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February

 

Typosquatters Profit From Common User Errors
By Ashley Sparks
 

The Web has opened plenty of new avenues for criminal behavior. For example, you may have heard of cybersquatting. Someone registers a site’s domain name that includes a trademark and then tries to profit by selling that name to the trademark owner.


But are you familiar with typosquatting? You should be — because these schemes can make just about any organization, along with visitors to its website, the victims of fraud.


Fat fingers
 

Like cybersquatting, typosquatting (also known as URL hijacking) involves the purchase of domain names in bad faith. It takes advantage of an inclination among users known as “fat fingers” — basically, our tendency to hit the wrong keys and enter misspelled trademarks or brands. For example, in a case involving the retailer Lands’ End, a typosquatter registered domains such as landswnd.com and lnadsend.com. Other human errors — for example, typing the wrong URL extension (.com instead of .org) or omitting punctuation marks such as hyphens — can also work to typosquatters’ advantage.

 

Some fraudsters seek to divert consumers away from competitors or just draw traffic to their own sites (often pornography or dating sites). A recent report from security firm DomainTools LLC says that major media outlets, including USA Today, the New York Times and the Washington Post, are frequently targeted. DomainTools found hundreds of fraudulent domain names related to these publications.

 

Big money
 

Other typosquatters go further. For example, the websites they divert to might feature a phishing scheme, whereby a visitor is induced to enter login information or download malware. Such tactics can make big money for fraud perpetrators — particularly if they target the right sites. Earlier this year, an anonymous typosquatter announced that he had stolen 200 bitcoins (then worth an estimated $760,000) from Dark Web sites over the previous four years.


Typosquatting can also be used for corporate espionage. In one case, a law firm sued a programmer who had obtained a domain name similar to its own, except for a minor typo. The law firm alleged that the defendant had used his doppelgänger domain name to create fake email accounts and intercept email sent to the firm.


Best defenses


When it comes to avoiding typosquatting, awareness is probably the best defense. Your company should regularly check various mistyped versions of its URLs and consider purchasing as many similar domain names as possible. Contact Ashley Sparks, CPA, CFE at asparks@myboyum.com if you’re worried about fraud — both on- and off-line.

 

 

Can the world agree on taxes?
By Roger Russell


The Organization for Economic Cooperation and Development is proposing what observers call the most significant restructuring of the international tax system in decades, including a single set of nexus rules and a global minimum tax.


The proposals are the result of Action One (of 15 action points) of the OECD’s “Inclusive Framework on Base Erosion and Profit Shifting,” which established a program to respond to what it calls the “Tax Challenges Arising from the Digitalisation of the Economy.”

 

The aim is to develop a consensus-based solution for a group of 130-plus countries by the end of 2020. A policy note released in January 2019 included proposals made by members framed within two complementary pillars:
• “Pillar One: Reallocation of profit and revised nexus rules. This pillar will explore potential solutions for determining where tax should be paid and on what basis (‘nexus’) as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located (‘profit allocation’).”


• “Pillar Two: Global anti-base erosion mechanism. This pillar will explore the design of a system to ensure that multinational enterprises — in the digital economy and beyond — pay a minimum level of tax. This pillar is intended to address remaining issues identified by the OECD/G20 BEPS initiative by providing countries with new tools to protect their tax base from profit-shifting to jurisdictions which tax these profits at below the minimum rate.”

 

BEPS refers to the tax strategies utilized by multinationals to shift their profits from high-tax jurisdictions to low-tax jurisdictions, a practice the OECD aims to combat with the eventual consensus reached on its action points.


It all started in October 2015, according to Monika Loving, practice leader for international tax services at Top 10 Firm BDO USA. “The OECD has been working on the BEPS project since then. The goal is to come to agreement on a set of international global standards for how jurisdictions tax global companies,” she said. The discussion drafts for the pillars were released in October 2019 and November 2019.


Jumping the gun
 

While the OECD is seeking a consensus approach among its members, a number of countries decided to enact their own digital services tax without waiting for a consensus. Among these is France, which enacted its DST on July 24, retroactive to Jan. 1, 2019. And the U.K. has proposed — but not yet enacted — a DST that is similar to the European DST proposed by the European Commission.

 

In response to France’s enactment of its DST, the U.S. conducted an investigation under the Trade Act of 1974, which found that the French tax discriminates against U.S. companies, and is inconsistent with prevailing tax principles, which renders the tax particularly burdensome for affected U.S. companies. As a result, the administration is threatening duties of up to 100 percent on French champagne, cheese and handbags. France said it would go to the World Trade Organization to oppose such tariffs.


The possibility of individual countries enacting a DST is at odds with the OECD’s goal of a consensus-driven approach. In France’s case, it is a reflection of the difficulty in reaching a consensus, since it was undertaken after the EU failed to reach a consensus on a Europe-wide DST.


The Pillar Two (anti-base erosion) discussion draft sets out four suggested rules as to how a global minimum tax could be structured, according to Loving. “There will be very significant complexities in constructing the rules to accomplish this,” she said. “As it relates to digital businesses, it’s a very complex issue to determine where the profit arises. The concept of Pillar Two is to level the playing field between jurisdictions so there is not a tax advantage to locating a business in one jurisdiction as opposed to another.”


“One of the principles in its design is to take away the competitive aspect of tax in different jurisdictions,” she said. “Multinational entities are closely monitoring these developments.”


“The Pillar Two proposal consists of an income inclusion rule which would allow countries to impose a ‘top-up’ tax on the income of a company’s foreign branch or controlled entity if that income is subject to tax at a low effective tax rate,” said international tax attorney and CPA Selva Ozelli. “This would be complemented with an undertaxed payment rule which would deny a deduction or impose source-based taxation, such as a withholding tax on payments to a related party that are not subject to tax at a minimum rate. The Pillar Two minimum tax is designed to complement a Pillar One proposal that would allocate more multinational group profit to countries where a multinational’s customers or users reside.”

 

The forays by countries into levying their own DST have implications for both pillars, explained Pete Sepp, president of the National Taxpayers Union.


“As BEPS rolls on, we’re seeing other countries’ attempts to levy DSTs that have components that function as a minimum tax, if not global, then one that can cover large parts of global trade involving U.S. transactions,” he said. “So this is a good evaluation point for the BEPS project to consider how many of the drivers that initiated the process have lost steam and been addressed in other ways.”


“That doesn’t mean that countries levying a DST are taking the right approach,” Sepp said. “That may be an area where BEPS participants [the ‘Inclusive Framework’] should take the closest look, because if the concepts embodied in the DSTs being proposed in Europe are allowed to take root on their own, many of the harmonization concepts that underlie the BEPS project won’t ever flourish.”

 

“France’s assurance that it will comply with any BEPS consensus agreement is somewhat shaky,” he suggested. “You can envision a situation where one or more countries finds a provision distasteful and holds out for concessions that will make the BEPS framework worse. The disturbing paradox we have here is whether BEPS is allowed to proceed in stamping out a great deal of tax competition, or countries are allowed to go forward with rogue solutions of their own. Neither choice is appetizing.”

 

 

 

 

Shareholder tax savings is ultimate goal of IC-DISC ownership structure
By David McGuire

 

One way for C corporations to reduce taxable income is to utilize an interest charge – domestic international sales corporation (IC-DISC). However, when dealing with C corps, it is imperative the IC-DISC’s ownership structure is correctly established at the onset.

 

In general, a C corporation does not realize a tax benefit by owning an IC-DISC as the dividends-received deduction is specifically disallowed between the two pursuant to IRC §246(d). Treasury Regulation 1.995-1(a)(5) explains the rationale: “Since a DISC is not taxed on its taxable income, section 246(d) and §1.246-4 provide that the deduction otherwise allowed under section 243 shall not be allowed with respect to a dividend from a DISC, or former DISC, paid or treated as paid out of accumulated DISC income or previously taxed income or with respect to a deemed distribution in a qualified year under §1.995-2(a).”

 

That seems straightforward, but we do get some pushback from practitioners who promote the use of an LLC between the C Corp and the DISC, wherein the C corp would own the LLC, which in turn would own the IC-DISC. The DISC pays its dividend to the LLC, which would pass it along to the C corp via its K-1 and, voilà, the IRS doesn’t “see” the IC-DISC source of the dividend (or the chain of ownership of the dividend has been disrupted) and the dividends received deduction is utilized between the C corp and the LLC, resulting in a non-taxed dividend made to the C corp.

 

The problem with this strategy is the Tax Court and Board of Tax Appeals determined in CWT Farms, Inc. vs. Commissioner, 79 TC 86, that dividends paid out of a DISC’s previously undistributed accumulated income didn’t qualify for the dividends received deduction as the regulations under §§1.246-4 and 1.995-1(a)(5) were valid interpretations of both the statutes’ and Congress’ intent to tax income from a DISC once. This reasoning is supported by IRC §246(a)(1), which lays down the basic rule that dividends sourced from a tax-exempt entity are not permitted the dividends received deduction.

 

In its opinion, the Tax Court offered this explanation: “Generally, a corporation receiving a dividend from a domestic corporation is entitled to a deduction under section 243. The purpose of such intercorporate dividends received deduction is to prevent, for the most part, the multiple taxation of dividends as they pass from one corporation to another. However, since a DISC is generally not subject to taxation on its earnings and profits (sec. 991), Congress saw no reason to provide for an intercorporate dividends received deduction for dividends distributed to corporate shareholders of a DISC.” The court further stated: “Where the income of the DISC is not subjected to corporate tax, there is no reason to allow its corporate shareholders a dividends received deduction.”

 

Worth noting is the court’s reference to what is now IRC §1504(b)(5): “Such section provides that a DISC, or a former DISC, may not be included in a group of affiliated corporations which elect to file a consolidated tax return. The congressional rationale for enacting such provision was that the effect of including a DISC within an affiliated group which files a consolidated return would be to allow a 100-percent dividends received deduction on dividends flowing from one member of the group to another. The allowance of this treatment, like the allowance of the general dividends received deduction, is not compatible with the principle that earnings of a DISC are not to be taxed in the hands of the DISC but rather are to be taxed in the hands of its shareholders."

So the court’s focus was not on the source of the income to be distributed, but on its ultimate destination. The court summarized its opinion in the headnote to the case: “Since accumulated income of DISC wasn't taxed, allowance of deduction on deemed distribution to parent would result in no tax on income.” Therefore that income is going to be taxed somewhere along the line, and in this case it would be in the hands of the ultimate recipient, the C corporation shareholder (again rendering the DISC of no benefit to the C corp parent).

 

This determination has not been successfully challenged in a higher court. Consequently, it illustrates the importance of incorporating a DISC in a way that shareholders can recognize the tax savings.

 

 

 

Transforming business functions to meet complex sales tax challenges
By Mark Friedlich

 

I have interviewed many companies across the country in many sectors, from the largest multinationals to small and midsized enterprises. My focus was on whether and how these businesses are evaluating their tax operating models and reconsidering how their tax teams approach increasing regulatory, talent, technology and other challenges in order to build a future-ready tax compliance operating model.

 

I have found that some companies, particularly the larger ones, have evolved in recent years to keep pace with technology advances. However, tax and finance leaders are now dealing with some unprecedented pressures, coming from several sources. Specifically, they are facing ongoing issues from the Tax Cuts and Jobs Act of 2017, and the Supreme Court’s landmark 2018 decision in Wayfair resulted in the move in most states from physical presence to economic nexus as the basis for being subject to state sales tax.

 

Considering these and other mounting compliance challenges, together with talent gaps, and the speed of technology change, businesses are struggling just to keep up, let alone transform their tax functions. Terri La Rae, a partner at Deloitte Tax LLP and leader of Global Operations Transformation for Tax, said recently, “Conditions now are leading many companies to step back and challenge everything from talent capabilities and operational processes to technology and data collection as they redefine their tax operating model.”

 

What to do? For many companies, it makes good sense to consider the use of experienced, third-party firms to outsource some or all of their tax services in general, and sales and use tax compliance services in particular, to reduce costs, increase efficiencies and minimize the substantial risk of noncompliance. But why now more than ever?

 

Why now
 

Here are some of the key drivers making the reconsideration of indirect tax compliance operating model more urgent than ever:


• The impact of Wayfair significantly increased the exposure and burden from sales and use tax compliance.
• There’s a growing need for states to find additional sources of revenue as a result of the TCJA.
• States and localities are conducting more frequent and more comprehensive sales and use tax audits.
• Sales and use tax rates and rules are changing rapidly.
• Companies are having difficulty finding and keeping talent.
• States are making greater use of software, big data and other sophisticated tools to identify businesses that have not registered with the states in which they do business.
• Businesses need to replace labor-intensive processes with automated processing to reduce costs, increase efficiency, get more competitive and avoid disruptive state tax audits. They also need to save money, reduce risk and avoid potential liabilities.
• Businesses and their executives are facing a significantly enhanced risk of no or inaccurate sales and use tax compliance. The risk is both financial and reputational. Some states are looking back years, placing the ongoing viability of small business at risk.

 

The above factors have led to greater complexity and increased accountability in sales and use tax compliance, which in turn has led to increased audit exposure, resulting in the potential for significantly increased and unanticipated liability both for businesses and, potentially, key executives.

 

An example of aggressive state sales and use tax audit behavior was recently reported in the Philadelphia Inquirer. A relatively small business based in Pennsylvania that sold goods in California on a marketplace facilitator website was hit by California tax authorities with a proposed adjustment of $1.6 million, going back six years to 2012.

 

Businesses are also facing increased costs of operations, and a substantially more competitive business environment. They are also dealing with increased difficulty and cost of finding, training and keeping qualified staff. There are a greater number of complex rates and rules changes, occurring not only at the state level, but also at the local level.

 

There has also been an increase in class-action lawsuits from overcharged customers. There have been two noteworthy class action suits in recent years: Walmart had to pay $5 million to establish a sales tax settlement fund and provide eligible class members with $3 to $15 Walmart gift cards. In the other case, a Madison County, Illinois, circuit court judge granted final approval of a settlement in a class-action alleging that Papa John’s Pizza wrongly charged sales tax on delivery fees.

 

What to do about all this exposure and the risk?
 

The increased complexity and financial risk of a failure to accurately comply have led businesses to re-evaluate their entire sales and use tax compliance process — the operational manner in which business is tracked, computed and reported for sales and use tax purposes, but also how returns are completed and filed. These sales and use tax processes include nexus, rates and rules, tax computations, exemption certificate management, document and return preparation, and audit preparedness and representation.

 

What is the most efficient, cost-effective way to conduct this needed review of current sales and use tax processes; to recommend changes as needed; to implement these changes; and to maintain the quality of sales and use tax processing on an ongoing basis? Should you employ an in-house solution only, an outsource solution only, or something in between (such as hybrid outsourcing or co-sourcing)?

 

Who can better assist businesses in providing best-practices solutions to minimize or eliminate these risks — internal staff alone with reduced in-house resources, third-party experts, or outside consultants — working with a reduced number of internal staff or assuming the function entirely? In this “create or buy” decision process, a growing number of both large and smaller companies have chosen to either outsource their tax compliance activities completely or selectively. If the fit is right, outsourcing can offer both quantitative and qualitative benefits, enabling tax departments to focus on more value-added activities for the company, such as business and tax planning, enhanced audit defense, risk management, and other company-defined priorities.

 

How do businesses and their advisors determine if the fit is right for sales and use tax compliance outsourcing? There is no one answer to the “inhouse or outsourcing” decision.

 

There are several reasons to choose an in-house only solution:
• Time to develop and deepen key internal and external relationships;
• Broader career development, with the ability to provide internal staff with the training needed to meet new demands specifically tailored to the needs of the company;
• Better work-life balance;
• Role of internal staff as trusted advisors to the company;
• Short-term cost savings — no initial layout of outsourcing fees.
There are also benefits to choosing a co-sourcing solution:
• Reduced headcount and other cost savings;
• Reduces the impact on other departments in the organization that have roles in the compliance process such as accounts payable, treasury etc.;
• Improve compliance accuracy, which will reduce audit exposure and financial risk to you and your business;
• Improve efficiency and accuracy, and reduce risk while freeing up key resources to focus on higher-value tasks, such as business and tax strategy and planning in an ever-increasing competitive and regulatory landscape;
• Introduce and implement new technologies, such as artificial intelligence, the Internet of Things, data analytics, and bid data to your business reducing costs and improving productivity;
• Look objectively and with “fresh eyes” across your industry and your competitors and quickly share new information to make you more competitive;
• Work directly with tax and revenue authorities in all jurisdictions;
• Leverage the knowledge gained from other clients and leverage those relationships
• Bring rates and rules tracking, sales and use tax compliance and audit preparation and defense together under a single, expert source.

