U.S. Supreme Court Expands Rights of States to Collect Tax on Internet Transactions

by James S. Pieper

Since the dawn of the Internet, online sellers have benefited from a line of United States Supreme Court precedent that prevented states from requiring out-of-state businesses to collect and remit sales tax on sales in states where the seller has no “physical presence.”

On June 21, 2018, the Court discarded its longstanding “physical presence” test, thus opening the door for state governments to impose a broader range of duties on remote sellers, including the duty to collect and remit sales tax.

In South Dakota v. Wayfair, Inc., South Dakota sought to defend its statute that imposed a duty on all retailers with more than $100,000 of sales or 200 transactions within the state to collect sales tax on transactions and remit the tax to the state.  For retailers with no physical presence in the state, the statute was clearly in violation of the historic interpretation of the Commerce Clause of the United States Constitution, which limits the ability of states to regulate “interstate commerce” unless there is a “substantial nexus” between the state’s interests and the commercial activity.

Prior court decisions concluded that a state could have no “substantial nexus” with a seller that had no “physical presence” in said state.  As a result, online sellers with no “brick-and-mortar” presence or employees working in a state were free from the obligation to collect tax on their sales.

In South Dakota v. Wayfair, the Court rejected its prior interpretations of the Commerce Clause and held that a “substantial nexus” could be created by online sales alone despite the lack of “physical presence.”  The decision was decided with a bare 5-4 majority.

As a practical matter, the majority of online sales already entail the collection of sales tax due to either requirements that were valid under prior law or voluntary compliance by larger online retailers (including amazon.com).  Some retailers with no physical stores, however, will lose the advantage of being able to undertake transactions without collecting tax (including the respondents in the case, wayfair.com, overstock.com and newegg.com).

It will be up to each state to set the parameters of which remote sellers might be exempt from collecting tax due to a lack of significant sales, and the Court did not set a constitutional standard for what level of sales would constitute a sufficient “substantial nexus” to allow a state to impose duties (only that South Dakota’s standards were more than sufficient).

Perhaps more importantly, by jettisoning the “physical presence” standard as inappropriate in an era of “substantial virtual connections,” the Court has raised the prospect of greater opportunity for individual states to tax and regulate the actions of businesses whose only connection to said state is via online presence.

All businesses that connect with customers in other states via online connections will need to have heightened awareness that state tax and regulatory requirements in those other states may now apply to those interactions due to the Court’s new reading of the scope of a state’s authority under the Commerce Clause.

© 2018 Vandenack Weaver LLC
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FIRPTA: United States Resident, Foreign Person or “Disregarded Entity”?

Upon arriving at a piece of real property, a prospective buyer or real estate agent is usually on the look-out for hidden liabilities. One hidden tax liability could involve the Foreign Investment Real Property Tax Act (“FIRPTA”). An unfamiliar concept to many, tax liability arising under FIRPTA could put the purchaser on the hook for the seller’s real estate capital gains.

The FIRPTA tax, which taxes a foreign person’s disposition of real property, was designed to address widespread concern that foreign investors were purchasing United States real property and selling it at a profit, but not paying any tax. Generally, under FIRPTA, a transferee, who is often the purchaser, must withhold 15% of the total amount realized when purchasing United States real property from “foreign persons.” The IRC defines “foreign person” to include a nonresident alien individual, a foreign corporation, a foreign trust, a foreign partnership, a foreign estate, and any other person that is not a U.S. person as defined by the IRC.

If the seller is an individual, IRC Section 7701 provides various technical definitions for when a “nonresident alien individual” becomes a “residential alien individual,” making FIRPTA inapplicable. If the seller is a single-member limited liability company (“SMLLC”) organized in the United States, which is owned by a “foreign person,” the residency status of the SMLLC is “disregarded.” The seller is deemed to be the SMLLC owner, potentially subjecting the sale to FIRPTA. Under the IRC Treasury Regulations, there are various seller entities that are considered “disregarded entities.”

