Choose Your Own Adventure

Brian: [00:01:08] Welcome to Future Commerce, the podcast about cutting edge and next generation commerce. I'm Brian.

Phillip: [00:01:12] And I'm Phillip, and we're live at IRCE 2018 at the Vertex Booth.

Brian: [00:01:16] What?

Phillip: [00:01:18] Excited to be here. And a very special shout out to Erin Kissling of Vertex for making this happen. We're very excited to be having some co-sponsored content on the show. And this is not an advertisment for Vertex so much as Vertex is actually leading the conversation and around some really timely and topical things for merchants. And so it's gonna be a really great show here today.

Phillip: [00:01:41] Brian, you want to introduce our special guest?

Brian: [00:01:43] Yeah, we have Dave Pelton. He's Product Line Leader at Vertex. They've got some great thoughts on what's happening in the world right now. But first, tell us a little about Vertex and what makes Vertex special. And how did you get into this world of tax? Who are you?

Dave: [00:01:59] Ok, Vertex has been around for about 40 years. We have serviced, traditionally, the largest companies in the world, people like Amazon and Apple and Target and Best Buy. We more recently moved as a company in the last five years, moved into the e-commerce space and moved downmarket to serve all segments of the market with the same level of service. You can imagine the demands out of the largest companies in the world are pretty high. From a service point of view. From a handling their tax solution point of view. So we're bringing all that learning down to the mid-market. And at the right price, going in the right service level to service those customers.

Phillip: [00:02:40] And everybody has to... Anybody who sells anything is a potential customer for you because everybody has to calculate tax when they sell products.

Dave: [00:02:48] Yes, tax is not sexy. I'm not the most popular person at the cocktail party when I start talking about what I do, but everybody knows that they have to do... It's death and taxes.

Phillip: [00:03:00] {laughter}

Brian: [00:03:00] Right. Right, right.

Dave: [00:03:01] So yeah, we do a valuable... We try to take the complexity out and automate it, so companies don't have to worry about tax.

Phillip: [00:03:08] We were talking a little bit about how merchants... It's one of those things that people don't think about as being so integral to your business. And it's very difficult for a company to make the switch to a new tax provider. So a lot of companies, it sounds a lot like other areas of e-commerce where companies might be traditionally trying to in-house some of that, and they don't realize what they're missing out on. What does Vertex to do for someone in the mid-market who's looking to outsource their tax compliance or calculation services?

Dave: [00:03:46] Right. Well, I'll tell you truth. In a lot of cases of a company is only in a small number of states, they opt to put in the rates and the rules themselves because it's not a big job.

Brian: [00:03:56] Right.

Dave: [00:03:56] It's when a company gets into 10 states or 20 states because the thing about sales taxes, every state has their own rules. So clothing may be taxable in one state. It's not taxable in another state. Food might be taxable or not taxable. But the idea that there's a difference between a Snickers bar and a Twix bar in some states.

Brian: [00:04:16] Wow.

Dave: [00:04:17] They're not just candy. One's a cookie. The Twix is a cookie. So it's taxed differently than the Snickers bar, which is a candy.

Phillip: [00:04:24] Wow.

Dave: [00:04:24] %And that's in one or two states. Not every state. Imagine the research you have to do if you're selling a lot of products online to know every state that you're going to have a presence in.

Phillip: [00:04:36] And that's the example I use a lot, too, is every state and even certain counties have specific tax holidays for certain types of products. And when you start thinking at that level, it does become very time intensive, labor intensive for business to try to manage on their own. So outside of just what the product does, we had an interesting conversation. That's kind of what I wanted to focus on today, especially on the Future Commerce side, around how especially here in North America and in the United States in particular, laws are changing pretty rapidly in this space to try to... States are trying to get revenue from more and more companies becoming either pure play e-commerce businesses or expanding their business into other states. And I know that that something is top of mind for you guys.