 

For many companies, investing in the legal, tax and accounting expertise of outside consulting experts with a proven track record has proven to be a good option for sales and use tax compliance. These consultants, often working closely with internal staff, will recommend and implement best practice solutions that will enable the business to have immediate access to subject matter and industry expertise. Companies can also have industry-leading software implemented to increase efficiency, ensure greater accuracy and reduce risk. They will be able to meet all the sales and use tax reporting and record-keeping requirements of the state, operate more profitably, position themselves competitively now and into the future, and meet their business objectives, currently and as they evolve.

 

 

Trump tax fight faces new urgency after impeachment acquittal
By Laura Davison

 

President Donald Trump has put impeachment behind him, but he’s got another battle ahead with Democrats that’s been brewing for almost a year: access to his tax returns.

 

The fight now is playing out in the courts, including a Supreme Court argument set for March 31. House Democrats contend they need to pry free Trump’s tax records as part of their oversight duties to determine whether he’s broken any tax laws, has financial ties to foreign governments or is being properly audited by the Internal Revenue Service.

 

There’s no guarantee they can get the documents they seek before November’s election — much less whether the tax filings and other financial records might show anything politically damaging to the president.

 

“It’s important for us to press where necessary for as hard as possible to get everything ASAP,” said Representative Raja Krishnamoorthi, an Illinois Democrat who is a member of both the House Oversight and Intelligence committees. “I think at this point I would not be surprised if we started for expedited relief on a lot of these matters. It’s clear Trump’s team is going to try to litigate everything to death.”

 

The tax records chase is one of the main threads for Democrats as they consider whether to pursue additional investigations of Trump after the GOP-controlled Senate acquitted him on two articles of impeachment stemming from his attempt to get Ukraine to seek damaging information on a political rival. That will be unfolding in the middle of an election campaign in which both parties will be fighting for control of the White House and Congress.

 

“Congress’s investigatory responsibility does not end with this trial,” said Senator Dick Durbin, an Illinois Democrat, while conceding that the Senate Democrats have few options compared to their House colleagues.

Trump is citing his acquittal by the Senate as vindication as he fully engages in his re-election campaign. But in a free-wheeling celebratory speech at the White House Thursday, Trump suggested he was expecting

 

Democrats to keep coming after him.

 

“If they find that I happen to walk across the street and maybe go against a light or something, ‘let’s impeach him,’” he said.

 

There are at least five different court cases regarding Trump’s tax and financial records. The Supreme Court is expected to decide by the end of June on the three cases it will hear in March.

 

The high court will hear arguments about whether Trump can keep the House Oversight and Reform Committee from getting records from his accountants Mazars USA LLP, and whether he can prevent the House Financial Services and House Intelligence committees from obtaining his financial records from Deutsche Bank AG and Capital One Financial Corp.


It’s not clear in the two House cases whether Trump’s personal tax returns would have to be turned over. The subpoena to Mazars doesn’t explicitly ask for the returns, while Deutsche Bank has said it doesn’t have them.

 

In the third Supreme Court case, Manhattan District Attorney Cyrus Vance Jr. has explicitly asked for Trump’s tax returns among other financial records. The demand is part of a criminal investigation into whether the Trump Organization falsified its business records to cover up hush-money payments to porn star Stormy Daniels and onetime Playboy playmate Karen McDougal before the 2016 election.

 

Trump lawyer Jay Sekulow said that the president’s legal team is responding in court.

“We are litigating those issues at the Supreme Court,” Sekulow said in a text message.

Two other cases — a lawsuit brought by the House Ways and Means Committee to compel the Treasury Department to release Trump’s federal tax returns and a lawsuit Trump filed against Ways and Means to prevent that panel from getting his New York state tax returns — are still working their way through the lower courts.

 

Democrats have one lever yet to pull — asking New York for Trump’s state tax documents.

 

So far, House Ways and Means Chairman Richard Neal has been hesitant to push for the New York state documents. He has said he’s focused on getting the federal returns that he first requested last April. And making that request could undermine his case on why he needs the IRS returns.

 

A spokeswoman for Neal didn’t respond to a question about whether the chairman plans to pursue the documents from New York.

 

And asking for the state tax returns could bring its own legal headaches. A judge said in November that Neal must notify the court and the president if he plans to ask for the documents and New York must wait two weeks before turning them over, to give Trump time to try to block the transfer.

 

“They can keep running down that hole and trying to re-impeach the president,” Representative Kevin Brady, the top Republican on the Ways and Means Committee, said. “They’re going to take a huge punishment at the polls.”

 

Trump is counting on the Supreme Court’s conservative majority to insulate him from a criminal investigation stemming from payments to the two women, who claimed they had sex with him before he took office. Trump is also trying to ensure that three committees in the Democratic-controlled House don’t get financial documents they could then release to the public.

 

Treasury Department
 

Democrats, conscious of the risk that could come with losing at the Supreme Court, are hoping to speed up another case seeking Trump’s tax returns from the Treasury Department, which a federal judge recently paused to wait for related cases to be decided.

 

“This case has been stalled long enough,” lawyers for the House said in a January filing asking the judge to resume consideration. “The requested relief is necessary for the committee to move forward with its pressing legislative and oversight inquiry, and to carry out its constitutional functions in the limited time remaining in this Congress.”

 

However, optimism is low among Democrats that they’ll obtain the documents before the November election. Senator Richard Blumenthal, a Connecticut Democrat, said he’s relying on a “free press” to investigate the president.

 

“I am concerned,” said Representative Lloyd Doggett, a Texas Democrat. “The chances that we ever see those returns in this Congress are not great.”
— With assistance from Jordan Fabian

 

 

IRS proposes update to income tax withholding rules
By Michael Cohn

 

The Internal Revenue Service and the Treasury have proposed regulations updating the income tax withholding rules to reflect the changes in the Tax Cuts and Jobs Act, the recently redesigned Form W-4 and the IRS’s new Tax Withholding Estimator.

 

The proposed regulations aim to take into account the redesigned Form W-4, Employee’s Withholding Certificate, and the accompanying tables and computational procedures in Publication 15-T, Federal Income Tax Withholding Methods. The proposed rules and related guidance don’t require employees to furnish a new Form W-4 just because of the redesign of the Form W-4. Employees who have a Form W-4 on file with their employer from before 2020 generally will continue to have their withholding determined based on that form.

 

The proposed regulations allow employees to use the new IRS Tax Withholding Estimator to help them fill out the new Form W-4. Taxpayers can still use the worksheets in the instructions to Form W-4 and in Publication 505, Tax Withholding and Estimated Tax, help them complete the form the right way.

 

The proposed regulations also deal with various other tax-withholding issues. They offer some more flexibility in how employees who don’t fill out a W-4 should be treated. Starting this year, employers are required to treat new employees who fail to furnish a properly completed Form W-4 as single and withhold using the standard deduction and no other adjustments. Before this year, employers in this situation were required to withhold as if the employee was single and claiming zero allowances.

 

In addition, the proposed regulations spell out the rules for when employees must furnish a new Form W-4 for changed circumstances, update the regulations for the lock-in letter program, and eliminate the combined income tax and FICA (Social Security and Medicare) tax withholding tables.

 

To help figure the proper income tax withholding, the redesigned Form W-4 no longer uses an employee’s marital status and withholding allowances, which were tied to the value of the personal exemption. Because of changes under the 2017 tax overhaul, employees can no longer claim personal exemptions. Instead, income tax withholding using the redesigned Form W-4 is mainly based on an employee’s expected filing status and standard deduction for the year.

 

The Form W-4 has also been redesigned to make it simpler for employees who have more than one job or married employees who file jointly with their working spouses to withhold the correct amount of tax.

 

Employees can opt to have itemized deductions, the child tax credit and other tax benefits reflected in their withholding for the year. As in the past, employees can decide to have an employer withhold a flat-dollar extra amount each pay period to cover, for instance, income they get from other sources that’s not subject to withholding. Under the proposed regulations, employees now also get the option to ask their employers to withhold additional tax by reporting income from other sources not subject to withholding on the Form W-4.
The Treasury and the IRS are asking for comments from the public on the proposed regulations, which contain information on how to submit comments.

 

 

A shakeup in free tax filing, and other tech stories you may have missed
By Gene Marks

 

AI startups suck in capital, time to get off Windows 7, and eight other technology developments that will impact your clients and your firm.

 

1. Tax prep companies can’t hide their free filing software from Google anymore
The Internal Revenue Service announced that they will be making changes in an effort to make filing taxes less stressful this upcoming year. It will now be easier for Americans to file their taxes for free, thanks to an addendum to the nearly two-decade old Free File agreement. The addendum forbids Intuit — the maker of TurboTax — and the nine additional companies forming the Free File Alliance from being involved in any interactions that would keep their free software from appearing in a Google search or any additional search engines, for that matter. The most profound change — however — is that the IRS will be permitted to develop software of their own (Source: Engadget)

 

Why this is important for your firm and clients: Taxpayers who are paying software companies a fee to file their taxes really shouldn’t be. There are plenty of free services available to do this — and even the IRS plans to get in the game.

 

2. Receipt Bank raises $73M
Digital bookkeeping platform Receipt Bank announced last month that they have raised nearly $73 million in equity and debt during a Series C funding round led by Insight Partners. Receipt Bank’s machine learning technology categorizes and digitizes financial data from several sources, processing and storing the information for bookkeepers and accountants. The company plans to use the funding to expand upon its product suite, as well as continue growth in North America, Europe and Australia. (Source: Pymnts)

 

Why this is important for your firm and clients: Receipt Bank is one of a number of back-office processing applications that leverage technology that can extract data from an image (e.g., a vendor’s invoice sent to you as a PDF) and migrate it directly to your accounting system with little human involvement. I’ve recommended products like Receipt Bank to clients who are looking to increase office productivity and lower overhead.

 

3. AI startups raised a record $18.5 billion in 2019
Data collected by the National Venture Capital Association showed that $18.457 billion was raised by 1,356 AI-focused companies in the U.S. during 2019, despite collective U.S. venture capital funding showing a decline during that time. According to the data, facial recognition, finance, drug research, and autonomous driving appeared to have some of the highest investments, while the amount of AI unicorn startups similarly went up. (Source: Venture Beat)

 

Why this is important for your firm and clients: Follow the money, right? If almost $19 billion was invested in artificial intelligence in the past year, both businesses and consumers can expect to see a lot of this research and development turning into real life technologies in the coming year.

 

4. Microsoft recommends 400 million users buy new PCs by next month
After recently announcing that they will be ending support for the Windows 7 Operating System, Microsoft released a statement suggesting that its nearly 400 million users still on Windows 7 switch entirely to Surface rather than upgrade their devices. The company detailed that — for most users who are using Windows 7 — navigating over to a brand-new PC that has Windows 10 Pro will be the most efficient move since — according to Microsoft — those devices are more secure, powerful, lightweight and operate faster than the previous models. (Source: MS Power User)

 

Why this is important for your firm and clients: OK, no one’s saying that you have to buy a Surface. There are plenty of other great devices you can get for your business that also run Windows 10. But please … if your company still has computers running Windows 7, you have to do something. Upgrade. Switch to new devices. Turn them off. Computers running older operating systems like Windows 7 are very vulnerable to malware attacks, which means that the cost of not upgrading could very well exceed the cost of replacing those older computers.

 

5. Google is planning to kill support for third-party cookies
Google announced that within the next two years it is planning to cease support for third-party cookies in its Chrome browser. Ad networks and advertisers are typically the ones who add third-party cookies in an effort to track users through various sites in order to help target advertisements and monitor performance. Before Google begins to dial back support for third-party cookies within Chrome, they first plan to navigate meeting the needs of advertisers, publishers and users who will be impacted by the change. (Source: CNBC)

 

Why this is important for your firm and clients: This is a potentially big deal. Cookies from third parties are at the core of many brands’ efforts to track visitors and drive ads to their attention. If your firm or your clients do online ad campaigns or use retargeting services to drive traffic to your website, then Google’s potential change could impact your marketing plans. Stay tuned.

 

6. Amazon is reportedly developing hand-scanning technology
The Wall Street Journal reported that Amazon is developing point-of-sale technology that would allow customers to have their hands scanned in order to make a payment. Using the hand-scanning technology, customers would no longer need to hand over an actual card in order to pay for their merchandise purchased at brick-and-mortar locations. With the developing technology, users would be able to link their handprint to a card prior to use. Amazon is collaborating with Visa and Mastercard regarding the terminals. (Source: SiliconAngle)

 

Why this is important for your firm and clients: Fingerprints, retina scans, embedded chips — now hand scans. Biometrics are coming into the mainstream and the security advantages of these types of access methods are significant. My expectation is that your password will soon be as old-fashioned as the telegram by the end of the decade, so be prepared to consider these new security changes in your business over the next few years.

 

7. The PC market saw rare growth in 2019
Research released indicated that the PC market had seen growth for the first time in eight years. According to Gartner and IDC — the firms conducting the research — annual PC shipments over the last year went up. Although the numbers released by both firms differed — with IDC estimating the increase at 2.7 percent year over year and Gartner finding the figure to be only 0.6 percent — any growth is a move in the right direction for the industry, with smartphones having taken precedence over desktop and laptop purchases. (Source: PCMag)

Why this is important for your firm and clients: If Microsoft has their way, those 400 million buyers (see above) may also have an impact in the near future! Two thoughts on this: Because PC sales have dropped so dramatically over the past decade, growth was inevitable because things can only drop so far. But, secondly, it’s good news. As things have shaken out in the hardware market, it’s clear from what I see at most clients that businesses do need PCs and laptops and that tablets and phones can’t do it all. So go ahead: Get that new PC.

 

8. The Venmo app went down
Reports in January confirmed that Venmo — the popular payment app — went down for several hours, and that the software’s desktop version was also impacted during the interruption. Issues with Venmo began on the morning of Dec. 30, 2019, and then progressed throughout the day. Several difficulties during this time were reported by thousands of users, such as frustrations regarding cards being declined and rent and bills going unpaid due to the system issues. By 4:40 p.m. Eastern time, Venmo’s services were fully restored. (Source: Pymnts)

 

Why this is important for your firm and clients: In this world of cloud-based applications that are vulnerable to power, security and usage issues, it’s important for small-business owners to always have other options. That was a hard lesson learned by those owners and freelancers who only accept Venmo. They were without cash during the service’s outage. They shouldn’t let that happen again.

 

9. Starbucks offers a meditation app to their employees
Think working at Starbucks is stressful? So does Starbucks. So much so that the company announced in a press release this past week that they have added Headspace — a meditation app that offers guided meditation — to the benefits that their employees will receive.

 

The app — which is a subscription service — includes specific programs designed to help individuals with anxiety, stress, as well as many other mental health issues. The addition of Headspace is the most recent move by Starbucks to support mental health. (Source: Fast Casual)

 

Why this is important for your firm and clients: I’m not going to weigh in on whether it’s stressful to work at Starbucks. (OK, I will — it is.) But that’s not why this story is important for your firm and clients. What’s important is that Starbucks is one of a number companies that are offering apps to their employees for health, wellness, financial planning, productivity and yes, mediation, as a relatively inexpensive perk. Not a bad idea for you, is it?

 

10. Mevo announces livestreaming video camera
This past month Mevo — a leader in live streaming cameras — announced that pre-orders for their new long-form streaming camera is now open. The new camera — named Mevo Start — amplifies the advanced technology of its existing video products by including 1080p HD video and clear audio that will allow users to easily share vital events in real-time. The Mevo App and Mevo Start are designed specifically for social media influencers and consumers at any level to help easily and efficiently livestream. (Source: GlobeNewswire)

 

Why this is important for your firm and clients: I’m a user and a fan of Mevo because their technology is affordable and provides a quality product. If you’re social media and online activities include making videos, then Mevo is a great technology to consider, and the product’s new features make it even more attractive.

Note: Some of these stories also appeared on Forbes.com.

 

 

63 of the biggest cities don’t have enough money to pay their bills
By Michael Cohn

 

The majority of the U.S.’s 75 most populous cities lack enough funds to pay their bills, but the remaining 12 have budget surpluses, according to a new report.

 

The 2020 Financial State of the Cities report, from Truth in Accounting, a think tank that analyzes government financial reporting, examined the fiscal health of the 75 largest municipalities in the U.S.. The data comes from the fiscal year 2018 audited Comprehensive Annual Financial Reports on file in city halls across the country.

