Tax Trolls Podcast Episode 1- How Amazon's Tax Credits Work? How Wayfair Court Case Effects Ecommerce Sales Tax? | CPA for Startups

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Transcription:

Lenard: Hello everybody this is Lenard De Guzman with Argel Sabillo. We're with Good Spring Welcome to the Good Spring podcast. So, I see you over there Argel in Grand Central Park having a walk.

Argel: Yes. I am at Central Park right now; I could see it’s still super early where you are.

Lenard: The sun is coming up.

Argel: But yes, here in New York everybody's already on the go, it's been nice here so far. It's supposed to be fall weather, but it still feels like summer so it's nice.

Lenard: Yes, it's fall. You what’s funny? Here in LA some random guy like a paparazzi guy just started taking pictures of me. I think he got mistaken for somebody. Like, yes, I was like I felt violated in a way but in a way, I was like well, yes go ahead I mean I don't know. If that makes your day. Yes, it's weird here.

Argel: [Inaudible 01:06] look like a Filipino movie star.

Lenard: Oh, thanks, might be I was so bad, but I have a story to that. But this about taxes okay, so just a quick disclaimer upfront. This podcast is for entertainment purposes only and if you have any issues with any taxes that you hear, contact your CPA or contact us at Hello@goodspring.IO and we'll help you with that tax issue. So, let's see the tax issues of the day. I was reading this article it published actually in the New York Times where Land Rover, Jaguar threatened to leave the city of New Jersey.

And the city gave them a $25 million tax credit, right to incentivize them staying and they ended up staying. But there was like reports that they're just bluffing. Right? And that city is just giving these companies money. So, like, as far as tax credits, like, how does that work? Because you are very informed CPA.

Argel: So I think with the article that you sent me, I was reading through it and it sounds like all of these, I guess, auto manufacturing companies that have offices in New Jersey they threatened to leave and then go to New York. And I think what had happened there is that New Jersey government, they passed this law but tax credit to incentivize companies to stay and also to create jobs in New Jersey. And so that process involves putting together an application and letting the government know what they're doing in order to like to increase more jobs.

So, it's a proposal, and that proposal gets approved by the government. But I think where the New York Times issue is that there's no oversight or follow through on whether or not it created jobs. But essentially, the tax credit comes in different forms. Sometimes it would come in a form of for every additional employee that you hire, you don't have to pay state payroll taxes, which could be a big tax saving for the company. So, think about somebody you're paying $100,000 a year and 15.3% of that is payroll taxes. You know, half is paid by the employee, the other half is paid by the employer. So, what so like around 7% is the employer’s piece of payroll taxes? So that's what that's $7,000, right.

Lenard: Per employee, yes.

Argel: For an employee that they hire that they could potentially save every year. So that's a huge amount of money. And so, when you have tax incentives like that from the government a lot of big businesses take advantage of it, especially in the manufacturing industry where they hire a lot of employees. So, for something like that article that you read, it's really hard for the government to police whether or not you're going to follow through unless they start asking for your yearly financials. I know in California, there is such a thing as [inaudible 05:14] they incentivize you to grow your business in California or move to California from another state. And they to have some sort of like incentives for companies to not have to pay payroll taxes, but with California every year, they ask you for your headcount. And so, they could kind of see whether or not you're increasing jobs.

And there's some weird calculation that, that basically let them know how much headcount you added since the last time that you applied. And so it's over a year credit and it's not going to be the same amount every time, it's going to be based on the amount of increase every year as opposed to just like giving you money with no oversight. So, I think it just depends on how structured their State Government is in keeping track of those incentives and tax credits that they are giving companies and it's available for everybody too, it's not just.

Lenard: Yes, I was going to say, this tax credit is available to like the SMBs, like the small business owners, right? Like you just apply to this state or how do you research this stuff?

Argel: I mean, every state will be different requirements, but the first thing you should do is contact a CPA who can help you if you can, if you want to do it yourself you can go straight to your state website and then ask them about all the incentives that are available for you. Every program is different. Some programs are made for like big businesses because they have bigger impacts. So, unless overall if you're a growing company, like in California, for example, if you're adding like one or two jobs, every year, there's like tax credit for that, that you can qualify for.

If you are a headquarters or you have offices in depressed areas of California there's an opportunity. It's called an opportunity zone credit, where you're hiring employees from a certain background or if you're investing in a property in areas where it's developing, that one I think it's the latest one from the Trump administration where if you invest in a property, you don't have to recognize your gain until later down the line. So, it kind of help [inaudible 07:47] your income. So, it just depends on the type of tax profile that you have and the business that you have. But definitely talk to someone who can help you with your like tax planning, because that would dramatically increase your bottom line right away.

