Thank you. If you are the leader, press star now. You will now be placed into conference. Your conference is being recorded. You will now be placed into conference. I'll try to look at that. The problem is, Daniel, that I get focused on my materials, and I don't pay attention to it. I will handle that. I'll handle that, but just like I said, if there's like a natural break where you see that – you don't even need to look at the questions. You can just say, Daniel, are there any questions thus far on what I presented, and I can answer. So Liz, let us know, I guess, when you want to – it looks like we're still missing a lot of people. The only other thing that is unique to this one is in addition to the PowerPoint, there is a handout, and Liz converted it into a PDF. And so I won't mention it during the webinar, but you might mention that that's available for them to download as part of their materials. Hey, Rex, I left it in the Excel spreadsheet. Would it be better to convert it to a PDF? I wasn't sure if there was anything in there that you wanted them to be able to manipulate like through the Excel. No, there's nothing in – as a matter of fact, it's kind of the opposite. It's time sensitive because the laws change all the time. Okay. So if it's a PDF – at the end, it says this was compiled as of 1-16 of 19. Now, nothing has changed since then. But, you know, I didn't want NRAID. If they look at it as a PDF, it'll have on there, hey, this is as of 1-16. I will change that when we're done. We're going to have to go ahead and get started. So I will change that after the webinar. So, Rex, I am going to turn it over to you so that you have control. Daniel, give me like 10 seconds to start the stream, and then if you want to go ahead and start, you can. Okay. Does that work? Sounds good. Do you think we should give it, I guess, a minute or two? There's still – I mean, there's only like a third of the people that registered on it, but I guess I can – do you want me to – after you start streaming, do you want me to pause, or should we just dig into it? I think we should just get started. Some people might have registered for it just so they could get the recording of it later. All right, give me like – start in like 10 seconds. 10 seconds? Yep. Okay. Good morning, everyone. I'm Daniel Fisher, AAD's Vice President of Government Affairs. Thank you for joining today's webinar on the Supreme Court's Wayfair v. South Dakota decision and its impact on equipment dealers. Before turning it over to today's expert presenter, I'd like to take care of a few housekeeping items. First, you'll have the ability to ask questions via the chat box at the bottom of your screen. You can submit questions as they arise, and I'll read them to Rex at the end of the presentation, during the Q&A session, or during the presentation, depending on where they're asked. Also, this webinar will be recorded and available for on-demand viewing after it concludes. Last summer, the U.S. Supreme Court handed down its landmark decision in the Wayfair v. South Dakota case. In the case, Wayfair challenged South Dakota's application of its sales tax to internet retailers who sell into South Dakota but have no property or employees in the state. As most everyone knows, South Dakota prevailed, effectively allowing other states to collect sales tax on goods sold in the state. Rex will dive into the case a bit more and discuss the consequences of the decision. In my opinion, Congress will eventually need to step in to clarify and impose a more orderly framework to avoid a patchwork of state laws across the country. However, there's no clear consensus in Congress on how to deal with this issue. Internet sales tax has been a controversial issue for lawmakers even before the Wayfair decision, hitting eBay and smaller internet sellers against the likes of Walmart, Target, and others, making a resolution difficult. So in the meantime, businesses are stuck with trying to navigate a complex structure that's resulted from the Wayfair decision. Our presenter, Rex, will take a deeper dive into all these issues. Rex Collins is a principal at HBK CPAs and consultants and leads the HBK dealership industry group. He began practicing as a CPA when he was in high school. Since 1987, Rex has focused his practice entirely on dealers and their dealerships. Rex is a familiar face and name to most AAD members. He particularly participates regularly in AAD programming, including Summit, Small Dealers Conference, and other events on a range of topics. So with that, I'm going to turn it over to Rex. Rex, thank you for joining us. Hey, thank you, Daniel, and welcome, everyone. I want to give a little background as to what we're going to do, our little agenda for today. We're going to start off with a little history. Basically, I'm going to build up to how we got to this decision. As Daniel said, it is a landmark decision. It is changing the landscape. It's a landmark decision. And while it was intended to capture the Internet sellers like Wayfair, the dealers have gotten caught up in this. So we'll walk through that and the impact to you. We're going to also talk about a topic that we're going to talk about shipping, but then I'm going to add to that. We're going to talk about drop shipping. This topic actually just came up about two weeks ago because a few of the manufacturers are changing their requirements of their dealers when they're doing drop shipping for them, and we suspect that nearly all the manufacturers are going to impose similar types of requirements on you, the dealer, and these requirements are very onerous. Then I'm going to wrap up with some specific questions and answers that I've put together that are going to help you consider maybe more of the issues than what you've thought about for yourselves. And then we've also got a chart that is in the material that lays out basically the requirements for each of the states. So that's kind of where we're headed. Let's start going. As Daniel said last summer, on June 21st of 2018, the U.S. Supreme Court overturned decades of established law that required vendors to have a physical presence in a state before that state could require them to collect and remit sales tax on purchases by customers within that jurisdiction. The court overturned its 1992 decision of Quill, which is a very popular or very recognized name, and it overturned Quill v. North Dakota when it issued in June the South Dakota v. Wayfair decision, and in that it noted that the physical presence rule, both as first formulated and as applies today, I can't tell I'm reading