 

The report found that 12 of the largest cities have more assets than obligations, a key indicator of long-term financial health. The remaining 63 cities carried varying levels of debt, many of them in the billions of dollars.

 

New York City claimed the prize for worst municipal finances in the country for the third consecutive year. Every New York City taxpayer would have to pay $63,100 in order for the Big Apple to pay off all its bills. Chicago (which ranked second-worst in the nation) would need each taxpayer to pay $37,100. The average taxpayer burden across all 75 cities in the report is $7,040.

 

At the other end of the scale was Irvine, California, which has the best city finances in the U.S. with a $380.4 million surplus. Divided by the number of Irvine taxpayers, each Irvine taxpayer’s share would be $4,100.

 

“We have good news this year,” said Truth in Accounting CEO Sheila Weinberg in a statement. “The cities are finally reporting all of their liabilities on their balance sheets, including those related to retiree health care benefits. The bad news is for every $1 of promised retiree health care benefits, the 75 cities have only set aside 13 cents to fund these promises.”

 

The full 75-city ranking is below:
1. Irvine taxpayer surplus: $4,100
2. Washington, D.C. taxpayer surplus: $3,500
3. Charlotte taxpayer surplus: $3,400
4. Fresno taxpayer surplus: $3,200
5. Plano taxpayer surplus: $2,800
6. Stockton taxpayer surplus: $2,600
7. Lincoln taxpayer surplus: $2,500
8. Aurora taxpayer surplus: $2,200
9. Arlington taxpayer surplus: $2,100
10. Tampa taxpayer surplus: $1,700
11. Raleigh taxpayer surplus: $1,400
12. Tulsa taxpayer surplus: $100
13. Corpus Christi taxpayer burden: $300
14. Oklahoma City taxpayer burden: $400
15. Long Beach taxpayer burden: $500
16. Greensboro taxpayer burden: $700
17. San Antonio taxpayer burden: $1,100
18. Wichita taxpayer burden: $1,200
19. Louisville taxpayer burden: $1,300
20. Bakersfield taxpayer burden: $1,600
21. Fort Wayne taxpayer burden: $1,700
22. Minneapolis taxpayer burden: $1,900
23. Henderson taxpayer burden: $1,900
24. Las Vegas taxpayer burden: $2,100
25. Virginia Beach taxpayer burden: $2,100
26. Colorado Springs taxpayer burden: $2,300
27. Chula Vista taxpayer burden: $2,300
28. Orlando taxpayer burden: $2,300
29. Saint Paul taxpayer burden: $2,300
30. Riverside taxpayer burden: $3,300
31. Austin taxpayer burden: $3,300
32. Indianapolis taxpayer burden: $3,500
33. Memphis taxpayer burden: $3,700
34. El Paso taxpayer burden: $3,900
35. Los Angeles taxpayer burden: $4,000
36. Toledo taxpayer burden: $4,100
37. San Diego taxpayer burden: $4,500
38. Sacramento taxpayer burden: $4,600
39. Columbus taxpayer burden: $4,800
40. Cleveland taxpayer burden: $5,100
41. Detroit taxpayer burden: $5,100
42. Mesa taxpayer burden: $5,300
43. Santa Ana taxpayer burden: $5,400
44. Seattle taxpayer burden: $5,400
45. Phoenix taxpayer burden: $5,500
46. Albuquerque taxpayer burden: $5,800
47. Anaheim taxpayer burden: $6,200
48. Denver taxpayer burden: $6,500
49. Omaha taxpayer burden: $7,100
50. Anchorage taxpayer burden: $7,800
51. Tucson taxpayer burden: $8,100
52. Jacksonville taxpayer burden: $8,500
53. Lexington taxpayer burden: $9,100
54. Dallas taxpayer burden: $9,400
55. San Jose taxpayer burden: $9,400
56. Kansas City, Missouri taxpayer burden: $9,800
57. Atlanta taxpayer burden: $9,900
58. Boston taxpayer burden: $10,200
59. Miami taxpayer burden: $10,600
60. Houston taxpayer burden: $11,600
61. Fort Worth taxpayer burden: $12,300
62. Milwaukee taxpayer burden: $12,800
63. St. Louis taxpayer burden: $14,500
64. Pittsburgh taxpayer burden: $15,600
65. Cincinnati taxpayer burden: $15,600
66. Baltimore taxpayer burden: $16,000
67. San Francisco taxpayer burden: $17,000
68. Nashville taxpayer burden: $18,400
69. Portland taxpayer burden: $18,400
70. Oakland taxpayer burden: $18,600
71. New Orleans taxpayer burden: $18,800
72. Philadelphia taxpayer burden: $25,500
73. Honolulu taxpayer burden: $26,400
74. Chicago taxpayer burden: $37,100
75. New York City taxpayer burden: $63,100

 

 

Stanford faces $43M tab in Trump endowment tax
By Bloomberg News

 

Stanford University faces as much as $43 million in taxes under a new levy on college endowments included in President Donald Trump’s tax overhaul, the first time private colleges will pay such a fee.

 

The provision, which was passed as part of the Republican tax bill in December 2017, affects about 30 wealthy schools including Stanford — the third-richest U.S. private college with an endowment of $27.7 billion. The California-based college estimated it will eventually pay the more than $40 million figure on both realized and unrealized capital gains for fiscal 2019, according to an emailed statement from the university.

 

Stanford’s multimillion-dollar tab shows how the levy — designed to offset cuts elsewhere — may hit the richest U.S. colleges. It includes a 1.4 percent tax on net investment income and affects schools with more than $500,000 in endowment assets per student. The Congressional Budget Office had estimated the tax will raise $200 million annually.

 

Harvard University, the richest school with an endowment of almost $40 billion, expects to pay about $38 million on its net investment income, which includes earnings from endowment investments. The estimate includes the tax on unrealized gains, which will be paid in future years.

 

“It’s an unhealthy precedent,” Cristian Tiu, an associate professor of finance at the University of Buffalo, said in a telephone interview. “It may have the potential to affect quite a few things in the long term such as budgeting, charitable giving and the propensity of the government to think of even more taxes for endowments.”

 

College endowments have seen lower investment returns in recent years, which may be another blow to those caught up in the tax.

 

Schools generally seek to earn at least 7 percent annually to account for spending rates of 4 percent to 5 percent plus inflation. The returns help fund professor salaries and financial aid. Endowments on average gained 5.3 percent for fiscal 2019, the first year that the tax applies. That’s the lowest performance since 2016.

 

Stanford and Harvard both returned 6.5 percent for the fiscal year, down from 11.3 percent and 10 percent, respectively, in 2018.

 

The schools are still waiting for guidance from the Internal Revenue Service about how to calculate their payments. Stanford and Harvard determined the estimated payments after they closed their fiscal years, but those could still change. Most colleges finish their fiscal years on June 30.

 

Colleges will have to indicate if they paid the levy on their annual 990 tax forms. They won’t be required to disclose the amount publicly, according to an IRS spokesman.

 

 

SCOTUS to rule on wrangling over corporate tax refunds
By Roger Russell

 

In a case that aims to resolve whether a parent corporation or its subsidiary owns a tax refund during bankruptcy proceedings, the U.S. Supreme Court will soon decide Rodriguez v. Federal Deposit Insurance Corp. The outcome has the potential to impact hundreds of millions of dollars in corporate tax refunds.

 

At issue in the case is the Bob Richards rule, in which the presumption is that a tax refund belongs to a subsidiary unless the parties agree otherwise. The current case involves a dispute between United Western Bancorp Inc. and its subsidiary United Western Bank, or “Bank,” both of which claimed a $4 million tax refund when the two entered bankruptcy.

 

UWBI received a tax refund check from the IRS while it was in Chapter 7 bankruptcy proceedings. The refund was the result of net operating losses incurred by one of its subsidiaries, Bank. UWBI and its subsidiaries had entered into an allocation agreement.

 

The FDIC, as receiver for the subsidiary Bank, argued that it was entitled to the refund. Simon Rodriguez, as the Chapter 7 trustee for the bankruptcy estate of UWBI, argued that UWBI owned the refund, and therefore it was part of the bankruptcy estate. The courts of appeals are split on the issue -- four circuits hold that ownership of a tax refund paid to an affiliated group should be based on the law of the relevant state, while three circuits have ruled that federal common law should apply (the Bob Richards rule).

 

The bankruptcy court agreed with Rodriguez, the FDIC appealed, and the district court reversed. The Tenth Circuit affirmed the district court, finding that under federal common law, “a tax refund due from a joint return generally belongs to the company responsible for the losses that form the basis of the refund.”

 

The American College of Tax Counsel, in an amicus brief supporting the hearing of the case by the Supreme Court, said that it does not recommend any particular approach regarding the issue: “It does believe that the differing positions of the circuits should be resolved in order to provide taxpayers with greater certainty in structuring their relationships in the consolidated group context. The lack of uniformity on this question of law with significant and recurring tax and bankruptcy implications warrants this court’s attention.”

 

A decision to hear the case was granted June 28, 2019, and the case was argued Dec. 3, 2019.

 

Although the statute was changed in 2017 so that NOL carrybacks are no longer permitted, the case could still help settle situations regarding consolidated returns where one member of the group has a profit and the other member has loss, according to Lee Zimet, senior director with Alvarez & Marsal Taxand.

 

“It will be interesting to see what the Supreme Court says about Bob Richards, specifically, and the concept of federal common law, more generally,” he said. “The court could agree that federal common law has a role to play or they could eliminate the concept entirely.”

 

“The key driver in the various court of appeals decisions has been determining whether the bank and the holding company had a debtor-creditor or agency-principal relationship,” he said. “The distinction is important because under bankruptcy law the bank would receive the full refund if the holding company is its agent but not if the bank is a mere creditor. It will be interesting to see if the Supreme Court makes this distinction based on a careful analysis of the language of the tax-sharing agreement, as the lower courts have done, or decides that the parties in such a situation will have one or the other relationship. Many of the court cases were decided based upon subtle differences in language or context. That could drive the Supreme Court to come up with a set rule for deciding the relationship issue.”

 

 

The millionaires who actually want to pay more in taxes
By Bloomberg News

 

They might sound crazy rich to ordinary Americans — and plain old crazy to 0.1 percenters: They’re millionaires who actually want to pay more in taxes.

 

They call themselves the Patriotic Millionaires, and they say with straight faces it’s time the ultra-affluent kick in more to Uncle Sam.

 

If they’re traitors to their class, they’re certainly proud ones. In this era of gaping inequality, the group of 200 or so millionaires is pressing for a more progressive tax system.

 

“I’d still have two airplanes,” says one of them, Stephen Prince of Tennessee.

 

Prominent members include Disney heiress Abigail Disney, Men’s Wearhouse founder George Zimmer, real estate developer Jeffrey Gural, and Chuck Collins, heir to the Oscar Mayer fortune. It takes an annual income of $1 million or at least $5 million in assets to join and, as one might expect, most members are old, white, liberal men.

 

Many ordinary people agree with them, according to public opinion polls, as do the Democratic candidates for president.

 

Some Patriotic Millionaires say they signed up because they feel a little guilty about being so rich when they were “born on third base.” Others say they’re looking for a sense of community. Do-good vibe aside, some concede they will still gladly take advantage of tax loopholes.

 

Bloomberg sat down with some members of the group, which started a decade ago, to find out why they’ve chosen this course. Comments have been edited and condensed.

 

Scott Nash
Age: 54
Home: Washington, DC
In 1987, after dropping out of college and bouncing from job to job, Nash co-founded grocery chain MOM’s Organic Market, which now has 19 stores and $230 million in revenue. Nash, who owns 100 percent of the company, is a millionaire “several times over” and lives in the leafy suburban outskirts of the nation’s capital. He joined Patriotic Millionaires about five years ago.


Why did you join?


If you want a good democracy, where people are protected and certain services are provided like education and military, then you’ve got to pay your flipping taxes. It’s unpatriotic to live here and thrive here and then not pay the bills.


Do you support the wealth tax?

It would probably be difficult to enact and enforce. I’m generally for raising taxes on the wealthy, but whether or not that specific tax is a good way to do that, I’m not sure.

 

What do you think of the wealth bashing that’s now so common?


Wealthy people aren’t bad. You’re allowed to be wealthy. It’s something to strive for. Anyone is going to wish for a life of ease. That’s human nature. That’s the way capitalism was set up and democracy supports it. There is this backlash against the wealthy from the left, which I think is fairly ridiculous.


Do you have a favorite presidential candidate?


I’m going to vote for whoever the Democrat is. Anyone we have is going to be a billion times better than what we have now.

 

Morris Pearl
Age: 62
Home: Manhattan’s Upper East Side
Pearl retired from BlackRock Inc. in 2014 after a decades-long career in finance that made him a “high seven-, low eight-figure” fortune. Pearl, the group’s chairman and one of its first members, lives on Park Avenue just a few blocks from the Metropolitan Museum of Art.

 

Why did you join?
 

So I could actually do something and feel I was a part of something and actually feel like I’m making a difference, as opposed to sending a big check to whomever and getting to meet Nancy Pelosi once a year.
What’s the appeal of paying more taxes?


It’s not that I personally want to pay more money. I can give away all my money if I wanted to. It’s that the growing inequality in our country is bad. We’re moving in a direction where there’s a few rich people and lots of poor people. That will lessen the possibility of having a middle class of storekeepers and professionals and doctors and lawyers and people like that who really are the bedrock of our economy.

 

What about philanthropy?
It doesn’t take the place of government funding. It’s not that hard to raise money for a new music hall at Lincoln Center. It’s much more difficult to raise money to build a new sewage treatment plant at 143rd Street.

 

Charlie Simmons
Age: 71
Home: Los Altos Hills, California
Simmons, a long-time Bay Area resident, retired almost 20 years ago as vice president of corporate development for a computer storage company and became an angel investor. He won’t say how much he’s worth because his wife would “freak out,” but said he has “well over $5 million.” He lives in a Silicon Valley suburb and joined the group soon after Donald Trump was elected president in 2016.

 

Why should rich people like yourself pay more taxes?


We have to fund programs to bring the bottom up and even some of the middle class needs help and that’s going to take a lot of money. We’re the ones who can afford it. I’d much rather live in a country that has much more equality and have my net worth reduced — it doesn’t change my lifestyle.


How would you do it?


I think the top rate can be higher on me and others. We’ve had it well over 70 percent before and survived as a country. At least it could be somewhere between 50 percent and 70 percent. And tax capital gains at the same rate.


What would you want the extra money spent on?


Universal Medicare. We have to admit the areas where capitalism doesn’t work, and medicine is one. Education is another.

 

Stephen Prince
Age: 68
Home: Brentwood, Tennessee
Prince developed many of his political beliefs growing up in the small town of Waycross, Georgia, during the Civil Rights era. He’s since started various businesses — a plastic card printing business, computer imaging business — and built a $40 million fortune, including about $25 million in cash from two stake sales last year. He spoke by phone while vacationing on the Big Island of Hawaii.

 

How did your childhood influence your political views?


I was very supportive of the Civil Rights movement as a kid. I was pretty rare in that regard, being a white kid from the South. I mean most of my friends were racist and had no desire whatsoever to balance the ground. For some reason, I came out on the other side of that.


Do your friends and family agree with you politically?


Most of my friends are pretty conservative — fiscally conservative and socially conservative. They frown and shake their heads at how I can see things the way I do. And I’m equally astounded that they feel the way they do.


If the tax laws were changed in a more fair fashion, sure I would’ve kept a smaller amount of the transactions we executed last year, but I’d still be OK. I’d still be able to take vacations and I’d still have two airplanes.
 

Which tax ideas do you support?

We have to have something like a wealth tax. But it’s not enough for just individuals to do so. Corporations have got to start paying more taxes.

 

Karen Seal Stewart
Age: 75
Home: Oceanside, California
Stewart, a certified financial planner, grew up middle class in Santa Maria, California, to parents with eighth-grade educations. After years of real estate investments, she has $4.8 million, two homes, just got back from a trip around the world and has decided she doesn’t “need any more.”

 

Why should the wealthy pay higher taxes?
Because I can afford it and the country needs it. Nobody needs $10 million or $100 million or $1 billion or $10 billion or $100 billion. My God, these guys are worth more than most countries. It’s all about ego, especially for the men.


Why do you use some of the tax loopholes that you complain about?
I will continue to take advantage of everything there is because everybody else is, too. There are 10 to 12 million millionaires in this country and there are only 200 of us so what difference can we make?