Dave: [00:05:33] Yeah. Yes. So what the environment that went into now is the states are looking at the fact that by 2020, 40% of sales will be online.

Brian: [00:05:42] Right.

Phillip: [00:05:42] Wow.

Dave: [00:05:43] So that's a huge amount of revenue that they potentially lose if they're not able to collect sales tax. And today, the rules behind whether you have to collect sales tax and remit it in the state is if you have a physical presence. It's called physical nexus. You have employees at work there, you have offices that work there. You go to a lot of conferences in that state that will trip you into physical nexus. So but a lot of companies try to avoid having physical nexus in a lot of places, so they don't have to collect and remit sales tax. So with all that movement, especially on the e-commerce front, so if you're an e-commerce vendor, you don't care what state you're in, you want to sell them product. And you want to limit the physical nexus that you have. So with the state seeing this trend, they're crying foul. They're trying to get... They've been trying to get Congress to make a change. And finally, the Supreme Court, having not seen Congress act on it, is hearing a case right now that could change this rule of nexus from not whether you have a physical presence, but whether you are actually selling, you know, into a state.

Brian: [00:06:49] Tell us more about this case.

Dave: [00:06:51] Yes, it's called Wayfair versus South Dakota. In January, the Supreme Court decides to hear the case. And in an order for them to do that, four out of the nine justices have to say, "Yeah, I think it's worthwhile to have a discussion about this." The original case, which set up the physical nexus was heard in 1992. That was the Quill case. So they've been waiting for Congress to solve this problem. It's been a growing problem with the growth of e-commerce. So they've finally stepped back and said, "OK, we'll hear it." And they actually talked about it on April 17th. And they've already decided it, but they're in the process of writing up whether they're going to, you know, change the rules for nexus or keep the rules for nexus as a stand down.

Phillip: [00:07:41] I'd love to, actually... Let's play a little bit of the choose your own adventure, if you wouldn't mind. I didn't prep you for this, by the way. What happens if... Let's talk about both scenarios.

Dave: [00:07:50] Yes.

Phillip: [00:07:51] Or maybe there's some gradient in between.

Dave: [00:07:53] Yes.

Phillip: [00:07:53] What happens if the Supreme Court decides that the rule as it stands today is "We will go on as we've been transacting," which I would gather has been this way for hundreds of years, right? So the catalog businesses have existed. Sears built its whole business that way. This can't be a new phenomenon transacting across state lines and not having to pay sales tax unless you have a physical presence there. If we keep on in that direction, how does that play out?

Dave: [00:08:24] So if we keep on that direction, the states have already started to try to figure out how they can go after the customers that aren't paying the sales tax, so they're already putting in reporting requirements. So merchants are being asked in certain states. You've got to send us a report of all of your transactions in the state with a lot of detail, so we can figure out how much you should have charged in tax, and we can try to go after those people for tax. So that's a burdensome thing. They're also asking merchants to put up a notice, in some states, a notice on their website that makes sure the buyer understands that they should be paying sales tax. So all of a sudden the e-com, it's kind of more...

Phillip: [00:09:05] You have state by state basis, so that becomes...

Dave: [00:09:08] Imagine South Dakota wants to put up a notice, and so does Colorado, and so does California. They all have different notices. So you have different notices that you have to put up or you'll be...

Brian: [00:09:20] How would they even track this? Would it be based on billing address? Shipping address?

Phillip: [00:09:27] That's already different on a state by state basis, so...

Dave: [00:09:29] It's all very different. How taxes calculate is already very different.

Brian: [00:09:32] Exactly.

Dave: [00:09:33] RASome states you have to have billing address, order, and shipping. And it's gonna be a burden. It's beginning to be a burden already.

Phillip: [00:09:41] And so if we continue down that path, if I had to play it out like as the nightmare scenario as a merchant, you could be potentially faced with the decision of whether you even want to try to do business in that state, because this could be so onerous for you to try to comply with. Let's say you're on an e-commerce platform, but you don't have the ability to tailor a message to someone within a particular state bounds. What would the financial ramifications be like from a fine or something that would happen as a result of you not complying?