A certificate of non-foreign status provides the purchaser the requisite information to determine the seller’s residency status and whether funds need to be withheld to satisfy FIRPTA. In the above SMLLC scenario, a United States “disregarded entity” cannot provide a certificate of non-foreign status. The certificate of non-foreign status is required to state that the entity is not a disregarded entity, evidenced by a United States employer identification number. An individual transferor may also provide a certificate of non-foreign status, whereby the individual certifies he or she is not a nonresidential alien, and provides their Unites States taxpayer identification number, which is often their Social Security number.

Mischaracterizing a seller’s legal status under the IRC may create liability for the purchaser or their designated agent(s). A simple request by the purchaser or their agent of a notarized certificate of non-foreign status when purchasing real property will allow the purchasing party the ability to discover the FIRPTA implication, and its tax implications.

 

 

© 2018 Vandenack Weaver LLC

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End of the Year Tax Planning Considerations: New Issues Arise from Tax Legislation

            With the passage of new tax legislation by Congress, the usual gamut of year-end tax considerations has been made more complicated this year.  The timing of this legislation leaves US taxpayers with little time to determine what actions need to be taken this year to give them favorable consideration in 2017 and beyond.  Vandenack Weaver LLC has assembled the most important changes here for your consideration.  We encourage you to discuss these issues with your tax professionals.

  • 2018 Real Estate Taxes – The new tax legislation limits the deductibility of state income tax, real estate taxes, or sales tax to $10,000. With this new limit, some clients may find it advantageous to pay all but $10,000 of their 2018 real estate taxes in 2017.  If you are paying taxes into an escrow account, you are eligible to take the deduction in the year when the bank pays the property taxes, not when you pay the bank.  As such, consult with your bank to determine if you may take advantage of this.  Note, for those clients who are subject to the Alternative Minimum Tax (AMT) in 2017, paying early is inapplicable as these taxes are not deductible when computing AMT in 2017.

 

  • Gifts – Gift and generation skipping transfer tax exemptions will double under the new tax legislation. For those making large gifts, consider waiting until the new year in order to avoid 2017 tax consequences.  However, remember to make your annual gifts before the end of the year.  These limits will increase from $14,000 to $15,000 in 2018, but if you do not make a transfer in a calendar year, you will not get the exemption for that calendar year.

 

  • Payment Timing for Estimated State Income Taxes – Traditionally, state and local income taxes have been deductible provided that such tax payments were based on a reasonable estimate of the taxpayer’s actual liability (and that the state has authorized the tax payment). This was available even if you received a refund after the end of the year for which payments were made.  The new tax legislation curtails this practice.  For example, an amount paid in 2017 for taxes that are imposed in 2018 or later will be treated as though it was paid at the end of 2018.  This is particularly important for individuals who are under audit or who have outstanding liabilities for 2017 and earlier.  In 2018, deductions for payments of taxes attributable to prior years will be severely reduced.  Consider settling these issues prior to 2018.

  • Moving Expenses – Under the new tax legislation expenses for a work-related move will be eliminated (except for those in the military). While it is highly unlikely anyone who hasn’t planned to or already moved will be able to take advantage of this, it is important to take this change into consideration for your future plans.

  • Impact to Charitable Gifts – Although the new tax legislation did not make many changes to deductions for charitable gifts, other changes in the legislation will impact how far charitable gifts go in reducing your taxes. Because the tax brackets are shifting downward, many taxpayers will find themselves requiring fewer deductions in 2018. Thus, making a charitable deduction in 2017 could have a greater impact on your taxes than in 2018.  There are many factors that can impact the deductibility of your charitable contributions, so it is highly advised that you speak to a tax consultant before making any decisions.  It should also be noted that because of the overall decrease in itemized deductions and the increase of the standard deduction, some taxpayers will find it more advantageous to take the standard deduction in the new year.  If you are taking the standard deduction, then you will not be able to deduct your charitable contributions.  One change that was made to the deductibility of charitable gifts is in the ability to deduct 80 percent of an amount donated to a university in order to acquire the right to purchase tickets to the university’s sporting events.  That deduction will no longer be available after December 31. If you expect to make any such donations, you should consider doing so before the end of the year to take advantage of this expiring deduction.

