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Thursday, July 12, 2018

Tax, Tech and Form 1099 - H.R. 5377


H.R. 5377, Creating An Online Platform For Instant 1099 Submissions Act, introduced in March 2018 by Congressman Renacci (R-OH), a CPA, calls for something that should already be part of our tax system. H.R. 5377 "directs the Internal Revenue Service (IRS) to provide taxpayers with online access to IRS resources and guidance that will allow them to: (1) prepare and file Forms 1099, (2) prepare Forms 1099 for distribution to recipients other than the IRS, and (3) create and maintain necessary taxpayer records. The IRS must ensure that the online services required by this bill: (1) are a supplement to, and not a replacement for, other services provided to taxpayers by the IRS; and (2) comply with security standards developed by the National Institute of Standards and Technology.

Just like we can pay bills online, order goods and services online, why can't a business complete a Form 1099, such as for payment to a contractor, online with it being automatically sent to the contractor and the IRS?

H.R. 5377 would give the IRS until 2021 to get the system working.  Seems reasonable.

What do you think?

Sunday, July 1, 2018

Postcard Size Form 1040 for 2018 - What?

Front:

Back:

For many years, some lawmakers and others touted a postcard-size tax return as an indication that tax simplification had been achieved. Professors Hall and Rabushka had one on the cover of their flat tax book released in 1985 (flat tax first proposed in a Wall Street Journal op ed in 1981). Their brief return was truly simple because the flat tax only included a few items in income and only allowed a standard deduction and personal exemption. But you'll see that there was no place to sign. (Also, it's a consumption tax, not an income tax.)

Leading up to the Tax Cuts and Jobs Act (PL 115-97; 12/22/17), a postcard size return was touted by President Trump, Speaker Ryan and others.

Well, this past week, Treasury and IRS released a draft postcard-size Form 1040:
Observations:
  • Unlike a postcard, the form will need to be sent in an envelope since it is 2-sided with tax information and there is no room for the sender's address. Also, you'll likely want to include your address and not want the world to see your Social Security Number on the card. There are several schedules that may need to be attached (all postcard size too). But some of the schedules, such as Schedule 1, refer to forms, such as for capital gains/losses, that also need to be attached and likely won't be postcard size.
  • I asked my graduate students the other day how many had ever sent or received a postcard - about 20% had.  Postcards are really a thing of the 20th and 19th century.
  • Today, about 80% of returns are e-filed (ETAAC 2018 report, page 6).
  • If not e-filed, you may need something larger than a standard letter-size envelope if you don't want to have to fold your "postcard".
  • Most returns are filed via software where it really doesn't matter how many lines are on the return. In fact, software would make it possible to produce a return that only shows the lines you needed. 
  • The postcard lists more than five schedules and there might also be one for the Section 199A Qualified Business Income Deduction. The schedules and attachments (with links to the draft if available):
      • More than 2 dependents
      • Schedule 1 add’l income and adj to income
      • ScheduleA if itemize
      • Section 199A deduction – line on page 2; still waiting to learn if there is a form or worksheet for it
      • Schedule2 - Kiddie tax, AMT, payback any Premium Tax Credit, and likely the alternative tax calculation if have net capital gains
      • Schedule 3 – Non-refundable credits (not required if only credits are child and dependent credits)
      • Schedule 4 – other taxes, such as household taxes, NIIT, individual health insurance mandate (penalty)
      • Schedule 5 – other payments or refundable credits
      • Schedule 6 - foreign address and designee
  • Will there also be postcards for 1040EZ and 1040A? While not many people use 1040A, many use 1040EZ and have become used to it. Starting for 2019, there must also be a 1040SR for seniors per legislation enacted in February 2018 (PL 115-123; 2/9/18).
What do you think?

Monday, June 25, 2018

State Reactions to Wayfair Decision

What are some states saying about the US Supreme Court's decision in South Dakota v Wayfair, et al [see my 6/22/18 post for more on the case]

Here is news from several states. I don't think most states will strive to collect below the thresholds of the South Dakota law, but you never know. I think we'll hear from more states soon and perhaps even from a few in Congress. I'll continue to update this post.