Dave: [00:10:16] Yeah. I mean, all companies are subject to audit, you know, by states, and the audits are done like state by state. So a state could come after any merchant. They tend to go after... They're hunting for dollars. So they go after the bigger companies. But you can get into a large remittance problem fairly quickly in a state like California, which now has an economy greater than Great Britain at this point. They're like the fifth largest economy in the world just for the state of California.

Phillip: [00:10:49] And if you look at what's happening in the world in GDP right now, there are very large companies here in the United States who have just decided that they can't sell into the EU for some time until they get their act together, and they've effectively turned off their digital commerce presence in the European Union, which means we have this really strange, where the web used to be very democratized, and we all had common access to the same site experiences, we're starting to see it really very much depends on where you are, whether you can transact or even see a website now. Now imagine that on a state by state basis. That sounds awful.

Dave: [00:11:29] Right. And imagine what that would do for your business. I can't sell in these 20 states or these 25 states? The biggest ones are going to be the ones that are the most burdensome, probably.

Phillip: [00:11:38] It's probably very burdensome for a specific type of a company, too. If you sell snowboards, you're probably not selling a whole lot of snowboards in New Mexico.

Dave: [00:11:47] Right.

Brian: [00:11:50] Yeah. If you're a snowboard company based in say Nebraska, and you're selling to Seattle, that could completely...

Phillip: [00:11:58] Yeah. Decimate your own business.

Brian: [00:12:02] Exactly. Exactly.

Phillip: [00:12:03] So let's take the other path. Now, let's say that the Supreme Court does decide in some way that would create some federal standard by which we'd have to transact. Tell me about that.

Dave: [00:12:17] Yeah. So actually South Dakota put a regulation into place that they thought would have the best chance of being heard by the Supreme Court. Because they basically structure their regulations such that you only have to collect and remit if you have over one hundred thousand dollars in a state.

Phillip: [00:12:36] Ok.

Dave: [00:12:38] So the littlest companies probably still don't have to worry about it, or though, if you have 200 or more transactions in the state.

Brian: [00:12:45] Oh, my goodness.

Dave: [00:12:45] Which could trip up most companies, or a lot of companies.

Brian: [00:12:50]  Yeah.

Dave: [00:12:50] And the other thing that they did is they made it so it wasn't retroactive, which was one of the things that the Supreme Court last time they heard this was really afraid that the states would say, "Oh, you haven't been collecting, and you have to go back the last seven, eight, ten years.

Brian: [00:13:01] That would just put certain businesses completely out of business.

Dave: [00:13:06] Exactly. So depending on these thresholds, the court is trying to weigh, I don't want to be too burdensome on companies, you know, versus allowing the states to collect their fair share. So there are ways. I mean, if it goes down that path and you all of a sudden go from having physical nexus in one state or five states to 50. There's a lot you've got to do. You can use a calculation and remittance service that automates the process, like Vertex and those other players in the market that can do that for you. You could also work with work within your e-commerce system and put all the rates in the rules in your e-commerce system, take on the burden of that yourself, but that's a way to do it.

Phillip: [00:15:34] Right.

Dave: [00:15:35] It's a very viable to do it. But you really have to start thinking about it. It would be way burdensome if you were, you know, not using some kind of automation.

Brian: [00:15:46] Is there a possible middle ground on this decision? Do you see another sort of different path this could go?

Dave: [00:15:55] Potentially the Supreme Court could say this is still too burdensome.

Brian: [00:16:01] Yeah.

Dave: [00:16:02] Either they could decide potentially on some level to make it less burdensome. Or they could not hear it. And then another state puts forward next month the regulation that makes it a thousand transactions instead of, you know, two hundred or two thousand and maybe they get it through. I mean, the train's coming down the tracks one way or the other. It's going to be a burden from reporting and notice requirements the states puts on you, or having to collect and remit tax.

