The Power of Data: Vertex’s Approach to Keeping Pace with Tax Changes Part 2

Hosts & Guests

Judy Vorndran, Partner, State and Local Tax

Meredith Smith, State and Local Tax Senior Manager

Mike Bernard, VP of Tax Content and Chief Tax Officer at Vertex

What You Will Discover:

In this episode of the SALTovation podcast, we continue our conversation with Mike Bernard, VP of Tax Content and Chief Tax Officer at Vertex, a global provider of indirect tax software solutions. We examine the threefold increase in fee impositions within three years, underpinning the expectation of continued expansion in this domain. We also explore the burgeoning landscape of state and local taxation, where green fees, neighborhood assessments, and intricate policies intertwine with local economies and legislative nuances. Mike also shares insights on the future of sales and use taxes, the impact of commercial real estate devaluation, and the potential taxation of services. 

Topics Discussed in this Episode:

  • There’s been a significant increase in environment-related fees, which is reflective of a broader trend towards eco-conscious taxation.
  • Fees are emerging as a preferred alternative to sales tax increases due to the ease of implementation and their transaction-based nature.
  • Diverse new fees create operational and compliance challenges for businesses, requiring sophisticated tax software and calculated strategies.
  • The sales and use tax is positioned to become more prominent in funding state budgets, especially considering economic downturn resistance and recovery.
  • Professional services taxation complexity may continue to be addressed indirectly through audit practices, while explicit taxation of services remains a point of debate.


      • “Fees can be passed with relative ease. They’re easy to audit because it’s on normally a per-transaction basis. And so I think if you think about how local communities or local districts want to continue to raise revenue without raising the sales tax rate, these are going to be a significant portion of that. And I will tell you this, a lot of our customers are very aware of this and they want to make sure that at least we stay apprised of making sure that in our monthly data update, we get those fee positions updated with that as well, so that they’re charging proper fees as well.” -Mike Bernard [01:43]

        • “The devaluation of commercial real estate in the urban cores puts pressure on budgets. So you’re seeing this massive kind of revaluation because people are either hybrid work or they’re not having to go in five days a week. And so now these commercial buildings are being revalued. And so property tax revenues are starting to be greatly impacted.” -Mike Bernard [13:37]

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    [00:00:00] Meredith Smith: Welcome to SALTovation. The SALTovation Show is a podcast series featuring the leading voices in salt, where we talk about the issues and strategies to help you make sense of state and local tax. And one of your kind of more recent recordings, you had mentioned kind of the uptick in those like green fees, like the bag fees to find electronic goods and you know, tires and whatnot.

    [00:00:25] Um, those things that could adversely affect the environment is that, do you expect kind of that expansion of those going forward? Do you think that's going to be something just crystal ball as you know, a tax person who's been working, you know, in, in tax for this long, that that's going to be just kind of a new thing that you're, we're just going to keep seeing and seeing and seeing.

    [00:00:47] Mike Bernard: I do. I think it's, um, if I definitely do. I mean, if you think back, just say two or three years ago, we at Vertex were supporting around 400 fee impositions and mostly in the green space area that you mentioned today, we support about 1200. So in a three year time period, it's gone up by a factor of three.

    [00:01:11] Um, and I don't think it's just in the environmental space. Also, we, um, we tend to think that it's going to. Also, and we see this because we have a lot of customers in the hospitality space, so they actually have to impose fees on what we call we call them neighborhood fees. So if you're at the airport and you buy a cup of coffee, there might be a port fee for that airport just because that's where you bought it.

    [00:01:34] We're starting to see some places where trending neighborhoods are actually starting to impose fees. If you go out to dinner or something like that, yeah. And and the thing about fees is that fees can be passed with relatives with relative ease They're easy to audit because it's on a normally a per tracks per transaction basis and so I think if you think about how local communities or local districts Want to actually continue to raise revenue without raising the sales tax rate fees are going to be a significant problem I will tell you this, that a lot of our customers are very aware of this and they want to make sure that at least we stay, you know, apprised of making sure that in our monthly data update, we get those fee positions, uh, you know, updated with, with that as well so that they're charging proper fees as well.

