Taxability of software can wear you down

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Guest post by Mark L. Stone, CPA, MST

This week, the REM Cycle is pleased to welcome Mark L. Stone of Sales Tax Defense LLC as  guest blogger. Mark is an expert on Sales and Use Tax, and has served as an expert witness, testifying in tax court on behalf of his clients. Mark can be contacted here.

Software is prominent in today’s world.  Just to read this blog post, you’re using software.  It’s everywhere.  But it wasn’t prominent when most sales tax law was written and that’s an issue.  Trying to fit the definition of software into a pre-internet world tax code is like trying to fit a square peg into something even worse than a round hole.  The states are catching up though and issuing a lot of guidance about what software is, the taxability of different types of software and whether certain services are actually the sale of software.

The definition of software in many states is usually something along the lines of a set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task.  That’s Georgia’s definition.  But some states, like Maryland, don’t even have a formal definition of software in their tax code.

Knowing this information, here’s a few helpful hints to understand the taxability of software:

  1. Understand that what you believe you’re selling and what you are selling as defined by the tax law are often two different things. For example, “software as a service” is not defined under the tax law in many states.  If you operate in one of those states, what are you selling then?
  2. There is usually a difference between prewritten software (aka canned software) and custom software.  Sometimes combining two pieces of prewritten software does not quality as custom software.
  3. In certain states, there are situations where you can be selling taxable prewritten software but a separately stated charge for customizations to that software are not subject to tax.
  4. If you host software that customers access through the internet, there is often specific information or documentation that must be maintained to prove that customer is located in a different state.
  5. There are often very specific rules relating to software sold via the “load-and-leave” method – both for taxability purposes AND for nexus purposes.
  6. SHOCKER SPECIAL:  If your customers access software electronically and you pay a third party to host that software, it might create nexus with a state.  That means you might owe tax in a state that you didn’t realize you had any connection with.

Someone once said that a computer programmer is a machine that turns coffee into code.  If you sell software, let us be the machine that turns your tax problem into… well... not a tax problem!

This article originally appeared here.

Wake-Up Call - Valentine's Day edition

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Posted by REM Cycle Staff

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

As accountants, we get excited about numbers. (Maybe a little too much.) We got to wondering: What percentage of Americans celebrate Valentine's Day? How much does the average adult spend on gifts? How many gallons of wine get sold that week? Grab some heart-shaped chocolates and dig into this handy infographic of Valentine's Day by the numbers. [history.com]

Currently filing joint, but about to file as single? Take note: divorce agreements entered into or amended after December 31, 2018 will no longer be picked up in income (recipient) or a reduction of income (payor) due to the Tax Cuts and Jobs Act. [Taxbot.com] (See REM's full list of changes here.)

Between 30-40% of Americans will rely primarily on Social Security for income after age 65. But how much of that Social Security is taxable? The amount you receive will determine whether the IRS will take a chunk, but the likelihood is that you won’t have to pay state tax at all: Check out this list of 37 States That Don't Tax Social Security Benefits. [The Motley Fool]

Valentine’s Day is a good time to review the new tax brackets. Whether you’re filing single, married jointly, head of household, or married filing separately, the likelihood is that the new tax law has changed the rate you’ll pay this April. (Who says romance is dead?) [Business Insider]

Think you’ve heard the worst of the Equifax data breach? Think again. Tax ID numbers, credit card expiration dates, and even the states that issued the consumers’ driver licenses were accessed by hackers. [AP News]

ICYMI: Love is in the air in Date Night with Taxes [YouTube].

Is the IRS really emailing me?

Posted by REM Cycle Staff

Tax-filing season has started, which unfortunately means tax-scam season has started, as well. The IRS is already warning taxpayers to be on guard about a new refund scam, and just two days ago, a Manhattan grandma made the news by foiling an IRS phone scammer. All of which raises the question of how to identify an IRS scam in the first place. We've put together this infographic to help you separate tax fact from fiction.

Copyright 2018 Raich Ende Malter & Co. LLP.

Copyright 2018 Raich Ende Malter & Co. LLP.

What's your experience with tax scammers? Drop us an email to let us know.

