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Saturday, September 14, 2019

60th Anniversary of P.L. 86-272

State Tax Notes, 9/5/19
Today, September 14, 2019 marks the 60th anniversary of the enactment of P.L. 86-272 dealing with nexus for net income tax purposes for a limited category of sellers (those selling tangible personal property). This legislation was intended to be temporary while Congress studied numerous state/multistate tax issues that went beyond the initial reach of P.L. 86-272. Despite lots of study and a 1,000+ detailed report with recommendations issued in the early 1960's, no change was ever made.

Meanwhile, issues continue to grow including exactly how to interpret P.L. 86-272 in the modern era with new ways of doing business.

I've got an article in State Tax Notes about this law and its issues and recent developments.  I was hoping not to have to consider even writing this article after I wrote an article in 2009 on the 50th anniversary.  There are proposals for change in each session of Congress and lots of commentary and analysis on nexus, including the U.S. Supreme Court's decision in Wayfair in 2018. But, still no update.

I hope you'll take a look at the article and post your comments on what you think should be the next step in providing useful and appropriate nexus rules for taxpayers and states.  See "Public Law 86-272 Reaches Its 60-Year Anniversary," State Tax Notes, 9/5/19. I've also updated the website I created for the 50th anniversary - here.

What do you think?

Monday, September 2, 2019

Two States Using Wayfair Economic Nexus Standard More Broadly


As we know, the June 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., et al, allows for an economic nexus threshold for all types of taxes. Many states already had an economic nexus threshold for income taxes. Many states have adopted the South Dakota threshold for nexus. This standard generally starts use tax obligations when a vendor has over $100,000 of sales in the prior calendar year or the current year to date or 200 or more transactions.

Now, one state - Hawaii, has adopted that same threshold for its state income tax effective for tax years beginning after 12/31/19.  [SB 495 (Act 221, 7/2/19)] Hawaii's sales tax nexus threshold based on the South Dakota law upheld by the Court started 7/1/18.

Also, the Texas Comptroller has proposed the same via a proposed regulatory change for its franchise tax. The Texas sales tax Wayfair threshold though is over $500,000 of sales and it doesn't matter how many transactions there are (there is only a dollar sales threshold).

Remember that a state cannot override P.L. 86-272 which still applies to limit nexus if a taxpayer has no physical presence other than sales personnel who solicit orders that are approved and shipped from out-of-state. This is relevant for Hawaii's state income tax, but doesn't apply to the Texas franchise tax because it is not a net income tax.

Making the thresholds the same should be a lot simpler for small businesses. I don't agree with the South Dakota threshold's 200 or more transactions because for many small businesses though because that can be a small dollar amount, such as if selling items that cost less than $10 each. I think that is not sufficient nexus for commerce clause purposes.  I think states should do like California and Texas did and drop the transaction threshold and only use a dollar of sales gross receipts that is at least $100,000 and perhaps higher in large states (after all, buyers not charged sales tax still have to pay use tax on their own, and the higher threshold keeps the burden on the state tax agency more manageable and more likely that most remote vendors will be found and have to collect.

Not all states define sales the same for these purposes so there is still complexity for multistate sellers. But for a remote seller to know that once they have use tax collection obligations in a state they also have income tax obligations (assuming they are not protected by PL 86-272), should provide greater certainty to businesses and state tax agencies and simplify recordkeeping.

What do you think?

Friday, August 9, 2019

Does TCJA Make C Corps Better?

Does TCJA Make C Corps Better? Generally no when you factor in double taxation of C corporations. I've got an article looking at this question but only looking at domestic tax rules. Certainly, lots of international activity might make the C corporation look better.  Here is the article, published this week in the Wealth Strategies Journalhttps://wealthstrategiesjournal.com/2019/08/08/is-a-c-corporation-preferred-after-tax-reform/

What do you think?

Saturday, August 3, 2019

Two New Sales Tax Exemptions in California for Two Years

California SB 92 (Chapter 34, 6/27/19) adds two new sales tax exemptions starting 1/1/20 and ending 12/31/21:
  1. “diapers designed, manufactured, processed, fabricated, or packaged for use by infants, toddlers, and children” [R&T 6363.9]
  2. menstrual hygiene products” shall only include the following: (1) Tampons. (2) Sanitary napkins primarily designed and labeled for menstrual hygiene use. (3) Menstrual sponges. (4) Menstrual cups.” [R&T 6363.10]
For these new temporary sales tax exemptions, the legislature applies R&T §41 dealing with accountability. Thus, the legislature had to specify the purpose of the exemptions and require a report from the LAO on the effectiveness of these provisions including whether they should be modified, extended, or allowed to expire. For the diaper exemption, the LAO is also to assess “whether more targeted approaches to providing families in need with adequate access to diapers are available.” For the menstrual products, the LAO is also to assess “whether more targeted approaches to providing individuals in need with adequate access to menstrual hygiene products are available.” The specified goals of these exemptions:
·         Diapers: “to promote public health by increasing the affordability of, and expanding access to, diapers.”
·         Menstrual hygiene products: “to promote public health by increasing the affordability of, and expanding access to, menstrual hygiene products.”