this quote, is an incorrect interpretation of the Commerce Clause. While it's going to take us some time to completely understand the full effects of this decision, it's safe to say that this is the most important development in the sales tax world in at least 25 years. And as you see on the slide in front of you, the whole genesis for this is the states were losing revenue. As we move forward, I've got a little pretty map here, and oftentimes dealer clients and dealer members are saying, hey, that's not my state. I don't do business in that state. It's not my home state. Well, even if it isn't your home state, you still might get a tax bill. In fact, you're more likely than ever before to be assessed on sales tax online or in person to customers from a state other than where your business resides. As I've said, state budgets are tight, and state revenue agents are more aggressively reaching across state lines to make these assessments even before Wayfair this was happening. We had a customer, an equipment dealer in Ohio, had no presence in Kentucky. The Kentucky came into the state of Ohio, audited our dealer because they were getting, they were seeing UCC filings on the equipment in Kentucky, and they said, hey, there has to be a sale. Well, if delivery was taking place in Ohio, my dealer didn't have an issue. If delivery took place, he didn't have to collect and remit. Now, the customer still technically was supposed to pay use tax on that, but it was his problem. Well, here's the issue that came up, proof. The state of Kentucky came in and said, prove to us where delivery took place. Well, how many of you on the call right now can prove that delivery of the equipment took place at your location in Ohio? Probably very difficult. So we've got some recommendations for that. I'll get into that later as to if you're going to physically deliver equipment. But it results in an assessment by a state in which they don't, the dealer doesn't believe he has an assessment. At the end of the day, the fact that customers buying goods from businesses in other states owe sales or use tax, this really isn't new. Most dealers are aware that customers buying goods from them owe sales or use tax on those purchases, but our problem has been determining which state is entitled to the sales and use tax. That sometimes is difficult. We've got three assessments right now in the state of Indiana for $500,000 by dealers. Dealers are being assessed half a million dollars because, again, we can't prove. So the states are being very aggressive. And many dealers are being surprised by these audits from other states related to these cross-border transactions. So let's start by defining what nexus is. So before a state taxing jurisdiction can require an out-of-state company to charge, collect, and remit sales tax, the company must have some connection with the taxing jurisdiction. And we call that nexus. Well, okay, those are a bunch of words. Let's put feet on those words. What exactly does that mean to have a connection with the taxing jurisdiction? Physical presence nexus. And you guys can all read. You can see what's on there. Having some physical presence in the state, storing inventory, having fixed assets, having a location there. You notice up second from the bottom is drop shipping from a third party. And then trade shows. New Jersey is very aggressive, for example, with regards to trade shows at the bottom. Before the court issued its Wayfair decision, they had established the physical presence standard in several landmark cases. Going back to 1967, they decided in National Bellas Hess versus the Department of Revenue in Illinois, in which it held that both the due process clause and the commerce clause prevented the state of Illinois from requiring a mail-order seller of tangible personal property to collect and remit sales tax on purchases made by customers in Illinois when the seller did not have a physical presence in Illinois. The court noted it has never held that a state may impose the duty of use, tax, collection, and payment upon a seller whose only connection with customers in the state is by common carrier or the U.S. mail. Why am I saying this? I'm saying this because technology has changed. We've had rulings that have dealt with mail order. Think about Sears, you know, the Sears catalog. When I was growing up, we went through the Sears catalog to make our Christmas wish list, if you will. Well, we roll forward from 1967 to 1977, and we have another ruling, and that is complete auto transit versus Brady. And in that case, the courts had to decide whether... Pardon me, I got a little catch in my throat. They had to decide whether Mississippi's privilege tax could be imposed on a Michigan company that transported cars for General Motors to dealerships in Mississippi via motor carrier. The court ruled in favor of the state, holding that the imposition of the privilege tax did not violate the Commerce Clause, and noted that the court has rejected the proposition that the interstate commerce is immune from state taxation. And there were four criteria that we won't get into that the court enunciated that needed to be met in order to survive this. So we've got a little conflict here going on. Now we enter Quill. For sales tax purposes, the most widely supported nexus principle requires the out-of-state company to have some physical connection with the state. The physical presence requirement was reaffirmed in the Quill versus North Dakota Supreme Court decision of 1992. This case involved the sale of office supplies made via mail order catalogs by Quill to customers in North Dakota. Even though Quill owned some floppy disks in the state of North Dakota, the Supreme Court held that this presence was de minimis, really wasn't substantial enough to require them to have a filing or registration requirement in North Dakota. However, just because the retailer does not have nexus in the taxing jurisdiction, the purchaser is required to remit use tax on the purchase price of the merchandise. So that's no surprise to us. The customer will ultimately, as I said before, in Kentucky, that Kentucky customer has to pay use tax. However, the problem is, and this again is no surprise, individual customers almost never pay the consumer use tax on their purchases, which is what we're dealing with in Quill. This leads to a slow but steady loss of sales tax revenue to, in this case, North Dakota, but to each of the states. In Quill, the U.S. Supreme Court indicated that the solution to this issue rests with Congress and would require federal legislation