Wake-Up Call

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Posted by REM CYCLE Staff

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Planning a trip to the Grand Ole Opry in Nashville? Maybe you’re an Elvis Presley fan, off to pay homage at Graceland in Memphis. Either way, be cautious when booking that sweet, cheap apartment for the weekend—Tennessee is the latest state to make Airbnb  guests and hosts responsible for local sales and occupancy taxes. [Airbnb to collect and remit state, local sales taxes—The Advocate and Democrat]

The IRS is finally getting serious about collecting taxes on cryptocurrencies like Bitcoin and Etherium. How should newly-minted (sorry...we couldn’t help it) Bitcoin billionaires account for the incredible gains in the last few months? [How to file your income taxes on bitcoin in 2018—The Verge]

Taxpayers in NFL host cities, counties, and states pay an increasingly high price to host the league's biggest game. Is it worth it? Depends who’s playing... [What The Super Bowl Costs You In Taxes—TheStreet.com]

And in case you missed it: Stephen Colbert goes undercover as an H&R Block tax pro [YouTube]

That's it for this week. Check back with us next week!

What you need to know about the IRS’s new withholding tables

 
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The Tax Cuts and Jobs Act passed in Congress sparked a major change in the withholding requirements for employers. As if our friends at the IRS didn’t have enough going on, they were tasked with the unenviable project of creating new withholding tables to incorporate the new laws. Even seasoned tax vets are left asking numerous questions regarding the new withholding amounts:

  • How will the new withholding amounts be calculated if there are no longer exemptions?
  • When do these new withholding rates need to be put into effect?
  • Will new W-4s need to be filed for employees?
  • Where can I get additional information on the new tables?
  • Is it time for me to change professions?

Luckily for you, The REM Cycle is on top of it and here to help. Let’s take these issues one by one.

How will the new withholding amounts be calculated if there are no longer exemptions?

The new withholding tables are designed to incorporate all of the changes to the new tax law, not just the suspended exemptions. There are also reduced tax rates, adjusted tax brackets, and an increased standard deduction to account for. To summarize how it works, the new tables use a percentage method based off of your net wages. Your net wages are reduced by your total withholding allowances and then a percentage is withheld accordingly.

When do these new withholding rates need to be put into effect?

This answer depends on when your employer puts these changes into effect. However, the IRS stated that the new rates need to be put into use no later than February 15, 2018.

Will new W-4s need to be filed for employees?

In the past, as a best practice, new W-4 forms should have been filed on a yearly basis for employees. At the very least, employees should have been reviewing their withholding on a yearly basis to make sure no changes were needed. In that regard, not much has changed. The new withholding tables are supposed to incorporate the W-4s that the employees already have on file. As a helpful tool, the IRS will be releasing an improved withholding calculator that can be used to verify any withholding is accurate. Also, the IRS will be revising the W-4 form to fully reflect the new laws and rates. Having your clients check their withholding after these new tools and forms come out is strongly suggested.

Where can I get more information on the new tables?

The IRS released Notice 1036: Early Release Copies of the 2018 Percentage Method Tables for Income Tax Withholding, which details how the new withholding tables work. The Service also provided an FAQ page on irs.gov to help answer commonly asked questions.

Is it time for me to change professions?

I can’t answer that one for you but can tell you this: as long as the tax laws are written and controlled by politicians, we’ll all have jobs. No “postcard” filings – it’s called job security, people!

At the end of the day, the Tax Cuts and Jobs Act created a slew of new tax planning hurdles and opportunities. If you haven’t already, reach out to your trusted advisor to see how the new laws affect you.

Wake-Up Call - Don't hit the snooze!

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Posted by REM Cycle Staff

Welcome back to another edition of The REM Cycle's Wake-Up Call, our biweekly feature where we bring you a variety current tax-related issues. Let's get it started, shall we?