Do you favor a wealth tax?
Absolutely. Do you own a home? Do you pay property tax? That’s a wealth tax.


Who are you planning to vote for?
Elizabeth Warren. She’s got policies that you could imagine appeal to me.
(Michael Bloomberg is also seeking the Democratic presidential nomination. He is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.)
— Sophie Alexander, with assistance from Ben Steverman

 

 

Trump tax cut hands $32B windfall to America’s top banks
By Bloomberg News

 

Savings for the top six U.S. banks from President Donald Trump’s signature tax overhaul accelerated last year, now topping $32 billion as the lenders curbed new borrowing, pared jobs and ramped up payouts to shareholders.

 

JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley posted earnings this week showing they saved $18 billion in 2019, more than the prior year, as their average effective tax rate fell to 18 percent from 20 percent. Bloomberg News calculated the haul by comparing the lower tax rates to what they paid before the law took effect, which averaged 30 percent.

Debate has raged over the tax overhaul’s impact since Trump signed it into law near the end of his first year in office, with critics saying it’s worsening inequality by favoring the wealthy and inadequately stimulating economic growth. Because banks used to pay higher tax rates than many other industries, they were among the biggest beneficiaries.

 

Proponents predicted lowering rates would give lenders more cash to fuel the economy, helping companies invest in expansion, hire workers and raise pay.

 

Here are the trends at the top six banks since then:
• Growth in their outstanding loans slowed to 1 percent last year, down from 3 percent in 2018, which was unchanged from 2017.
• They collectively shrank their workforce by about 1,200 people by the end of 2019 from two years earlier. To be sure, hiring and firing was mixed among the six lenders, and some raised base pay or enacted special bonuses. Some also updated investors this week on investments in technology to automate jobs.
• Shareholders were big beneficiaries. After banks cleared the Federal Reserve’s mid-year stress tests, the group announced plans to boost stockholder payouts by $21.5 billion, an increase of 14 percent.

 

The tax savings have spurred the banks to record profit. The six firms posted $120 billion in net income for 2019, inching past 2018’s mark. They had never surpassed $100 billion before the tax cuts.

 

On conference calls with analysts to discuss earnings this week, some bank executives predicted the tax rates may tick back up slightly to between the levels of 2018 and 2019. That suggests some of last year’s savings may also have been attributable to temporary factors. But in at least one case, a bank’s rate was elevated last year by legal expenses that aren’t tax deductible.

 

Trump, who’s also pushed to ease financial regulation, indicated Wednesday he’s aware that his efforts have helped banks boost profits. At a gathering of corporate leaders to celebrate his trade deal with China, he greeted a senior JPMorgan executive by suggesting the bank thank him.

 

“They just announced earnings and they were incredible,” the president said of the nation’s largest bank. “I made a lot of bankers look very good. But you’re doing a great job.”

 

 

Should you take Social Security at 62?
If you can wait a few years longer, you can boost your benefits—and your spouse's.
FIDELITY VIEWPOINTS
 

Key takeaways
• If you claim Social Security at age 62, rather than waiting until your full retirement age (FRA), you can expect up to a 30% reduction in monthly benefits.
• For every year you delay past your FRA up to age 70, you get an 8% increase in your benefit. So, if you can afford it, waiting could be the better option.
• Health status, longevity, and retirement lifestyle are 3 variables that can play a role in your decision on when to claim your Social Security benefits.

 

When it comes to Social Security, it can be tempting to take the money and run as soon as you're eligible—typically at age 62. After all, you've likely been paying into the system for all of your working life, and you're ready to receive your benefits. Plus, guaranteed monthly income is nice to have.

 

Health status, longevity, and retirement lifestyle are 3 key factors that can play a role in your decision on when to claim your Social Security benefits. You may not be able to predict the true impact of these variables, but you can rely on the simple fact that if you claim early versus later, you will likely have lower benefits from Social Security to help fund your retirement over the next 20–30+ years.

 

If you start taking Social Security at age 62, rather than waiting until your full retirement age (FRA), you can expect up to a 30% reduction in monthly benefits with lesser reductions as you approach FRA. Remember, FRA is no longer age 65. It now ranges from 66 to 67, depending on your date of birth (see your full retirement ageOpens in a new window). And your annual cost-of-living adjustment (COLA) is based on your benefit. So if you begin Social Security at 62, and start with reduced benefits, your COLA-adjusted benefit will be lower too.

 

Waiting to claim your Social Security benefit will result in a higher benefit. For every year you delay past your FRA, you get an 8% increase in your benefit. That could be at least a 24% higher monthly benefit if you delay claiming until age 70. But, make sure to evaluate your decision based on how much you've saved for retirement, your other sources of income in retirement, and your expectations for longevity.

 

While many people could benefit from waiting to age 70 to take Social Security payments, others may need this source of guaranteed income sooner to help pay their bills, or may anticipate that they may not live long enough to reap the rewards of delaying.


The downside of claiming early: Reduced benefits

Consider the following hypothetical example. Colleen is 62 as of 2019. If Colleen waits until age 66 and 6 months (her FRA) to collect, she will receive approximately $2,000 a month. However, if she begins taking benefits at age 62, she'll only receive $1,450 a month. This "early retirement" penalty is permanent and results in her receiving up to 28% less year after year.

 

However, if Colleen waits until age 70, her monthly benefits will increase another 28% over what she would receive at her FRA, to a total of $2,560 per month.1 If she were to live to age 89, her lifetime benefits would be about $114,000 more, or at least 24% greater, because she had waited until age 70 to collect Social Security benefits.2 (Note: All figures are in today's dollars and before tax; the actual benefit would be adjusted for inflation and would possibly be subject to income tax.)

 

Spouses and Social Security
Several Social Security claiming strategies were eliminated in 2015 including the ability to file a "restricted application for spousal benefits," which allowed you to claim benefits based on your spouse's work record and then switch to claiming on your own work record at a later date. This strategy is no longer possible if you turned age 62 after December 31, 2015.

 

Claiming before your FRA on a spouse's record means you'll lose even more than claiming on your own record—the benefit reduction for a spouse is up to 35% while the reduction for claiming your own benefit is up to 30%. For instance, if you're the spouse of Colleen in the above example and you are the same age, you'd be eligible for only $675 a month at age 62, 33% less than the $1000 a month you would get at your FRA of 66 and 6 months.

 

Read Viewpoints on Fidelity.com: Social Security tips for couples

Not married? Read Viewpoints on Fidelity.com: Social Security tips for singles

 

Your decision to take benefits early could outlive you. If you were to die before your spouse, they would be eligible to receive your monthly amount as a survivor benefit—if it's higher than their own amount. But if you take your benefits early, say at age 62 versus waiting until age 70, your spouse's survivor Social Security benefit could be up to 30% less for the remainder of their lifetime.

 

Bridge to Medicare
Remember that while you are eligible for reduced Social Security benefits at 62, you won't be eligible for Medicare until age 65, so you will probably have to pay for private health insurance in the meantime. That can eat up a large chunk of your Social Security payments. For the average 55- to 64-year-old, total health care spending was $10,137 in 2016 (including $1,310 in out-of-pocket spending ).3 Taking Social Security early to pay for temporary health care cost locks in a permanent Social Security reduction.

 

Read Viewpoints on Fidelity.com: Your bridge to Medicare

 

Benefits of working longer
Many people want to retire as soon as it is financially feasible to do so, but it's crucial to consider the earning and investing power you may give up if you stop working full-time and take Social Security at 62. If you leave a job with good pay and benefits, it may be difficult ever to regain that level of compensation if you need or want to return to work later. Of course, not everyone can keep working, but it is something to consider if you are healthy and have the opportunity to stay in the workforce, in either a full-time or part-time capacity.

 

Tip: Women often live longer than men, and are more likely to depend on one income when they are older. Don’t make the mistake of coupling your decision to leave the workforce with your Social Security claiming strategy. Remember, by the time you get into your 80s, you have fewer financial options, so don't jump at the first opportunity to claim Social Security at age 62 just because you may want to quit your current job.

 

But there's even more to the story. As you approach retirement, you're often at the upper-end of your lifetime earnings trajectory—and of your ability to save more for retirement. In addition, if you can keep working, you can make "catch-up" contributions to a tax-deferred workplace savings plan like a 401(k) or 403(b) or a traditional or Roth IRA. Catch-up contributions allow you to set aside larger amounts of money for retirement.

Remember, if you decide to stop working at 62, you will cease tax-advantaged saving opportunities and cap your Social Security benefits throughout your retirement—and you may need to begin to draw down your savings earlier than you want.

 

When you factor in longevity, health care, and the cost of your expected lifestyle in retirement, your decision on whether or not to claim Social Security at age 62 may become clearer.

 

 

IRS leaker who outed Michael Cohen’s banking secrets is spared jail time
By Joel Rosenblatt

 

A former Internal Revenue Service analyst persuaded a judge not to send him to prison for leaking confidential government records on suspicious banking activity by President Donald Trump’s former lawyer Michael Cohen.

 

John C. Fry, who worked in the IRS’s law enforcement arm in San Francisco, pleaded guilty to illegally disclosing records from a Treasury Department database showing that a shell company linked to Cohen (pictured) had received millions of dollars from multinational companies that were trying to get access to the Trump White House, as well as $500,000 from a company tied to a Russian oligarch.

 

After Fry privately shared the information in 2018 with Michael Avenatti, the California lawyer who sparred publicly with Trump for months, the reports on Cohen’s transactions wound up on Twitter, triggering a media frenzy. A San Francisco federal judge sentenced Fry Wednesday to five years of supervised probation and ordered him to pay a $5,000 fine.

 

Fry is the second federal official this week to express remorse to a federal judge for making unauthorized disclosures from Treasury’s Financial Crimes Information Network, or FinCEN, which probes money laundering by studying data about financial transactions.

 

A senior Treasury adviser pleaded guilty to giving a journalist so-called Suspicious Activity Reports from the database involving one-time Trump campaign chairman Paul Manafort and others. Natalie Mayflower Sours Edwards is set to be sentenced June 9 in Manhattan federal court.

 

Fry “made a onetime mistake within a lifetime of good,” his lawyer, Gail Shifman, wrote in a court filing seeking leniency from U.S. District Judge Edward Chen.

 

Prosecutors recommended that Fry, 55, spend three months in prison and pay a $10,000 fine. They argued in a memo that Fry set aside his “training and experience, and committed crimes in violation of the law he was sworn to uphold.”

 

While Cohen sought more than $14 million in restitution from Fry, the government said Cohen failed to show he or his business were harmed. The judge agreed.

The case is U.S. v. Fry, 19-0102, U.S. District Court, Northern District of California (San Francisco).

 

 

Senate Democrats push for passage of energy-related tax incentives
By Michael Cohn

 

A group of 27 Democratic senators is calling for action in the Senate Finance Committee on extending energy-related tax credits and examining new tax proposals, especially those that incentivize renewable energy projects.

Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, led the group of Democrats in writing a letter Tuesday to Sen. Charles Grassley, R-Iowa, who chairs the committee.

 

“Despite numerous opportunities, including in the recent tax extenders package, the Finance Committee has failed to take action on the dozens of energy tax proposals pending before it,” they wrote. “It is critical that the Committee move to address these issues in a timely manner, along with much needed policy changes to combat the damage and growing dangers caused by global climate change.”

 

They pointed out that the Senate Finance Committee hasn’t held a single hearing on energy tax policy during the previous congressional term, and has yet to hold one in the current one.

 

“The sole energy tax-related recommendation of the Committee’s temporary policy task forces was ignored in the tax extender legislation passed in December 2019, along with nearly all proposals put forward in members’ legislation this Congress,” they wrote. “This Committee must fulfill its role in examining members’ energy tax proposals and in bolstering our nation’s efforts to combat climate change. Therefore, we urge you to swiftly schedule Committee action to address these proposals and ensure our nation’s energy tax policies keep up with the changing energy and climate landscape.”

 

They noted that In 2019, the global average temperature was the second highest ever recorded and the past decade was the hottest ever. The lawmakers pointed to raging wildfires and increased flooding in the western part of the U.S. causing unprecedented destruction over the past several years. They called for tax incentives for renewable energy to help combat climate change.

 

“Gaps in the tax code have disadvantaged complementary technologies that could improve climate resiliency and provide additional emissions reductions,” they wrote. “While power sector emissions continue to decrease, emissions from transportation, heavy industry and agriculture have stayed level or increased over the past 10 years. The United States is not on pace to meet its international climate commitments, to say nothing of the reductions necessary to stave off the worst potential outcomes of global warming.”

 

Grassley reacted to the letter, noting that he had worked to get tax extenders legislation passed. "I begged Democrats for a year to help me get an extenders package passed, about half of which were green energy policies, so this rings hollow," he said in a statement Tuesday. "We wouldn’t have a wind energy credit or a biodiesel credit but for me, let alone an extension of either. Democrats were holding up these green energy provisions in an attempt to get a big expansion of taxpayer subsidies for rich Tesla owners.”

 

 

Careful Tax Planning Required for Incentive Stock Options
 

Incentive stock options (ISOs) are a popular form of compensation for executives and other key employees. They allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the ISO grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for. But careful tax planning is required because of the complex rules that apply.

 

Tax advantages abound
Although ISOs must comply with many rules, they receive tax-favored treatment. You owe no tax when ISOs are granted. You also owe no regular income tax when you exercise ISOs. There could be alternative minimum tax (AMT) consequences, but the AMT is less of a risk now because of the high AMT exemption under the Tax Cuts and Jobs Act.

 

There are regular income tax consequences when you sell the stock. If you sell after holding it at least one year from the exercise date and two years from the grant date, you pay tax on the sale at your long-term capital gains rate. You also may owe the 3.8% net investment income tax (NIIT).


If you sell the stock before long-term capital gains treatment applies, a “disqualifying disposition” occurs and a portion of the gain is taxed as compensation at ordinary-income rates.

 

2019 impact
If you were granted ISOs in 2019, there likely isn’t any impact on your 2019 income tax return. But if in 2019 you exercised ISOs or you sold stock you’d acquired via exercising ISOs, then it could affect your 2019 tax liability. It’s important to properly report the exercise or sale on your 2019 return to avoid potential interest and penalties for underpayment of tax.

 

Planning ahead
If you receive ISOs in 2020 or already hold ISOs that you haven’t yet exercised, plan carefully when to exercise them. Waiting to exercise ISOs until just before the expiration date (when the stock value may be the highest, assuming the stock is appreciating) may make sense. But exercising ISOs earlier can be advantageous in some situations.

 

Once you’ve exercised ISOs, the question is whether to immediately sell the shares received or to hold on to them long enough to garner long-term capital gains treatment. The latter strategy often is beneficial from a tax perspective, but there’s also market risk to consider. For example, it may be better to sell the stock in a disqualifying disposition and pay the higher ordinary-income rate if it would avoid AMT on potentially disappearing appreciation.

 

The timing of the sale of stock acquired via an exercise could also positively or negatively affect your liability for higher ordinary-income tax rates, the top long-term capital gains rate and the NIIT.

 

Nice perk
ISOs are a nice perk to have, but they come with complex rules. For help with both tax planning and filing, please contact us.

 

 

7 reasons to start your taxes early
Make tax filing less stressful and potentially save money by starting early.
FIDELITY VIEWPOINTS

 

Key takeaways
• Filing your taxes early could protect you from identity theft.
• Getting started ahead of time gives you plenty of time to look for opportunities to reduce your taxable income.
• If you end up owing money, starting early can mitigate some of the sticker shock since you'll have time to plan how to make the payment.

 

Tax season is upon us with tax forms arriving in inboxes and mailboxes. Tackling your 2019 tax return may be a dreaded chore (because of complexity or the prospect of owing additional tax) or a welcome event (because you are due a refund). Either way, getting started early may help make your tax-filing season less stressful and potentially save you some money.

 

Beginning your tax preparation now may help you avoid surprises, give you more time to gather your documents, reduce your taxable income, and even protect you from identity theft.

 

Here are 7 reasons to get a start on your 2019 tax return now.

 

1. Protect yourself from identity theft
Filing your tax return as soon as possible is one of the best ways to guard against tax-related identity theft. For the scheme to be successful, a criminal files a fraudulent return and collects a refund in your name before you file your return. If you file your legitimate return before a crook tries to file one for you, the fraudulent return is rejected.

