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 (8/3/18) 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?

**Here is the blog post originally posted on SalesTaxSupport on 8/3/18

Wayfair - What If the Respondents Were NOT Billion Dollar Sellers?

The U.S. Supreme Court's ruling in South Dakota v. Wayfair, Inc., et al, on June 21, 2018 is a landmark one, overturning 51 years of precedent to find that physical presence is not the appropriate standard for nexus. I won't go into the details as much has been written about the case (for example, do a search for "Wayfair" on SalesTaxSupport.com).

South Dakota's law change in 2016 (SB 106) provided that a vendor had sales tax collection obligations if it had over $100,000 of gross revenue into the state or 200 or more transactions in the previous calendar year or the current calendar year. South Dakota is a member of the Streamlined Sales and Use Tax Agreement (SSUTA) so provides software and other resources to help vendors comply.

The Court found that the "economic and virtual contacts respondents have with" SD were sufficient for nexus. SD law also included features "designed to prevent discrimination against or undue burdens upon interstate commerce." The three features:

1.       A small vendor safe harbor (the $100,000 of sales or 200 or more transactions in 12 months threshold);

2.       The law does not apply retroactively; and

3.       As an adopter of the SSUTA, SD law has features that "reduce administrative and compliance costs" such as uniform definitions, and access to software with audit protection for using it.

One of the aspects of the case that I find interesting is the size of the three plaintiffs. Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc., all have sales over $1 billion per year. The first two are publicly traded companies (links are to their recent 10-K reports and for Newegg, to a 2009 S-1 report). If you don't know the background of these companies, I encourage you to look at the 10-Ks (see links) of Wayfair and Overstock.com. It really hits you that these are really tech companies, using the technology to create unique shopping experiences - 21st century retailers. The co-founders of Wayfair are engineers who "created a company culture deeply rooted in technolgoy and data." Wayfair has a "team of over 1,300 engineers and data scientists" in their workforce! That is out of 7,751 full-time equivalent employees (per the 2017 10-K report).

Certainly, based on size and technical expertise and ability to navigate many laws including those of the SEC, these respondents will have no problem collecting sales tax. Wayfair has already indicated such in a 6/21 press release where it says it already handles sales tax on about 80% of U.S. orders. They "do not expect today's decision to have any noticeable impact on our business, as it may on other retailers who do not currently collect and remit sales tax." On 6/28, Overstock.com stated that its decision to voluntarily collect in all tax jurisdictions has not led to any noticable sales decline.

Would a small remote vendor selling 200 or more $5 items into South Dakota be able to make the same claims? That is - no problem collecting? I don't think so.

What if instead of three very large retailers, the respondents were vendors who barely crossed the SD safe harbor thresholds? Would the Court have taken a different perspective?

Of course, the Court did remand the case to the SD Supreme Court, but the respondents remain the same.

While over $100,000 of sales into a state is arguably a good indicator of a company large enough to handle sales tax collection, the 200 or more transactions is not. Is the number of transactions safe harbor even needed? Why not just use gross receipts? Yes, a company might sell a single item costing $90,000, but the state has other ways to handle such transactions. Such a sale would likely be to a business and the business buyer could be required to self-assess the sales tax on the spot. If it was an individual buyer, chances are good it was a car, boat or plane that needs to be registered and sales/use tax can be collected then. If it were artwork, jewelry or clothing, alternatives would be needed, but doable.

Many states are following the SD approach. I suspect that we'll see near future litigation with a small vendor challenging the existence of substantial nexus based on 200 transactions in a year of nominal value each.

What do you think?

Crowdfunding and taxes

In Information Letter 2016-0036 (6/24/16), the IRS explains general rules that might apply to someone’s receipts of funds via a crowdfunding platform. It doesn’t mention any websites, but examples of such web platforms include Kickstarter and GoFundMe. The IRS notes the broad rule of Section 61 that receipt of funds is likely to be taxable gross income. Three examples of non-taxable receipts offered by the IRS are:

a.       Loans (must be paid back)

b.      Capital contributions (equity)

c.       Gifts “made out of detached generosity and without any ‘quid pro quo.’”

Without details, the IRS also states: “However, a voluntary transfer without a “quid pro quo” is not necessarily a gift for federal income tax purposes.”