to modify the Commerce Clause to permit states to tax out-of-state sellers that do not have physical presence in their state. As Daniel mentioned earlier, and I will reiterate, we are now in a worse situation, and it will likely take congressional moves to clarify what we have to do. However, I, for one, don't expect those moves to take place anytime soon, and we've got to deal with the case law as it is right now. Moving on, as remote commerce, as the Internet came around, so we migrated from mail order catalogs to e-commerce. The loss in sales tax revenue has absolutely mushroomed and is forcing states to make some short-term adjustments while they've waited for Congress to act. This includes increasing sales tax rates, eliminating some tax exemptions, and adjusting income tax laws. The state of Ohio, for example, enacted the CAT tax, which is a commercial activity tax, which actually, as an aside, was one of the first taxes to reach across borders and start taxing dealers in other states for commercial activity they did with customers in their state, just as an aside. This slide is just a little simple history. It's really more for you to read of the 67 case. And then the 92 case, I've just got a little bit more of the fact pattern. This is for you for take-home. We've kind of talked about everything here, but the fact is, the last bullet point on this slide, the court really did solidify, or I use the word cemented, this physical presence standard in this 1992 case. That brings us up to the current case, the case from last summer, if you will. So the Supreme Court agreed to hear the case of South Dakota v. Wayfair last June, paving the way for a pivotal decision in the years-long debate over how to apply sales taxes to online retail activity. Again, the focus of this case was online retail activity. By way of background, Colorado had a different statute. It went to the Supreme Court. The Supreme Court failed to hear that. They declined to hear the Colorado case, which what that did, Amazon and some other big internet players backed that case. They pushed that case to the Supreme Court. The Supreme Court failed to hear it. What that did was, it basically upheld what the Colorado court case had found, which was basically that while dealers, to convert it into dealer language, dealers doing business with customers from Colorado did not, under that statute, which no longer is in play because Colorado, I believe, is one of the 37 states or so that has, and they have, I'm looking at my chart here, they have enacted economic nexus, which is a result of the Wayfair decision, but that Colorado statute said, okay, we recognize that it's an undue burden to have dealers in other states collect and remit our tax, but it is not an undue burden for them to report to us when they do business with a customer from our state, whether that's selling a part or selling a piece of equipment. So for a long time, you've been required to be doing that with Colorado and nine other states. My guess is you've not done any of that. Most dealers have not. And again, as Daniel said, I work exclusively with dealers, have since 1987. We've got 390 dealer clients right now. I need 10 more dealers to sign up as clients of ours, so I'll be over 400. That was a joke. Getting back to the South Dakota case, under prior Supreme Court precedent, the Quill decision, retailers were not required to collect sales tax unless they had a physical presence in the state. Traditional brick-and-mortar retailers that have to collect sales taxes have felt they're at a competitive disadvantage, and states are potentially losing out on billions of dollars, as we talked about. So again, you're a brick-and-mortar retailer, and we have, for the most part, dealers have said, hey, if everybody else just has to play by the same rules I do, it'll level the playing field, and I'll win some of my customers back. Well, here's our chance. Well, realistically, the ruling in Wayfair is going to result, has resulted, in a complex and indefensible, we're fearful that it will result in a complex and indefensible patchwork of laws that may harm economic nexus. Let's see. I mentioned Ohio and the CAT tax, but I won't talk about that again. This slide is just, again, giving you some more background for your own use as we leave. Let's look at the session today, okay? As I say, Quill was affirmed before the internet, so that's changed things. And, oops. All right, all right. I have been hitting the button, but it's not been going forward, so I apologize, I've gotta get back onto the right slide. Anyway, regardless. In South Dakota, the case ruling basically said the physical presence test is no longer valid because technology has changed. And you're now able to, as a consumer, buy from multiple jurisdictions, and the states are at a disadvantage in collecting the tax. One of the things that was pointed out in the South Dakota case was the fact that there was a minimal amount, it wasn't the first transaction that held, that made you have, made a retailer automatically have a presence in that state. The Attorney General for the state of South Dakota actually was, in their testimony, stated that the first physical presence rule should be upheld, but the state has put into place, as you see there, $100,000 of sales or 200 separate transactions. Now, this is important. The states vary, like I say, I think there are 37 states, some ranging as low as $10,000 in transactions. But, by and large, I guess the consensus is probably $100,000 in sales or 200 transactions. Well, here's the issues we have to deal with. $100,000 in sales, equipment dealers. Takes one transaction to be over $100,000 of whole goods. So you are in on the first transaction. But, if you're doing parts, you have to keep track of this for, to get up to the 200 transactions, or to get up to $100,000, retroactively for the prior 12 months. So it's a rolling 12 months. It's not, look back at last year, the last calendar year, the last fiscal year, and now you have a requirement for that going forward. It's not a forward-looking thing. It's once you cross that 100, you gotta look backwards to determine whether you've crossed 100,000. And a question that I get frequently is, okay, I've sold $80,000 worth of exempt equipment. So let's say it's being sold to farmers. It's ag exempt, just to keep it simple. I've sold 80,000. Now I'm selling $40,000 in a taxable transaction. Do, have I now crossed the threshold, or have I not? You have crossed the threshold. The $100,000 in activity and the 200 transactions, doesn't matter whether they're taxable transactions or not. So it's every transaction counts in getting you to that threshold, although each transaction may not be subject to sales tax. We also, okay, I'll get into some other points a little bit later. The other thing is, the Supreme Court made it clear there's no retroactive obligation to remit the sales tax. South Dakota is now, this says 20, oh, well, no, that's right. 