Lenard: So, like, what's like a tax trick because you work with a lot of clients that you advise. What do you see like now, like what's trending or is it the same? Or what do you see coming like, in 2020? Especially with the job act because they revise the whole tax, the IRS code. Is there more coming through or what's the kind of the climate especially because as it is politics a lot, right, they pass those laws. What do you see coming through in the next maybe 20 months from now?

Argel: Well, I think 20 months, we may have a different government. But in general, the theme is the same. If you're Republican you're going to pass more laws that give tax breaks to businesses. If you’re a Democrat you will pass laws that would incentivize more jobs and more money on people's pocket as far as like from an individual standpoint and not as pro-business as like, what a Republican President might do. Right? But that's just a general. I mean, every president is different. For example, Obama, he created this tax credit for research and development, right. So, he's a Democrat President.

But I would say for the new jobs act that came out there aren't a lot of incentives for hiring people from diverse backgrounds. That was the case before you had the opportunity [10:00] zone credit and that was completely phased out. Now what the opportunities own credit is, is if you're an investor and you invest in a property that you can defer your capital gains. So, you see is like one is benefiting the poor and the public. The other ones benefiting more like businesses, especially investors. But they're also good things that came out of the Jobs Act, a couple of things is being able to recognize a hundred percent of your fixed assets. So, like if you're depreciating before you would depreciate, I mean, I don't want to get deep into this but.

Lenard: You're going to make me fall asleep [inaudible 10:45].

Argel: Yes, I know but in general, you can take more deductions now, of what you spend in like machinery or because before you had to depreciate any assets you buy. Then you had to, like, take deductions over time but now, in some cases, you can take 100% of it today, which only lowers your taxable income and so you save money on taxes.

Lenard: Yes. Well, that would be a good talk later because you know they're saying in 20 months there might be a recession, there probably will be but we'll talk about that another episode.

Argel: I'd be interested in hearing your thoughts on the recession though.

Lenard: Oh, there's going to be a recession like the banks like I think the Chase, the banks are already like kind of forecasting it right. Like, it's just the cycle is just like the Fed cut rates, again. Which is like If you look at the charts, it's like, I guess the one metric is where the short term and the long-term bonds I guess they're inverting, which, you know, that's a data point. That's debatable, but it happened in 07 and it completely changed the yes history, then it wasn't depression, but the Great Recession. So yes, we'll see what happens. We'll cover that, we will be in the recession and we'll cover it. Hopefully, we will see what happens.

Argel: Yes, I think it'd be cool to like to forecast it a little bit and say what's going to happen and then on like, 50th episode, it's like, oh, yes, we're covering what we predicted.

Lenard: We going to make bets like, we are going to see what Bitcoin is in 24 months and so.

Argel: Like over-under in a number of months.

Lenard: Yes. So yes, let's switch topics. On Amazon, right, I have the all bird shoes. The shoes Obama wears real comfortable.

Argel: Yes.

Lenard: They rip off everything so I have the shoes like rip off one in my Amazon cart I'm like I don't know it's like shoes is one of those things, like this shirt you can like you don't know it's like Uniquo or like Tommy Hilfiger is ambiguous right but shoes are like very specific right. I'm like I don't know if I want to get clowned by my brother. He would be like those are rip off, those are rip off.

Argel: The dad shoes that shoes too?

Lenard: Yes, the dad shoes but back to taxes how it all collude. So back to our thing where like sometimes on Amazon I get sales taxed and other times I don't, right. And I know it has to do with this ruling the Supreme Court was it Wayfair versus what South Dakota? Where I guess some states charge taxes and some don't. Tell us about it. What the heck is that?

Argel: Yes, so the recent ruling. I guess a little background. So, for the longest time, we've had to think about how businesses operate back then before a computer. You know, you have a storefront, you charge sales tax for people that are coming in and buying your product, right. And then all of a sudden, like Amazon came about, and now if I'm buying a product, all the way from Seattle, but I'm liking California, do I have to pay Seattle tax or do I have to pay California tax right? And so, this thing where, just like how federal government generates revenue through taxes off their federal return well states got to eat too so they have to charge they had to get their revenue as well on income tax, but primarily sales tax.

So when the internet basically broke that model, now every state is scrambling where the hell am I going to get my revenue. California is notorious for this because California is a consumer state like so many people are buying here, products that are here. Maybe you're like in a small state like South Dakota and so, the calculation before is that California gets their shares and South Dakota would never get their share, right? Because they have South Dakota businesses and residents, but their residents are buying from California. Yes, so think about what would happen to like South Dakota, and they're getting killed by Amazon. So, there's really no revenue coming in.

So the response from South Dakota and then there was this landmark case where what the existing law that was put in place decades ago basically stated that you have to have a physical presence in that state in order to collect sales tax. So, if I have an HQ in California, or if I have a sales agent in New York, like those states have to collect sales tax and give their share to the state government. And so, someone like South Dakota who is buying from Facebook, right or they have customers that are buying Amazon products like the state can never collect sales tax. And so, what this new landmark case with the Supreme Court happened with Wayfair, which is like a popular e-commerce company right.