    [00:02:27] So yes, And that's not really

    [00:02:28] Judy Vorndran: a sales tax. Right. That's just a fee, but you've got to, if you're going to send an invoice and put something on it, how else are you gonna put it on there? Right. Just help with that. So it's almost expanding your base of what you actually have to be collecting on an invoice.

    [00:02:43] But that's a service to your end user. And to the, you know, pass through a bit, but you know, the interesting thing, Colorado, we have Tabor. So we cannot increase our taxes without a vote of the people. We can appreciate that does not go over very well. In fact, we just lost this property taxing was actually to the benefit of everybody because of a lack of awareness around what the law really meant to them.

    [00:03:05] And they thought, Oh, it's going to take away my 800 Tabor refund. I'm like, this is bigger than that. You should pass this is law governor put it, but. People don't understand that. So they're not going to vote for tax increases. So what do we do? We impose delivery fees, bag fees, because fees are not a tax in Colorado.

    [00:03:24] And so far so good. They've won on that. They've won. And then that fee was a transportation bill. It was not a department revenue bill. Department of revenue was enforced with, uh, tasked with enforcing it and managing it and taking the input. But it was not a Department of Revenue bill. And I just had a meeting with Heidi Heitkamp.

    [00:03:42] Our she is our executive director. She actually came out of retirement as the deputy back to be the executive director. And I we asked her straight up this over my career. We've seen different advocacy at the Department of Revenue where they're pushing legislation rather than receiving it, have no comply with it.

    [00:03:57] And their policy is. They're going to go towards, uh, enforcing what the legislators want to do, right? Not, they're not going to assert policy. So it is a push pull. Like you said, how do you serve policy that could be a detriment to another taxpayer, but they're just taking, um, the Canadian, what is it?

    [00:04:13] They're taking no side. So just, okay. What, you know, and then explaining to the legislators, this is going to be hard for us to implement. So just be mindful. We're going to need some more full time equivalents. to make it happen. Exactly.

    [00:04:25] Meredith Smith: What I'm sure there's a lot of digging into the nuts and bolts of like what that fee actually is to understand whether it's going to be part of the purchase price and is it taxable and just really trying to assign like and here's the new code for the you know, kind of that mapping code within the system for, you know, the living wage fee when you go to a restaurant, is it a tip?

    [00:04:47] Is it, uh, you know, is it required because it's not optional and just the taxability and the nuances of each one of those fees, I'm sure is just a huge, just undertaking to try to get behind what those actually mean.

    [00:05:03] Judy Vorndran: And typically the people in the company don't have a clue how to apply tax law to that.

    [00:05:07] So they're just winging it and hoping and relying if they have a vendor like you, they're going to provide them some information because they don't know it themselves or how to find the answer to it. That's why we have a prayer. Not everybody can talk to us. So it's tough.

    [00:05:20] Mike Bernard: Yeah. No, there's almost no guidance behind it.

    [00:05:23] And the other thing to it is it's so very local. that they, they pass these things and it's just imposed and there's, and as you, as you both said, it's, you're kind of left to kind of figure it out on your own and maybe, maybe it's analogous to some other place or some other place of, of adding some of these fees.

    [00:05:41] So a lot of, again, not much guidance, have to collect it. Have to remit it. Uh, and it's, it's, it's quite a burden actually on our customers to actually do that as well. Well, I

    [00:05:55] Judy Vorndran: remember when the, when the, when the delivery fee got imposed and of course within a year it was raised a point a penny. I'm like, come on.

    [00:06:02] So anyway. Mm-Hmm. , um, we. It was mandatory. It had to be imposed. So there are many home rural cities in Colorado that were going to tax it because mandatory, mandatory related to delivery delivery is taxable in those cities, not at the state level, depending on mandatory, if it's, you know, uh, You know, you can choose blah, blah, blah.