 

If you haven't received the necessary tax documents from an employer, financial institution, charity, or some other source, be proactive and ask for them. On the other hand, if you owe a payment with your return and you need time to raise the money, you can file your return early and instruct the Internal Revenue Service (IRS) to deduct the amount from your bank account or debit card, or charge your credit card, on a specified date—right up until the filing deadline. (The deadline is April 15, 2020, for your 2019 taxes.)

 

2. Lower your taxable income
You have several options for potentially reducing your taxable income with a contribution to a tax-advantaged account up until the tax deadline. The sooner you make a contribution, however, the sooner you'll be able to invest your contribution and give that money the chance to grow tax-deferred.

 

One opportunity available to many taxpayers is a contribution to a traditional IRA. A contribution to a traditional IRA may reduce taxable income and, in turn, 2019 taxes for those eligible for the tax deduction.1 The tax-deductible contribution limit for the 2019 tax year is $6,000. For those who are age 50 and over, the limit is $7,000.

 

It isn't necessary to have a job to have a traditional IRA. A nonworking spouse, as long as their spouse has earned income, can contribute to a Roth or traditional IRA. The amount of a married couple's combined contributions can't be more than the earned compensation reported on their joint return.

 

Self-employed individuals and freelancers can open a Simplified Employee Pension plan—more commonly known as a SEP IRA—even if they also have a full-time job as an employee. Those who earn money freelancing or running a small business on the side could take advantage of the potential tax benefits from your side gig. With a SEP IRA, contributions may be tax-deductible, just like with a traditional IRA, but the SEP IRA has a much higher contribution limit. The contribution amount varies based on income. For 2019, the contribution limit is 25% of eligible compensation (or 20% of eligible compensation for the self-employed2) or $56,000, whichever is lower. The deadline for 2019 contributions is the tax deadline—April 15, 2020. If you file an extension, you'll have until October 15, 2020, to make the contribution for 2019.

 

Consider speaking with a tax advisor to determine the impact of SEP IRA contributions on the tax deductibility of contributions to a traditional IRA in the context of your personal situation.

 

3. Review your 2018 tax return
Looking back at your 2018 tax return can give you a great head start on what you'll need in order to prepare your return for 2019. You can see which financial institutions should be sending you tax documents, which charities you might have contributed to, and which deductions you might again be eligible to claim.

 

Here's another benefit to taking time to review your 2018 return: If you spot an error, you can file an amended return and possibly get back some money you thought was long gone.

 

4. Take into account significant life events
Got married? Had a child? Divorced? Retired? Bought a new home? All of these and many others can have a significant impact on your tax return. Consider the effects they might have on your tax liability and how you file your return. If you are unsure of the effects, consult a tax professional. Newly married couples, for example, are typically better off filing a joint tax return, but there are circumstances, such as one spouse owing back taxes or having large medical bills, when filing separately may make sense.

 

5. Make a checklist
After reviewing last year's return and any significant life events from 2019, make a checklist of items you need to prepare before filing your return. By starting early, you'll give yourself time to compile all the information you need and to explore potential tax-saving deductions and strategies.

 

6. Avoid "sticker shock"
The last thing you want is to get to the bottom line and see an unexpected large balance owed to the IRS. If you wait until the last minute to prepare your taxes, you may not have time to raise the cash for the payment. Filing for an extension won't help. You still have to pay what you owe by the filing deadline or face a penalty and interest.

 

Last-minute surprises may become more common as larger numbers of Americans earn self-employment income from things such as driving for a ride-sharing service, renting out a room in their home, or performing consulting services. People engaged in these types of income-producing activities are typically required to pay estimated taxes each quarter (i.e., 4 times a year). If you're new to self-employment and failed to make quarterly payments, you'll probably need time to plan for any additional taxes due.

 

7. Catch errors in tax documents
Tax preparation software is great at filling out forms and calculating your tax liability, but it doesn't always spot reporting errors in tax documents sent to you. Unless you catch them yourself, they could significantly impact your tax bill.

 

For example, suppose you received money from a lawsuit settlement or a sweepstakes prize and it was reported on a Form 1099-MISC. The amount should appear in Box 3, "Other income," but if the issuer mistakenly placed it in Box 7, "Nonemployee compensation," it would be considered self-employment income and subject to an additional 15.3% self-employment tax. Another example is Box 7 on Form 1099-R, which may contain a letter or number code as well as a check box for IRA, SEP, or SIMPLE distributions. The entries can make a difference in how you report the distribution and if it's taxed.

 

If you can't determine on your own what the proper entries should be on the forms you receive, you should consult a tax professional.

 

Start as soon as you can
By starting your tax return now and giving yourself time to resolve questions and issues that might arise, you may find the process less anxiety-producing and may discover some opportunities to help lower your tax bill.

 

 

The TCJA Effect: Qualified Residence Interest
The Tax Cuts and Jobs Act (TCJA) made a significant impact — both directly and indirectly — on the deductibility of various types of interest expense for individuals. One area affected is qualified residence interest.

 

Two ways about it
The TCJA affects interest on residential loans in two ways. First, by nearly doubling the standard deduction and placing a $10,000 cap on deductions of state and local taxes, the act substantially reduces the number of taxpayers who itemize. This means that fewer taxpayers will benefit from mortgage and home equity interest deductions. Second, from 2018 through 2025, the act places new limits on the amount of qualified residence interest you can deduct.

 

Previously, taxpayers could deduct interest on up to $1 million in acquisition indebtedness ($500,000 for married taxpayers filing separately) and up to $100,000 in home equity indebtedness ($50,000 for married taxpayers filing separately).

 

Acquisition indebtedness is debt that’s incurred to acquire, build or substantially improve a qualified residence, and is secured by that residence. Home equity indebtedness is debt that’s incurred for any other purpose (such as buying a boat or paying off credit cards) and is secured by a qualified residence. A single mortgage could be treated as both acquisition and home equity indebtedness, allowing taxpayers to deduct interest on debt up to $1.1 million.

 

The TCJA reduced the deduction limit for acquisition indebtedness to interest on up to $750,000 in debt and eliminated the deduction for home equity indebtedness altogether, through 2025. The new limit on acquisition indebtedness doesn’t apply to debt incurred on or before December 15, 2017, subject to an exception for mortgages that were incurred on or before April 1, 2018, in certain circumstances. Specifically, it involves debt incurred pursuant to a written binding contract to purchase a qualified residence executed before December 15, 2017, and scheduled to close before January 1, 2018 (so long as the purchase, as it turned out, was completed before April 1, 2018). And it doesn’t apply to existing mortgages that are refinanced after December 15, 2017, provided the resulting debt doesn’t exceed the refinanced debt.

 

The elimination of interest deductions for home equity indebtedness, however, applies to existing debt. So, if you were previously deducting interest on up to $100,000 of home equity debt, that interest is no longer deductible. The same holds true for the $100,000 home equity portion of $1.1 million in mortgage debt. Note, however, that interest on a home equity loan used to substantially improve a qualified residence is deductible as acquisition indebtedness (subject to applicable limits).

 

Review your expenses
In light of the TCJA’s changes, you may want to make changes such as paying off home equity loans because interest is no longer deductible. Contact us for help.

 

Sidebar: Investment interest also affected
The Tax Cuts and Jobs Act (TCJA) also affects investment interest. This is interest on debt borrowed to buy taxable investments (margin loans, for example). Like qualified residence interest, investment interest is an itemized deduction, which is lost if you no longer itemize.

 

Deductions of investment interest cannot exceed your net investment income, which generally includes interest income and ordinary dividend income, but not lower-taxed capital gains, qualified dividends or tax-free investment earnings. For many people, net investment income is now higher because the TCJA eliminated miscellaneous itemized deductions for such expenses.

 

 

State sales and use tax changes in 2019 and what to expect in 2020
By Mark Friedlich

 

The year 2019 was a continuation of the banner year of 2018 for major law and administrative changes in sales and use tax compliance, inspired and driven in large part by the Supreme Court’s decision in South Dakota v Wayfair. This landmark decision greatly expanded the reach of states to impose sales and use tax collection and remittance obligations on businesses beyond actual physical presence to also include mere economic presence.
Not only has the Wayfair decision on nexus directly empowered the states to impose sales and use tax collection and remittance obligations on businesses that had been beyond their reach, but it has also indirectly inspired other changes in state taxation rules across the country. This article:


• Reviews economic nexus and other types of nexus in more detail as they have been playing out in various states around the country in 2019;
• Highlights other significant rates and taxability rules around the country in 2019, and then
• Peers into my crystal ball to take a sneak peek at 2020.
Economic and other types of nexus
Growth of state-wide economic nexus rules
Driven by the need to find new sources of state revenue, all but two states (Florida and Missouri) have enacted economic nexus laws, and it is expected that in 2020, Florida will be on board. Missouri might remain the only holdout in 2020, mostly because it has a very complex system of districts and special rules that will make it administratively challenging to navigate and implement
Growth of local economic nexus rules
And to make matters even more complex for businesses, especially in home rule states like Colorado and California, local governments also have the power to adopt economic nexus rules that vary from locality to locality. So, these jurisdictions within jurisdictions must also be tracked.
Growth of economic nexus “flavors”
And if the state and local jurisdictional challenges weren’t enough, there are many flavors of economic nexus for each state that have emerged in 2019.
• How much economic activity is enough to trigger nexus in a state? Some states look to both the amount of economic activity in a state and the number of transactions; other states look to either the amount of economic activity or the number of transactions in a state; and still other states are flirting with the idea of no safeguard threshold amounts at all.
• How do you compute the amount of economic activity? Some states include both taxable and nontaxable sales in the total for economic nexus purposes. Other states don’t. Some states measure economic activity by the number of sales; other states use total revenue or some combination of them.
• When do you start counting up the volume of activity and the number of transactions? When does the state’s law take effect? The date of enactment? The initial start-collection date determined by the departments of revenue? Subsequent modifications to that date for special circumstances?
• When do you know when you have exceeded the thresholds of activity? Once you determine the start date for collection, some states make you start counting from previous periods and, as soon as you cross the threshold, you have to start collecting sales tax from that time forward. What if the level of activity in a state goes down, when can you stop collecting?


Effects of Wayfair on other types of nexus
Before Wayfair, there were many types of nexus on the books.


Such existing statutes include: physical presence nexus, affiliate or attributional nexus, cookie nexus, click-through nexus, online market platform facilitator nexus, and use tax notification/reporting requirement laws (see the U.S. map below).


Current U.S. map of nexus-related laws
As states added new economic presence laws and related administrative rules in 2019 where none previously existed, they also started to review and in some cases repeal or reinterpret existing nexus laws and rulings in order to “fit” economic presence principles into them. Most of these laws are still on the books and remain relevant to nexus determinations.


Growth of new state tax registrations under economic nexus and the resulting potential prior-period liability under other pre-Wayfair nexus laws


Increased registration under economic nexus rules has increased the risk of prior-year liability under then existing pre-Wayfair nexus rules, as well as the ability to take advantage of voluntary disclosure agreements (VDA) and various state amnesty relief programs


However, post-Wayfair, most, if not all, of those laws are still on the books and so far, remain effective for current as well as past years. And there are two risks here:


• These rules might have applied to the business in the past (whether it knew it or should have known it). So, in a company’s zeal to register in states under Wayfair, a business may find itself liable for unexpected and unbudgeted past tax liability under these other nexus rules.
• Once a business registers, it may no longer be entitled to use a VDA to limit past liability exposure. However, prior contact between a state and the taxpayer concerning sale tax, for example, may disqualify the business from participation in a VDA with respect to sales tax. Contact includes filing a tax return, paying tax, or even receiving an inquiry from the state regarding sales tax.


The audit risks of inadequate exemption certificate management
Nonretail businesses, such as manufacturing, wholesalers and distributors, have increased sales and use tax registration and exemption certificate management requirements in 2019


Since nonretail businesses have nexus in more states because of Wayfair. These businesses are required to register in those states. This means that manufacturers, wholesalers and distributors may have to register as well where the volume of business or number of transactions exceeds the minimums thresholds created by the economic nexus laws in each state. And although sometimes these businesses will be eligible for various resale and manufacturer’s exemptions and will owe no tax, they may still have to file what are called “zero-tax” state tax returns. The bottom line is that all nonretail businesses will have to have systems and expert support in place to manage all of the various exemption requirements of the states. This will be key when the taxing authorities come knocking at the door.


The rise of marketplace facilitator laws in step with economic nexus laws
More and more businesses continue to sell their goods to buyers all over the country on so-called marketplace platforms, such as Amazon, Etsy, etc. In step with the rise of economic nexus laws, the states are passing what are called marketplace facilitator laws that shift the burden of collecting sales and use tax to the marketplace facilitator. At latest count, the number of states adopting marketplace facilitator laws has more than quadrupled in 2019 to over 36 and more will be added in 2020


In a nutshell, these laws generally provide that a marketplace facilitator is responsible for collecting and paying the tax on retail sales made through their marketplace for delivery to state customers.


So, are marketplace sellers now off the hook for sales and use tax compliance? Not really. Sellers may still be liable for sales and use taxes under these new marketplace facilitator rules. Here’s why:


• The seller is still responsible for collecting and remitting sales and use taxes on sales not made on the marketplace facilitator platform.
• The marketplace seller is liable for the tax if the marketplace facilitator can show that:
• It has made a reasonable effort to obtain accurate and complete information from an unrelated marketplace seller about a retail sale.
• The failure to remit the correct amount of tax was due to incorrect or incomplete information provided to the marketplace facilitator by the unrelated marketplace seller.

 

State sales and use tax audit enforcement
Although the numbers are not yet in for state audit results in 2019, the numbers for 2018 show an increase in state revenue attributable to Wayfair. Most states have been reluctant to publicize the sales tax collection windfall they have experienced as a result of SCOTUS’s landmark decision in Wayfair a little more than a year ago. However, South Carolina has been more forthcoming. Top officials at the state Department of Revenue told me that the state collected $46.8 million in extra revenue from 3,089 registered remote sellers from Nov. 1 through June 30. The bulk of this increase comes from online companies. That’s because remote sellers — or companies that don’t have a physical presence but do business in the state — have been required for nearly a year to collect sales and remit taxes on the products they sell to South Carolina customers. Keep in mind that the almost $47 million in state tax collections is on top of what they would have otherwise collected. “Regular” collections during that same period shot up by $89 million.


I expect that 2019 and 2020 will show even higher Wayfair-related revenue increases and that part of that will come from audit adjustments that took place in 2019, as well as audits in 2020.

 

Roundup of other key sales and use tax development in 2019
In general
As explained in detail above, the vast majority of the important sales and use tax developments in 2019 for all states centered in some way or another around the Wayfair holding. But as usual, all states have also made changes to the rates and rules of various taxable products and services, not just statewide but also in many local jurisdictions. Therefore, taxpayers and practitioners should check out the state tax websites for these changes.
Specific noteworthy state changes


Among the thousands of changes made to state tax rates and rules around the country, here are a few that should not be overlooked for 2020.

Alabama
A new law:
• expands existing amnesty provisions for remote sellers participating in the Simplified Sellers Use Tax Remittance (SSUT) Program; and
• bars class action lawsuits against remote sellers for over-collecting taxes under the SSUT Program.
Guidance: The amnesty programs in all states around the country should be checked for changes as well.

 

Arizona
The U.S. Supreme Court denied a petition for certiorari challenging the constitutionality of a car-rental surcharge imposed in Arizona. The Maricopa County Tourism and Sports Authority imposes the surcharge on car rental companies. The companies pass the costs along to customers. The companies had asked the Court to consider whether:
• the surcharge violated the dormant Commerce Clause by forcing nonresidents to bear a disproportionate share of the tax burden; and
• there was an intent to impose a disproportionate burden on nonresidents.
Saban Rent-A-Car LLC, et al. v. Arizona Department of Revenue, et al., U.S. Supreme Court, Dkt. 19-136, petition for certiorari denied October 7, 2019
Guidance: Any time the Supreme Court gets involved in a state action, that is worthy of note.
 

California
Relief may be available to marketplace sellers using fulfillment centers in California. An out-of-state retailer (marketplace seller) may qualify for reduced liability for certain California sales and use taxes, penalties, and interest if:
• the out-of-state retailer that is or was engaged in business in California solely because the retailer used a marketplace facilitator to facilitate sales of merchandise for delivery in California; and
• that marketplace facilitator stored the retailer’s inventory in California.
What relief is available?
The California Department of Tax and Fee Administration (CDTFA) is prohibited from assessing sales and use taxes on sales made by a qualifying retailer prior to April 1, 2016. The CDTFA is required to relieve any penalties imposed on a qualifying retailer with respect to sales made for the period April 1, 2016 to March 31, 2019. Special Notice L-681, California Department of Tax and Fee Administration, July 2019
Guidance: Of course, now that marketplace facility statutes are in place in over 36 states now, any issues that arose before Wayfair may no longer be as relevant after the new marketplace facility legislation.
 

