The Cloud Accounting Podcast: Supreme Court sales tax ruling is a windfall for Avalara

The Cloud Accounting Podcast: Supreme Court sales tax ruling is a windfall for Avalara

: Welcome to the Cloud Accounting Podcast, a show for accountants using technology to make their jobs more strategic, and impactful. I'm Blake Oliver-

: -and I'm David Leary.

: So, David, I hear that you were at Scaling New Heights this week. How did that go?

: Yes. I'm still in Atlanta, actually. I'm hanging out for a couple more days. I have a honey-do list to do at my mother-in-law's house, so I'm still hanging out here. Scaling New Heights was really, to be honest … It was pleasantly, surprisingly great, if that makes sense.

: I don't know how many people followed, but maybe about eight weeks ago – feels like maybe 10 weeks ago – there was just a lot of, let's say, drama around Scaling New Heights. Whether it'd had a bankruptcy; they changed venues; people's hotel rooms were getting canceled. There was just a lot of uncertainty that this conference was even gonna happen.

: You could feel like it was scaled back a little bit, but it was scaled back in that more of a grassroots way. Once the community was there, it was just … It was great. I've talked to everyone … The app vendors … Everybody who was there had a really good time at the conference. There was deep conversations. We had a really great time. We brought our App Showdown finalist. It was, like I said, surprisingly, surprisingly, surprisingly refreshing. Did you travel this week, too?

: Yes. On Monday, I was in Indianapolis, at the IMA Conference, and then, on Tuesday, I was in Minneapolis, at the Minnesota Society of CPA's conference. Busy travel week for me, but did it all very compressed, and I'm glad to be back.

: Yeah, one thing I like about these conferences are sometimes these travel weeks like this. I was just so … You get in the conference, and that's the only thing you're living, and breathing, and touching for 48 hours or 72 hours. I admit, it was kind of refreshing. All this drama that was going on in the outside world …

: It's like going down into a nuclear bunker, and then, you come out, and the world is changed.

: Exactly, exactly. It was nice not to be distracted by that, or kind of, in a way, I'm encouraged now. I think maybe two or three days a month, I might just not pay attention to anything outside of my own world. It's kind of a refreshing break, actually.

: Well, fortunately, we had come out of our caves of conferences by the time the biggest news broke, this week, which is the Supreme Court has overturned Quill v. North Dakota, which was the decision that governs sales tax in this country, for many, many years – decades.

: Now, according to this new decision, South Dakota, and any other state, can leverage, or require sales taxes to be collected by out-of-state retailers. Previously, if you were out of the state, if you didn't have what's called Nexus, which means, typically, an employee in the state, or inventory in the state, or some sort of physical presence in the state, you didn't have to collect those sales taxes, when you shipped into those states.

: Those states have been losing out on a lot of revenue – big ones and small ones. South Dakota, it was something like $50 million a year in revenue that wasn't being collected. It was a big problem for brick-and-mortar retailers, because if you had a physical presence in the state, like a store, you'd have to collect those sales taxes, but if your customers went online, and bought from somewhere out-of-state, then they didn't have to pay sales taxes. They were required to do so on their personal tax returns, but, effectively, nobody does that, so, basically, they were getting to buy stuff free of sales tax.

: Huge implications for this decision; potentially, lots of compliance requirements, now, on small businesses that do e-commerce, because, where they may have only had to collect sales tax in one state, now, they may have to do it in many states, and some really big benefits for some of the sales-tax-automation-software developers, right, David?

: Yeah, I think there's so many takes. I think I have an article that's an argument about why this is so bad for small business. I have another article we'll get shared that … Why Amazon wins in this. I think, really, the big winner has to be Avalara. I think it went public on Monday morning, or was it last Friday?

: It was very recently.

: They go public. Their IPO goes up like 57 percent, or something, and then, three days later, the Supreme Court makes this ruling. Then Avalara stock goes up another 30 percent. Avalara's definitely the winner in all this, for sure. Yeah, congratulations to all those Avalara friends that I have.

: It's almost like they timed it perfectly.

: Yes, yes, yes. It's actually amazing that all this happened in the same week – their IPO, and the decision that finally came out.

: Yeah. It's interesting, because the Supreme Court … I've been digging into this a little bit more, over the last day, since this just happened yesterday morning. The Supreme Court didn't actually get rid of nexus, they just redefined it. Now, nexus can include having a … I'm not sure what the actual wording is, but they changed the substantial-presence definition, so, now, that can include shipping packages into the state.

In the case with South Dakota, they have set a threshold of a hundred thousand dollars a year, in annual sales, into the state, or two hundred items being shipped into the state. I've just been thinking about this, going around in my head, and if you ship a lot of volume, but low-cost products, you could very easily meet that 200-quantity threshold, even though you're nowhere near a hundred thousand dollars in sales.

: This could really hit some smaller mom-and-pop-type e-commerce retailers. If you're selling 200 $10 items into South Dakota, now, you'd meet the threshold. You're only making $2,000 gross, and perhaps, your profit margin is less than $200 a year. It may cost you that much, far more than that, just to file all of these forms that you've gotta file, now.