States in bold are full members of the Streamlined Sales and Use Tax project. The SSUTA scheduled an emergency meeting of the SSUTA Board for July 19-20 to discuss the Wayfair decision. Agenda items include use of the Central Registration System and the Certified Service Provider system by non-members.

    • Alabama - The Dept. of Revenue released a statement on 7/3/18 that reminds readers that the DOR issued economic nexus sales tax rules in 2016. Per the DOR, these will be applied prospectively starting for sales made after 9/30/18, even though the rules were effective 1/1/16. The threshold for economic nexus under the rules is annual sales in the state above $250,000, The statement also notes the state's marketplace facilitators law also for sales exceeding $250,000. These facilitators must collect sales tax on sales of its third-party sellers or comply with the reporting and customer notification rules.
    • California - This is one of the states that already had broad language in its statute that with the repeal of Quill, likely allows the state agency (California Department of Tax and Fee Administration (CDTFA)) to start collecting from remote vendors with over $100,000 of sales in the state or 200 or more transactions. I say "likely" because while California Revenue & Taxation Code Section 6203(c) provides that retailer in the state includes "any retailer that has substantial nexus with this state for purposes of the commerce clause of the U.S. Constitution," is the $100,000 receipts or 200 transaction threshold enough for the state? The U.S. Supreme Court noted three aspects of the SD law that supported nexus within commerce clause parameters (see page 23 of the opinion): (1) safe harbors of the $100,000 receipts or 200 transactions, (2) no retroactive application, and (3) SD belongs to the SSUTA which requires states to offer free software for compliance and audit protection if used. While the CDTFA can offer (1) and (2), it can't easily offer (3). That would likely take some additional appropriations. In fact, given the size of California, its customer base likely supports many remote vendors who meet the safe harbors of the SD law. Can the CDTFA handle all of the new registrations and support that would be needed without an allocation of more funds? Also, might the legislature of the state that is home to eBay want to raise the safe harbor thresholds?  And, how important is (3)? Are factors (1) and (2) enough? 
    • Connecticut - SB 417 (Public Act 18-152; 6/14/18) modifies the states economic nexus for sales tax for remote vendors to having at least $250,000 of retail sales in the state and 200 or more transactions, effective 12/1/18. Also see Dept. of Revenue Services special alert.
    • Hawaii - Prior to the Court's decision, Hawaii enacted SB 2514 (Act 41, 6/13/18) to match the SD law, effective 7/1/18, but applying to tax years beginning after 12/31/17. In Announcement No. 2018-10 (6/27/18), the Dept. of Taxation states that it had been unclear when its general excise tax (GET) applied when a seller did not have a physical presence in the state. Act 41 though, provides clarification. Starting 7/1/18, taxpayers must obtain a GET license and file returns and remit the GET if for the current or prior year the taxpayer had gross income or proceeds of $100,000 or more, or 200 or more separate transactions from tangible property delivered in Hawaii, services used or consumed in Hawaii or intangible property used in Hawaii. Thus, it is effective 1/1/18 as a vendor could have crossed the requisite threshold in 2017 making it subject to collection starting 2018. The announcement has further details and some FAQs.
    • Illinois - Enacted HB 3342 (Public Act 100-0587)on 6/4/18. Article 80 includes a “marketplace fairness” provision providing that a vendor is considered a “retailer maintaining a place of business” in the state if it makes sales of tangible personal property to buyers in the state, from outside of the state and have cumulative gross receipts from sales of such property of $100,000 or more, or has 200 or more separate transactions for the sale of tangible personal property to Illinois buyers. The determination is made quarterly by looking 12 months back from the last day of March, June, September or December. If the criteria is met, the retailer must collect and remit sales tax for one year. At the end of that year, if the criteria continue to be met, collection continues. Effective starting 10/1/18.
    • Indiana - Has an amnesty program through the end of 2018 for online vendors who should have been collecting such as because they have inventory in the state.  The DOR released a statement noting that on 6/21/18, Governor Holcomb said they were studying ruhe ruling "to better understand its implications for Indiana."
    • Iowa - Prior to the Court's decision, Iowa enacted SF 2417 effective 1/1/19 which basically mirrors South Dakota law. On 6/25/18, the Dept. of Revenue issued an explanation and a reminder that if a vendor has physical presence and has not been reporting, it should consider the voluntary disclosure purposes. The new economic nexus law is prospective only (starting 1/1/19).
    • Kentucky - DOR news release on HR 487.
    • Louisiana – The Department of Revenue issued a statement on 6/21/18 that “it is far too soon for a definitive estimate of what the state will receive from online sales as a result of today’s decision, but when appropriate, we will provide updates.”
    • Massachusetts – in a 6/22/18 news release, the Department of Revenue noted that its existing regulation 830 CMR 64H.1.7 (Vendors Making Internet Sales), effective October 2018 remains in effect and is not affected by the Wayfair decision. This regulation has also been referred to as the “cookie nexus” rule. This regulation includes the following:
“Unlike the mail order vendor at issue in Quill, Internet vendors with a large volume of Massachusetts sales invariably have one or more of the following contacts with the state that function to facilitate or enhance such in-state sales and constitute the requisite in-state physical presence. …”
a.  property interests in and/or the use of in-state software (e.g., “apps”) and ancillary data (e.g.,“cookies”) which are distributed to or stored on the computers or other physical communications devices of a vendor’s in-state customers, and may enable the vendor’s use of such physical devices;
b.  contracts and/or other relationships with content distribution networks resulting in the use of in-state servers and other computer hardware and/or the receipt of server or hardware-related in-state services; and/or
c.  contracts and/or other relationships with online marketplace facilitators and/or delivery companies resulting in in-state services, including, but not limited to, payment processing and order fulfillment, order management, return processing or otherwise assisting with returns and exchanges, the preparation of sales reports or other analytics and consumer access to customer service.”
    • Minnesota – The Department of Revenue issued a news release on 6/21 stating that the Wayfair decision means that “states like Minnesota can require certain retailers with no physical presence, such as online sellers, to collect and remit the applicable sales or use tax on sales delivered to locations within their state.” The DOR also stated that they “will work with our customers to ensure fair, efficient, and transparent implementation of this decision. We will provide further guidance within 30 days. The department will work hard to provide our customers with the information and services they need to meet their sales and use tax obligations under Minnesota tax law in as smooth and efficient manner as possible.” The DOR expects to issue guidance within 30 days for vendors not presently collected sales tax from Minnesota customers. The DOR also observes that vendors who want to start collecting now can register to do so with Minnesota and the other 23 member states of the Streamlined Sales Tax System at https://www.sstregister.org/.
    • Mississippi - The Department of Revenue stated in a 6/21/18 release that it is studying the Wayfair ruling to determine its effect in the state. "It is our belief this will create a more level playing field for Mississippi businesses that compete with online sellers." The DOR reminds sellers with out a physical presence in the state that existing state law requires those with sales in excess of $250,000 in the prior 12-month period to register and collect sales tax.
    • Montana - Has a website explaining the effect of Wayfair on its residents and in-state businesses. Montana does not itself impose a sales tax. They suggest that in-state vendors "seek competent legal advice on how to proceed with collecting and remitting sales tax for sales tax states such as South Dakota."
    • New Hampshire - Governor Sununu news release of 6/28/18 to fight the decision. NH doesn't impose a sales tax.
    • New Jersey - legislation pending.
    • North Dakota – The Tax Commissioner states that remote sellers must now follow ND’s law enacted in 2017 (SB 2298; 4/10/17) that is similar to that of South Dakota. At 6/25/18, the website states that it is a “work-in-progress” and more information will be added later.
      • SB 2298 included a “contingent effective date” provision: “This Act becomes effective on the date the United States Supreme Court issues an opinion overturning Quill v. North Dakota, 504 U.S. 298 (1992), or otherwise confirming a state may constitutionally impose its sales or use tax upon an out-of-state seller in circumstances similar to those specified in section 1 of this Act.”
    • Rhode Island - The Dept. of Revenue issued an advisory on 6/27/18 to remind remote vendors of registration options. RI is a member of the Streamlined Sales and Use Tax System. The advisory doesn't state though which vendors need to register. Also see DOR Pub 2018-06 (7/6/18) with FAQs for remote sellers.
    • Texas - Comptroller Hegar announced 6/27/18 his office would study the situation with input from the public and lawmakers. He suggested there would be no retroactive application.
    • Vermont - The Dept. of Taxes announced that the Court's decision makes Act 134 (2016) effective. That law is similar to that of SD affecting out-of-state vendors that made at least $100,000 or sales or 200 individual transactions in any prior 12-month period.
    • Wisconsin - The DOR website states that starting 10/1/18, remote vendors will have to start collecting sales tax from Wisconsin customers if they meet the new standards that match the SD thresholds. The website also has a set of FAQs.  The Legislative Fiscal Bureau reports in a 7/2/18 memo that if the state changed its law to follow SD law, it would generate an additional $120 million per year. It also notes that state law likely needs to be changed to specify a threshold for "an electronic nexus threshold." The memo also notes that a law change in 2013 states that additional sales and use tax revenues generated from "any federal law" expanding the ability of the state to impose sales tax obligations on remote vendors is to be used to reduce income tax rates. 
    • Wyoming - The DOR issued a memo reminding readers that the state has an economic nexus rule similar to that of SD. The DOR is studying the decision's "impacts" to determine a "date certain for licensing deadline." The rule will be enforced prospectively only. 
States with South Dakota type laws will need to issue guidance on effective date, whether the law applies retroactively, and how to measure the $100,000 sales and 200 transaction thresholds. For example, do sales of tax-exempt items count?

