Sales tax exemption oddities - California's exemption for some foreign purchases

Since 1990, California has allowed Californians traveling abroad to bring back up to $800 ($400 prior to 2008) of goods without having to pay use tax on them. I think that's odd because it is so high (and can be used every 30 days), unfair to people having to pay use tax on the same goods purchased in the US or not hand carried back, and unnecessary due to easy ways to pay use tax today. The exemption ties to a federal duty exemption amount although there are exceptions to the federal duty that California does not follow, such as bringing back a $10,000 piece of fine art (no duty, but California would want use tax on $9,200 of it).

I've got more on this exemption (R&T Section 6405) in a post on SalesTaxSupport.com - here.  Please take a look. I'm interested in hearing other views and whether other states have a similar exemption (I have not found any, but perhaps it is too obscure to easily find).

California advertising its use tax

For several years, I have taken any opportunity to promote ways that states, particularly California, might increase use tax collection. That is, reduce its use tax gap. (Click here for links to a paper I presented to legislative and BOE staff in February 2013 another presented to a Sales Tax Commission in Vermont in October 2012.)

One suggestion is to run ads. Ideally, pop up ads on websites where people might be ordering goods for which they won't be taxed use tax. Ads in other locations would also be good, such as in lobbies and windows of government buildings. There could also be messages on pay stubs of state employees and on letters sent to any individual or business in California. The ads should let people know what a use tax is and that if we were collecting this tax that has been on the books since 1935, perhaps we could lower other rates.

Well, I was pleased to see, what I think is a new effort, to do a bigger educational push. I found links in a November 15 cyber shopping release from the BOE. It includes links to some short videos and an infographic (also here).  I'm not sure how many people are seeing the videos though. I just watched the use tax basics video (under 2 minutes) and that was only the 140th view it had in the 8 days since the press release!

One of the videos is about use tax when you travel abroad and bring items back.  It says you "may " owe use tax, but does not explain the very odd sales tax exemption for up to $800 of goods hand carried back to California every 30 days. This is a wacky and inappropriate exemption! (I'm working on a paper now to present to legislative and BOE staff in February. This is R&T Section 6405 and should be repealed. It is puzzling why the video doesn't mention the rule. It is summarized on the BOE website with an overview of the use tax.

Here is the infographic:

 The main BOE website has a banner about use tax:

Hopefully this tag line with intrigue people who don't know about a use tax to take a look, but they also might not know from the description that this even pertains to them. I'd be stronger - Have you paid your use tax?

What do you think? Do you think this is a step forward or not enough.

Affiliate nexus legislation - everyone loses

I've written on aspects of this topic many times for many years - the state challenges in trying to collect all of the sales and use tax they are due for sales to their in-state consumers and businesses. With the requirement that a vendor only has to collect sales tax if they have a physical presence in the state and e-commerce enabling businesses to have customers everywhere but perhaps only one physical location, states become more dependent on trying to get their in-state consumers to self-assess use tax.  States tend to do a poor job educating these folks about their use tax obligation.

It would be far easier to just have all vendors collect. However, that is unlikely to happen, even with federal legislation (such as S. 743, the Marketplace Fairness Act).  This legislation is likely to exempt some type of small vendor. Also, it is unlikely to have impact on a vendor located outside of the United States.

State efforts through affiliate nexus/click-through nexus/Amazon laws, will not capture the entire amount owed. And, it is too easy for vendors to avoid these laws by cancelling their arrangements with in-state affiliates. Meanwhile, consumer use tax bills pile up.

I've got a short article summarizing and offering my perspective on the current state of affairs which involves litigation (costly and time-consuming) and still leaves use tax obligations on the table.  See Affiliate Nexus Litigation - Everyone Loses in the AICPA Corporate Taxation Insider for 11/14/13.

What do you think?

Growing support for lower corporate rate and territorial system

On 10/30/13, Senator Baucus issued a statement about the merger of California-based Applied Materials (manufacturer of semiconductor manufacturing equipment) with Tokyo Electron along with the reincorporation of the entity in the Netherlands. He referred to information from an October 8 New York Times article. Baucus noted that Applied Materials effective tax rate will decrease from 22% to 17%, saving about $100 million annually.

Baucus also observes that this type of restructuring is "a new spin on the old “inversion” problem.  And it’s becoming an increasingly popular practice."

Finally, he observes: "This is a simple issue. Globalization has made America’s tax code out of date."

October also brought us a report from the Joint Committee on Taxation - Modeling the Distribution of Taxes on Business Income (10/16/13). It analyzes the age-old question of who bears the burden of corporate taxes.  Well, to the extent some of it is borne by workers, that broadens the group of politicians interested in lowering the corporate tax rate.

And, we await the release of a tax reform mark-up from both tax committees.

What do you think should happen with the corporate tax rate and what it means for other forms of business?

Many tax questions on same-sex federal tax filings

I think the IRS did a good job getting real guidance issued on the meaning of the U.S. Supreme Court's finding that Section 3 of DOMA is unconstitutional. On August 29, 2013, the IRS issued Revenue Ruling 2013-17 (binding guidance) and some new FAQs (not binding, but often just restating the binding guidance).

Key points of the ruling:

• The Internal Revenue Code and regulations should be read in a gender neutral manner. This is helpful because there are several references in both to "husband and wife" rather than always "spouse."
• For federal tax purposes, a state of celebration approach is used to determine if a couple is married. Thus, if they are married in any state, DC or foreign country allowed to confer marriage status, they are married, even if they live in a state that does not recognize the marriage.
• Couples in a registered domestic partnership or civil union are not considered married for federal tax purposes.

The ruling is effective for returns filed after 9/15/13. Thus, same-sex married couples will definitely have to file either as married filing joint (MFJ) or separate (MFS) for 2013. Amended returns can be filed, if desired, for earlier years still open under the statute of limitations.

This ruling, as well as the FAQs and Notice 2013-61 on how employers can obtain FICA refunds for excess FICA paid on income that had to be reported for workers who had spousal benefits.

There are still several open issues and likely more will be found as people go forward, as well as work to amend prior year income, payroll, gift and estate returns and plans.  I was pleased to have the opportunity to work with several other members of the AICPA to create a list of these issues. The AICPA sent the letter to the IRS on 10/30/13. Here are two of the several topics noted in the letter:

• "The IRS should clarify if the taxpayer would also need to change the filing status if a same-sex married spouse needs to amend a prior return filed as single or head-of-household to make an adjustment unrelated to marital status. While this form is an amended return filed after September 15, 2013, it is not filed “in reliance on” Rev. Rul. 2013-17."
• "The IRS should clarify whether a same-sex married employee who requests that his/her employer file to obtain a FICA tax refund must also amend his/her Form 1040 to change the filing status."

What do you think? Have you run across additional areas in need of guidance?