: I think that's the argument Steve Forbes is making, this like … The average small-business entrepreneur is now gonna have this burden that is … It's a very expensive burden to track this, comply to, for 50 states, essentially. It's gonna be tough for small businesses, for sure. They're the ones that are gonna feel the pain from this, first.

: I think the hardest part is just going to be staying on top of all the different sales-tax legislation that gets passed in all of these states, now. There are a group of states that have come up with standardized rules, but most of them, especially the big ones, have not. Congress has the opportunity, now, to step in and do some national sales-tax legislation. I think they should set up a centralized system for collecting, and remitting sales tax, and all the states can then divvy it up amongst themselves, that sorta thing. That would be ideal, if you ask me, but, given how paralyzed Congress has been about many, many issues, I really doubt they're gonna do anything.

: Yeah, that seems a little dreamy, I think, but I do … What's your take? Do you feel like a bunch of states, now, that have kind of kicked around this, somebody's proposed it … They probably have things like this, proposals that have came through, on the shelf, right?

: Yeah.

: There's just gonna be like … In the next six to eight weeks, every single state's gonna be like, "Great, we want our piece. Here's our sales-tax rules." Just like boom. We're just gonna see this every week, five states come out with new sales-tax rules.

: Yeah-

: You need to pay here …

: They can't lose, because it's the state legislatures passing legislation that affects people that aren't in the states, or that are not in that state. It's basically a taxation without representation. It's a no-brainer for them.

: I've been reading this L.A. Times article, this morning, about the states that would gain the most from expanded e-commerce-tax collection. California, actually, is the biggest one. Could gain anywhere from 1 to 1.75 billion dollars in additional revenue by collecting from out-of-state retailers. That makes sense, because we have very high sales taxes in California.

: People try to avoid those sales taxes by purchasing from out-of-state retailers on, say, eBay, or Amazon Marketplace, where they don't collect the sales tax, so it's a no-brainer for California to pass legislation. Texas is next. They've got about a billion dollars that they could be collecting. Then New York, Florida, Illinois, Washington, Ohio, Tennessee, and Georgia. I would be expecting to see legislation in the next few months from all of those states.

: Wow. I think a related article … This is about Amazon's gonna win, because Amazon … They kinda have two plays on this. One is they're already set up to do this, as well, but Amazon's really good at punting. They get to play that, "We're a marketplace," and they can punt this down to the third-party sellers on Amazon, cuz there's millions and millions of third-party sellers on Amazon. Versus somebody like a Wayfair, or Overstock, where they basically are the retailer.

: Right. Yeah, Wayfair is really screwed. One of the big perks of buying from them is that if they don't have a presence, it's that you don't pay the sales tax, and you get that free shipping, so you're willing to put up with the hassle of not really being able to return these giant items, because you're getting such a huge discount. That's going away.

: One thing that's great, right, we do live in America. Entrepreneurs always figure out a way. I think there's a … I'll try and find it. There was a podcast I listened to about the duty-free stores at the airports. People shop at those, cuz you don't pay sales tax. I guess there's duty-free areas on the ports. Could there be some interesting … Could entrepreneurs start figuring out how to … Somebody might spin up some sort of distribution center in the ports of certain cities, or maybe at certain areas of airports. I could see, somebody's gonna figure out ways around this, and very creative, creative ways. That's what makes America great.

: Something that has not been discussed widely in the press, but that will potentially impact accountants, and bookkeepers, and software developers, dramatically, is that this ruling not only applies to hard goods, to products, it also potentially applies to services.

: South Dakota, if they wanted, they could tax services delivered from out-of-state to residents of their state. That might mean tax work. That might mean accounting work. I would be very surprised if we didn't see some states start taxing services delivered from out-of-state to in-state.

: I know that state of Arizona, on our ballot, this year, there's gonna be an initiative that will write it in to our constitution that doesn't let the legislature ever pass a sales-tax law to tax services-.

: Hmm, interesting.

: It's funny that you brought that up, because I think it's actively a table discussion in probably state legislatures everywhere, right now, like taxing services. You're right, for our impact, these cloud accountants … Because we've been telling people, "Hey, if you go cloud, you can take on clients in any states in America." Now, you, as the cloud accountant, if you have 45 clients, now, you gotta deal with nexus in 45 states, that you didn't have to do before.

: Yeah.

: This is a huge ripple effect of this, and I think we'll be talking about it next week, and the week after, and the week after. This is not anything done, anytime soon.

: No, this is gonna be a big-impact ruling that has consequences for years, and it's gonna change how people do business, I think. We're gonna see some retailers choose not to ship to certain states. We're going to see some retailers choose not to do online, and we'll … If the services component expands for taxation, we're going to see some of these cloud firms probably choose not to do business with certain states, or be selective.

: It was already a challenge with my cloud firm, because whenever we had an employee in a state, we then had an income-tax obligation, there, and then, you have to apportion your income. That gets very complicated, so, I know how that goes.

: I feel like Amazon, early on in the e-commerce game, so this is probably going a dozen years ago … I feel like one of the states wanted to tax everything they shipped, and I think Amazon played hardball, and said, "Fine, we won't ship to your state." I think that kinda killed it, but, we were in a whole different game about this.