What do you think?  Have you checked the existing sales tax nexus/jurisdiction law in states where you or clients have nexus per the South Dakota standard?

What do you think?

Friday, June 22, 2018

US Supreme Court Brings BIG News for Sales Tax

In a 5-4 decision, the U.S. Supreme Court ruled on 6/21/18 in South Dakota v. Wayfair, et al that the 1992 Quill decision is "unsound and incorrect"! This is big news and will affect thousands of medium to small vendors selling goods (and sometimes services) to customers in states where the seller is not physically present. [the "et al" are Newegg and Overstock.com]

In 1992, the Quill decision was significant as the Court ruled that for sale tax nexus, physical presence is not needed under the Due Process clause, but is needed under the Commerce Clause. Under the Due Process clause of the 14th Amendment, the question is whether it is fair for a state to impose its laws on someone. Where sellers are purposefully making a market or reaching out to customers in a state, they can be subject to that state's laws even without physical presence.


But for Commerce Clause purposes, the 1992 Court was concerned that with over 9,000 state and local jurisdictions able to assess sales/use tax with varying rules, definitions and procedures, making non-present vendors collect would impede interstate commerce.  Congress though, controls the Commerce clause and the Court noted that Congress could provide a different rule if it desired.


States, eager to be able to get sellers to collect sales tax rather than trying to get in-state consumers to self-assess and pay a use tax which most people have no clue about, wanted Congress to allow them to go after non-present vendors.  Usually, the federal proposals, dating back to 1994, include a de minimis seller exception, such as for vendors with no more than $1 million of sales.


The majority in Wayfair found that Quill was not the correct approach. So, what is the proper standard? Well, the law before the Court was South Dakota's law enacted in 2016 to challenge the Quill decision. That law (SB 106) provides that a seller has sales tax nexus if it has either over $100,000 of sales of goods or services into the state or 200 or more transactions. SB 106 also specified that it would not apply retroactively.


The majority found Quill "flawed" in that physical presence is not the requisite interpretation of the nexus requirements laid out by the Court in 1977 in Complete Auto Transit. They also found that Quill "creates rather than resolves market distortions" and created a "tax shelter" for remote vendors.


I interpret that as the Court realizing that perhaps physical presence was not the appropriate standard to determine nexus. It does present an oddity that a small vendor with 2 items of inventory in a state could have sales tax nexus while a very large company selling items costing lots of money (so a large company likely with a tax department) would not have to collect sales tax if it had no physical presence in the state despite having a significant economic presence in the state.