20 states that have adopted the Streamlined Sales and Use Tax Agreement, but, and that's just informational, we can't rely on that. That's all I'll say on that. We've got reporting requirements. This is the Colorado statute that I was speaking of. Got a little ahead because the screen didn't advance when I thought it was. But there were 10 states that required reporting, and you see the 10 states that are there. And some of those sales also were as low as 10,000 and as high as 250. Economic nexus is the new buzzword. And there is a supplement that I've provided. You should have access to it through the webinar. And it's an Excel document that may have been converted to a PDF. But what that is, for those of you that don't have it in front of you, we've listed out each of the states. And we've put down what their post-waiver guidance is, and whether they're a streamlined sales tax state or not. We've also put down whether they have an economic nexus policy and the date of that. And then we've summarized what their threshold is for economic nexus. As I've said, some states are as low as $10,000. Some are as high as $500,000. And some have either number of transactions or dollar amount of the transactions. Some have both, in order to fall under this, a requirement of X number of transactions and X number of dollars, okay? So you're going to have to be in front of this problem. A study that I read indicated that each dealer is going to spend up to between $100,000 and $150,000, was their estimate, on compliance with the Wayfair decision. That is not the cost of the tax. That is the cost of the dealer to comply. Where that's coming from, this is my opinion. This was not stated in the study that I read. My opinion is that the bulk of that cost bulk of that cost is hiring a professional, hiring a state and local tax attorney or CPA to be on your staff, or to have them at your beck and call to help them walk you through what your filing requirements are. Because as you're getting ready to sell a piece of equipment, you need to know right then, let's say you're a Kentucky dealer and you're selling into Ohio. You need to know right then, first of all, whether you're subject to tax or whether you're not. The rules are unclear whether you're subject to tax in Ohio or Kentucky. Oh, but let's wait a minute. Ohio doesn't have one sales tax rate, as many other states do. The municipalities and counties, so forth, have multiple sales tax rates that are either applicable or not applicable. At the end of the day, you are dealing with hundreds, probably thousands of taxing jurisdictions. And that's what this cost is for you. In addition to the cost of hiring the professional, you are going to need to register in all of these states. You've got to do an annual filing fee to register for a license, to keep your sales tax license up. You have to get a retail merchant certificate in order to get a sales tax number. So you're gonna have to do that. You're going to likely, in many states, depending on what you're selling, you may have to get a dealer license in that state. And along with getting a dealer license, oftentimes you have to get a bond to do business in that state. Have I made this utterly complex? Not me, it's Wayfair. Now, one of the questions that we have also is, okay, I had a dealer in Mississippi that said, to heck with this, I'm not shipping anything. Everything's gonna be done from here. Okay, well, now we get into the proof issue. Let's talk about proof. My Mississippi dealer says, we're not gonna ship anything anywhere. Everybody's gonna come to Mississippi and pick up their equipment and take it. Well, they can do that. They can hire your dealer or your customer in Colorado that has found you, and you're in Mississippi, they can hire a third-party common carrier to drive to Mississippi, pick up the equipment and take it back to them. That can absolutely happen. The customer can do that. The reason I'm saying the customer needs to do that in order for the dealer to avoid any presence anywhere else is because if the customer hires the third-party carrier, they are treated as an agent of the customer, of whoever hired them, so it's just as if the customer picked it up. If the dealer hires them, then it's as if you get into further complexity. Now, let's talk about using your own rolling stock, which is what we get frequently into surrounding states, using your own trucks and trailers to deliver equipment. We've got some recommendations here because this is really where the proof is very difficult. If we have a third-party carrier, that's our first choice. If we have a third-party carrier, we have proof. We have independent proof, so when the state of Kentucky comes into Ohio, in my earlier example, we have a third-party carrier receipt. They know exactly where it was picked up and where it was delivered and who hired them, no problem, no more discussion. So we were able to exclude a lot of the transactions. The ones that we weren't able to exclude were the ones that the rolling stock, the dealer, delivered themselves. So I've got four things that you need to do if you're going to use your rolling stock, and this just deals with physical presence nexus. Into a state in which you have no other tie, you can avoid the physical presence nexus by, well, you, I don't want to say this, it's not, you may, you can avoid collecting your home tax or can establish that you're going to collect your home tax depending on what you do with these four items. That's a better way to say it. And I'm still dealing with prior to economic nexus rules. This is the old physical nexus rules. So number one is on the buyer's order. This is the strongest of the four. On the buyer's order, document where title transfers. Transfers, let's say you've got a customer that doesn't want to pay Ohio tax, wants to pay Kentucky tax, wink, wink, nudge, nudge, thinks he's not going to pay use tax in Kentucky. Then what we would do in that case, and I'll use that as an example for these four steps. On the buyer's order, we would state that right on the buyer's order that the title transfers, the sales document, buyer's order, whatever, title transfers at one, two, three, main