Digital Services Tax (DST) Plans Outside the US

New ways of doing business often challenge tax rules written for a different model. That is a concern expressed for many years by several countries. The concern is that it looks like companies that make money by other than selling tangible goods are profiting by activity in the country, but have no permanent establishment in the country, so owe no income tax. For example, a search engine company makes money when someone uses its search engine because it provides data to the company. And if the user clicks on an ad, the search engine company makes money. But no tax revenues go to the user's country.

The OECD, European Commission and others have been studying this for many years. The AICPA recently released a policy paper that explains the topic, issues and lists what some countries are doing or proposing. See AICPA Policy Report – Taxation of the digitized economy: A policy paper designed to educate, enlighten and stimulate discussion (October 2018).

The UK has also studied this issue and solicited comments on its suggestions. It now proposes to start a Digital Services Tax (DST) in 2020. In November 2017, the UK government released a discussion paper – Corporate tax and the digital economy: position paper; later updated in 2018. The position is that “a multinational group’s profits should be taxed in the countries in which it generates value.”  Also see the UK policy paper – Digital Services Tax: Budget 2018 brief. It states:

 “The DST applies a 2% tax on the revenues of specific digital business models where their revenues are linked the participation of UK users. The tax will apply to: search engines; social media platforms; and online marketplaces. That is because the government  considers  these business models derive significant value from the participation of their users.”

The UK DST will only apply to businesses with at least £500 of global revenues ($650 million USD).

Congressman Brady, Chair of the House Ways and Means Committee, stated his opposition to the UK DST – On 10/31/18, he released the following statement:

“The United Kingdom’s introduction of a new tax targeting cross-border digital services – which mirrors a similar proposal under consideration in the European Union – is troubling.  Singling out a key global industry dominated by American companies for taxation that is inconsistent with international norms is a blatant revenue grab. 

“The ongoing global dialogue on the digital economy through the OECD framework should not be pre-empted by unilateral actions that will result in double taxation. If the United Kingdom or other countries proceed, that will prompt a review of our U.S. tax and regulatory approach to determine what actions are appropriate to ensure a level playing field in global markets.”

Spain has also proposed a DST of 3%.  See DLA Piper Global Tax Alert 11/1/18.

Is a new tax the answer? Can existing income taxes be modified to address where income is generated? How easy it is to know where income is generated? I think technology makes it possible to know the location of the person clicking on a social media ad. The harder question might be where is that income generated for tax policy purposes. That has been a longstanding multistate question - where the costs of performance occur or at the destination, or perhaps some combination?

What do you think?

More on Wayfair

There have been many articles on the June 2018 US Supreme Court's decision in South Dakota v Wayfair. But, that's not surprising given the decision overrode 51 years of state tax precedence!  I've written two article (so far) and a few blog posts.

One post was on SalesTaxSupport.com where I asked the question - what if the parties were not billion dollar vendors? I think it is too bad the vendors in the case were so large. After the case, Wayfair issued a press release noting that it was already collecting tax on 80% of sales with that figure growing as its logistics footprint grows (that is, it was setting up distribution or other operations in more states).

Wayfair's 2017 10-K also indicates it has over 1,300 engineers and data scientists! Well, that makes it a lot easier to create a logistics system to collect sales tax from all customers and remit it to the state. What about a vendor who sold 200 $1 items to customers in the state?

Additional examples of small vendors I came across recently in doing research on taxes and crowdfunding are small vendors raising money on crowdfunding sites such as Kickstarter. In fact, I gave $30 to a party trying to raise funds to create and distribute calendars. And they are not alone. There are similar sites where someone is trying to raise funds to create a comic book, artwork and more calendars. If the party I gave the money to hits his target (and he did), I'll be sent a printed calendar. The party says they will ship to anywhere in the world. Well, 200 or more of these sales in a state will create sales tax collection costs too in a growing number of states, despite being what appears to be a small vendor. Hitting that figure is more likely in high population states such as California.

I see that some of the sellers of calendars and comic books are providing a pdf of the item. While that is not taxable in all states, the seller needs to check the law in each state to be sure and for states that find sales tax nexus with 200 or more transactions in the state, whether that figure includes taxable and non-taxable transactions in that count.

