say it's origin sourcing, that means at the rate that's charging to the customer is based on where the seller is. So for an in-state seller in Missouri, it's really easy because they're an origin sourcing state. So if I was in Missouri, everything I sell to my Missouri customer, I just need to find out what my rate is based on my address and I on my tax return. It's really just that one line of filing before a remote seller, it's destination sourcing for remote seller, which means every transaction I sell, I need to track every single shipping address and source the rate by those separate addresses and report on different lines. And Missouri has 2300 different rates.

Blake Oliver: [00:44:31] 2300 rates.

Kexin Smith: [00:44:33] And their system is so old. Every time I hit refresh, I wait for 5 minutes, like, and sometimes even waiting for 5 minutes doesn't doesn't even work. So, I don't know. We tell our we tell our team if someone asks you to file a missouri return bill by the hour, we're not giving them a flat rate because you never know how long it's going to take.

Blake Oliver: [00:44:56] Right. You're beholden to that system. Oh, man.

Brittany Brown: [00:45:00] Well, yeah. Some other things that create discrepancies would be things like if the engine that's on the like funneling, calculating the sales tax on the on the channel is different than the tool that they're actually using to remit taxes. Those systems don't necessarily agree with each other. And so the tool that is that is remitting will basically come up with its own number. But that's not necessarily the same number of what as what was collected. And what sellers are required to remit is what should have been collected as a first point, but what was collected as a second point. So this third number, which is just whatever the tax tool came up with, is like not even on that list of like options, really. And so that's another reason why there are discrepancies.

Blake Oliver: [00:45:47] Yeah. And that could be a problem too, because if you collect more by accident, you're still supposed to remit it, right? Like you can't write like that's that's the kind of thing that could send you to jail is you collect 10%. They really only were supposed to pay 7%. You can't just.

Kexin Smith: [00:46:03] We'll only remit 7% in certain states and they tell you that you're still responsible in remitting that $3 like the 30%. But how many business owners actually go and do that? Right.

Blake Oliver: [00:46:17] So that could get you in trouble, right? Yeah.

Brittany Brown: [00:46:19] Yeah. And while we're on the topic of gel, I just want to say real quick that the number one mistake we see clients make who don't have an accountant advising them that puts them in the most amount of trouble, is that when they hear about sales tax and they get scared about sales tax, they'll go into their channels and just turn it on to collect in every state and they're not registered to collect in those states. Therefore, they can't legally collect in those states. Therefore, they have no. Hearth and place right now for remitting that sales tax to those states. And it becomes a huge pain in the neck to unravel that because you legally either have to register in the states and send them their taxes or you have to refund the money that was collected to the customers that actually paid you. And I can't tell you because she probably could, but I can't tell you the number of clients we've had to unravel because an accountant told them or they just got scared and turned it on. But like number one rule is do not register, do not collect an estate until you've registered to collect in that state and do not turn your channels on to just collect everywhere because you're afraid of sales tax.

Blake Oliver: [00:47:24] So when you say turn it on, you mean like I'm a what, Shopify seller? And I just say, turn on sales, tax collection and all the states.

Brittany Brown: [00:47:32] Exactly.

Blake Oliver: [00:47:32] Because then you have to go register and then once you've registered, you have to file every.

Brittany Brown: [00:47:36] Right.

Blake Oliver: [00:47:37] Quarter. Every year.

Kexin Smith: [00:47:38] Yeah, every month.

Blake Oliver: [00:47:39] And then if you want to stop filing, you've got to then shut it down.

Brittany Brown: [00:47:44] Which De-register with the states and yeah, it's and most of the clients don't want to register in all those states. So now they're stuck with this money that doesn't belong to them. Like one of our largest clients, we actually almost fired over this very issue about three years ago because he had registered in all of these states and he had no intention, he can't register. He had collected in all the states and he had no intention of registering. Right. And he was like happy to shut it off. But he was kind of like, I'm just going to hold on to this as a cushion. And there, you know, as CPAs were perfectly happy to kind of help people like juggle the compliance issues, but like things that are fraudulent that would get him thrown in jail and us thrown in jail and all that kind of stuff is kind of where we draw the line on that. And so we ended up telling him like, I'm sorry, but we will no longer be working with you if you are unwilling to resolve this issue. And he finally was like, Fine, whatever.