Connecticut
The threshold for click-through nexus has been lowered. Every person who sells property or services through an agreement with a person located in Connecticut must collect and remit sales tax on their in-state taxable sales. The agreement must provide that:
• in return for the person in Connecticut referring potential customers to the retailer, directly or indirectly, by any means including a website link;
• the person will receive a commission or other consideration from that retailer; and
• the cumulative gross receipts from sales by the retailer to in-state customers who are referred to the retailer by all such persons with this type of an agreement with the retailer is in excess of $100,000 during the preceding four quarterly periods.
Formerly, this requirement applied to any retailer that annually earned more than $250,000 in gross receipts from sales in the state under such referral agreements in the preceding four quarters. This provision is effective July 1, 2019, and applicable to sales that occur as of that date.
District of Columbia
DC passes permanent sales tax laws for digital music, books and games. Digital goods, including music, books, movies and games, are subject to sales and use tax in the District of Columbia. In prior temporary legislation, sales tax law for digital goods was effective January 1, 2019. The permanent legislation also includes changes to DC’s sales tax nexus laws. Act 22-584 (D.C.B. 22-914), Laws 2017, approved Jan. 18, 2019, effective after a 30-day congressional review period
Guidance: The taxability of digital products is at the forefront of states all across the country.


Florida
A managing member was personally liable for a penalty based on twice the total amount of Florida sales and use tax owed for the audit period. The taxpayer was responsible for, and had administrative control over, the collection and payment of taxes for the company. Moreover, the taxpayer willfully attempted to evade or defeat his responsibility to pay sales tax owed. Scott v. Department of Revenue, Florida Department of Revenue, DOAH Case No. 18-4464 (DOR 2019-003-FOF), July 8, 2019
Guidance: This case is a reminder that states can impose business sales and use tax liability personally on key persons in the business.


Georgia
As a reminder that states are becoming more aggressive in the taxation of digital-type products, a seller of exempt software was advised to register in Florida. A taxpayer’s retail sales of prewritten computer software were exempt from Georgia sales tax because it was only delivered electronically. However, the taxpayer was required to indicate this electronic method of delivery on its invoices to customers. Though the sales were exempt, the Georgia Department of Revenue found that the taxpayer should register for a Georgia sales and use tax number as a "dealer" because it had an active Georgia withholding tax account. Due to the withholding account, the DOR assumed the taxpayer was a "dealer " for sales and use tax purposes and stated that it should file sales and use tax returns even if no sales were made or tax was due. Letter Ruling LR SUT-2018-10, Georgia Department of Revenue, Aug. 7, 2018, released January 15, 2019, ¶201-252
Guidance: The taxability of digital products is on the forefront of states all across the country.

 

Hawaii
Periodic general excise tax returns for Hawaii for months beginning on or after July 1, 2020 will be required to be filed electronically. In addition, annual returns for taxable years beginning on or after Jan. 1, 2020 will be required to be filed electronically. Taxpayers may file general excise tax returns electronically by using Form G-45, Periodic General Excise / Use Tax Return, and Form G-49, Annual Return and Reconciliation of General Excise / Use Tax, available online at https://hitax.hawaii.gov. The department will impose a two-percent penalty on the amount of tax required to be shown on the return if the return is not filed electronically unless the failure is due to reasonable cause and not due to neglect. Announcement No. 2019-16, Hawaii Department of Taxation, Dec. 6, 2019, ¶201-112
Guidance: More and more states are now requiring electronic filing of tax returns and other key documents.


Idaho
In a recent case, a taxpayer was responsible for Idaho use tax, penalty, and interest because it failed to file a return and submit the documentation requested by the Tax Discovery Bureau. In this matter, the bureau sent the taxpayer three letters requesting documentation to show that sales/use tax had been paid on the purchases of prefabricated building materials or to show these transactions qualified for an exemption. However, the taxpayer failed to provide any documentation and, therefore, the bureau issued a notice of deficiency determination assessing use tax, penalty and interest. The court rejected the taxpayer’s request for abatement of the interest and penalties on the grounds that he did not know the tax was due at the time of purchase. Decision No. 0-647-038-976, Idaho State Tax Commission, November 2018, received April 3, 2019
Guidance: Once again the court makes it clear that ignorance of the law is no excuse.

 

Illinois
Effective Jan. 1, 2020, Illinois legalizes the growing and selling cannabis as of June 25, 2019, and taxes cannabis sales as well. The state imposes:
• a cannabis purchaser excise tax, varying from 10 to 25 percent.
• a 7 percent privilege tax on cannabis cultivation centers;
• a 7 percent privilege tax on craft growers of cannabis;
• a 7 percent "cannabis cultivation privilege tax" on both cultivation centers and craft growers.
H.B. 1438, Laws 2019
In addition to the cannabis legislation now effective in Illinois, two unrelated recent Illinois court cases are also worthy of note.
• The Illinois Appellate Court affirmed the circuit court’s decision of upholding the constitutionality of the streaming services tax. Labell v. The City of Chicago, Appellate Court of Illinois, First District, No. 15 CH 13399, Nov. 21, 2019.
• The Appellate Court of Illinois affirmed the judgment of the circuit court that a taxpayer’s change of ownership was a taxable event. In this matter, the taxpayer bought an aircraft and paid a corresponding general use tax. Subsequently, the taxpayer changed the legal ownership of that aircraft to himself as trustee of his revocable trust. The Department of Revenue noticed the change in legal ownership and sent the taxpayer a notice of tax liability under the Aircraft Use Tax Law. The circuit court found that the department properly imposed the aircraft use tax on the taxpayer.
• Shakman v. The Department of Revenue, Appellate Court of Illinois, First District, No. 1-18-2197, Dec. 12, 2019
Guidance: This case reminds us that a change in ownership, even if “related,” can trigger a taxable sales and use tax event.


Iowa
Vape regulations adopted. Iowa has adopted regulations implementing changes to its cigarette tax law. The legislation has imposed sales and use tax on all delivery sales of alternative nicotine products or vapor ("vape") products within Iowa. In-state or out-of-state retailers of these products into Iowa are required to obtain a delivery sale permit. A retailer holding a delivery sale permit must also have an Iowa sale and use tax permit. Rule 701—82.12, Iowa Department of Revenue, effective April 3, 2019
Guidance: We are just starting to scratch the surface of many issues related to Vaping. Stay tuned.


Kansas
The Kansas Attorney General’s office has opined that the Department of Revenue’s policy in Notice 19-04, requiring all remote sellers to collect and remit sales tax by Oct. 1, 2019, has no force or legal effect.
Guidance: Politics aside, the real issue is whether the Kansas economic nexus law, or frankly any state nexus law, can constitutionally exclude statutory safe-harbor minimums.
 

Kentucky
The latest Kentucky Sales Tax Facts discusses 2019 sales and use, utilities gross receipts, excise, and gross receipts tax changes. This document should be reviewed on its website. The newsletter highlights the changes enacted by H.B. 354, Laws 2019:
Guidance: This is a great tool for practitioners to use to catch up with all the changes at least in those states that provide such a document. Check all websites.
 

Louisiana
The Supreme Court of Louisiana affirmed the decision of the district court that the law that allowed funding mechanism for the Louisiana Uniform Local Sales Tax Board was unconstitutional. West Feliciana Parish Government v. State of Louisiana, Louisiana Supreme Court, No. 2019-CA-00878, Dec. 11, 2019
Guidance: Any time the Supreme Court gets involved in a state action, that is worthy of note.
 

Maine
Maine has enacted a number of sales and use tax sourcing rules depending upon whether the property or services are received at a seller’s business location, other location, where the business records are found or where the property is shipped, or services provided. H.P. 1279, Laws 2019, effective Sept. 18, 2019
Guidance: Sourcing rules are critical components of sales and use tax analysis and compliance.
 

Maryland
Answering services are not subject to Maryland sales and use tax if the physical act of answering a telephone is less than 5% of the service provider’s gross receipts in a taxable year. Ch. 292 S.B. 945, Laws 2019, effective April 30, 2019
Guidance: Who knew answering a telephone too much could make you subject to tax?
 

Massachusetts
In a recent court case, a taxpayer’s sales of standardized software online were subject to Massachusetts sales tax because the transactions constituted taxable sales of tangible personal property (TPP). The taxpayer sold its software in a subscription format wherein customers paid a monthly or annual subscription fees for unlimited access to the software during the subscription period. In this case, the court rejected the taxpayer’s argument that (1) the transactions at issue did not involve the transfer of software, and (2) the sale of software constituted a sale of service and not TPP and therefore should not be subject to tax. Citrix Systems, Inc. v. Commissioner of Revenue, Massachusetts Appellate Tax Board, No. C321160 and C325421, Nov. 2, 2018
Guidance: Again, the taxability of digital products is on the forefront of states all across the country. This is a good case to review for how the court analyzes these special fact patterns
 

Michigan
Nexus Extended to Marketplace Facilitators. Michigan has just enacted legislation that extends sales and use tax collection obligations to marketplace facilitators. Act 143 (H.B. 4540) and Act 144 (H.B. 4541), Laws 2019, effective Jan. 1, 2020
Guidance: Although we cover marketplace facilitator nexus above, it is worth noting here since it was just enacted, making it No. 37. But laws are being added so quickly that state tax changes in this area must be monitored daily.
 

Minnesota
The Minnesota Department of Revenue revoked and replaced a revenue notice setting out its position on physical presence nexus standards. The notice discusses the criteria used by the department for determining when a retailer or marketplace provider is a "retailer maintaining a place of business in this state" or a "marketplace provider maintaining a place of business in this state" and therefore has physical presence nexus in Minnesota, such that they must register, collect and remit Minnesota sales or use tax on all taxable retail sales made or facilitated into Minnesota. However, this notice does not apply for the purpose of determining when a retailer or marketplace provider is not maintaining a place of business in this state but may have economic nexus with Minnesota. Minnesota DOR Notice Replaces Notice on Physical Presence Nexus Standards (Oct. 2, 2019)
Guidance: Physical presence is still alive and well.
 

Mississippi
Mississippi has extended the sunset dates of two incentive programs that offer sales and use tax incentives. The sunset dates of the following programs have been extended four years (from July 1, 2019, to July 1, 2023):
• the Major Economic Impact Act, and
• the Growth and Prosperity Act.
S.B. 2133, Laws 2019, effective April 3, 2019
Guidance: Most states have special incentive programs, regimes and holidays that are effective for very specific periods of time. These must be checked every year in all states.
 

Missouri
Enacted legislation contains various Missouri sales and use tax changes, including those on:
• tax receipt requirements;
• deadline for filing refund for erroneously paid taxes; and
• authorization for additional transient guest taxes.
S.B. 87, Laws 2019, effective Aug. 28, 2019
Guidance: Missouri has a very complex state-local tax system as noted above by the fact that it is only one of two states yet to adopt economic nexus. So, paying attention to changes requires close scrutiny.
 

Nevada
An exemption from Nevada sales and use taxes has been enacted for certain medical equipment. Effective July 1, 2019, a sales and use tax exemption applies to:
• durable medical equipment;
• oxygen delivery equipment; and
• mobility enhancing equipment.
Nevada voters approved an amendment to the state constitution to provide for the exemption. Ch. 244 (S.B. 447), Laws 2019
Guidance: The important note here is that it required a voter approval to get the changes. Voter-approval-required legislation is always worth tracking no matter the state.
 

New Hampshire
The New Hampshire Attorney General has advised New Hampshire businesses that have been contacted by another state regarding sales tax collection to contact:
• an accountant, attorney or other appropriate advisor; and
• the New Hampshire Department of Justice Consumer Protection Bureau.
The Consumer Protection Bureau will help determine if the attempt to collect taxes is legitimate and if states are complying with recently enacted legislation (Ch. 280, Laws 2019). Reporting Out-of-State Sales Tax Requests for New Hampshire Businesses, New Hampshire Attorney General, Aug. 29, 2019
Guidance: New Hampshire is one of only five states that does not have a sales tax. Such states may feel, like New Hampshire, that requiring its businesses to collect a tax that it itself does not have is onerous. Therefore, they want to give their businesses a mechanism to appeal abusive tax collection rules from another state. Whether the other four states will enact such protections is an open question to watch in 2020.
 

New Jersey
In this case, a conveyor systems manufacturer (taxpayer) was not entitled to an exemption from New Jersey sales and use tax because it did not qualify as a subcontractor. Jervis B. Webb Company v. Director, Division of Taxation, New Jersey Tax Court, No. 000054-2016, 000269-2016, 000270-2016, 000271-2016, 000272-2016, 000273-2016, 000274-2016, 000275-2016, 000276-2016, 000277-2016, Aug. 13, 2019.
Comment: Sales and use taxes around construction in general can be complex and often center around the definition of a contractor. It may be useful for practitioners of all states to track such litigation although not directly impacting other states.
 

New Mexico
New Mexico enacted destination sourcing rules for its gross receipts and compensating taxes, effective July 1, 2021. The legislation requires the Department of Taxation and Revenue to create a database that sets out the local tax rates in the state by address. The legislation authorizes the department to issue additional guidance on sourcing, such as for taxpayers having more than one place of business. H.B. 6, Laws 2019, effective as noted
Guidance: Sourcing rules are critical components of sales and use tax analysis and compliance.
 

New York
A recent case in New York confirmed the audit methodology utilized by the New York Division of Taxation to calculate sales and use taxes due on a grocery store operator (taxpayer) The method was reasonable because the taxpayer failed to establish that the audit methodology employed by the division to calculate the tax due was unreasonably inaccurate. Silver Saddle Deli Grocery Inc., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 827058 and 827059, April 25, 2019
Guidance: This case provides a good discussion of the indirect methods that tax authorities can utilize to determine sales tax liability. Such indirect methods are often a mystery to taxpayer.
 

North Carolina
North Carolina has extended the sunset date of a number of sales and use tax exemptions and refunds. The sunset date for the dry cleaning solvent tax is also extended.
• Exemption for qualifying airlines;
• Exemptions and refunds for professional motorsports teams;
• Dry cleaning solvent tax: The sunset date of the dry cleaning solvent tax is extended from Jan. 1, 2020, to Jan. 1, 2030.
Ch. 237 (H.B. 399), Laws 2019, effective Nov. 1, 2019
Guidance: Most states have special incentive programs, regimes and exemption holidays that are effective for very specific periods of time and then expire. These “sunset” provisions must be checked every year in all states.
 

Ohio
Cryptocurrency payment program suspended. The Ohio Attorney General’s office has opined that the use of OhioCrypto.com cryptocurrency payment processor to accept payment of commercial activity (CAT) tax and sales tax, among other taxes, is not authorized. As a "device or method for making an electronic payment or transfer of funds, " OhioCrypto.com constitutes a "financial transaction device" pursuant to Ohio statute. Therefore, this payment processor may not be utilized without the express approval of the Board of Deposit. Opinion 2019-033, Ohio Attorney General, Nov. 5, 2019
Guidance: Cryptocurrency is a relatively new payment method. Practitioners must pay careful attention to such new technologies and the regulations around them.
Ohio’s rule on manufacturing amended. The definition of an item transferred for use in a manufacturing operation is expanded to include:
• Machinery, detergents and supplies located at a manufacturing facility and used to clean towels, linens, mopheads and clothing to be supplied to a consumer as part of laundry or dry cleaning services, if the towels, linens and similar items belong to the service provider; and
• Equipment and supplies used to clean processing equipment part of a continuous manufacturing operation to produce milk, yogurt, ice cream and other dairy products.

OAC5703-9-21, Ohio Department of Taxation, effective March 24, 2019
Guidance: The manufacturing exemption is a very important and complex area of the law so it’s noteworthy whenever any state changes the rules.
 

Oklahoma
Medical equipment exemption amended. Enacted Oklahoma sales tax legislation makes changes concerning a medical equipment exemption. H.B. 1262, Laws 2019, effective May 28, 2019
 

Pennsylvania
Statute of limitations for most taxes now 10 years. Pennsylvania may collect tax owed if the collection begins within 10 years of the date the settlement, determination or assessment of the tax becomes final. The change applies to all taxes administered by the Department of Revenue, except the inheritance tax. H.B. 17, Laws 2019, effective Nov. 27, 2019.
Guidance: Practitioners must stay current on the running of any statute of limitations because if the date is overlooked, it usually results in unhappy taxpayers.
 