street, whatever, Louisville, Kentucky, all right? So we've established it there. The second thing that I would do is I'd have an affidavit signed by the customer at the time of delivery, dated and time, both put on there, received by the driver that says, yes, it was delivered at this time and at this date at one, two, three, main street. Number three, every one of your drivers carries a phone with him all the time. And his phone has a camera on it. So let's take a picture of the equipment still on the trailer in front of one, two, three, main street, okay? People are starting to laugh now and getting ridiculous and that is the case. Fourth thing is to have your driver stop at the nearest gas station and whether he needs gas or not, buy something, okay? So he goes in, he buys a slushie, whatever. Buy something, keep the receipt, put it in the deal. Now I've got independent proof that at least my driver was there to buy it. You see what I've done. I've tried to button that up. Do you know that we've got some of those half a million dollar assessments, we've got all four of those items present and the other state is not backing down? Okay, many states will look at the buyer's order and walk away. I'm just giving you the best advice that we have possible, okay, as we work through there. Now, I'm kind of talking about shipping and receiving at this point. So let's move on to those slides. I did it again, I didn't go forward. Okay, so as you see on there, sales tax with regards to shipping and freight is really tricky and it becomes confusing when you get into different jurisdictions. There are some states that consider shipping a taxable activity 100% of the time, pretty much. And I've got a list of those there. And then there are other states that say, nah, shipping really isn't taxable if it's included in the price. So we've got different jurisdictions with different rules. Okay, frequently, tax on the freight will typically follow the transaction. So if the goods that you sell are exempt, then the freight's gonna be exempt for delivery or handling charges. If it's taxable, then obviously the inverse of that does apply. Freight is typically non-taxable unless it is considered a necessary part of the transaction. You can read for yourselves there. And I've got a couple of, just diving in a little deeper. Freight or delivery is not taxable when the customer pays the carrier directly. So third-party carrier, them paying them directly, that's okay. As I said, the guy from Colorado paying the third-party carrier to pick up the equipment in Mississippi, my Mississippi dealer now has no obligation to Kentucky and has avoided it, okay? We get into issues with bundled items. Some of the items are exempt, some of them are taxable. You can read that example. Typically, it is prorated there, although in some states it may take the entire transaction. All right. Now let's talk about this brand new item that is directly hitting dealers and will only grow. And this came up the last couple of weeks. I spend a lot of time traveling from dealer to dealer. I have a lot of what I call windshield time. It allows me to think ahead. I didn't see this coming. I wasn't considering requirements imposed by your manufacturers. So what I want to talk about is drop shipping. And drop shipping is a fundamental aspect of the supply chain and represents two separate and distinct transactions. The seller, the dealer, you accept an order from your customer, you invoice your customer and receive a shipping address of where the product's gonna go, your equipment. The shipping address can be in a state in which the dealer has a presence or any other state that the dealer is not located in. The dealer will then place an order with the manufacturer to fulfill this customer's order, who's then going to ship the product directly to the shipping address that we, the dealer, have provided. The supplier, your manufacturer, never invoices or deals directly with the customer. They engage in a sale solely with the seller. Okay. I'm making a note to go back to. Just popped into my head that I wanna make sure that I cover. Now, rolling forward with that, South Dakota versus Wayfair has had a substantial impact on sales tax, as we've already talked, and 30 plus states have implemented some form of economic nexus. And by sometime mid-2019, we expect the 45 states that have sales tax plus the District of Columbia that has a sales tax, so 46 jurisdictions, are all going to get on board with some sort of economic nexus rule. And we've already talked about those, so it is going to expand. Just a reminder, you do need to track your physical nexus still even with economic nexus there. But the impact of Wayfair can create significant issues for companies that provide, that'd be your manufacturer, or what we wanna talk about today is use drop shipping services. That's you guys. Most of the states consider sales of tangible property, tangible personal property taxable unless we've got a valid exemption certificate, as we've stated. Now, typically the dealer is looking at that exemption certificate as from their customer. Do a mind shift right now. Right now you need to be in the mind of the manufacturer. The manufacturer is required to get an exemption certificate from you, which is a no-brainer. You're buying the equipment because you are their customer. You are buying the equipment exempt from sales tax because you're reselling it. You're not the ultimate end user. Well, that's easy. We've explored with a couple of the manufacturers, if we've got state statutes, which exist in some states, that mandate that a manufacturer cannot sell direct to customers in those states, then we don't have to provide an exemption certificate because state law covers it. We've also explored whether we can modify the sales and service agreement between you and your manufacturer, and if that would be sufficient enough to avoid the dealer from registering in all what will be all 46 jurisdictions to provide exemption certificates. We're exploring that. Don't have an answer right now. A resale certificate must be valid. And the reason that we're talking about this is because all 46 states have different rules regarding the validity of the exemption certificate. And that resale certificate must be valid in the state where the property is shipped, not your home state. And the reason for that is because the state that it's shipped to is the state that's gonna try to assess sales tax on it. Failure to obtain a valid resale exemption certificate by the manufacturer's failure to obtain that can cause the manufacturer to be