As the Super Bowl approaches, it’s time to examine our priorities… Specifically, how will the new tax structure affect your ability to get reasonably-priced craft beer? How the Tax Cuts and Jobs Act could impact small and independent craft brewers [Brewers’ Association]

A young Swiss banker allegedly abetted dozens of Americans in hiding millions of dollars from the IRS between 2009 and 2013 (hey, take advantage of offshore voluntary disclosure programs, guys!). Here’s what happened when he was extradited and brought to trial [New York Times]

Why is tax day April 17 this year? Tax returns for 2017 are due a couple days later than usual this year. Here’s why. [MSN.com]

SALT news for New York taxpayers: Representatives Nita Lowey (D-NY) and Peter King (R-NY) introduced a bipartisan piece of legislation last week to “restore the full state and local tax (SALT) deduction, which is limited by the new tax law that President Trump signed last month.” NY lawmakers offer bill to restore state and local tax deduction [The Hill]

How does blockchain technology work? Political scientist and blockchain researcher Bettina Warburg was challenged to explain the central concepts of blockchain to five different people: a child, a teen, a college student, a grad student, and a blockchain expert. Blockchain expert explains one concept in 5 levels of difficulty [WIRED-YouTube]

Meet Angel, a kitten who does not like to file her tax returns. Can you blame her? [YouTube]

That’s all for this week. Got a hot tip? Email us at REMCycle@rem-co.com and tell us all about it.

Three things to consider for the new year

Posted by Evan Piccirillo

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A new year has arrived.  It’s time to swap out our desk calendars and lie to ourselves about how healthy and disciplined we are going to be over the next 12 months.  Time to start fresh and get off on the right foot.  Who cares if you had to call out sick the entire first week of the year to take care of your sniffling kids (true story)?

There are many significant changes that could impact you in 2018 and going forward.  The only way you will be able to use those changes to your advantage is if you understand them and take appropriate action.

In honor of the New Year, we here at the REM Cycle have gathered together some things you should be considering over the first few months of 2018:

  • Try to understand how the new federal tax law impacts you and/or your business and take action to best position yourself for 2018 and the future.
    • If you are a sole proprietor or have pass-through income: talk to an advisor who understands the new 20% business income deduction about how you can maximize your benefit
    • If you are an estimated taxpayer: don’t just pay the same amounts you paid for 2017.  It is possible that your tax burden will be drastically different in 2018; consult your tax advisor
    • Consider paying down your home equity line; you will no longer get an itemized deduction for the interest paid
    • If you have net operating losses, you need to understand the limitation – you might be paying taxes in spite of them
    • Leveraged business taxpayers with gross receipts in excess of $25M need to understand the interest expense deduction limitation and strongly consider different financing strategies
  • If you are a New York employer or employee, review the new law for Paid Family Leave (PFL).
    • Most employers must have an insurance policy for PFL
    • Employers may have payroll withholding considerations
    • Employees should know their rights to these new benefits
  • Remember to get your 2017 tax information to your preparer as soon as reasonably possible.  Your due date for partnership and S-corporation returns is 3/15/18 and for individual returns is 4/17/18, before extensions.  Maybe you won’t have to go on extension this year!

It is cold, it is dark, but we have an opportunity to set ourselves up for a bright 2018 if we act now.  Don’t hesitate to reach out to your tax preparer or advisor to talk about the above.  You will be happy you did.

Wake-Up Call - New Year's Edition

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Posted by REM Cycle Staff

Good morning, and welcome to your first Wake-Up Call of 2018! As you know, we have been publishing every other Tuesday since 2016. This year, the REM Cycle staff has resolved to bring you tax tidbits from a variety of sources on alternate Tuesdays. We promise to keep things fresh and lively to get you going in the morning.

That’s it for this week. Did you like your first wake-up call? Leave us a shout-out in the comment section below and let us know what you think.

Have a tip for an article you’d like to see linked here? Please forward it to REMCycle@rem-co.com.

Last-minute tax planning opportunity for New Yorkers

 
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You have undoubtedly heard much grumbling from taxpayers in the great state of New York regarding the Tax Cuts and Jobs Act.

A quick recap of the pertinent element of the new law: the itemized deduction is capped at $10K for combined income tax or sales tax and property taxes.  Due to a combination of high income tax rates and high property taxes, this cap will be exceeded each year by many New York taxpayers, especially in the New York Metro and surrounding areas.  That, coupled with the fact that most taxpayers will be taking the standard deduction as a result of the elimination of most other itemized deductions, means the $10k limit on SaLT is no sweet deal for those of us living, working, and owning homes in New York State.