    [00:06:21] I mean, unlike these cities, don't do this to us. That's a circuitous transaction. But imagine you've got to figure out how to do that. We did get them to back off on that by rounding up our Colorado Municipal League, which is similar to the Multi State Tax Commission, but Just represents the cities of Colorado, but really explaining because there's such a disparity amongst the cities.

    [00:06:41] We have 71 and we just have 72 now because Keystone just rolled to be Keystone. I don't know how many people live there can't possibly be more than 3000 humans live full time in Keystone ski resort area. I'm sorry. It's just not a huge community. It's a lovely mountain ski town. They don't realize the repercussions on the people giving them money and the kind of the impossibility of managing it.

    [00:07:03] So, uh, we are very grateful that, you know, through some information, Denver especially decided to back off because they kind of set the standard. I know they're our biggest metro city, um, and they're, you know, their rates 4. 8 percent because they're a city and a county. That's double your state rate if you're going to tax some ancillary fee.

    [00:07:22] So that was a really anxious creating time for me to tell our legislators and our department revenue and our other cities, you can't do this to taxpayers. You're just going to be asking for trouble for them and you're going to be putting them in trouble on an audit. We don't want that.

    [00:07:37] Meredith Smith: Out of curiosity, is there one fee that you've heard of that you're just like, wha?

    [00:07:42] Like the green headphone fee in Fargo, North Dakota, because you bought a pair of green headphones. Is there anything that's just kind of being silly and like, is there any kind of fee that you've heard of that was just like, what? Like that head scratcher WTF moment?

    [00:08:00] Mike Bernard: No, I, I, I don't know. I think I just expect it's going to be kind of a bit odd sometimes, but I will say this.

    [00:08:07] I will say Where we where you see some struggles is in Canada because it's your fees are based upon Volumes and so you have this graduated thing about where you have to impose the fee and how much the fee is so if you really want to kind of see the how granular fees can go on a say a bottle of soda like given like You What volume is in it?

    [00:08:30] That's the thing that really makes, you know, things tough. And they impose those. She's kind of because they say the bigger the bottle. Well, you know, the more that it needs to be recycled or should be recycled. And so that's that's where you take some

    [00:08:44] Meredith Smith: more room in a landfill or interesting. You got 12 ounce can versus a 16.

    [00:08:49] 9 ounce Uh, plastic bottle versus a two liter were,

    [00:08:55] Mike Bernard: you know, interesting.

    [00:08:59] Judy Vorndran: I had a situation with a client where it was like they sold their own convenience store and they would sell to go, right. Grab a bag of chips or versus it's. Food for home consumption by a container or a big bag of chips versus a little bag of chips or a package with all The little chips for your kids lunches So the package and the big container all non taxable food for home consumption But the one off chip bag, which you could probably take to go is actually take out food subject to tax So it's like who couldn't do that who could do that as a taxpayer?

    [00:09:33] They also sold energy drinks Okay, so I learned about energy drinks. I'm like, oh Do you know how many energy drinks there are? When I went to law school, I drank Mountain Dew. I didn't ever drink coffee actually until my forties, but I drank Mountain Dew, which is so bad for you, but regardless, I love that Mountain Dew.

    [00:09:47] I drank my Mountain Dew. So I didn't know anything about all these crazy energy drinks. I mean, we're looking at the, their list of all the cups, all the types of energy drinks that are selling like over a thousand. And the distinction on the labeling is it could be a supplement, a nutritional or a supplement label.

    [00:10:04] If it was a nutritional label. Except if it's a supplement label, taxable, or if it has milk or coffee in it, food, anyway, you can't figure that out. You could have the same can sitting on the shelf with two different labeling systems. You don't control the labeling as a convenience or anybody who buys an energy drink.