liable for collecting sales tax on the transaction. If tax is not charged and it is determined under audit that the manufacturer didn't have a retail or an exemption certificate from the dealer, the supplier's gonna be assessed taxes, interest, and penalties on that. That is our major problem. And going further, some states will not accept the home state, your home state exemption certificate, and will require the dealer to register in for sales tax within that state. And we talked previously about the complexities with that. And I used, I think, Michigan as the example. In Michigan, Michigan will not accept a blanket, the multi-state exemption form. Michigan is not a member of the SSUTA. So you have to, and Michigan will not accept your home state's exemption certificate. So what do you do if you're shipping into Michigan? You as a dealer in, pick a state, Pennsylvania. You as a Pennsylvania dealer have to register to do business in the state of Pennsylvania, incur the annual registration fees. So you're gonna have pocket for some filing fees. You have to then register or get your sales tax number. You're gonna have to file returns because they're now expecting returns from you. It goes further than that. You're going to have to file to get maybe a dealer's license. You're gonna have to maybe get a bond with regards to that. Let's do the inverse. Michigan going to Pennsylvania. In order to do business in Pennsylvania, there are five different regulatory agencies that you have to register with in order to get this done if you're going into Pennsylvania from Michigan or another state. It is tremendously burdensome. And tracking these nuanced provisions can be very, very tricky. In some cases, it may really be more economical for you to simply pay the tax or to have your distributor, your manufacturer, pay the tax. Basically, bake it in to your transaction with your customer. We need to get, as Daniel spoke about early on, we need to get some guidance, overarching guidance from Congress for this. There are, as you know, getting back to everything in general, but drop shipping also and specifically, there are some states like California and Illinois that are hypervigilant in enforcing their rules on all relationships. And some of these states have enacted separate provisions laying out the treatment for each party. We've just got a tiger by the tail here, and we need to be in front of this. So let's talk about some of these questions. And Daniel, you feel free to interrupt at any time with any questions that you may have of your own or from the attendees. But let's go through maybe some of mine. So are states going to pursue retroactive application of Wayfair? Most likely, unsuccessfully. There are some states that have attempted to do so, but we suspect that anything prior to June 21st will not be upheld. But everything after June 21st will be upheld for them. Now, my question to you as a dealer, were you ready to comply as of June 21st? Were you ready to comply as of July 21st, August 21st, September 21st? Most likely not. From a practical standpoint, we have had some states tell us informally that, yes, you need to comply. Yes, you're subject to this, but we're really not going to start enforcing until January 1st of 19. That's not universal. Do not rest your head at night thinking you have no exposure because of those informal conversations. Number one, they're informal. We can't rely upon it. Number two, it doesn't cover all of the 46 jurisdictions, first 46 states, including DC. So New Jersey, for example, passed theirs on October 1st, I think. I think that was the date. It was October 1st, and they said immediate for that. So anyway, the second question that I've put up here, will states adopt the South Dakota model, or will they push for even lower transactional gross revenue standards? My belief is, yes, it's the latter, not the former. Some states are just adopting, copying South Dakota, saying, hey, this works. We don't have a problem. Others have dropped those thresholds, recognizing that the Supreme Court said we're uncomfortable with the Commerce Clause, with compliance with the Interstate Commerce Clause, if you say the first transaction is going to get you in trouble. Now, asterisk on that, we know with a threshold as low as $10,000, and for most of you in attendance, $100,000, the first transaction is subject to tax. But the Supreme Court was ruling for all businesses, not just dealers. So if there is some minimum dollar threshold that has to be crossed for some minimum number of transactions, who's to say that the Supreme Court, if it ever got to that, wouldn't say, we know South Dakota is 100,000 and 200 transactions. Who's to say that if somebody cut that in half, or by a third, that the Supreme Court wouldn't have still ruled that way? They probably would have. They may have. When do they cross that line when it's too minimal? And we don't know that, OK? The third question is in bold for a reason. And it is, will states become more aggressive in imposing economic-based nexus to other taxes, such as income taxes? And I will tell you that, in my opinion, that's a resounding yes. Here's what I will also tell you. South Dakota has no income tax. If South Dakota had an income tax, they would have also had economic nexus standards for income taxes, like they have for sales tax. And we would have been litigating, or they would have been litigating, income tax and sales tax all at one fell swoop. There is one more defense for income taxes. It's a public law that's been relied on for ages. However, that public law, while it does give us a little bit additional support for not being subject to economic nexus, it is so minimal that I believe the Supreme Court would have ruled similarly for income taxes as it has for sales tax. Now, there are other taxes. I mentioned the Ohio CAT tax. The Ohio CAT tax has been in play for decades, and it has since the early 2000s. And it has already been reaching across state lines. In essence, what is the commercial activity tax imposed by Ohio? It is a gross receipts tax. It is an income tax based upon your gross receipts, not your net income, is what it is. That's already out there in Ohio. We believe that these states are going to be very aggressive, and they are going to start reaching across state lines. What does that mean for us? That means for most of our dealers, they're S-corps, they're float-through entities. But whether you're a C-corp or an S-corp, you will be filing tax returns in every state. Just because of the dollar limit being so low, you're probably going to