Phillip: [00:16:32] I have to wonder why Wayfair?  This sounds like an interesting company to use as the...

Dave: [00:16:40] It is. I kind of thought about that myself. Why were they... I think they might have taken the lead on the case.

Phillip: [00:16:49] eIs it because larger companies that might be top of mind, like, you know, the one that starts with an A...

Dave: [00:16:54] Yeah.

Phillip: [00:16:55] ...have seen this coming for some time and have decided to comply or police themselves to some degree?

Dave: [00:17:01] Yeah. Well, well yeah. That's an interesting one.

Phillip: [00:17:05] Yeah.

Dave: [00:17:05] Because a company you're talking about actually used to only have nexus in a small number of states. And then when they started to try to get faster delivery, they relocated warehouses in more and more states which gave them physical nexus.

Phillip: [00:17:21] Sure.

Dave: [00:17:22] But yeah...

Phillip: [00:17:22] And ten years ago people were talking about whether having affiliates that receive commission payments for inbound referral traffic, if that should be considered as, you know, having physical presence in a state.

Dave: [00:17:34] Yes.

Phillip: [00:17:35] I know that this is gonna be a moving target.

Dave: [00:17:37] This is a moving target. And the company you're talking about, they have the biggest target on their back.

Phillip: [00:17:42] Sure.

Dave: [00:17:42] So everybody goes after them first.

Brian: [00:17:44] Right.

Phillip: [00:17:45] The fact is though, if the Supreme Court rules in some way, it affects everybody.

Dave: [00:17:49] It affects everybody.

Brian: [00:17:50] Everyone will be affected. I think that's an interesting point. As far as that, it's effect on Amazon goes, the effect would probably... I don't want to say this because I don't know it exactly, but like compared to some other companies that have less nexus... There are many companies that have much less presence throughout the US, and so it could... I'm looking around at this room and thinking about the merchant in here. Let alone Amazon, this is  something that could change things for everyone in a very big way.

Phillip: [00:18:31] Right.

Brian: [00:18:32] So if you don't have nexus in a lot of states, but you sell to a lot of states, this should be perking your ears more than anyone.

Phillip: [00:18:42] Right. Yeah, a certain type of business can be adversely affected disproportionately to another.

Brian: [00:18:46] But I'm curious about Wayfair, in particular, because I wonder if they were picked because they don't have as much nexus. I don't know.

Dave: [00:18:57] Well, I'm guessing they were, and frankly, they sell larger items which sales tax can become significant.

Brian: [00:19:05] Right.

Dave: [00:19:06] And if they don't... And they're battling against much larger e-commerce players that have a cost advantage. So without having sales tax, you know, they can compete better.

Brian: [00:19:17] Right.

Dave: [00:19:18] You know?

Brian: [00:19:19] Yeah, because they're selling like rugs and furniture and all of the stuff that's like really high value. Yeah.

Dave: [00:19:24] Eight percent on a $200, $500 sale, and it's a chunk of money that you start to think about buying from one company versus another.

Phillip: [00:19:31] So I'm curious what your take is. When a decision is reached one way or another, I have to assume that the rest of the world takes notice as the United States sort of makes its decision here, this has to be a conversation being had in other parts of the world, as well. Is there some sort of an example like how would this affect the global economy in some way? Do you think that at some point someone decides that we have to levy taxes and tariffs against other companies that do business in the United States that don't have physical presence here? That's the next level of conversation.

Dave: [00:20:16] Well, actually, we believe that if this goes into effect, it's going to apply to anyone who's selling to anybody in the US. I was over in at a show over in Birmingham, UK a couple of months ago, and I was talking to the merchants over there. And you don't have to be a real large merchant to decide to sell in the US.

Brian: [00:20:36] Right.

Dave: [00:20:36] Because you can today, you can get partnerships for logistics. You get partnerships for everything. You don't really have to have any presence here to effectively start selling internationally. So they got it pretty quick. Oh, my God. This is a big problem.