    [00:10:22] So this poor convenience store is getting audited for this. And I'm thinking this is crazy for you to expect them to manage this. and we got them out of the audit assessment, but it was very distressing. And I had, I went to the grocery store and pulled the same can with two labels on the shelf, right next to each other, same product, different labeling.

    [00:10:41] It's like, if you cannot make a distinction based on that, that's crazy. Do you

    [00:10:46] Meredith Smith: remember when we were mapping kind of like a newer supplement, vitamin, whatever we called my parents, my parents

    [00:10:55] Judy Vorndran: are food scientists. It was CBD. What is CBD?

    [00:10:59] Meredith Smith: So we called my parents who are food scientists to like really get into the nuts and bolts of like what the definition under the FDA, because my mom was in regulatory with the FDA private company, but dealt with the FDA a lot.

    [00:11:10] So we called her to talk to her about that, those distinctions. And so those are all of those things that kind of bringing us back on topic that you all as a software vendor and as, you know, Chief tax officer have to, you know, be aware of have,

    [00:11:26] Judy Vorndran: you know, the option

    [00:11:28] Meredith Smith: of people, right. To implement that and just, you know, where technology is changing, right.

    [00:11:35] You know, when we first started working with a vendor, there was no code for infrastructure as a service because that wasn't really a thing. And then all of a sudden, you know, everyone has AWS. You know, is storing stuff in the cloud that we've got to come up with a mechanism for people to kind of assign that code correctly.

    [00:11:56] And then before you can implement a code, you've got to know the rules behind it. And sometimes That's what really

    [00:12:02] Judy Vorndran: is IAAS. Yeah. And those newer

    [00:12:04] Meredith Smith: technologies. Yeah. There are, there isn't

    [00:12:07] Judy Vorndran: a lot of rules. And you're building the tech stack together, not even separately sometimes. So it's like, what is it that you buy?

    [00:12:16] Meredith Smith: And I guess, you know, we've talked about a few things, you know, the, the evolution of fees and just kind of new taxes. Is there anything that Vertex or, you know, you not as an employee of Vertex are really kind of interested in or keeping your eye on from kind of new tax policy that you might have to be kind of aware of, you know, on the income tax side, we're really heavily watching, you know, what states are doing with public law 86 272 and what the MTC has come out regarding that, you know, from a sales tax side, is there, what are you all really kind of looking at crystal ball that, you know, we're not going to hold you

    [00:12:57] Mike Bernard: to.

    [00:12:58] I think I'll, I'll go back to something that's happened over the past couple of years where a lot of states have provided a lot of relief in the personal income tax space. They've cut rates or they've done something like that. And, and so they've put, they've, They've allowed that to kind of happen as a policy decision.

    [00:13:18] And I understand that because a lot of people did have a tough time during COVID and, and so they, they wanted to provide some relief there. The second thing that is putting pressure on budgets. So that puts a pressure on budgets. The second thing that puts pressure on budgets is actually the devaluation of commercial real estate in the urban cores.

    [00:13:39] So you're seeing this massive kind of revaluation because people are either Or, uh, or they're not having to go in five days a week. And so now these commercial buildings are being revalued. And so property tax revenues are actually starting to be greatly impacted. And I would say this, I would say as a funding mechanism between corporate and personal income taxes, property taxes.

    [00:14:05] And sales and use taxes that sales and use taxes is going to become a much greater place for funding more prominent in the future. And I would say that because one thing that is true about sales and use tax, it's normally, even though we've talked about a lot of complexity around it, it's normally a little bit easier to get that and impose that tax.

    [00:14:28] It collects much sooner than it does say for income tax purposes. Cause you're getting, um, you're getting those remittances every month. And then the last thing too, is it's really kind of based on, on, on a transaction, which is the economy moves along in, in a transaction. Two thirds of the economy is based upon all of this commercial activity by consumers.

