Debunking Sales Tax Myths | Sales Tax Expert Roundtable

Think you don't owe sales tax because you're not based in that state — but what if you're wrong?

In this episode of The Sales Tax People podcast, Danny Wright, Jason Parr, and Paul Johnson bust the most dangerous sales tax myths that cost businesses real money — from nexus misunderstandings and service taxability blind spots to B2B collection gaps and drop shipping traps. You'll learn the simple "Where, What, and How" framework to evaluate your sales tax responsibility and why ignoring it can become a massive margin killer with compounding penalties and interest.

📌 Questions we answer in this episode:
Do I owe sales tax in states where I don't have a physical office or employees?
Are services like web design, SEO, and SaaS taxable for sales tax purposes?
Does selling B2B or wholesale exempt me from collecting sales tax?
Do third-party contractors or 1099 reps create sales tax nexus for my business?
If I sell on Amazon or Walmart, do I still need to worry about sales tax collection?
What happens if I've been selling without collecting sales tax I should have been?
How do drop shipping arrangements affect my sales tax liability?

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And, as always, if you've got any questions don't hesitate to reach out!

Transcript

Introduction: What is a sales tax myth?

SPEAKER_03 0:00

You're listening to the Sales Tax People Podcast.

SPEAKER_00 0:07

In today's episode, Paul, Parr, and Danny dive into the biggest myth in sales tax, which is I'm not based in that state, so I don't know tax there. It's one of the most expensive assumptions a business owner can make, and it could cost them tens of thousands of dollars in back taxes, penalties, and interest. Things like SaaS, web design data processing, you're not off the hook. All of it is taxable in more states than you think. If you sell online, ship across state lines, or operate in multiple jurisdictions, this one's for you.

SPEAKER_04 0:36

A sales tax myth. So it's either something you hear about frequently, you know, that comes up frequently, or you've, you know, just seen a big enough issue that it's it's one that you wish would go away. Now, Paul, before you get all crazy with like conspiracy theories, we're not talking about conspiracy theories here. These are myths. And you know, if you get crazy with conspiracy theories, I'll get even crazier. So we don't want that. That's true. This is true.

SPEAKER_05 1:01

If we go conspiracy theory, this podcast will go from 10 minutes to 10 hours. There's no doubt about it. This is true.

SPEAKER_04 1:08

And we'll have to change the name, the the sales tax people living in the rabbit holes or something like that.

SPEAKER_02 1:13

According to the Oxford Dictionary, a myth is a traditional story, especially one concerning the early history of a people or explaining some natural or social phenomenon. It's a widely held false belief or idea. Widely held a lot of those.

SPEAKER_05 1:29

It's a say it again.

SPEAKER_02 1:30

It's a widely held but false belief or idea.

SPEAKER_05 1:34

Okay. Yeah. Well, yeah, so we get some of those in sales tax for sure.

SPEAKER_04 1:38

And while you're thinking in true par fashion, while while you're thinking of one par, we're gonna have you go first. Let me just highlight why there's no one

Why understanding the facts matters before making assumptions

SPEAKER_04 1:47

like Paul Johnson or PJ, as we like to call him. Because you know, here we are, we you know, ask a question and Paul just goes right to the research, which is such a great habit to be in when you are a sales tax leader and a sales tax trusted advisor. Because he's not just gonna answer things, he's gonna ask more questions and he's gonna research and figure out like even what we're asking or what we're talking about.

SPEAKER_02 2:11

It's true. When it comes to sales

Myth: "I only sell services, so I don't have a sales tax responsibility"

SPEAKER_02 2:13

tax, you you gotta make certain that you understand the facts. What are the facts? And so we talk about what the myths are in sales tax. Well, what exactly is a myth? And how would you define a myth? Let's start with that to make sure that we're on a common ground. Make sure everybody's on the same page.

SPEAKER_04 2:28

And in addition to understanding the sales tax facts, you gotta understand the myths. It's true. So part, what's a myth?

SPEAKER_05 2:35

Did we give you enough time? What is a widely held but false idea or concept? Well, here's one. My service is not taxable in the state where I run my operations, so I don't have any tax responsibilities. Or I guess the more the broader myth would be I just provide services, so I don't have a sales tax issue. We worked with uh an advertising or marketing agency recently, and uh they're based in Utah. For the most part, marketing services, advertising services, web design services, helping you with your SEO and other efforts. Maybe you have a fractional CMO, whatever the case may be. Not taxable in Utah, but services are rendered across the country and maybe even around the world when it comes to marketing. Remember, you have to keep remembering this. Post Wayfair, my sales tax responsibility is based on where my customers are located, not where I'm located, right? So you just always keep that in the back of your mind. So now if I'm a marketing agency, I do all sorts of work. Some of them I listed. And in doing that work, I might be providing those services to customers

Post-Wayfair reality: tax responsibility is based on where your customers are

SPEAKER_05 3:42

across the US. And I might not recognize that in some states, some aspects of what I do may be taxable. So that's just one myth. And what we found was in Texas, web design services working on your SEO can fall under data processing services, can fall under SaaS, can fall under other categories of services that are taxable in Texas. And so we were just able to make this company aware that there are some states where they need to be thinking about a sales tax responsibility where they have customers in that state. So just to be clear again, the broad general myth is all I do is provide services so I don't have a sales tax responsibility.