  • Miscellaneous Itemized Deductions – If you do visit a tax consultant to discuss these issues, be sure to consider paying for those services in 2017! The new tax legislation eliminates the deductibility of tax preparation fees as well as other miscellaneous itemized deductions.  Some of these include appraisal fees for charitable gifts of property, investment advisory advice, and safety deposit box fees.  Clients should look at paying any of those expenses that are coming up in 2018 now to get the deduction before it is gone.

  • Unreimbursed Employee Expenses – Expenses that are attributable to an employee’s work and that have not been reimbursed are deductible in 2017. However, the new tax legislation will be eliminating this deduction.  As with miscellaneous itemized deductions, clients should look to move any of these expenses that they were planning to incur in 2018 to the current year.  Such expenses may include tools, uniforms, work-related education, even unpaid mileage and gas if the trip was work related.  Business owners are still able to deduct business expenses on Schedule C under the new legislation.

  • Mortgages – Current tax law allows for a deduction of the interest paid on up to $100,000 (for married couples) of home equity debt on a personal residence. This interest will no longer be deductible with the new tax legislation. Interest on mortgages for the acquisition of a principal residence will remain deductible, but the debt cap of $1,000,000 (for married couples) will be lowered to $750,000.  However, those who have purchased a home before December 15, 2017, will still be able to use the higher cap.  These changes may impact your decision in purchasing a home as it effectively increases the cost of the loan.  In addition, this is also one of the main reasons why many clients may consider taking the standard deduction in the future as the deduction for mortgage interest can make up a significant portion of your itemized deductions.

  • 8% Surtax – While the new tax legislation does not change the present 3.8% surtax on net investment income, some other changes may cause your taxable net investment income to rise in 2018. First, as noted earlier, the deduction for investment-related expenses will no longer be available.  In addition, state income taxes that could previously be deducted (to the extent they were connected to net investment income) are now capped at the $10,000 limit.  Clients should consider making any of these payments they can in 2017 in order to take advantage of these deductions.

  • Roth IRAs – The new tax legislation changes an existing rule regarding Roth IRAs. Presently, if you convert a traditional IRA to a Roth IRA, you may undo the conversion by recharacterizing it within specified time frames.  The new legislation removes the ability to recharacterize a Roth IRA.  In addition, there is legislative ambiguity as to what Roth IRAs may be impacted by this.  If you have converted an IRA in 2017 and are considering recharacterizing the subsequent Roth IRA, it is advisable you complete the recharacterization in 2017 to avoid any ambiguity in the law.

  • Capital Gains – Taxes on capital gains do not change significantly with the new tax legislation. However, there are some hidden issues to consider.  Because income tax rates and tax brackets are changing significantly, accelerating or deferring your capital gains may create a positive impact (or avoid a negative one).  Specifically, one of the major issues to consider is whether your taxable income will increase because of these changes that could bump your capital gains tax rate to a higher amount (from 15% to 20% for taxable income over $479,000).  One caveat to this issue is that it is highly dependent on other factors such as where you live.  Given the short amount of time left in the year it may not be possible to take advantage of these changes.

  • Pass-Through Business Limits – With the reduction of the corporate tax in the new tax bill, a corresponding change is made to the taxation of pass-through businesses (which do not pay the corporate tax) in order to keep them competitive. Those participating in a pass-through business will be able to deduct 20% of their allocable share of business income.  There are some limits to this, primarily if you earn more than $157,500 if single or $315,000 if married.  In addition, if you are in certain professional jobs such as accountants, doctors, or lawyers, the deduction will not apply unless you make under certain specified limits.  Still, small businesses may want to consider reorganizing in order to take advantage of these new tax savings.