    [00:14:50] So given all of that and rolling that all together, I just think it's a preferred method of funding going forward. The other thing I would say this to is the data over the last, say, 60 or 70 years. If you look at all the economic downturns that have occurred, there's been about five of them. The one tax between The income tax property tax and sales and use Is sales and use goes down faster in hard economic times, but guess what?

    [00:15:18] It comes back faster So it's almost like a v curve going down and coming back and it normally will restore itself within two quarters Maybe three at the most. Whereas if you look at the other taxes, income taxes and property taxes, it normally takes them anywhere from eight to nine quarters to actually go down and then come back.

    [00:15:37] So, so if I'm a legislator there and I'm thinking about like, what's my preferred method of funding? What's the one that's most resilient against economic downturns? It's sales and use tax. And so I'm probably going to continue to raise rates. The one thing I think that that still has to be decided by states is are they going to broadly tax services?

    [00:15:57] There's only about eight or 10 states that actually broadly tax services. I think you all know this is there, there's, there would be this Decision that have to be make. Are you going to tax professional services like accounting, data management, professional, uh, architecture, those kinds of things versus personal services like lawn care, daycare, uh, and those kinds of things, uh, healthcare won't be, cause obviously that's off the table.

    [00:16:23] But, but the question is which of those services are you going to tax? And the second thing is there's a lot of resistance within department of revenues to actually go ahead and tax services because there's They have to put out a bunch of new rules Uh, it it can be regressive in terms of that tax itself depending on what they tax And so the question is that's kind of like one of the last kind of big pieces of the economy that they simply just aren't taxing We'll have to wait and see.

    [00:16:53] Um, we thought for years that they would the dors that we talked to department of revenue directors They're kind of, they kind of aren't wanting to do that at this point, but let's see what happens. So

    [00:17:05] Judy Vorndran: those are, I feel like they do it through audit, like installation and training. I mean, they just ended up grabbing it through the tax of the product.

    [00:17:12] So my experience is they brought in, even if you're not bundling services with the product. I mean, I feel like it's handled on the indirect way on it by audit. I don't know if that's policy, but rather than actually putting it out there. So it's like secretly being enforced without actually legislatively being enacted.

    [00:17:31] Um, yeah, so that's been a real trap for the unwary. And I, you know, I think it's interesting in the professional services world, CPA services are taxable, like Connecticut and South Dakota and a few other states. Legal services are not taxable anywhere. And that's about advocacy. And if you know, software is still not taxed in a few states.

    [00:17:50] That's advocacy, right? California, still not taxing software. A state of 30 million humans that sells licenses all day long. And 30 million humans are buying all kinds of things. And I find that to be a fascinating political, uh, thing that we, we see across the nation. Why did you tax it? Why didn't you? You know, and then it's materiality.

    [00:18:10] I mean, I think about my moving from the big four to a regional firm and, you know, really getting to know the middle of America, very different tax policies and probably honestly fine to do because it's not a lot of humans that are affected by it, so easier to pass. And also I think everybody knows about income tax, not everybody sees sales tax, and like you said, it's a small amount on every invoice.

    [00:18:32] So they're like, Oh, okay, whatever. Well, and

    [00:18:35] Meredith Smith: that's something that I even kind of. As a, you know, Colorado resident, I live in the city and county of Denver that almost every sales tax increase gets voted through because it's just like when you think about, you know, half a percent, the Good. Tax base generally is a lot smaller and they can, they'll specifically assign it to, we're going to, you know, fund children's food in schools.

    [00:19:06] So we're going to increase the sales tax rate by, you know, half a percent. But when I go and buy a six pack of beer for 15 because I live in Colorado, right? Um, that, that half a percent doesn't mean a whole lot, but. We did vote to decrease our sales, our income tax, our income tax rate, and we have a flat rate for individuals and businesses that that went through the last two times it's been on, you know, on the bit on the ballots.