SPEAKER_02 4:19

Not true. I'm su I'm surprised you started with taxability. You didn't start with Nexus. Because the biggest myth when it comes to sales tax, it always starts with Nexus, because we love to start with Nexus. We always start with Nexus. But the biggest myth is I'm based in California. I don't owe Texas tax. I'm not I'm not based in Texas. I don't owe Texas tax because I'm based in California. Well, that's a

Myth: "I'm not based in that state, so I don't owe tax there"

SPEAKER_02 4:43

common misconception and understanding. The state of Texas can impose upon you the responsibility to collect its tax based on the fact you just you merely sold more than five hundred thousand dollars in revenue to customers in Texas. So you gotta understand the Nexus laws and legislation and how different it is from California to Nevada to Utah across the entire US.

SPEAKER_04 5:06

That's uh one that comes up it and call it even like a a sub-myth or subcategory of that myth around Nexus, and you know I don't I don't have a we're going down the rabbit hole.

SPEAKER_05 5:16

Paul, if you want to look up what a sub-myth might be, um I just we're st we're we're we're going deeper. That's all.

Sub-myth: third-party contractors and installers creating physical nexus

SPEAKER_04 5:24

Subterraneous myth. Well, subterraneous myth. Now I forgot. I don't remember what I was gonna. Oh man, see what you did. The the myth that I'm I'm talking about is one where again it's based on a company being remote selling uh services. Hey, this is gonna touch on yours too, Parr. I'm selling a service into a state, and I don't even have nexus, or I don't need to worry about it because I don't have employees that are going and doing the installation of that service. Now you're talking about materials, right? But generally, like people think, okay, I don't have a presence in that state, like I'm subbing out the

How 1099 contractors and third-party reps trigger nexus in other states

SPEAKER_04 6:05

installation, the actual you know, fulfillment of that service in the uh in that state, because sometimes it is just strictly a service, right? And the materials are either non-existent or immaterial. Well, if you're subbing out that work, right, and you're ultimately hiring someone in that state to fulfill that service and your business model requires such, you got some nexus problems.

SPEAKER_05 6:28

Yeah, that is a myth. I I don't have physical nexus, right? In today's world, we're talking about economic nexus so often that that we well, we don't, but often people will skip over physical nexus. So sometimes when we're having a conversation with a company, we realize or they realize, hey, we don't think we've reached the threshold for economic nexus. And then we start talking about their business operations and we find out they've got third-party contractors or third-party sales reps that are acting on their company's behalf that either live in other states or go into those other states to conduct some of that business. So I might be just across the border in one state, but I go into another state to conduct uh either I'm a third-party sales rep, or in a lot of cases, to your point, it's a third-party contractor or a third-party installer who might be doing some installation for some sort of software as a service. So there might be some sort of a modem or some sort of internet equipment that they're setting up or attaching, and that's creating a physical presence in in that state for a company that's like, hey, we don't have anybody there, we don't do any business there. We only use third-party contractors to do all this work or third-party sales reps. And it's like, yeah, so let's go back.

Myth: drop shipping means the shipper owes the tax, not the seller

SPEAKER_05 7:43

I can't control what they do. Yeah, yeah, that's gonna be a problem. That actually goes back, I believe, to the 60s or 70s. Um those laws have been on the books for a long time um in all these states. That is that is a myth that people have, is that they're not uh physically doing business in a state, but the Nexus laws would indicate that they are if they've got third-party contractors or or reps.

SPEAKER_02 8:07

You know what's similar to that is when you're drop shipping, you know, I'm working with this manufacturer and I'm I'm selling what he's uh providing or what he's manufacturing. I'm selling it to to a customer in Texas, but he's shipping it to Texas, so I don't owe tax on that one. No, no, no, you sold

The danger of "so I don't need to worry about sales tax" thinking

SPEAKER_02 8:25

him uh an Olwalla Cup, a lovely sales tough people old cut. You you sold it to him and you have employees in Texas, so you have Nexus in Texas. You started with Nexus, you have a tax responsibility. So drop shipments in general, just a great myth that they don't create a tax responsibility or Nexus and result ultimately in a tax liability.