Rhode Island
Federal law requires tax preparers to have a written plan to protect clients' data. The Rhode Island Department of Revenue issued an advisory reminding tax professionals that federal law requires them to create and follow a written information security plan to protect their clients’ data. Advisory for Tax Professionals 2019-36, Rhode Island Department of Revenue, Dec. 6, 2019
Guidance: Privacy issues are of concern all over the country in many contexts, but especially when it falls on practitioners to take specific statutory action.
 

South Carolina
Amazon was liable for third-party merchant sales. Amazon Services is liable for South Carolina sales taxes on the sale of third-party merchant products because it is "in the business of selling" for purposes of the Sales and Use Tax Act. Amazon accepts customer payments and is the point of sale for all transactions. Amazon Services LLC v. Department of Revenue, South Carolina Administrative Law Judge Division, No. 17-ALJ-17-0238-CC, Sept. 10, 2019
Guidance: Any case involving third-party companies like Amazon, Etsy, etc., is especially relevant for sales and use tax compliance purposes.
 

Tennessee
U.S. Supreme Court will not review tax imposed on fuel purchased by railroads. The U.S. Supreme Court has denied a petition for certiorari filed by taxpayers who argued that the imposition of Tennessee sales and use tax on diesel fuel purchased by railroads discriminates against railroads under the Railroad Revitalization and Regulatory Reform Act of 1976. Illinois Central Railroad Company v. Tennessee Department of Revenue, U.S. Supreme Court, Dkt. No. 18-866, petition for certiorari denied June 24, 2019
Guidance: As mentioned before, any time the Supreme Court gets involved in a state action, that is worthy of note.
 

Texas
Single local use tax rate for remote sellers announced. The Texas single local use tax rate for remote sellers is set at 1.75 percent. The rate is in effect beginning Jan. 1, 2020, through Dec. 31, 2020. The single local use tax rate provides an optional way of computing the amount of local use tax that remote sellers would be required to collect on taxable items. Certification of the Single Local Use Tax Rate for Remote Sellers - 2020, Texas Comptroller of Public Accounts, Dec. 12, 2019
Guidance: Such state efforts are intended to simplify compliance when remote sales are involved.
Sellers allowed to pay sales tax for customers. Texas has enacted legislation that now allows sellers to pay the sales tax on products they sell. A seller can advertise, hold out or state that it will pay the sales tax for a customer if:
• it indicates in the advertisement, holding out or statement that it will pay the tax for the customer;
• it does not indicate or imply that the sale is exempt or excluded from taxation; and
• any receipt or other statement given to the customer separately states the tax amount and indicates that the seller will pay the tax.
H.B. 2358, Laws 2019, effective Oct. 1, 2019
Guidance: The significance here is that before this legislation, taxpayers faced heavy fines for paying the sales tax for customers.
 

Vermont
Taxpayer’s charges for subscriptions to its computer software programs subject to tax. A taxpayer’s charges for subscriptions to its computer software programs of pre-recorded audio fitness instructions were subject to Vermont sales tax because the law provides for imposition of the tax on retail sales charges for audio or video programming and specified digital products. In this matter, the taxpayer’s customers were end users who purchased digital audio works obtained by means other than tangible storage media. Therefore, the taxpayer was deemed to be selling specified digital products subject to sales tax. Accordingly, the taxpayer’s charges for the subscriptions were subject to tax. Formal Ruling 2019-04, Vermont Department of Taxes, March 11, 2019, released July 2019
Guidance: Again, the taxability of digital products is on the forefront of states all across the country and many states tax them differently.


Washington
Motor vehicle tax eliminated. Washington Initiative 976 has eliminated the additional 0.3 percent sales and use tax applied to sales and leases of motor vehicles. Sellers and lessors may stop collecting this tax on Dec. 5, 2019. Any local sales and use tax exemption from the public safety component of retail sales tax remains. This exemption applies to the retail sales of motor vehicles and the first 36 months of lease payments on such vehicles. In addition, the rental car tax continues to apply to rentals of passenger cars for a period of less than 30 days. Special Notice, Washington Department of Revenue, Nov. 19, 2019, ¶204-524
Guidance: It is important to track laws that authorize no longer collecting tax. A mistake in timing here could be costly.
Taxpayer’s purchase of point-of-sale services subject to tax. A taxpayer’s purchase of point-of-sale services from an application provider was properly subject to Washington sales and use tax because the services were taxable digital automated services rather than nontaxable data processing services. Determination No. 16-0374, Washington Department of Revenue, Oct. 7, 2019
Guidance: This particularly affects companies that offer software solutions to point of sale technology.


West Virginia
Exemption enacted for sales of investment metal bullion and coins. Sales of investment metal bullion and investment coins are exempt from West Virginia sales and use tax. S.B. 502, Laws 2019, effective July 1, 2019.
Guidance: This should please folks who collect such things in West Virginia.
What about 2020 and beyond and the audit risk
The catchword in 2020 is increased audit risk resulting from the Wayfair decision and follow-on legislative, judicial and administrative action. State auditors are more sophisticated than ever and will use more sophisticated tools and data analytics to get more bang for the buck in audit targets where:
• Risks and the potential cost of incorrect compliance are growing and could result in large tax adjustments;
• That liability risk extends personally to key personnel in the business, such as officers, tax directors, financial directors, etc.
The audit risks are real and material. Each company must determine its risk profile by answering questions like:
• How much audit risk are you willing to take?
• Are you prepared to accept significant tax adjustments, with interest and penalties going back at least three years and maybe more?
• Are you prepared for audits that may go on for many months, significantly disrupting your business operations?
• How much potential business reputational damage can you accept if perceived as a tax cheat?
Depending on a business’s answer to these questions and no doubt others specific to each business — the predetermined level of risk taking and aversion — one should take the time to review any audit “red flags” the company may have and where possible perform simulated audits to identify points of vulnerability and correct them before an actual audit.
Another step in addressing this increased risk is to undertake a careful review of the business activity in all the states in which the business has nexus currently, as well as planning to do business in the future. In those states, a review of all relevant nexus laws is crucial — not just economic nexus laws under Wayfair, but the other types of nexus still on the books, such as click-through nexus, cookie nexus, affiliate nexus, etc. And this also means that business planning must include retroactive tax liability for prior years; therefore, before a business registers in a state, it should review its past liabilities in that state and understand the potential risks that are likely to follow.

 

 

Give Sanders and Warren Credit For Leaning Away From Tax Credits
By Janet Holtzblatt

 

Take two tax credits, and call me in the morning. For many politicians that is the tried and true prescriptionfor the economic and social ills that ail our country.


Refundable tax credits encourage work (earned income tax credit or EITC), assist families (child tax credit), and subsidize education (American opportunity tax credit) and health insurance (premium assistance credit). Nearly all the Democratic presidential hopefuls have proposed expansions of existing tax credits, and some support new tax credits for housing, retirement saving, and caregivers.

 

Yet, there are two holdouts. Senator Bernie Sanders (I-VT) hasn’t proposed any expansions of refundable tax credits, while senator Elizabeth Warren (D-MA) offers just three—a temporary increase in premium tax credits (during the transition to Medicare for All) and two energy-related credits. Their proposals for health care, college, and child care would operate through new spending programs. Other candidates also propose new spending programs; Sanders and Warren are unique in the weight they place on that approach.


Are tax credits always the right medicine for the problems they are meant to cure?
 

Well, like any treatment, whether a tax credit works depends on the circumstances. My checklist? Check yes if the potential beneficiaries already file tax returns. Check yes if the Internal Revenue Service can verify eligibility for the credit.


But perhaps check the “need more information” category if the eligibility criteria are complicated. And check no if the credit is a reimbursement for an expenditure—such as college tuition or housing—that taxpayers must pay long before they receive a refund check from the IRS.


The EITC prevented political stalemate in a dispute over child care funding


And there is that other consideration—the likelihood of enactment of a tax credit or spending program.
Flashback to 1989 when many Congressional Democrats (and a few Republicans) supported the Act for Better Child Care Services (ABC), a bill that would have provided funds to states to subsidize day-care centers that served families with low and moderate incomes. Looking back, I see similarities between the ABC bill and Warren’s child care proposal.


Incoming President George H.W. Bush countered with a proposal to create a refundable tax credit for pre-school kids. The Bush plan cost less than ABC, but the disagreements between the president and Congressional Democrats ran deeper than money: Bush viewed ABC as too bureaucratic, too paternalistic, and too unfair toward stay-at-home moms. And the Democrats viewed the Bush proposal as too skimpy.


The compromise that emerged in the Omnibus Budget Reconciliation Act of 1990 nearly doubled the size of the average EITC by 1994. The compromise met Bush’s goal of providing assistance to couples with a stay-at-home parent through the tax code. And it met Democrats’ goals by increasing tax benefits to working low-income families.

 

The enduring appeal of refundable tax credits
Since then, Congress has enacted twelve more refundable tax credits, including several temporary credits enacted during recessions. One reason for the popularity of refundable tax credits—and other tax expenditures—is that their costs are less transparent than spending programs. And a new tax credit can be presented as a tax cut rather than as a new government program. That is the case even for a refundable tax credit where the portion of its cost that exceeds taxes owed is considered an outlay by budget scorekeepers.


Another reason for their popularity is that changes in refundable tax credits can make tax legislation look progressive. But unlike tax credits, changes in spending programs do not show up in the distributional tables released by the Joint Tax Committee and the Tax Policy Center. Including spending programs would be the right analytical thing to do, but that task presents substantial methodological challenges. (The Congressional Budget Office is making strides toward overcoming those challenges, but their reports are retrospective.)
Another flashback: Coming into office in 1993, President Clinton proposed both a broad-based energy tax and another large EITC expansion for families with children—especially for larger families—on top of the 1990 increase. Despite the proposed EITC expansion, the initial distribution tables of Clinton’s overall tax plan showed that very low-income people would pay higher taxes because of the proposed energy tax.


The fix? The EITC was extended to include very low-income workers who didn’t live with children (a “childless EITC” population that includes noncustodial parents). That extension ensured that the lowest-income group shown in the distribution tables had a net tax cut on average, even though the overall legislation significantly boosted tax revenues (including receipts from a gas-tax hike, which replaced Clinton’s proposed energy tax).


Today, many candidates would expand the childless EITC. Doing so would strengthen the social safety net and encourage work. And administering this support through the tax code meets my criteria for a refundable tax credit: simple and administrable relative to a spending program.


Flash forward to either a President Sanders or Warren administration. Relying on spending programs over tax credits would be the better medicine for their goals—health care for all, cheaper college, and affordable child care. But will a future Congress swallow that pill when refundable tax credits are branded as progressive tax cuts?


Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.

.

Wielding Benford’s Law to Find Fraud
by Ashley Sparks


Benford’s Law is a long-standing statistical precept that remains as relevant and widely accepted in fighting fraud as ever. By wielding it effectively, experts can cut down fraudsters who unknowingly reveal their wrongdoings in dubious digits.


Historical background
The rule is named for Frank Benford, a physicist who noted that, in sets of random data, multidigit numbers beginning with 1, 2 or 3 are more likely to occur than those starting with 4 through 9. Studies have determined that numbers beginning with 1 will occur about 30% of the time, and numbers beginning with 2 will appear about 18% of the time. Those beginning with 9 will occur less than 5% of the time.

 

Further, these probabilities have been described as both “scale invariant” and “base invariant,” meaning the numbers involved could be based on, for example, the prices of stocks in either dollars or yen. As long as the set includes at least four numbers, the first digit of a number is more likely to be 1 than any other single-digit number.


Striking implications
Benford’s Law carries striking implications for fraud detection. To avoid raising suspicion, fraud perpetrators often use figures they believe will replicate randomness. Typically, they choose a relatively equal distribution of numbers beginning with 1 through 9.


Fraud investigators can take advantage of such errors and test data in financial documents including:
• Tax returns,
• Inventory records,
• Expense reports,
• Accounts payable or receivable, and
• General ledgers.


Although complicated software programs based on Benford’s Law exist to examine massive amounts of data, the principle is simple enough to apply using basic spreadsheet programs.

 

Not infallible
Benford’s Law, however, isn’t infallible. It may not work in cases that involve smaller sets of numbers that don’t follow the rules of randomness or numbers that have been rounded (resulting in different digits). Also, smaller numbers are more likely to occur simply because they’re smaller and the logical place to begin a count.
Assigned numbers, such as those on invoices, are also iffy. On a similar note, uniform distributions — such as lotteries where every number painted on a ball has an equal likelihood of selection — may not suit a Benford’s Law analysis. And prices involving the numbers 95 and 99 (often used because of marketing strategies) may call for a different approach.

 

Still relevant
Benford’s Law isn’t appropriate in every instance. And, as advanced metrics forge new inroads into fraud detection, it could fall out of favor. But Benford’s Law is expected to remain a foundational approach to fraud detection for many years to come. For additional information, contact Ashley Sparks, CPA, CFE at asparks@myboyum.com

 

 

IRS’s failure to collect from tax cheats could cost you $3,000 a year
By Laura Davison


The average U.S. household is paying an annual surtax of more than $3,000 to subsidize taxpayers who aren’t paying all they owe, a new report from the Taxpayer Advocate Service found.

 

Reduced funding for the Internal Revenue Service has led to lower staffing levels and fewer audits, which has reduced the amount the IRS has been able to collect from taxpayers voluntarily or through enforcement, the Taxpayer Advocate, an independent branch of the IRS, said in its annual report to Congress on Wednesday.
The IRS recently estimated the tax gap — the difference between what the federal government is owed and actually collects — averaged about $381 billion in unpaid tax from 2011-2013. That equates to roughly 14.2 percent of taxes never being submitted to the agency.

 

With approximately 122 million American households in 2013, that adds up to each U.S. household effectively paying an average annual “surtax” of more than $3,000 to cover others who don’t pay their full bill. The report, which included suggestions for legislation, said this calculation was based on the assumption that the government is seeking to collect a fixed amount of revenue, leaving compliant taxpayers to pay more to subsidize noncompliance by others.


“The IRS remains committed to continuing to do as much as it can, subject to budget constraints, to provide meaningful services to all taxpayers,” IRS spokesman Dean Patterson said in a statement.

 

“The agency has taken important steps in the past year to appropriately balance taxpayer services with meaningful enforcement efforts to pursue those who would intentionally evade their tax obligations,” Patterson added.


‘Fair to all’
The report comes as the IRS has faced criticism from its watchdog, the Treasury Inspector General for Tax Administration, and outside groups that it isn’t effectively auditing corporations and high-income individuals with complicated returns. IRS Commissioner Chuck Rettig has said he is focusing on improving enforcement — in both criminal and civil cases — and has asked Congress for more money to staff these efforts.


“To be ‘fair to all,’ the IRS should be funded to reduce noncompliance,” the Taxpayer Advocate said in the report. “But equally important, it must be staffed to answer calls from taxpayers against whom it takes collection actions, such as wage garnishments, bank levies, or the filing of notices of federal tax lien.”


Taxpayers who find themselves being audited or face adverse action from the IRS often cannot reach the agency to resolve the situation, the report found. The IRS received 15 million calls on its consolidated automated collection system telephone lines in fiscal year 2019. Employees were able to answer only about 31 percent, and taxpayers who got through waited on hold for an average of 38 minutes.


In the past decade, the number of income tax returns increased by about 9 percent, but the IRS’s funding and number of employees both declined by more than 20 percent, the report said.


Individuals face a 0.45 percent chance of being audited, while businesses are audited at a rate of 1.6 percent, some of the lowest audit figures on record, according to the IRS’s annual report released this month. Individual income taxes are the largest group of uncollected taxes before audits, representing about $314 billion, according to agency statistics on the tax gap.

 

 

Presidential elections and stock returns
History shows interesting patterns in stock market returns over the 4-year cycle.
FIDELITY VIEWPOINTS

 

Key takeaways
• History suggests that US stock market returns are correlated with the presidential election cycle.
• The first 2 years of a presidential term have been associated with below-average returns, while the last 2 years have been well above-average.
• But there are some clear exceptions. So always focus first on the economy and corporate earnings. Jurrien Timmer is the director of global macro in Fidelity's Global Asset Allocation Division, specializing in global macro strategy and active asset allocation. He joined Fidelity in 1995 as a technical research analyst.

 

Fundamentals like corporate earnings, interest rates, and economic growth are the main concerns of the stock market. But external events may sometimes be correlated to stock returns, for instance, the 4-year election cycle in the US.