These changes go into effect for the 2018 tax year.  But a quick check of the calendar shows me that we are still in 2017, and therefore have time for last-minute tax planning.  New York’s governor, Andrew Cuomo, made use of his executive power signing an emergency order to allow local New York taxing authorities to bill for 2018 NY real estate taxes in 2017.  You can read the executive order here.

This executive order was a necessary step to ensure the IRS recognizes the pre-payments as deductible for 2017, as the pre-payment would otherwise not be a valid itemized deduction.  Under current law, a deduction is only allowed for amounts actually billed and payable.  So while it might seem at first glance that “allowing” us to pay our property tax early, would benefit only the receivers of tax, it is in fact a mutually beneficial arrangement.

Remember, these property taxes are an add-back for alternative minimum tax purposes, so as always, we recommend you consult your tax adviser, rather than diving into this tax planning opportunity on your own.  There is precious little time to waste!

The Multistate Tax Commission’s sales tax amnesty for internet sales has closed

Posted by Courtney Kopec, CPA

Recently, the states have signaled that their sales tax regulations for sellers of online goods will change yet again.

First, the window has closed on the Multistate Tax Commission Online Marketplace Seller Voluntary Disclosure Initiative’s offer for sales tax amnesty.  Twenty-five states offered to waive all past tax, interest, and penalties for companies that agree to register for and collect sales tax for online sales going forward. 

 
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Second, South Dakota has filed a petition to have the Supreme Court overturn the landmark Quill case because the proliferation of internet sales has too much appetizing tax revenue on the table left uncollected by the states.  And so going forward the states’ goal is to force out-of-state-sellers to collect sales tax by expanding the definition of nexus, data sharing, and enforcement which have been the factors that would allow states to compel taxpayers to comply.

When must I collect sales tax?

Taxing authorities require businesses to pay or collect tax based on nexus, which is their connection to the state.  The 1992 Supreme Court case Quill Corp v North Dakota limited the burden of businesses required to collect sales tax to those with a physical presence:  in general, an office, employee, salesperson, or inventory physically present in the state creates physical presence nexus.  However, physical presence is just the starting point and not the only determining factor.  The state’s narrow application of the physical presence test allowed for the creation of economic nexus that is generally triggered when a company has a purposeful direction of its business activities within a state rising to a substantial level.

New York State has been said to lead the way in proposed legislation defining economic nexus.  In 2008, New York State amended the definition of vendor and created “click through nexus” (sometimes referred to as the “Amazon laws”) with the intention that large internet retailers with no physical presence in the state be required to collect sales tax if they pay commissions to in-state residents and gross receipts exceeded $10,000 during the preceding 12 months.  Then in 2015 New York proposed that “marketplace providers” collect and pay New York State sales tax at the point of sale when the transaction takes place whether the actual seller is located within or outside the State.   In October 2017, the state of South Dakota filed a petition for certiorari in the U.S. Supreme Court urging it to "abrogate Quill's sales-tax-only, physical-presence requirement."  In its appeal South Dakota noted that advances in computer technology have made it easier to determine appropriate sales tax based on the purchaser's location and requiring such "poses a minimal obstacle."  For a foreign seller of goods:  “Tax treaties do not cover the taxing activities of the States” (1983 Supreme Court, Container Case).   Therefore, because no international treaty provisions apply to sales tax, foreign sellers are subject to the same rules as domestic sellers.

Cover your bases

If you engage in internet sales and this is confusing to you, join the club.  The statutes are evolving continually in reaction to the changing landscape of retail sales.  However, the evolving concept of nexus may also apply to income and franchise tax, so being aware of and understanding the regulations is critical.

Another important thing to keep in mind is that when a transaction is complete, it is impossible to go back later and collect sales tax for which the taxpayer may be responsible.  Under audit, what should have been a tax collection process becomes an expense to the seller.

The analysis and interpretation of these changing laws is challenging. If your business has transactions out-of-state and you would like to review whether your business has compliance requirements in another state, contact your CPA or trusted advisor to review the latest guidelines.