SPEAKER_04 8:49

Yeah, another another common one is again, it's a common theme of if you look at just the high level and the you could call it even a foundation of a lot of these myths is I'm doing this or I'm not doing that, my business does this or my business doesn't do that. So I don't need to worry about sales tax. As soon as someone says, so I don't need to worry about sales tax,

Myth: "I sell wholesale/B2B, so sales tax doesn't apply to me"

SPEAKER_04 9:10

I know there's likely something to look at. Not necessarily that they are incorrect and they have some significant, you know, tax exposure. But usually with that mentality and that approach, that's a trigger you could say to ask more questions and actually dig in a little bit and both confirm some of you know what their suspicion is that they don't need to worry about sales tax, but it's usually

The critical role of resale certificates and use tax obligations

SPEAKER_04 9:33

not that black and white. And and an example that comes to mind, in fact, the myth that was on my mind as we came into this is someone that's manufacturer or you know, they're wholesaling in some way, shape, or form, right? Their business model is what a lot of people would call distribution. Oh well, I'm not selling to the uh consumer, but I'm not selling retail, so I don't need to worry about sales tax.

SPEAKER_02 9:56

Yeah, these are B2B sales, Danny. They're not B2C. I mean, I'm not selling to the end user, the consumer. I don't have to worry about sales tax. You don't have to worry about sales tax, but you do have to worry about that certificate.

Myth: selling on Amazon or Walmart eliminates your sales tax responsibility

SPEAKER_02 10:08

Exactly. Got to get that resale certificate, otherwise under audit.

SPEAKER_04 10:12

And a lot of times you're dealing with use tax issues too that you gotta pay attention to of, you know, are you know you're purchasing products exempt and are you're manufacturing them, but you know, are you using or consuming any of these materials and products? And you know, are you gonna need a self-assess and accrue use tax that needs to be reported to the states?

SPEAKER_05 10:32

That uh brings another myth to my mind. What you guys were just talking about, how you distribute, how you sell B2B versus B2C. Another myth is people get a little bit confused. They say, hey, I sell on Amazon or I sell on Walmart,

The "Where, What, and How" framework for evaluating sales tax

SPEAKER_05 10:45

so I don't have a sales tax collection issue, or I don't create Nexus because they have Nexus. Well, number one, you still create Nexus based on your sales volume. It doesn't, it doesn't always mean that you have the responsibility to collect tax, but even if you sell on some of these platforms where they're the responsible party for collecting, you're the responsible party for collecting tax on sales through your website or other channels that may not be collecting that tax on your behalf. You also should make sure that your your marketplace facilitator is is functioning according to the law, that they actually are collecting the tax on those sales. So that one hits Nexus taxability. And do I have the responsibility to collect the tax, or does another party have the responsibility to collect the tax? And people get confused on on those things. One of the ways we say this now is three things you need to know is where you sell, right? That's Nexus, what you sell, that's taxability, understanding the taxability of what you sell in each state or jurisdiction, and then how you sell, right? Do you what channels do you use? Are you selling those B2B, B2C? Are you using marketplace facilitators, et cetera? So where do I sell? What do I sell? And how do I sell it? If I can just, if you sit down with us and have a conversation, those are the three questions we're going to start with, just to get an understanding of what your responsibility might be. And real quick, we'll be able to help you understand what your potential responsibility is, and then we can dig in further to understand if there's actually any potential exposure or if any action should take place going forward. Which leads me to this last item, which is earlier, Danny, you were saying something about people having to worry or not worry about it because of the type of organization they are, where they're located, what they're selling, where they're selling, et cetera. And

The real cost: uncollected tax as a margin killer plus penalty and interest

SPEAKER_05 12:30

um, it's super simple. There are some people that don't have to worry about sales tax. The people that have to worry about sales tax or should address it is anybody anywhere in the world doing business in the U.S., no matter where you're located, if you're doing business in the U.S., sales tax is a conversation that we should have just to make sure that you don't have a responsibility that has been overlooked, which could result in some exposure, which can result in money out of pocket with penalty and interest. And that's the biggest tragedy in sales tax, is if you could have been compliant and registered, you could have been collecting tax from a willing party who understands the rules, and you didn't. So that tax comes

Final takeaway: destroy the myths, don't live in them

SPEAKER_05 13:11

out of your own pocket, works against your margins, but worse than that, salt in the wound, no pun intended, state and local tax, salt in the wound. You also may have to pay penalty and interest on those dollars that already were working against your margins. So anybody doing business in the U.S., and I would add Canada, you want to have a conversation and you want to be addressing the topic of sales tax because it's it can be a big margin killer.

SPEAKER_04 13:35

That's it. Stay out of the world of sales tax myths, people. Greek mythology, that's okay. In fact, that's awesome for a lot of people. Sales tax mythology.

SPEAKER_05 13:44

Hey, I can get down on some Percy Jackson. I enjoy it, especially with the grandkids. But sales tax myths, we we wanna we wanna destroy those.

SPEAKER_03 13:58

Thanks for hanging out with us on the Sales Tax People Podcast. If you want to talk about sales tax, or maybe you have an experience that goes along with something we talked about today, or maybe you just want to hear about how Paul's day is going, make sure you send us an email to podcast at sales.tax, or you can text us at nine four nine three five five five zero nine eight. See y'all again soon.