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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IRS Issues Notice on State and Local Tax Deductions

On May 23, 2018 the U.S. Department of Treasury and the Internal Revenue Service issued Notice 2018-54, which announced new  proposed regulations addressing state and local tax payment deductions for federal income tax purposes.

The 2017 Tax Cuts and Jobs Act places limits on an individual’s deduction to $10,000 ($5,000 in the case of a married individual filing a separate return) for the aggregate amount of state and local taxes paid during the calendar year.  Any state and local tax payments above those limitations   are no longer deductible.  This new limitation is effective January 1st, 2018 and applies to taxable years after December 31, 2017 and before January 1, 2026.  This limitation will  have implications for many Nebraska residents according to data research  by The Pew Charitable Trusts. Based on IRS data from 2015, 28 percent of Nebraskans claimed a state and local tax deduction amount higher,  than $10,000.[1]

Several state legislatures, in response to this limitation, are considering adopting legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, in exchange for credits against the state or local taxes already required.  New York, Connecticut, and New Jersey, states known for having higher state taxes, have already enacted measures that allow taxpayers to fund municipal governments by making charitable donations that are both fully federal income tax deductible and satisfy state and local tax liabilities.   In these states, a taxpayer would be able to apply any amount of state and local taxes over $10,000 toward a municipal government fund and report the transfer as a charitable donation.   The  treatment of these state and local tax payments as charitable contributions effectively reduces  the taxpayer’s  federal income tax liability.

Notice 2018-54 informs taxpayers that the upcoming proposed regulations will assist them in understanding the relationship between federal charitable contribution deductions and the state and local tax payment deduction.  The notice also warns taxpayers to be mindful and cautious in making such transfers or donations, and to remember that federal laws control the proper characterization of payments for federal income tax purposes.  Finally, the Notice states the proposed regulations intend to clarify the requirements of the Internal Revenue Code, and that “substance-over-form” principles govern the federal income tax treatment of such transfers.  In colloquial terms the Treasury and IRS are stating that “if it looks, smells and operates like a state tax deduction those payments will most likely be characterized as state tax deductions with the applicable deduction limits.

[1] Phillip Oliff & Brakeyshia Samms, Cap on the State and Local Tax Deduction Likely to Affect States Beyond New York and California, The Pew Charitable Trusts (Apr. 10, 2018) http://www.pewtrusts.org/en/research-and-analysis/analysis/2018/04/10/cap-on-the-state-and-local-tax-deduction-likely-to-affect-states-beyond-new-york-and-california.

© 2018 Vandenack Weaver LLC

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SSA Updates Social Security Taxable Wage Base for 2018

By Joshua A. Diveley

In October, the Social Security Administration (SSA) announced an adjustment to the Social Security taxable wage base to take effect in January based on an increase in average wages. Based on the wage data Social Security had as of October 13, 2017, the Social Security taxable wage base was set to increase to $128,700 in 2018, from $127,200 in 2017. Based on newly released data obtained by SSA, the new Social Security taxable wage base for 2018 is $128,400.

This lower taxable amount is due to corrected W2s provided to Social Security in late October 2017 by a national payroll service provider. Approximately 500,000 corrections for W2s from 2016 were received by SSA and resulted in the downward adjustment for 2018.

For more information about the updated 2018 taxable maximum amount, please visit www.socialsecurity.gov/oact/COLA/cbb.html

 

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Age Discrimination Complaints Must Be Specific

Discrimination Protection: The Age Discrimination in Employment Act forbids age discrimination against employees who are age 40 or older. Discrimination based on age involves treatment by an employer when an employee is treated less favorably because of his or her age. Age discrimination can include any aspect of employment including hiring, firing, pay, job assignments, promotions, layoff, training, benefits, and any other term or condition of employment.

Employment Policies. An employer’s policy can be discriminatory even when it applies to employees of all ages if it has a negative impact on individuals who are age 40 or older and there is no basis in a reasonable factor other than age.
Trends in Legal Practice. Following a lawsuit in Chicago earlier this year where an adjunct professor was not hired because of her age (66), the Equal Employment Opportunity Commission (“EEOC”) has proposed a regulation to remove birth and graduation dates from job applications. While the status of this regulation is currently unclear it is important for employers and employees to understand their rights. The standard under Nebraska law to establish a claim of intentional age discrimination allows a plaintiff to either present direct evidence of such discrimination or prove his or her claim through circumstantial evidence using the familiar McDonnell Douglas burden-shifting framework. An employee must then prove a causal connection between the alleged discriminatory actions and the resulting negative impact suffered. This action must be based on a specific business practice or particular policy and cannot be sustained by a mere allegation of multiple scenarios which could be determined to be age discrimination. Additionally, age cannot be a pretext when an employer is able to prove other reasons for their negative actions.

Nebraska does allow age to factor into an employer’s decision or policy when the requirements of the job would reasonably require an individual of a certain age.

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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 Issues Guidance on Health Care Reporting Requirements for 2017

by Joshua A. Diveley

The IRS issued guidance October 17, 2017, indicating Forms 1040 for the 2017 tax year will not be accepted if the taxpayer does not report on the health coverage reporting requirements of the Affordable Care Act (ACA). For prior tax years, returns that did not report required ACA information were delayed for processing, but it did not prevent the return from ultimately being processed and any applicable refund from being issued.

In general, the ACA requires taxpayers to obtain minimum essential health insurance coverage for themselves and any dependents. If sufficient coverage is not obtained, the ACA imposes a penalty. Form 1040 directs taxpayers to report the existence or non-existence of essential coverage or whether an exemption from coverage applies.

The IRS guidance is available at: https://www.irs.gov/tax-professionals/aca-information-center-for-tax-professionals.

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The Importance of Personal Cybersecurity

Malware attacks occur regularly in the United States, costing an estimated $15 million annually. The attacks on large corporations tend to make the news, but anyone connected to the internet is at risk of becoming a victim of a cyberattack. Personal internet connections are, generally, open, and personal computers are easy to locate with scanners, making an easy target for the cybercriminal.

Roughly 64% of Americans experience a data breach and nearly 20 million people become victims of identity theft each year. Many consumers fall prey to hackers through use of social media, where Cybercriminals gain access to personal data by creating fake links that download malware to user devices when users click the link. Consumers may also suffer data loss when cyber thieves victimize companies. The companies are desirable targets for cybertheft as they often collect their customers’ addresses, names, social security numbers, and other personal information.

In response to the data breaches, security-related legislation has been enacted at both the state and federal level. This legislation requires companies to take certain measures to protect sensitive information and establishes standards for notifying consumers when a breach occurs. Depending upon the industry, such as the healthcare industry, additional rules and penalties apply. Overall, with the proliferation and advanced tactics of cyber criminals, careful planning is required, both by a business and those with devices connected to the internet.

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