  • Recently Purchased Business Equipment – One of the new provisions allows for the full and immediate expensing of qualifying capital investments (as opposed to gradual deductions). In addition, the provision will be applicable in the 2017 tax year for purchases made after September 27, 2017.  Businesses should speak to their tax professionals to consider if this applies to them or if they should purchase new equipment before the new year to include it on their 2017 return.

 

  • Limits of the Bill – One final point to note is that many of these changes will terminate in 2025 or earlier, at which time the tax code will revert to the old rules.  Therefore, consultation with a tax professional is encouraged to ensure that you will be receiving the best tax treatment now and in the future

 

© 2017 Vandenack Weaver LLC

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Court Ruling Sheds Light on Estate’s Ability to Access Digital Information

By Monte Schatz

The Supreme Judicial Court of Massachusetts issued a ruling on October 16, 2017 that empowers administrators of estates to access digital content of deceased persons.

Federal statutes 18 U.S.C. §§ 2701 through 2712 titled The Stored Communications Act created privacy rights to protect the contents of certain electronic communications and files from disclosure by certain online service providers. If the Act applies, the online user account service provider is prohibited from disclosing the contents/files to the estate or trust representatives and family members unless there is an exception under the Act. The result of this legislation was that many digital communications and accounts of a deceased person were inaccessible

The Stored Communications Act provides for certain exceptions in § 2703 (b). One of the exception states that, “[A] provider may divulge the contents of a communication… with the lawful consent of the originator or an addressee or intended recipient of such communication.” The language of this exception did not clarify if the recipient could include a fiduciary of a trust or estate.

In Ajemian v. Yahoo, 478 Mass. 169 (2017) the administrator and siblings of a deceased brother’s estate sought to gain access to information from the son’s Yahoo email account. In that capacity, they sought access to the contents of the e-mail account. While providing certain descriptive information, Yahoo declined to provide access to the account, claiming that it was prohibited from doing so by certain requirements of the Stored Communications Act (SCA), 18 U.S.C. §§ 2701 et seq. The Supreme Judicial Court of Massachusetts stated in its decision that, “Nothing in this definition would suggest that lawful consent precludes consent by a personal representative on a decedent’s behalf. Indeed, personal representatives provide consent lawfully on a decedent’s behalf in a variety of circumstances under both Federal and common law.” The court relied on Massachusetts’ provisions in the Revised Uniform Fiduciary Access to Digital Act that has been adopted in 36 states including Nebraska and Iowa. This legislation provides a clear state law procedure for fiduciaries to follow to request access to or disclosure of online account contents and other digital assets.

Though the Massachusetts state court ruling isn’t binding on other states, this case will provide valuable precedent and guidance in interpreting and applying a standard that allows estate administrators to gain access to digital information of a deceased that previously was prohibited under strict interpretation of federal law by certain digital service providers.

© 2017 Vandenack Weaver LLC
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IRS Notice Provides Penalty Relief to Certain Partnership Return Filing Taxpayers

by Monte L. Schatz

The IRS has issued Notice 2017-47 that provides penalty relief to partnerships that filed certain untimely returns or untimely requests for extension of time who filed those returns for the first taxable year that began after December 31, 2015.

Section 2006 of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the Surface Transportation Act), Public Law 114–41, 129 Stat. 443 (2015), amended section 6072 of the Internal Revenue Code (the Code) and changed the date by which a partnership must file its annual return. The due date for filing the annual return of a partnership changed from the fifteenth day of the fourth month following the close of the taxable year (April 15 for calendar-year -2- taxpayers) to the fifteenth day of the third month following the close of the taxable year (March 15 for calendar-year taxpayers). The new due date applies to the returns of partnerships for taxable years beginning after December 31, 2015.