: Now, the other interesting thing is the … People have to understand, in the grand scheme of retail, I think e-commerce, even as big as Amazon is, I think e-commerce is still barely eight percent, or just broke eight percent. In the whole grand scheme of everything, most states are not getting … They're not getting a ton of revenue from e-commerce- [crosstalk 00:13:16]

: No, but if you look at the trends, and you see … You look at how it's growing, more and more people are getting comfortable with buying online. I'm an early adopter, and I buy as much as possible … Anything that I can buy that I'm comfortable buying online, I do, cuz I hate going to the store.

: My wife is the opposite of me, so, she's a good case study for the rest of America. She hates technology. She always resists adopting it, but even she has gotten much, much more comfortable with buying on Amazon, and buying … Especially like clothes for our son, we buy all of that stuff online, because it's so much easier than trying to go to the store with him. If she's comfortable, getting comfortable, with it, then I think it's just gonna explode. That's why this ruling was very timely. If they hadn't addressed this, if the Supreme Court hadn't addressed this it, would've just ballooned outta control.

: I think we're still all comprehending it, but I … This is one of the biggest things to come down in a long time. I can tie it back to the election. I heard an argument somebody made that when you go to vote, this year, at the polls, you should just vote for only people that understand technology, because decisions like this that are gonna keep coming down the pipe, there's gonna be more and more.

: Regardless of your political stances, only vote for candidates that understand technology, because if they don't, it doesn't matter where they stand on the other issues, they'll just make wrong decisions about technology, and it's just gonna affect us even worse than any of their political stances.

: I can get on board with that. Hey, before we go, I've got one more fun story that's a little less intense than this whole sales-tax issue-

: Oh, yeah, that's good.

: -I'd like to share that. This has to do with artificial intelligence machine learning. It's a story in the MIT Technology Review, from June 15. The headline: A Machine has Figured Out Rubik's Cube All by Itself. That caught my attention, because I've always played with Rubik's Cubes on and off. I've never actually owned one, but I've always been really impressed by the people who could solve them very quickly, and I've always [crosstalk].

: You really have never owned a Rubik's Cube? We have to stop right here for a second. You've never owned a Rubik's Cube?

: I've never owned a Rubik's Cube. Maybe I'm a little bit intimidated, but I've never gone online, and learned how to solve it. I know there's YouTube videos that will show you how to do that, but I've always … It's sort of been like on my bucket list of I wanna get a Rubik's Cube, and I wanna figure out how to do it, on my own, without anyone teaching me.

: Well, it looks like the machines have beat me to it, because an artificial intelligence, or, it's actually called a deep-learning machine, has figured out how to solve a Rubik's Cube, all by itself. In the past, we've, of course, had computers, and programs that we've taught how to solve Rubik's Cubes, but that's because we have given it clues, and given it an algorithm, or whatnot.

: In this case, a computer was given the Rubik's Cube, and was not given any clues. It had to learn how to do it, itself. It's interesting, the way they did it was they had the computer go backwards. They had it learn how to solve the Rubik's Cube by starting from a solved Rubik's Cube, and then messing it up. Then, once it had learned how all that worked, it was able to put it back.

: That's an interesting approach, because that's how, actually, it works in real life is you envision the completed product. You envision what you wanna create, or what you wanna accomplish. Then, often, you will work backward from the completed state to your current state, to figure out a path to the solution. The computer did it the same way.

: Interesting. There's this independent hacker that … He's creating a self-driving car, and his self-driving car is just almost as good as Tesla's. He did it from that way, like he just has it pay attention to how he drives, and it just learns from proper driving, instead of trying to program every … Like distance to stop signs, and program, "This is a stop sign. This is not a stop sign. This is a yield sign." It just learned from watching him drive, essentially.

: That's how human beings learn, so, you think it would work with computers, and it does. The thing that's kind of scary about this algorithm is that it is able to solve 100 percent of randomly scrambled Cubes, while achieving a median solve length of 30 moves, which is less than or equal to solvers that employ human-domain knowledge, and is way, way faster than almost anybody can do, except people who are really, really good at Rubik's Cubes.

: Yeah, I don't know … My boys, for a while … Last summer, that was the thing, Rubik's Cubes, and I think he got it down to 1:06, or something, that he could do a Rubik's Cube in. I'm telling you, though, Blake, I know you're a little younger than me … If you're gonna do this, you gotta do it now, because it's hard to memorize these algorithms when you cross 40. It's very, very hard. You better buy your Rubik's Cube, get online, pay the sales tax, order it, and get your Rubik's Cube as soon as you can.

: All right. I'm gonna do that. Unfortunately, I missed the … I think I missed the boat for getting it tax-free. You know, we'll have to leave it at that. I've got to do some work today, and I know you're a busy guy. I'll look forward to seeing you next Friday.

: Yeah, absolutely. Wow, everybody go research about sales tax.

: Yep, and connect with us online to continue the conversation. I'm @BlakeTOliver, on Twitter.

: I'm on Twitter, @DavidLeary.

: We'll look forward to hearing from you, and thanks for listening.

: Later, Blake.

: Bye.

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