Kexin Smith: [00:48:38] Just do what you have to.

Brittany Brown: [00:48:39] Do. He was pretty mad about it, actually. Well, he's still a client of.

Blake Oliver: [00:48:42] Our client doing well, so. Yeah, that's good. You held right? You held the line, and that's. That can be hard. You said it was your biggest client.

Brittany Brown: [00:48:49] So one of our biggest.

Blake Oliver: [00:48:51] One of our biggest. Good, good. Good for you for for doing that. Yeah, it's that there's that gray area and then there's the clear over the line. Fraudulent. Right. You know, or criminal activity. Right. And that's tough. It's tough to know exactly where that is or it can't be, I guess. Right. Well, so this has been really fascinating. And I don't know, I, I kind of want to like go out and start a sales tax practice. But, but I don't know anything about all these different states. And like, that's the challenge, right? The barrier to entry is that you got to learn at least the biggest ones, right? The most common ones, how do you do it? And all the nitpicky little issues, like you said, with Missouri. And so, Brittany, you mentioned you have a course. Tell us about your course.

Brittany Brown: [00:49:38] And so yeah, so it's just on our website, News.com, if you click on services and you click on cell stacks, it'll show you the different options that we have there. And we have the option of the whole do it for you where you just throw it over the fence to us and we handle it all. And then we have the option of the the D do it with you option where you can, you know, schedule our team and do some consulting calls with them to help walk you through the process or kind of teach you how to do it if you want to do it. And then we have the course that basically walks you through all the parts and pieces, everything from how to, and it's geared towards ecommerce sellers. And then there's another one that's geared towards accountants. And the difference between the two is really how deep we go into the Nexus analysis part of it. So with clients that are doing it themselves, we kind of give them sort of a back of the envelope method to kind of figure out sort of where they have their own nexus, which would be things like Go check out Avila's new tool or check out this dashboard on Shopify. Here's some basic, you know, without having to get really up close and personal with Excel and Master some skills that are probably a little over your head, here's, here's a way to start and get a decent idea of where you stand with Nexus. And then it goes through everything else. So it goes through how to register in every state, how to file in every state, setting up the tools and then the project management. But the accountant one goes into a lot of depth around basically creating, creating a full report that will show them like all the things and all the interests and the penalties and how to guide them in this conversation about cost of compliance versus cost of noncompliance and all that stuff.

Blake Oliver: [00:51:14] Well, thank you. That is that's really helpful for our listeners. I'm sure some will take advantage of that. So you're saying basically I can if I have a client and I want to offer sales tax services for them and I don't do it myself, I can either ask Leger gurus to do it or I can even learn from Leger gurus while you do it with me. Or I can take a course and like train up on all this stuff.

Kexin Smith: [00:51:39] You should. You should take the course. That's a really good course for me on it.

Brittany Brown: [00:51:43] Because she and I are the teachers of that course.

Blake Oliver: [00:51:46] So how long is the course? Like, how many? You know, what's my investment say?

Kexin Smith: [00:51:49] It's five modules, so just a self-paced.

Brittany Brown: [00:51:54] So course 5 to 10 hours, basically of material.

Blake Oliver: [00:51:57] Okay.

Brittany Brown: [00:51:58] Yeah, well, and I'll.

Kexin Smith: [00:51:59] Talk to you about how to get CPE credits for that.

Blake Oliver: [00:52:03] Oh, yeah, we can definitely figure that out. And by the way, our listeners heard this at the beginning of the episode, but I should remind them they can earn CPE credit for having listened to this podcast episode. Just go to earmark CPE sign up, download the app, find this course in the app under the Earmark Podcast Channel and you can take a quick quiz. You already listen to the audio so you can skip through that, take the quiz and get your CPP certificate. So, Brittany and Christine, thank you so much for joining me and helping us get some CPE and get an intro to the potential possibilities of an excitement and the opportunity in sales tax.

Brittany Brown: [00:52:42] Yeah, thanks for having us, Blake.

Kexin Smith: [00:52:43] We appreciate you.

Developing a Cutting Edge Sales Tax Practice for Ecommerce
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