Many partnerships failed to timely file their various partnership returns (1065, 1065-B, 8804, 8805 or 7004 Extension requests for any of the other various partnership returns).  The assumption of these taxpayers was that the normal deadlines for their 2016 Partnership returns applied (namely April 18, 2017 for the actual returns and September 15, 2017 for those that filed the Form 7004 extension for any of these returns).    Normally in these circumstances the taxpayer is subject to late filing penalties; however, the new filing deadlines shortening the return filing period by one month resulted in many taxpayers filing late returns and the IRS has provided relief for those late filed returns.

The IRS in Notice 2017-47 has announced relief will be granted automatically for penalties for failure to timely file Forms 1065, 1065-B, 8804, 8805, and any other returns, such as Form 5471, for which the due date is tied to the due date of Form 1065 or Form 1065-B. Partnerships that qualify for relief and have already been assessed penalties can expect to receive a letter within the next several months notifying them that the penalties have been abated.  For reconsideration of a penalty covered by this notice that has not been abated by February 28, 2018, contact the number listed in the letter that notified you of the penalty or call (800) 829-1040 and state that you are entitled to relief under Notice 2017-47.

SOURCE: IRS Guidewire Issue Number N-2017-47

© 2017 Vandenack Weaver LLC
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IRS’s Large Business & International Division to Implement Campaigns

The Internal Revenue Service (“IRS”) Large Business and International (“LB&I”) division recently announced the roll-out of thirteen campaigns as part of the IRS’s examination process.  A campaign is an issue-based compliance process that centers on focused examinations.  These campaigns cover a range of topics, including positions on related party transactions and S Corporation losses claimed in excess of basis.  Campaigns are a new approach to enforcement by the IRS that the IRS hopes will identify the most serious tax administration risks, create specific plans to move toward compliance, and effectively deploy IRS resources.  A taxpayer can be the subject of multiple campaigns during an examination.

The IRS will issue “soft letters” to some taxpayers, in which the IRS identifies the campaign issue and indicates the taxpayer’s return appears to include this position.  The letter will articulate the IRS’s legal position and ask whether the taxpayer agrees to change its position by amending the return.  Soft letters will not be released publicly.

The IRS recently informed taxpayers that the receipt of a soft letter does not mean the IRS has opened an examination.  Further, taxpayers are not required to respond to the letters.  However, failure to respond could lead to an examination.

Taxpayers should be aware that this new approach means businesses and high-net-worth individuals dealing with any of the identified issues may face increased IRS audit risk.  These taxpayers should work with their legal advisors to avoid or prepare for IRS challenges.

© 2017 Vandenack Weaver LLC
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Selecting the Right Entity for Your Tech Startup

Nebraska, and neighboring Midwest states, have developed a reputation as the “Silicon Prairie,” a prime location for technology startups. The recent tech startup boom in the Midwest can be attributed to the lower cost of living, knowledgeable tech labor force, and willingness of the community to embrace the startup. For many of these startups, besides the intense need to develop and protect the technology, a common issue is picking the right business entity structure.

 

In picking the right entity for the startup, several considerations should be weighed, including the need for liability protection, how the company will fund operations, and the most beneficial tax status. For example, if a tech startup is developing a product that will take a substantial period to produce, and likely need multiple rounds of equity financing involving institutional investors, with other funding coming through debt, the demand for classes of shares, preferences, and conversion rights, may require that the startup to form as a C-corporation, with corresponding tax status. On the other hand, if the startup only intends to have one round of equity financing, through a “friends and family” offering, a limited liability company may be appropriate, providing additional flexibility to select tax status.

 

Picking the right type of entity is important for the success of a tech startup, with many considerations to weigh. Ultimately, as facts change, it may be possible to change the structure of your company, but initial selection should not be taken lightly and can reduce problems as your company grows.

© 2017 Vandenack Weaver LLC
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