cross that threshold. You're likely going to have income tax filing requirements in all of these states. Many of those filing requirements have a minimal amount that's paid, not every state. So even if you do a minimal amount of business in that state, you're still going to be paying tax for some blanket amount. We just dealt with a dealer out on the West Coast that dealt with this. He was a California dealer doing business in Nevada. Didn't even consider, it wasn't even a consideration of economic nexus in that case. The other thing that you need to know, and this gets overlooked all the time, as a dealer, you frequently have physical nexus in those states. And you don't think you do. Let me put it very simply. I've got a dealer in North Carolina who sells specialty equipment. An AED member dealer who sells specialty equipment and ships that equipment all over the country. Maybe he's doing it, let's pretend that he's doing it in such a manner that he doesn't have economic nexus in those states. However, if that piece of equipment needs repaired, whether it's under warranty or not, he will be servicing that with his people. He now has physical presence in that state because he sent his person, his employee, to that state. One other issue, even if it weren't his employee, if another dealer is capable of working on that equipment and they do that at your request, in essence, you sublet it through them, guess what? You've now established nexus in that state by use not of your employee, but a use of a sublet, a subvendor, use of a vendor to meet your obligations for that. That's a major problem. We have dealers that are constantly sending field techs, either flying them or whatever, driving them into other states. And they don't think they have physical presence nexus. And they do. The economic nexus just is making this a lot easier to find. You're going to need to be tracking all of those situations. OK. No, Rex, we have a question here. If we are selling a titled registered vehicle to a customer from another state who will be paying the use tax at the time of registration in their own state, do these sales count toward the thresholds? Or are we responsible to collect the tax on behalf of the customer, regardless of where the vehicle will be registered? Very, very good question. OK. So there is very poor equipment in general. There are very few pieces of equipment that are titled, if you will, and registered. I happen to know who this is. I can actually read the question as well. And this dealer actually sells Class 8 vehicles. They're heavy truck dealerships. Just to put it into context for everyone. So they have titling and registration issues all the time. Now, there are certain states that will respect taxes paid to other states. And you need to issue a certificate for taxes paid to your state if that's what you are doing. So the customer is taking delivery in your state and paying tax to your state. Then they will receive a credit for that. There are states also, so it's going to vary by state by state, there are states that have provisions that say, if the equipment, I'll use the word equipment, if the equipment is staying in your state for less than 30 days, so it's only there to be picked up, the home state of the dealer. It's only there being picked up by the customer from another state. And immediately going to that state and being titled and registered there, then there's no obligation for that dealer to do anything. But he has to get the affidavit signed. It's basically, it's a form that has to be in the deal. Absent of that, then you are dealing with an issue where you may end up being required to collect and remit the tax in that other state. Furthermore, to the follow-up question, the last question, does, or the first question, do those sales count toward the threshold? They absolutely do count towards the threshold if you are delivering it into that state. The equipment, in your case, the semi has either been drop shipped there, or you've driven it there, or something. It's been delivered into that state. You're doing business in that state. It counts as towards the economic nexus. And unfortunately, a straight answer is almost impossible with these specific questions without getting the specifics of, what state are you in? What state are you going to? Because we've got to look at the interplay between the statutes and those. And then don't forget, for example, if this dealer is going into Ohio, which city, county, municipality in Ohio to determine what tax should be received. Great, great question, Peter. Very good question. One of the questions that I have is, do you know your footprint? Does your DMS system track? I spoke with, I got asked to speak with the development team, spent a day with them, of one of the software providers for the equipment industry. And I was there. We spent the day. They wanted to make their system much more beneficial for the dealer. While we were there, I brought up this issue. It was in August of last year. The Supreme Court ruling came down in June. I started talking about this. Glassy-eyed, jaws dropped open. They had no idea that this had even happened. And they quite frankly said, we have no way of tracking that in our DMS system. And so they had to start from scratch in developing that. Oftentimes, they will have the bill to address in the system. But they don't have the ship to address in the system. So you need to make sure that you're tracking this. And you're tracking it on a look back of 365 days. That's a problem with your own systems right now, because you've got to track number of transactions and dollar a transaction. The next question is, what tools do you have to identify states where immediate registration compliance is required by the decision versus states with alternative nexus rules? Basically, you've got to do your homework. You've got to track this. You've got to develop the tools. Relying on the DMS provider may not work. That's my point here. And then as you're doing every transaction, you need to rethink every transaction that you do. I've mentioned a few of them. We sell whole goods. That's the first thing everybody thinks of. Right behind that is, oh, yeah, we're selling some parts. We're sending those through the mail, or we're sending those through UPS, or whatever we're doing, how we're getting them, who's paying for it, when does title transfer, where does title transfer. I need to think about those things. I need to put them on my invoices. OK, so we're kind of thinking about those on Baby Steps. But now let's think further. What else do you do? You