Brian: [00:20:51] Right.

Dave: [00:20:52] I actually listened to a talk of a merchant who has got 150 million dollar company. Not a tiny company, not a huge company, though. And they had a big presence in the US already. And he in his presentation, he called out... It was a presentation about expanding globally... He called out, if you go to the US you need a tax engine. Which was music to my ears. {laughter} But the problem is going to be like at the same schedule for international companies as it is for the US.

Brian: [00:21:20] Yeah.

Dave: [00:21:22] And I do think in other countries, there's a VAT tax typically, and that's typically even a lot higher than sales tax. So they're already... Everybody's collecting something, and you have to register in countries for that. And there're some similar reasons they cause you to register in different countries. But to your point, I think they all will look at that and say, "Oh, look what's going on here. Can we tighten up our regime a little bit to make sure we're getting dollars on every sale that's made in our country?"

Phillip: [00:21:55] Sure. I think that's happening a lot right now at a global level. There's a lot of the tit for tat. And I'm assuming it's gonna be interesting no matter what happens here. It's gonna be interesting that it will likely... I don't want to say like it's good for Vertex, but somebody is going to wind up having to make a decision on how they're going to proceed no matter what happens. So next year, 18 months, you're going to have to do something. So it's better to know about it now.

Dave: [00:22:31] Right.

Phillip: [00:22:31] Be prepared for it now, whether you're willing to take that burden on yourself or not.

Dave: [00:22:36] Right. Right.

Phillip: [00:22:37] That's super interesting.

Dave: [00:22:38] Well, and there was one other. So as part of this process, we talked to a lot of accounting firms and tax law firms about what they thought was happening. What would happen. And one of them brought up an interesting point about most businesses want to be acquired someday in the future. Well, if you haven't taken care of your collection and remittance, the acquiring company will typically take an escrow out of the amount that they will pay and say, "Maybe you didn't get audited, but we're going to get audited.".

Brian: [00:23:06] Yeah.

Dave: [00:23:06] And they're going to go back seven years. So guess what? Shame on you for not collecting.

Phillip: [00:23:11] Wow.

Dave: [00:23:13] So companies should think about the other reasons why they might want to collect and remit, as well.

Brian: [00:23:18] Wow, that's super, super interesting. So merchants that are listening the show that are looking to get acquired, they should really be paying attention.

Phillip: [00:23:29] Right.

Brian: [00:23:29] Because when the acquisition opportunity does happen, there's going to be that huge moment where they're like, "Oh, gosh, yeah, we didn't remit that."

Phillip: [00:23:43] Yeah, the sins of the past, right?

Dave: [00:23:44] Or we didn't get it right. We set it up ourselves in our e-commerce platform. We didn't get the rules.

Brian: [00:23:49] Right.

Dave: [00:23:49] Oops.

Brian: [00:23:50] Oops. Yep, yep.

Phillip: [00:23:52] But an oops that could be substantial at a critical moment...

Brian: [00:23:54] Well, they could kill the deal.

Dave: [00:23:55] Either kill the deal or just reduce the price they'll pay you.

Phillip: [00:23:58] Right.

Brian: [00:23:59] Right.

Phillip: [00:24:00] I find that... Wow. When you think about what didn't exist five or seven years ago technology wise and what companies didn't even exist or what technologies are being adopted that are becoming... We haven't talked about it yet on the show on a Future Commerce yet. But Jet Black.

Brian: [00:24:20] Right.

Phillip: [00:24:21] Jet Black. Within the last five years, Walmart has changed its whole approach to digital. They've acquired media properties.  ModCloth, Jet...

Brian: [00:24:34] Moose Jaw.

Phillip: [00:24:35] Moose Jaw. Like all of these... Bonobos.

Brian: [00:24:36] Yeah.