 

I have studied the election cycle and its potential impact on the stock market for many years, looking back to the 1850s. I recently updated this study and took the history all the way back to the very first election in 1789 (yes, there is stock market history that far back if you splice different series together).

 

2 year total return (annualized), measured from end of previous October.

 

Monthly data (mix of S&P 500, Dow Jones Industrial Average, & Cowles index). Source: FMRCo.

 

Presidential elections and stock market returns
The "Presidential Cycle," as it is known, shows a consistent pattern in which the first 2 years of a presidential term have tended to produce below-average returns while the last 2 years have been well above-average.


Presumably, the reason for this is that during the first half of a term, a president's new agenda could take some time to work its way through the economy. It might even produce some indigestion for the market if it's not considered "market friendly."

 

But during the last 2 years, the party in power tends to be more inclined to focus its attention on getting re-elected, or so goes the general thinking. It presumably does this through fiscal stimulus and even monetary stimulus (at least it could have until the Fed became independent in 1951). This gooses the economy and creates a big rally that, presumably, is intended to ensure re-election of the incumbent party (or at least that's the goal).
The market's lackluster performance in 2018 followed by strong gains in 2019 certainly fits this pattern, with bulls hoping that 2020 could be more of the same. You can see the Presidential Cycle in the lower left panel on the chart below. In the lower right panel I show the forward return for the stock market based on various election outcomes, measured from the close of the October preceding the election to 2 years later and 4 years later.


Monthly data since 1789 (mix of S&P 500, Dow Jones Industrial Average, & Cowles Commission). Source: FMRCo.

 

The reason I show 2 years is because that's when the mid-term elections happen, which can change the power dynamic in Washington, which can, in turn, affect the market's momentum.

 

I sliced and diced it several ways, showing the outcome for all presidential elections (58 occurrences), a Republican win (24) versus a Democrat (24), to a "sweep" by the Republican party (16) or Democrats (19), to various forms of gridlock (president from one party and House and/or Senate of another). Note that since the party system was not "Republican vs. Democrat" in the early days, the various occurrences do not add up to the total number of elections since 1789.


Monthly data since 1789 (mix of S&P 500, Dow Jones Industrial Average, & Cowles Commission). Source: FMRCo.

 

Short-term differences, long-term similarities
What's interesting to note is that whatever the differences are in outcomes over the first 2 years following a presidential election (and there are many), they have all but disappeared by the time a full 4-year term has taken place.


For instance, on average over the 2-year period, the market does better following a Republican win (+8.3%) than a Democrat win (+5.8%), but over a full 4-year term the average difference virtually disappears and we are left with +8.6% vs. +8.8% for Republican presidencies and all presidencies respectively.

 

The contrast is even more extreme when there is a sweep. When the Republicans sweep, the 2-year average forward return is +12.2% and when the Democrats sweep it is a mere +3.4%. But again, after 4 years the difference in average returns is almost gone (+8.6% vs. +8.2%).

 

We also see a difference between the various gridlock scenarios. Republican wins without a majority in the House or Senate have produced an average 2-year forward return of only +1.1%, while Democrat wins with opposition in Congress have produced an average forward return of +14.5%. Again, over the 4-year term the difference narrows to +8.7% vs. +10.9%.

 

Part of this difference could just be the result of small sample size. For instance, there were only 6 instances of a Democrat winning the White House without taking control of both houses of Congress, including President Obama's second term in 2012 as well as President Clinton's second term in 1996. These were very strong periods for the market, producing annualized gains of +22% and +27%, respectively.

 

There were only 9 gridlock cycles on the Republican side, including George W. Bush's first term in 2000, right at the top of the tech bubble. That produced a 2-year annualized return of −25%. Ronald Reagan's first term in 1980 produced a 2-year return of −2% as the double-dip recession of 1980 and 1982 was still finding its bottom. But Reagan's re-election in 1984 produced a +26% annualized gain over the subsequent 2 years.

 

It's likely that mid-term elections play a role in creating a contrast between the 2- and 4-year returns. The political pendulum is always swinging it seems, sometimes quickly and other times slowly. While some mid-term elections reinforce a president's mandate, others cancel them out, mitigating whatever market momentum (positive or negative) was underway in the first 2 years.

 

It always comes back to fundamentals
But it could also just be that if you wait long enough, the long-term fundamentals of earnings and interest rates, labor growth and productivity, and the mean-reverting nature of an independent monetary policy, take over in driving long-term returns.

 

I think that's what ultimately is going on here. The economy—and therefore the market—is simply bigger than the direction the political winds are blowing. Plus, the mid-term elections tend to equalize any lopsided returns over the first 2 years.

 

It's a good reminder that while it is sometimes suggested that a particular president or party is "good" or "bad" for the stock market, ultimately, it's these long-term fundamentals that matter. While policy initiatives like taxes and spending can affect markets, so do demographics and an effective monetary policy.

 

From a longer-term market perspective, the upcoming presidential election is of course important, as the approaching demographic wave of an aging population increases demand for health and Social Security benefits, which are likely to result in ever-rising debt levels and the need for permanently low interest rates.

 

Nevertheless, it's my personal sense that the 2020 election will have less impact on the markets than some suggest. Ultimately, it's the long wave of economic fundamentals that drives the markets beyond any one election or any one party.

 

 

What are the potential tax advantages of the LLC, C corp and S corp?
By Nellie Akalp

 

As an accounting professional, you know there are potential tax-related upsides and downsides for every type of business entity. It’s important to communicate those considerations to your clients to help guide them as they decide which legal business structure to form for their company. In addition to your insight, of course, your clients should also consult a knowledgeable business attorney who can share the legal ramifications of the various business entity types.

 

Let’s take a moment to lay out the tax pros and cons in a way that may make it easier for you to cover all the bases in your conversations with your clients.

 

LLC (limited liability company)
As a “disregarded entity” for tax purposes, an LLC’s profits and losses flow through to its owners’ (known as “members”) personal tax returns. Note that from a legal standpoint, an LLC is considered a separate entity from its members, so it provides some liability protection to its owners. Generally, LLC members’ personal assets are not at risk if the company gets sued or cannot pay its debts.

 

Tax advantages of the LLC structure:
• Owners choose how to distribute profits. LLC members may choose how their business will divide the company’s profits and losses among its owners. This allows for members to consider not only money invested, but also time and work invested when distributing profits.
• S corporation election option for qualifying LLCs. LLC members may elect to have their LLC treated as an S corporation for tax purposes. More on that later!

 

Tax disadvantages of the LLC structure:
• Bigger self-employment taxes burden. All of an LLC’s business profits are subject to Social Security and Medicare taxes. This may create an unfavorable financial situation for LLC owners as they must pay self-employment taxes on their distributive share of the LLC’s profits, even if they invest that money back into the business rather than taking a distribution of those profits.

 

C corporation
A corporation or "C corporation" is a separate legal and tax-paying entity. Its profits, losses and liabilities are tied to the business, not its owners (shareholders). It comes with more complex compliance formalities than the LLC structure, but it also offers the highest level of liability protection for owners of the business.

 

Tax advantages of the C corporation:
• Corporate income tax rate may be favorable. A C corp’s profits get taxed at the corporate income tax rate. In some circumstances, that might work in the business owners’ favor. Depending on where the business is incorporated and shareholders’ personal tax situation, they might find the corporate income tax rates will cost them less than if they were set up as an LLC and had to pay the individual income tax rate (and self-employment tax) on all of their company.
• Possibly more tax deduction opportunities. As a C corp, the business may be eligible for more tax deductions than if it were operated as an LLC, partnership or sole proprietorship.
• S corporation option for qualifying C corporations. Eligible C corps may be taxed as an S corporation. I'll explain more about that below. The primary advantage of the S corp election for C corps is that it can enable them to avoid the sting of "double taxation." This leads me to the potential tax disadvantages of the C corporation...

 

Tax disadvantages of the C corporation:
• A double tax hit. A C corporation’s profits are taxed when they are earned. Then, any of the profits paid as dividend income to shareholders (which is not tax-deductible to the corporation) is taxed again on the shareholder’s individual tax returns.

 

S corporation
The S corporation isn't a legal entity in itself but rather an option for a qualifying LLC or corporation. The IRS explains what criteria an LLC or corporation must meet to get S corp tax treatment.

 

Tax advantages of the S corporation:
• Lessens the self-employment tax burden on LLC members. The primary advantage that LLC members gain by electing S corp status is that only income paid to LLC members on the payroll is subject to self-employment taxes. Profits paid as distributions are not subject to Social Security and Medicare taxes. Therefore, an LLC’s members may find that the S corp election will lower their personal tax burden.

• Enables C corporations to avoid double taxation. As an S corporation, a corporation's profits and losses flow through to shareholders' personal tax returns and are taxed (according to the shares of ownership) at the applicable individual tax rates. The corporate entity does not pay income tax. Shareholders who are employees of the C corporation only pay self-employment tax on the wages or salary that the corporation pays them.

Dividend income paid to shareholders is not subject to self-employment tax; those monies are taxed as either ordinary income (at the individual income tax rates) or qualified dividends (at the capital gain tax rates).

 

Tax disadvantages of the S corporation:
• May limit a corporation’s growth potential. S corps may not have more than 100 shareholders, so corporations that want to maximize their growth potential may find the S corp option limiting.
• Reasonable compensation is key for LLC members working as LLC employees. An LLC must pay its owners fair compensation for the work they perform. If it pays its members unreasonably low wages and doles out the majority of money as distributions, it could raise red flags with the IRS and other tax authorities. It might appear that the LLC members are gaming the system to avoid paying their fair share of self-employment taxes.

 

Your role in helping clients make an informed choice
As a financial and tax professional, your expertise will be immensely helpful to clients as they make the all-important decision about which business entity to choose. Remember to only offer advice that you’re legally authorized to provide — and direct them to a trusted attorney for guidance about the legal ramifications of each business entity type.

 

 

SALT: A look back and a look ahead
By Roger Russell

 

Two major issues dominated the conversation around state and local tax in 2019, according to Jamie Yesnowitz and the team at Grant Thornton’s SALT National Tax Office: the 2017 Tax Cuts and Jobs Act and the Supreme Court decision in South Dakota v. Wayfair Inc. in June 2018. They’ll both continue to have a major influence in 2020.

 

“In fact, the top two spots, and four of the top seven spots [for 2019] deal with the states’ response to Wayfair,” said Yesnowitz, a GT principal and SALT practice and National Tax Office leader. This year’s list ranked the top SALT stories of the previous year in order of importance:

 

1. Rapid post-Wayfair implementation of sales tax nexus. “Wayfair has spurred all but two states to adopt laws establishing sales tax economic nexus provisions for remote sellers, and those two states, Florida and Missouri, have pending legislation for this,” Yesnowitz commented. “But not all state sales tax nexus laws are alike. Remote sellers face plenty of challenges attempting to comply with these laws, where cost and transaction thresholds can vary depending on the state.”

 

2. The extension of Wayfair to income tax nexus. “With economic nexus a nearly foregone conclusion in nearly all states for sales and use tax purposes, states have begun shifting their sights on the applicability of Wayfair to income taxes,” Yesnowitz said. “Sellers should be aware that Hawaii, Pennsylvania and Massachusetts now impose a gross receipts tax on out-of-state sellers, with similar legislation being considered in Texas. Businesses operating in multiple states may need to conduct a complex sale sourcing analysis to determine how best to source their own sales, especially where services and intangibles are concerned.”

 

3. Continued state reaction to the TCJA. “For the second straight year, states’ reaction to the TCJA continued to receive major attention in state legislatures and by state taxing authorities,” Yesnowitz said. “The two primary issues considered this past year were the treatment of international tax provisions and the disallowance of the interest expense deduction.”

 

4. The rise of pass-through entity tax regimes. The limitation on the SALT deduction prompted a number of states to propose “workarounds,” many of which have already been disallowed by the IRS. Mandatory and elective pass-through regimes are intended to shift the tax from the owner to the entity at the federal level. A number of states have adopted some form of this workaround. “To date, the IRS has not ruled on whether these laws will stand,” Yesnowitz cautioned.

 

5. The U.S. Supreme Court decides Kaestner Trust. The court, in a unanimous decision, ruled that North Carolina could not tax the trust’s undistributed income based solely on the residence of a contingent beneficiary in the state. “Trusts paying North Carolina taxes on undistributed trust income based only on the presence of in-state beneficiaries should have their tax obligations re-examined,” said Yesnowitz. “Even trusts in similar circumstances in other states could be bound by this ruling.”

 

6. Widespread adoption of marketplace facilitator nexus provisions. Although the adoption of sales tax economic nexus legislation was initially focused on remote retailers after Wayfair, many states have interpreted the decision broadly enough to apply to marketplace providers or facilitators, according to Yesnowitz. “Forty states have enacted laws interpreting the Wayfair decision as applying to marketplace providers whose online marketplaces serve as a forum for retailers to market and sell products and services,” he said.

 

7. Adoption of sales tax economic nexus standards by local taxing authorities. “A number of states allow home-rule authority to local jurisdictions,” Yesnowitz said. “Some of these local jurisdictions imposed sales and use taxes for remote sellers following the Wayfair decision ... But businesses should be aware that because Wayfair addressed a state law, there is no guarantee this authority will be recognized for municipalities, if
challenged.”


8. Further adoption of marketplace sourcing. “During 2019, a number of states engaged in legislative activity concerning apportionment of income and the adoption of market-based sourcing for sales other than sales of tangible personal property,” Yesnowitz observed. “Six states adopted market-based sourcing rules for services, but they vary on how and where they are applied.”

 

9. Combined reporting expanded and clarified. “Compared with market-based sourcing, efforts to shift from separate to combined reporting for affiliated corporations slowed, with New Mexico the only state to pass such legislation,” said Yesnowitz. “Kentucky and New Jersey passed laws or adopted guidance with the intent of ‘cleaning up’ uncertainties in the method.”

 

10. Adoption of the Oregon CAT. “After years of failed legislative and referendum efforts, Oregon finally joined the growing list of states imposing entity-level commercial activity tax,” said Yesnowitz.

 

Looking at 2020
For 2020, SALT National Tax Office directors Chuck Jones and Lori Stolly and manager Patrick Skeehan offered these predictions:

• Federal tax reform. States will continue to react to the TCJA changes, especially the IRC Section 163(j) interest deduction limitation and the GILTI provisions, according to Jones. ”Specifically, at least three states will decide to decouple from the IRC Sec. 163(j) interest deduction limitations; and at least four states will clarify apportionment treatment of GILTI,” he predicted.
• Wayfair. “In 2019, we saw continued adoption (and the beginning of adjustment) of Wayfair-like nexus standards with respect to remote sellers and marketplace facilitators,” commented Skeehan, “During 2020, this trend will continue marching forward with: enactment of marketplace provider standards in at least three additional states; enactment of changes to marketplace facilitator/provider laws to achieve further uniformity in at least three additional states (in line with Multistate Tax Commission/National Conference of State Legislatures standards); and removal of transactional thresholds from sales tax economic nexus standards in at least three additional states.”
• Income tax economic nexus. “At least four more states will adopt an economic nexus threshold for income taxes via legislation, regulation or administrative action,” Skeehan forecasted.
• Additional PTE taxes. “At least three additional states will enact legislation establishing optional [pass-through entity] taxes as a workaround to the $10,000 SALT deduction limitation,” said Jones.
• U.S. Supreme Court litigation. “In 2019, the Utah Supreme Court rejected a Utah District Court’s determination that the state’s treatment of foreign business income violated the foreign commerce clause, citing the U.S. Supreme Court Wynne decision. During 2020, the U.S. Supreme Court will grant certiorari to hear the Steiner dispute,” said Stolly.
• Illinois constitutional amendment referendum. “Voters will not approve a graduated personal income tax at the November 2020 election,” predicted Jones.
• Reclassification of workers from independent contractors to employees. “At least two states will enact independent contractor reclassification laws as a means to address ride-sharing business practices,” said Skeehan.
• Market-based sourcing. Sales factor sourcing uncertainty will return as a point of focus, predicted Stolly: “At least two significant decisions addressing the calculation of market-based sourcing will be released in 2020.”
• Income tax rate reductions tied to revenue. “At least two states will legislatively adopt income tax rate reductions tied to state revenue measures,” said Stolly.
• Gross receipts taxes. While many states are enjoying economic prosperity, some are not, Stolly indicated: “In an effort to raise revenue, at least one state will follow Oregon’s lead and adopt a gross receipts tax.”

 

 

 

Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.

 

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