Reg. §1.451-2 on constructive receipt is also mentioned. Per the IRS: “income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. The regulation further provides that income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. However, a self-imposed restriction on the availability of income does not legally defer recognition of that income.”

The IRS also states that the particular facts and circumstances of the funding must be examined to determine the tax consequences.

The IRS also notes that a taxpayer may request a private letter ruling (PLR) on how the law applies to their particular situation.

Observations: It would be helpful if the IRS would issue a publication with an explanation of the general rules as many people generating funds from crowdfunding do not know about the tax consequences. They are likely to get a 1099-K from the crowdfunding website. The IRS should explain what the recipient should do with a 1099 that doesn’t represent taxable income. The publication should also cover the rules for the contributor of the funds. It is not unlikely that someone contributing funds for a stranger’s medical bills thinks it is a charitable contribution (even though it is likely that there was no Section 501(c)(3) entity).

The IRS should issue binding guidance on when a “gift” crowdfunding site might be taxable to the recipient even though there is no “quid pro quo.”

One example that comes to mind for me is where there is some type of relationship (other than family) between the giver and the givee.  For example, let's say a college student sets up a fund to get money to help pay tuition. Her employer contributes funds. That is not really a gift because the employer expects something from the employee/student - continued work or perhaps it is for past work.  It would be nice to see a revenue ruling from the IRS with various fact patterns and the tax treatment for both parties.  A lot of this is not new law, just new fact patterns.  

The law also needs to be changed to require the crowdfunding site to issue a 1099 regardless of the dollars involved.  Again, IRS guidance would help on what to do with the 1099, particularly if the amount received either is not income (for example, it is loan proceeds) or it is an excludable gift.

States also need to issue guidance on the state income and sales tax consequences of crowdfunding.

Also see my post of 2/14/11.

What do you think?

New models challenge tax laws

You may have heard the news report that a women in Omaha, battling cancer, received about $50,000 from strangers after she set up an account with GoFundMe. It was also reported that the IRS is seeking $19,000 of income taxes from her on this amount. [See ABC8, 4/27/15 story and KETV.]

The power of the Internet includes to easily reach many people throughout the world enabling vendors to have a larger market, writers to have more readers, and people seeking funds to potentially raise a lot. Crowdfunding websites can generate funds for many purposes and many of these purposes result in taxable income to the recipient. However, not always. What the woman in Omaha received is a non-taxable gift under the income tax law.

A well-known US Supreme Court defines "gift" for tax purposes (Commissioner v. Duberstein, 363 US 278 (1960)). Per the Court:

"A gift in the statutory sense ... proceeds from a "detached and disinterested generosity," Commissioner v. LoBue, 351 U. S. 243, 246; "out of affection, respect, admiration, charity or like impulses." Robertson v. United States, supra, at 714. And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's "intention." 286*286 Bogardus v. Commissioner, 302 U. S. 34, 43. "What controls is the intention with which payment, however voluntary, has been made." Id., at 45 (dissenting opinion)."

Basically, if the giver expects nothing in return and the transfer is not for goods or services provided in the past, it is a gift. Clearly, the $50,000 was given with detached and disinterested generosity. The only tax consequences should possibly be gift taxes to the givers if the gift exceeded $14,000.

But, how does GoFundMe know that the transfers to the person in Omaha were a non-taxable gift to her?  GoFundMe is liable for penalties if it fails to report information under any rules it may be subject to. While the law is not entirely clear on what reporting is required by the crowdfunding sites, it likely issues a Form 1099-K to recipients of the funds because it handled the transfer of funds. 

It would be helpful for the IRS to create a new form or schedule allowing recipients of information returns that may be incorrect or improperly sent, to report them, explain them, AND back them out of their income. This would prevent the IRS computers from finding unreported income when it matches a 1099 with the recipient's return and sends out a notice. The new reporting form or schedule would prevent the computer from doing this.

New approaches are sometimes needed for new transactions and this simple solution should work here.  Congress also needs to update information reporting laws to make it clear to web-based businesses when they are required to issue a 1099 (and which type) for funds they collect and transfer to someone.  This would help many companies today beyond the crowdfunding platforms - for example, Uber, Lyft, Amazon Mechanical Turks, Task Rabbit, and more.

What do you think?