service your equipment. Do you have remote salespeople? Do you have field techs that live in another state that now gave you a presence there? All of these things that you're doing, you need to walk through and go through these items. Are you going to have to start tracking for conglomerate customers, construction companies that have a presence in multiple states, the pipelines that you may be selling equipment to that are following the pipeline through various states as they're developing it? You're going to have to start invoicing them differently so that you can track that. And do you need to collect exemption or resale certificates in states where historically you've not been required to? And that's a resounding yes. You need to make sure that you're getting all your exemption certificates because you don't know what the definitions can be different from one state to the other. I've had dealers that have said, oh, yeah, I got an exemption certificate. It's ag exempt, let's say. I got an exemption certificate on that. Well, timber is exempt in Mississippi under an ag exemption. But timber is not exempt in other states, for example. So you need to make sure you get one for the state. I do a belt and suspenders approach at that. I get one for my home state, and I get an ag exemption for the destination state just to cover myself in case either jurisdiction comes in. So to kind of wrap things up, sales tax nexus is no longer solely based on the overruled quill physical presence standard of 1992. Out-of-state dealers that meet minimum standards may be required to charge, collect, and remit sales tax. In South Dakota, those minimum standards are $100,000 in sales or 200 transactions over a 12-month period. The handout that I've provided you provides you a guidance that we will keep updated for ourselves and for sharing with the association. You just need to know this is time-sensitive, what you've got. As a result of the Supreme Court ruling, out-of-state may pass, they already have, 31 of them, 37 of them. We're going to end up with all of them by the middle of this year, we believe. So all 46 jurisdictions that charge sales tax. They're going to pass statutes that are at least similar to South Dakota or change their current definition of physical presence nexus, which is going to create a sales tax obligation for out-of-state dealers. Matter of fact, North Dakota enacted new legislation the same afternoon that the Supreme Court ruled on the Wayfair decision in order to begin collecting additional sales tax revenue as absolutely as soon as possible. Many other states have already enacted economic nexus standards, which does not require the Quill definition of physical presence for sales tax nexus. And it's simply a numerical calculation of threshold of sales revenue. And again, we do expect the other states to follow suit. In addition to all the states that impose a sales tax, many states permit counties and municipalities to impose additional sales taxes. There are hundreds, if not more than 1,000 different taxing jurisdictions that a dealer may encounter. Dealers are going to need to hire someone to ensure compliance with the rules relating to these various taxing jurisdictions. Dealerships will likely need to reprogram their computer systems in order to collect the proper amount of tax. And we anticipate the cost of this compliance is going to easily exceed $100,000. South Dakota does not have a state income tax. Accordingly, the Supreme Court ruling is specific to sales tax. However, most other states impose a state income tax and is reasonable to expect that dealerships will now be filing income tax returns in these states. The dealer principals will be filing individual income tax returns in those states and those cities and municipalities. You're going to be incurring fees related to registration and so forth. And I've said that over and over again. Bottom line, your cost of doing business just went up. Some dealers are supportive of this ruling, the Wayfair ruling. Their thoughts being that a local brick and mortar dealer is now able to compete with the online giants. States and municipalities stand to gain billions of dollars in lost revenue, which is a tremendous victory for infrastructure and other spending. We know that things are going to be developing over the coming months and years. First of all, you guys are in a busy time of the year, typically. But adding to that is the Wayfair versus South Dakota compliance. Because of the magnitude of the revenues being missed by the various states, we've been talking about this for years upon years now, for at least five, six years in very public forums. I expected, Daniel and I were talking earlier. We both expected Congress came to the Supreme Court. Doesn't matter. What I would suggest at this point is you're going to have questions. One of the benefits of membership in a AED that we offer as a supporting member of the association is calls from the dealers to us. We don't charge for those calls. Now, we get on the phone for an hour. You probably have a bigger issue. But call us with a question. I've put on here our dealership hotline. And that will ring to a secretary. That phone is manned during typical business hours. And if she can get a hold of me, that's who she gets a hold of. If it's someone else, it's a dealership-specific person in our professional staff. And then you've got my cell phone number there if anybody wants to call me or email me with questions. Daniel, I'll turn it back over to you. I went over a few minutes here. And for that, I apologize. Any other questions or anything else you want to talk about, Daniel? No, I think you about covered it. I don't see any other questions in the chat box here. I think that this Wayfair decision sounds like a tax accountant's employment act. So give Rex a call if you guys have any questions that weren't answered. But other than that, thank everyone for participating. Thank Rex for this excellent presentation. And I just want to remind attendees that the recording of the webinar will be available shortly after it concludes. And also a reminder that others in your company can also register and view for free through the system here. So with that, thank you, Rex. Thank you, all participants. Have a good day. Thank you, everyone. The looter has disconnected. The conference will be terminated in 5 minutes.

Rex Collins

Wayfair v. South Dakota

equipment dealers

sales tax nexus

economic thresholds

valid exemption certificates

drop shipping

resale exemption certificate

income taxes

compliance

new regulations