    [00:19:34] Um, so it's like sales tax got voted through no problem and like a clear majority, but the income tax also reduction got voted through and a, you know, You know, pretty high majority as well. So you, we, like I had been following that and making that connection, you know, in my own home state. So yeah, that's a very, you know, something I can see right

    [00:19:56] Judy Vorndran: away.

    [00:19:57] You say that many business owners. I mean, look where Jeff Bezos just moved Florida, no personal income tax in Florida. Why do you think he moved there? There's no personal income tax in Washington either, but now they were going after that wealthy person tax. So, you know, He's not going to get taxed by Washington even more, even though that's the heart of his business and where, you know, he kind of got his start, but he's not going to give up all his income on, um, you know, on a tax.

    [00:20:22] So it is. Some people have the wherewithal and the ability to kind of pivot and move and make different decisions in order to change their residency. And there's only five states without a personal income tax. So how many are desirable to live in compared to others? I don't know, but you see a lot of people moving to save personal income tracts a lot in America and the wealthier ranks and the business owner ranks and so forth.

    [00:20:44] So it's interesting.

    [00:20:47] Meredith Smith: Well, Mike, as we wrap up, is there anything that you, any parting words you have for us? Any things that we, anything that we should think about, um, you know, and before that we do really appreciate your, your expertise. And, you know, what you're doing to help us all stay compliant. So any parting words for our listeners?

    [00:21:10] Mike Bernard: Sure. First of all, it's been a wonderful day to be with both of you here today, and I've enjoyed it greatly and talking about a lot of these issues. I would say this, um, there is one thing in terms of parting words. One thing I would say is that the technology that companies deploy in their tax department Is really not just important from a governance issue, but it's really important from like an employee retention and recruiting issue as well.

    [00:21:38] And so, to the extent that you have a very, very robust and, um, very automated. Tech stack that serves your needs well with very little kind of manual kind of interference or, uh, influence you want to do that because you want to continue to the, the, the competition for great people to work in your department is really, is really stiff and you need to really kind of have that I've seen people leave certain.

    [00:22:07] Really good companies where their tech stack wasn't modernized and go to other places that were maybe a little bit smaller, but they were much more efficient in what they were doing. So when you think about when you think about the, um, the conversation that you have in terms of funding for your technology stack, The don't always don't always get kind of caught with like what have been the audit assessments and that kind of thing.

    [00:22:32] It really should be focused on government on governance. And it really should be more focused on the retention and the quality of people that you can continue to hire along with the fact that Judy something you said along. Back in this thing is ultimately a core piece of what the tax department has to do and their core component of it Is produce a proper invoice in a frictionless environment.

    [00:22:55] I've talked about that before So you really you really need you really need some automated some good tools to actually do that So, please also please consider when you have those conversations about funding within your company that those are kind of front and center So that's what I would leave you with.

    [00:23:09] Yeah, and then

    [00:23:10] Judy Vorndran: well, all right I just want to wrap with Are you the oldest sales tech software company out there? I mean, aren't you first in line that you start? Do you know if that's true? We

    [00:23:19] Mike Bernard: are yeah, we've been I mean, I feel like I

    [00:23:22] Judy Vorndran: think so. Yeah, we've been at it Yeah, so like you're kind of number one You were the number one to get out.

    [00:23:29] very much It's already shown all the things you've done with all the people you have to support you, the good tech stack you have, also the robust, uh, rules and rates. I mean, that's just imperative, like you said, for good governance. Um, and you're dealing with, you know, thousands of taxpayers, lots of money.

    [00:23:46] You're making sure it goes into our state government's coffers. It's a big deal to make things run around here. Thank you. Truly. Thank you.

    [00:23:57] Meredith Smith: Well, thank you, Mike. And this has been another episode of SALTovation. Till next time. This podcast is for educational purposes only and is not intended, nor should it be relied upon as legal tax accounting or investment advice to consult with a competent professional to discuss specifics of your situation and the applicability of the information presented.