The dissent basically took the approach that Quill has worked and not impeded commerce or sales tax collection. Per the dissenters, "states and local governments are already able to collect approximately 80 percent of the tax revenue that would be available if there were no physical presence rule."


Will this hurt small sellers such as those who sell via eBay or Etsy? Probably not. States will have to enact economic nexus rules, likely similar to that of South Dakota which the Court just upheld. Or, perhaps state tax agencies can enact regulations to allow economic nexus for sales tax. This all also depends on existing law in the state and how broadly (or narrowly) it might already be written.  While over $100,000 of taxable sales into the state is significant, 200 or more transactions is not. That is a problem. Making a seller who sells 200 $5 items into a state have to deal with that state's sales tax procedures will be costly for that seller.  I think a sales volume approach is better than a number of items approach.


Also, South Dakota is part of the Streamlined Sales and Use Tax Project so offers free software to vendors to ease collection. That is a good idea for states to do as well. I don't think all states need to join the SSUTA, but providing low-cost tools to aid sales tax compliance is a good idea.


In May, both Iowa (SB 2417) and Illinois (HB 3342; A 100-0587) enacted laws similar to those of South Dakota. I expect other states will do the same.


And, perhaps Congress will step in under its commerce clause authority and provide some limitations on what the states can do. Perhaps they will act quickly.  In 1959, following a Supreme Court ruling in Northwestern Cement v. Minn., 358 US 450 (1959) that Congress thought would lead to states harming multistate businesses regarding income taxes, they enacted Public Law 86-272 within 7 months!


Senators Wyden (D-OR) and Shaheen (D-NH) sent a letter to the Small Business Administration on 6/28/18, noting concerns on how states follow the Wayfair decision because it can put a significant burden on small businesses that may have to deal with some portion of the more than 12,000 local jurisdictions that impose sales/use tax. [Senator Sheehan press release of 6/28/18] Senator Tester (D-MT) and others from states with out a sales tax introduced S. 3180, a bill to regulate certain State impositions on interstate commerce.

A bipartisan group of senators and congressmen also filed an amicus brief in Wayfair in favor of the respondents (Wayfair, et al); it included lawmakers from states with and without a sales tax.

One last point - States still need to work to get consumers in the state (both individuals and businesses) to pay their use tax. A law like South Dakota's does not result in sales/use tax being paid on all taxable purchases due to the de minimis threshold and because a state can't easily make non-US vendors collect.


Links: 6/21/18 ruling in Wayfair + 4/17/18 oral argument + links to the 40+ amicus briefs filed


What do you think?


Sunday, June 17, 2018

State Bewilderment to TCJA - Podcast Too!

A State Tax Notes article of mine for 5/28/18 is titled, "Moving Past a TCJA State of Bewilderment." My focus is on a few states, notably, New York, where the governor and a few others made statements implying that the Tax Cuts and Jobs Act would harm the state and its residents.  Yes, some will pay more, but the vast majority will see a tax reduction.

Many new rules are at play including ones that may result in loss of deductions, such as capping the state and local tax (SALT) deduction to $10,000, but many will get new deductions, such as if they are self-employed or have rental income (the "199A deduction"). And the rates go down for everyone.

We are seeing some states enact workarounds to the SALT cap, including New York and New Jersey. Connecticut just enacted (SB 11) a new tax on partnerships and S corporations with a credit given to the owners - that starts now! (See information from CT Dept. of Revenue.) That's an interesting workaround. The IRS plans to issue regulations on whether these workarounds, including ones to donate money to a state fund to get a federal charitable contribution deduction and a state tax credit, work (Notice 2018-54).

I recently had the opportunity to record a "Simply Tax" podcast with BKD's Damien Martin on this topic - state tax workarounds (6/7/18).  Or see link on Apple Podcasts or link on YouTube. You can also find links to over 30 terrific podcasts Damien has produced on various tax topics - many on TCJA provisions.

What do you think? Should states be truly worried?