Some states and likely more will enact legislation making the "marketplace facilitator" such as Etsy and eBay collect tax.  I think Kickstarter and other crowdfunding sites will likely fall under this definition, but states should be sure (see Pennsylvania's definition here). Unlike eBay and Etsy, Kickstarter does more than help people sell products. Also, the funders might be providing more than needed to receive the product. That raises more issues on the sales tax collection side. Also, when must the sales tax be remitted because on many sites, the party doesn't get the funds if their target is not met, or they might get the funds, but never deliver the product.

What do you think?

Congressman Brady Asks IRS To Issue More Guidance on Virtual Currency

On 9/19/18, Congressman Kevin Brady (R-TX), chair of the House Ways and Means Committee sent a letter to the IRS asking them to issue more guidance, as it had promised in 2014, on taxation of virtual currency. Chairman Brady also refers to the 2018 letters from the ABA and AICPA requesting guidance.

In the letter, Brady states:

"While the Committee appreciates the IRS’s need to undertake enforcement actions to ensure that taxpayers generally meet their tax obligations, in this case, we are concerned that the IRS is seeking to enforce guidance that does not adequately advise taxpayers of their tax obligations when using virtual currencies.  Furthermore, while the issues surrounding virtual currencies are complicated and ever evolving, a key component of the IRS’s duties as the nation’s tax administrator is to assist taxpayers in understanding what their tax obligations are and how they may best meet them.  A failure to put forth adequate guidance severely hinders taxpayers’ ability to do so.  The IRS has had four years to work through these issues since its preliminary guidance was issued, providing more than adequate time for the IRS to thoughtfully consider what additional information is needed.

We therefore strongly urge the IRS to expeditiously issue more robust guidance clarifying taxpayers’ obligations when using virtual currencies. We also ask that you provide a written response outlining where the IRS is in its efforts to issue updated virtual currency guidance, what the IRS intends to cover in this guidance, and a timeline for its release.  In addition, to assist the Committee in better understanding this issue, we will be asking the Government Accountability Office to undertake an audit on this matter."

I hope this can occur before the extended due date for 2017 returns (10/15/18).  Let's see.

What do you think?

TCJA Reference to 1944 Law Regarding SALT Cap is Now Online

Santa Clara County Law Library - great place and free - has the 1944 Cumulative Bulletin!

In describing the new $10,000 deduction limit for personal state and local taxes that was added by the Tax Cuts and Jobs Act (P.L. 115-97; 12/22/17), the committee report at footnote 168 refers to a page from the 1944 Cumulative Bulletin (CB) regarding a 1944 law change. To help understand what they were getting at, I recently tracked down that 1944 page.

This is a reminder of a few things. First, not everything is on the Internet.  While there might be a copy of the 1944 legislation available on an online database somewhere, likely not for free access (I could not find it). But the CB is really needed because footnote 168 refers to a specific page for its support of a statement about the present law (pre-TCJA law). I pulled the CB from where the Santa County Law Library (free to public) stores its old government publications (in the attic!) (Note: the photo above shows first and second floors, there really is an attic above that.)

But - now that page from the CB is on the Internet - click on Section 164 from this 1/2/18 post where I have links to a few track changes versions of Code sections changed by the TCJA. The Section 164 link will also take you to the committee report.

Second, the 1944 law is a reminder that when Congress created the concept of Adjusted Gross Income (AGI) in 1944, they described where state and local taxes are deducted (for or from AGI). For property taxes paid by your sole proprietor business for example, they are deducted for AGI because they are paid and imposed directly on the business. In contrast, state income taxes imposed on that business are deducted from AGI as they are remotely connected to the business income. Basically, I think the concept is that when an individual calculates their state income taxes that calculation involves all of their income, various deductions, exclusions and credits. How much of that state income tax is attributable to the business income?

This is why for decades, state income taxes go on Schedule A rather than splitting it among other schedules, such as C, E, and F. In contrast, property taxes paid by a business, partnership or farm are deducted above the line (as part of one of these schedules).

This was also an issue after the Tax Reform Act of 1986 when tax prep fees became subject to the 2%-of-AGI threshold. People asked - what about the tax prep fee attributable to my Schedule C sole proprietor business? Despite the treatment of state and local income taxes, the IRS determined that the tax prep fee could be allocated (see Rev. Rul. 92-29).