Observation: Often, bills that provide a new credit or exemption state that R&T §41 does not apply. Then there is no need for accountability as to whether the provision meets its purpose or even that a purpose be articulated. Important to this assessment though is whether the LAO will have the information needed for a strong assessment. The legislation should have included a provision and funding to have the LAO identify information it will need the CDTFA to collect.

Other states provide similar exemptions with the sales tax on menstrual products sometimes referred to as the pink tax or the tampon tax. States with an exemption include Connecticut, Florida, Illinois, Minnesota, New Jersey and New York.

Do these exemptions reflect good tax policy? NO. The biggest issue is equity and fairness in that they give the largest break to higher income buyers because they are likely to spend more on diapers. I see that on Amazon, diapers range from 11 cents/diaper up to at least 49 cents/diaper. Someone already buying the more expensive diapers doesn't need a sales tax break to make diapers more affordable as they have already opted to not buy a less expensive diaper that would be more affordable. If the exemption were only given to individuals who need it and who may need even more assistance in paying the price without the sales tax, this exemption is poorly targeted.  A similar argument can be made for the menstrual products.

There are better ways to target relief to taxpayers needing relief rather than also giving relief to those who don't need it. This sales tax break results in reduced revenue for state and local governments. How will they make it up?

More targeted relief would be to provide diaper coupons to individuals already receiving state or local aid, or just giving them diapers which the state would buy in bulk at a reduced cost. Same with menstrual products.

Another concern with these products is that there are added environmental costs of these disposable items. Thus, removing the tax on them means that the costs of disposal and filling up landfills needs to come from elsewhere.

What about the argument that only females need menstrual products so taxing them is a gender disparity. That same argument can be made for other products such as razors, shaving cream, jock straps, football helmets, and I'm sure other items. Exempting these items makes the system more complex, less equitable, and requires that the rate be higher on other items.

The California Legislative Analysts Office issued a report (5/12/19) on these exemptions before enactment of S 92. It notes a few additional issues including the difficulty of defining a "necessity" and whether an income tax credit for the menstrual products would present greater tax relief.

What do you think?

Monday, July 29, 2019

Moving Backwards - New Form 1040-SR for 2019

Draft Form 1040-SR
You're online reading this blog post so you know that technology can do a lot, usually making our lives easier. For example, can you imagine filing a complex tax return without the aid of tax prep software? Well, IRS statistics show that for fiscal year 2018, about 12% of individual federal tax returns were filed on paper (but some of this could have been prepared using software). The balance were prepared by a paid preparer, or otherwise online or via the free file system. This is still a lot of paper filings given a total of almost 153 million individual returns files (about 18.6 million paper filed) (2018 IRS Data Book, p 2).  I think many of these paper filed ones are fairly simple returns, perhaps with just one or two Forms W-2.

When using tax prep software, you're asked questions and you need to enter information from your tax reporting forms, such as W-2 and 1099. Good tax prep software performs the required calculations and produces a return that you can print and file or much easier, e-file. It doesn't really matter much what the return looks like, just that your required information is on it.

Well, despite this reality today and that e-filing continues to grow, a proposal offered since at least 2009 (H.R. 728, Seniors' Tax Simplification Act of 2009), calls for the IRS to create a new individual income tax form for use by seniors - those age 65 or older. This form 1040-SR, finally made it into legislation that was enacted in 2018 - P.L. 115-123 (2/9/18), effective for the 2019 tax year.

The enacting legislation calls for this new form to:
"be as similar as practicable to Form 1040EZ, except that--
(1) the form shall be available only to individuals who have attained age 65 as of the close of the taxable year,
(2) the form may be used even if income for the taxable year includes--
  (A) social security benefits (as defined in section 86(d) of the Internal Revenue Code of 1986),
  (B) distributions from qualified retirement plans (as defined in section 4974(c) of such Code), annuities or other such deferred payment arrangements,
  (C) interest and dividends, or
  (D) capital gains and losses taken into account in determining adjusted net capital gain (as defined in section 1(h)(3) of such Code), and
(3) the form shall be available without regard to the amount of any item of taxable income or the total amount of taxable income for the taxable year."

Well, the IRS got rid of Form 1040EZ starting in 2018.

With this new form, which the IRS released on July 11 - draft Form 1040-SR, U.S. Tax Return for Seniors, taxpayers and their preparers will need to spend time figuring out if the taxpayer should file Form 1040-SR.  Seniors may still file the regular 1040, and I assume that is what will happen.  But, tax prep software will likely ask this question: "If the taxpayer and spouse are age 65 and older and qualify to use Form 1040-SR, do you want that form produced?"

What is the point of all of this? Well, if we were still filing tax returns on paper and without the aid of tax prep software, perhaps it would be helpful except that the senior still needs to be sure they have the right type of income and deductions to qualify to use the form rather than just using Form 1040.

I refer to this as a step backward because the form isn't needed. Form 1040 is just fine.

Also, any change in filing should be to make greater use of technology.  For example, have a system that regularly grabs your digital data, such as those automatic deposits of your paycheck into your bank account, and your Quickbooks data if self-employed, and bank and brokerage data, and calculates your tax liability on a daily or weekly basis. In fact, with so much digital data and the ease of making non-digital data digital, this would be a much more efficient system. But instead, there continues to be too much focus on paper as the basis of our 21st century tax system. We need to change that mindset to move forward to have a more efficient and simpler compliance system.

What do you think?