Phillip: [00:24:36] All these acquisitions that sort of changed how we think about a business like Walmart. And can you imagine that if one of those companies five, seven years prior, didn't have their tax nexus straightened out at that point in time, what that could have done for the way that we all are engaging in digital commerce today?

Brian: [00:24:56] You know who else should we pay attention to this is VC because a lot of VC is coming in and buying out like a portion or investing in merchants right now. If they're not aware of how the merchant is gathering their taxes... That is a key factor. They should be paying attention if they're not already.

Dave: [00:25:14] And we actually have people on our staff that came from tax offices, you know, tax staff departments and other companies. They've confirmed that, "Oh, yeah. When we made an acquisition, that was the first place we called in for due diligence to see how bad or good their situation was."

Brian: [00:25:29] Yeah.

Dave: [00:25:29] So it's a real factor.

Phillip: [00:25:34] Well this is there's been really, really interesting, very informative. Have you been here at IRCE? Have you seen anything interesting here at the show?

Dave: [00:25:41] Not yet. I just arrived.

Brian: [00:25:44] Just arrived.

Dave: [00:25:45] But I can't wait to get out on the floor and wander around today.

Phillip: [00:25:48] What do you look to get out of a show like this? Since I make the assumption that you come to these sorts of things a lot.

Dave: [00:25:55] Yeah. I am really looking for... This seems like a space that just changes very rapidly.

Brian: [00:26:01] Yeah.

Dave: [00:26:01] And I want to look, I was here last year, and I just want to see what's changed. I mean, it seems like it's fascinating what other vendors are offering, what SIs are doing. I mean, it's just... This is moving. In other spaces, they just don't move with this velocity as e-commerce. It's really exciting to come to the show.

Phillip: [00:26:19] And if you think about like even three or four years ago, the people that had really big boots at a show like this who, you know, aren't even here anymore.

Brian: [00:26:28] Right.

Phillip: [00:26:29] It does change quickly.

Brian: [00:26:31] Phillip, did you see any notable absences this year or anything that's different? Have you seen anything interesting, so far?

Phillip: [00:26:40] I mean, I'm scared to name names because it comes back to bite me at some point.

Brian: [00:26:47] We talked about this a little bit last year. There were some really big changes last year. I also just arrived, so I'm excited to go out there and walk around the floor and see what's different. We'll have to do a little talk little additional recap, I think.

Phillip: [00:26:58] Yeah. We'll do an additional recap on the show. It's always great to be able to meet people, especially those that have really interesting takes on topics. I'd love to hear... Maybe we should have you come on and talk about whatever happens down the road with the Wayfair case.

Dave: [00:27:11] I'd be glad to. It would be fun.

Phillip: [00:27:13] This will not be the last time that we hear the content coming out of our Vertex partnership.

Brian: [00:27:17] Oh yeah.

Phillip: [00:27:18] We are really excited to be bringing this kind of content to you. Anything else?

Dave: [00:27:22] No, I'd just appreciate you guys wanting to learn about tax.

Phillip: [00:27:25] Yeah.

Dave: [00:27:26] We don't get asked very often. {laughter}

Brian: [00:27:30] Well it's super cool. A lot of implications.

Phillip: [00:27:32] Very, very timely.

Brian: [00:27:33] Yes.

Phillip: [00:27:34] I appreciate Dave Pelton from Vertex, and again, special thanks to Erin Kissling for making this happen. And if you need tax at some point, and we all do. Death and taxes. Right? Make sure you head over and check out Vertex, and tell them that Future Commerce or MageTalk sent you. We'd love that. And with that, I guess...

Brian: [00:27:54] Yeah. Well, you know, it has always loved to hear feedback from you. Come subscribe. Leave us a comment. If you haven't already listened from a smart speaker device, make sure you say, "Alexa" or "Hey Google, play Future Commerce." Leave us the rating. Leave us a review. Let us know what you think. With that... Retail tech is moving fast...

Phillip: [00:28:24] And Future Commerce moving faster.  Thanks for listening.

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