Also, old IRS rulings determined that in calculating a net operating loss (NOL), the state and local income taxes attributable to business income can be part of that NOL (Rev. Rul. 70-40). Thus, there are ways to measure that (there are ways to measure most things).

The $10,000 state and local income cap (also referred to as the SALT cap), is in the law from 2018 through 2025. The House Ways and Means Committee voted to make it permanent, along with other temporary individual provisions including the reduced tax rates), on 9/13/18 (HR 6760). It is unlikely the Senate will vote on this as it would take 60 votes there to pass.

Final point while I'm talking about the $10,000 SALT cap, why not change the law to allow individuals to deduct their state and local income taxes attributable to their business income above the line?  Certainly with the $10,000 cap, this seems like the right thing to do. After all, corporations don't have a cap on their state and local income tax deduction, why should individuals operating a business outside of the corporate form have a limitation. And even without the cap, deducting for AGI makes sense because not all business owners itemized.  The AICPA recommended this change while the TCJA was being discussed in Congress (which was the first time the SALT cap came up) (see item 4 in this 11/2/17 letter to Congress and this 11/13/17 letter and 11/10/17 letter).

What do you think?

Smart 401(k) Plan to Help Employees with Student Loans

In PLR 201833012 (8/17/18), employer (T) sought a ruling from the IRS on whether it was permissible to amend its defined contribution 401(k) plan to allow T to make a nonelective contribution for an employee if that employee makes a student loan repayment (SLR). The option would be voluntary. The plan already included T matching contributions equal to 5% of the employee’s eligible compensation for the pay period.

Participating employees could still make elective contributions but could not receive regular matches on such contributions. T sought a private ruling from the IRS to be sure the planned amendment did not violate the “contingent benefit” prohibition at §401(k)(4)(A) and Reg. 1.401(k)-1(e)6). The IRS found no problem with the plan.

The IRS found that the plan did not violate any of the 401(k) rules.

While private letter rulings (PLRs) do not state the taxpayer's name, a taxpayer can volunteer such information. That is the case here and Abbott says it is their plan and ruling (6/26/18 press release). They call it the Abbott Freedom 2 Save Plan. 

Per Abbott, if an eligible part-time or full-time employee contributes 2% of their eligible compensation towards paying down their student loans, they receive Abbott’s 5% match into their 401(k) plan and do not need to make a contribution on their own. Abbott’s press release gives an example of an employee accumulating $54,000 in their 401(k) plan after ten years assuming a salary of $70,000 with 3% increases annually. (Also see Abbott’s infographic.)

Abbott started the plan because it found employees not contributing to plans because of their need to make payments on their student loans. Abbott employees appear to potentially have significant student debt as the company notes that most of its employees have colleges degrees and about one-third of the 1,000+ people under age 35 hired in 2017 had a doctorate degree and about the same had a master’s degree.

In 2016, the ERISA Industry Committee (ERIC) issued a press release (10/18/16) that it had asked Congress to “adopt legislation to support employers as they develop programs that assist their employees in both repaying student loans and saving for retirement.”

President Trump's Executive Order 13847 (8/31/18) on Strengthening Retirement Security in America calls for efforts to “expand access to workplace retirement plans for American workers.” Per the BLS, 23% of private-sector, full-time employees and 34% of part-time ones do not have access to a retirement plan from their employer. Complexity of plans for small employers is noted as an obstacle, as well as costs and risks of not properly following numerous rules. A key solution proposed to be explored by the Department of Labor is expanding access to multiple employer plans (MEPs).

The EO also calls for updating life expectancy and distribution period tables for required minimum distributions (RMDs) and determining how often they should be updated.

Queries:

• The PLR only applies to the taxpayer who requested it (Abbott). Will the IRS issue binding guidance applicable to all taxpayers with the same holding to provide assurance to other employers who make similar changes? The cost to obtain a letter ruling is $28,300!

• Will EO 13847 lead to other modernizations to retirement plans to let them reflect the ways we live and do business in the 21st century? For example, why not have retirement plans that tie to the worker rather than the employer? With a growing gig economy and workers changing jobs frequently, why not let them have a single plan of their own to contribute to and have employers contribute to within specified rules? With technology, this would not be difficult.

What do you think? What are new solutions to improve retirement savings and to help people pay down their student loans (or not to have such large debts in the first place)?