Lenard: Yes, I have some from Wayfair table here.

Argel: Yes, Wayfair.

Lenard: Yes, my wife loves that place. Yes, we got some Wayfair here, Wayfair products.

Argel: Yes, which is interesting because you know Wayfair basically became the poster child of [inaudible 17:29] but basically, this new case now requires that in addition to having a physical presence where you have to be in that state, now, every state. if you hit a certain economic threshold, like let's say I made gross sales in South Dakota of $100,000. Well, now, anything north of 100,000 I'm going to need to start registering in South Dakota and start collecting sales tax from South Dakota residents and then sending that money to South Dakota.

So as you grow your businesses, an e-commerce company, now the burden is on us the entrepreneurs and business owners to track where our gross sales are going in which state and to see if what the threshold is in that state and then now we have to register in that state or get your seller's license. And then you have to collect sales tax then you have to send it to the government. And it's all manual because every state doesn’t have like an API or some sort of like portal where you can just connect it to a software.

Lenard: Yes, I think eventually, like government flow, like they're slow to execute certain, especially like E-commerce right like, so then like, so let's say I sell I don't know, these wallets right and I sell them online, I have a like a Shopify store, like and I sell to wherever right? And if I make like sales to South Dakota maybe some people love it or something. Let's say I pay the sales tax to South Dakota for my customers, what's the benefit that I get if I'm here in like, let's say, Los Angeles? Because like, usually if I pay tax, I get some sort of benefit, right? Like, is there any benefit?

Argel: No, you're basically just collecting the money on behalf of the government. I mean, so for example, when you get your sellers permit in California to be able to like to sell your products in California, like you can't sell product without a Seller's Permit, right.

Lenard: Okay.

Argel: So, you have to get that from the government. And one of the things that you're required to do is [20:00] that you have to collect sales tax on behalf of the government, if you're selling tangible products, so like a wallet, right? So, the government wants their fair share. They want to charge sales tax on that wallet and you're the vehicle to collect them and then give it to them.

Lenard: Okay, well. I thought there was something where you'd like to get a free pass to the National Park? Like what's Yellowstone again? Like the, oh forget it.

Argel: Oh, I don't know. I never been to Yellowstone.

Lenard: You get a pass or something.

Argel: Like the National Parks basically.

Lenard: Yes, you get a free pass to collect sales tax.

Argel: You should.

Lenard: So, okay. [inaudible 20:52].

Argel: I want to add to that, so you have to remit all these sales tax, your wallet, for example, what's the benefit? The question should be what's the benefit of me selling to South Dakota? If at the end of the day I had to do all these administrative tasks, right. I think it's so new right now what's happening with Wayfair and collecting sales tax that most people are either finding out about it or reacting. Many are tax planning on what does this means from a tax planning standpoint?

And I think what's an interesting conversation later down the road regarding this is think about if internet will eventually have a way to like some futuristic stuff, right where every city state is going to be regulated online, where there's like an invisible border for every state. Because that's basically what's happening right you have a physical border of commerce where you know that when a truck crosses the border, you know that you're in like California territory or like Nevada territory. So, I think what we're going to see eventually is this like virtual barriers or virtual like city states. Where once you cross that.

Lenard: Oh okay, it's going to be weird.

Argel: It's going to be weird but like, think about to be able to say, Okay, I'm selling on Shopify. I know that I don't really get a lot of customer from South Dakota. I know that like my fulfillment center where my inventory is, is all the way in, really far like Texas and I know that it's going to cost me more money to ship to Dakota. And then in addition to that, I'm not getting enough sales and in addition to that, I had to file in South Dakota. From now on, I'm not going to sell for any South Dakota resident because it' not economical.

Lenard: Okay. Yes, they're going to read it by IP address. But then what is like you put on your VPN? I don't know. Yes, you're right. It's like, you're going to have the target it because it's not worth it right if you're going to pay 10% more or whatever the fees associated with, what's the point if my profit margin is like zero or negative.

Argel: So, I think one strategy would be for your CPA to do some sort of tax planning to see if whether or not it's worth entering in that state. Right? Before the tax planning, before it was just physical Nexus. It wasn't like economic Nexus. So, by the Big Four accounting firm gives you is that, oh, maybe you shouldn't have an office there because it's not worth it. We have to pay all these income taxes and sales taxes. When in the future it is going to be you shouldn't sell ecommerce there because you have economic Nexus and yes that's what's going to end up happening and so I think people should be tax planning about and thinking about those things at least for the future.

Lenard: Yes, they should call you get your knowledge. I think we will close it there with some good information so if you if anyone listening but you know the millions of listeners out there and viewers go to goodspring.io and we'll help you there. Thanks guys.

Argel: Alright.

Lenard: Got to go.

Argel: Bye.

Lenard: Go ahead and go walk, continue your walk.