sales tax

REM Cycle Review: Cell phone tax, test your altruism, and marijuana CPAs

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It’s Friday, and that means it’s time for another edition of the REM Cycle Review, your weekly roundup of all the tax news that’s fit to print. We’ve got a few tax tidbits that might have slipped under your radar this week. If you’re reading this on your mobile device, our first story will be of special interest to you…

Cell phone users are paying more in sales and use tax than ever before. According to a new study by the Tax Foundation, wireless tax rates have been on a steady increase since 2006—to an average current rate of 19.1%. [www.taxfoundation.org]

This December, you can test your altruism! Because that charitable contribution might not be tax-deductible after all. [Forbes]

Could raising taxes on alcohol save lives and prevent crime? The answer is complicated (it usually is), but sobering. A worthwhile read, especially during the festive season. [Vox]

Accountants are increasingly finding that pot is a proverbial pot of gold. A brand-new, multi-billion-dollar global industry is in desperate need of number-crunchers: marijuana. The pros for accountants: higher fees due to highly specialized knowledge of accounting practices. The cons, well… [Business Insider]

This week we’re watching…

The REM Cycle editorial staff recommends one professional development video and one funny or thought-provoking video each week.

What makes a great leader? Management theorist Simon Sinek suggests it's someone who makes their employees feel secure and draws staffers into a circle of trust. But creating trust and safety means taking on responsibility.

A misplaced cell phone leads to unexpected consequences. Featuring Vine and YouTube star Darius Benson.

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

The taxes, they are a-changin'

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Posted by Courtney Kopec, CPA

A recent Supreme Court decision upheld a South Dakota sales tax law requiring sales tax to be collected by large internet retailers, such as Wayfair and Overstock, who are not physically present in South Dakota, but “maintain an extensive virtual presence.” The law applied only to out-of-state sellers who deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions. For South Dakota, a state with no income tax, the effect of the losses from online sales tax revenue to state and local services was critical. While the Supreme Court decision seems reasonable, it effectively gutted the bright-line physical presence standard established by the Quill decision. Prior to the Supreme Court decision, businesses relied on the Quill decision to avoid nexus (a connection to a state upon which the obligation to pay or collect sales tax is based).

The physical presence standard limited the burden of businesses required to collect sales tax to those with a physical presence, such as an office, employee, or inventory. In this new decision, the Court reasoned: “Each year, the physical presence rule becomes further removed from economic reality and results in significant losses to the States. These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.”

The Court opinion further explained that the physical presence test espoused in Quill was “flawed on its own terms” and could no longer uphold, because a business need not have a physical presence in a State to satisfy the demands of due process. This resulted in market distortions caused by the desire of business to avoid tax collection and a “judicially created tax shelter for businesses that limit their physical presence. … [the] rule produces an incentive to avoid physical presence in multiple states. And this Court should not prevent States from collecting lawful tax through a physical presence rule.”

What’s next for nexus?

Other states, including New York, that passed similar sales tax legislation based on “click-through nexus” as far back as 2008 may now rely on the South Dakota law as a constitutionally upheld example. The Supreme Court noted the effects of the South Dakota law as minimizing the burden on interstate commerce by including a safe harbor provision on certain transactions “so small and scattered that no taxes should be collected,” forgoing retroactive application, and through the Streamlined Sales and Use Tax Agreement providing state-funded sales tax administration software intended to reduce compliance costs. While the South Dakota law has been constitutionally upheld, the Court did not address economic nexus laws in other states, nor the possibility of imposing sales tax retroactively.

Because no international treaty provisions apply to sales tax, foreign sellers are subject to the same rules as domestic sellers.

Will states seek back taxes?

In its case, South Dakota noted that advances in computer technology have made it easier to determine appropriate sales tax based on the purchaser's location and that requiring such "poses a minimal obstacle."

In the summer of 2017, the Multi-State Tax Commission Online Marketplace Seller Voluntary Disclosure Initiative offered 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.

Therefore, it stands to reason that states will engage in litigation to verify how much sales tax revenue they can attempt to collect and the constitutionality of the sales tax statutes already in place. However, the guidelines written in the decision stressed: “The Court has consistently explained that the Commerce Clause was designed to prevent States from engaging in economic discrimination so they would not divide into isolated separable units.”

Federal legislation from Congress has proposed a destination-based collection system based on the location of the buyer and the local sales tax rate where the buyer receives the product.

What about my company’s exposure?

The evolving concept of nexus also applies to income and franchise tax, so a good understanding of the regulations is critical. The analysis and interpretation of these laws is challenging, in part because the Court’s most recent decision upended prevailing state statutes. Now, a modern “economic nexus” standard is required, but not yet written nor agreed upon by the fifty United States. We can expect revised statutes based on a new form of nexus to potentially broaden the states’ claim on income and franchise tax.

While the Court favors prospective legislation, companies that have received notice from state taxing authorities regarding past sales transactions should not consider the Court’s recent decision as constitutional protection.

Our recommendation

When a sales transaction is complete, it is difficult to impossible to retroactively collect sales tax for which the taxpayer may be responsible upon audit. What should have been a tax collection process becomes an expense to the seller.

In states that already have sales tax requirements for online sales and have enacted legislation similar to South Dakota, such as Georgia, we recommend registering to do business in that state and complying with sales tax collection. The odds are they will offer some type of amnesty.

If a state has not yet enacted legislation, we recommend a “wait-and-see” approach that may offer prospective amnesty. This decision gives some certainty that companies with sales in other states will have to register and collect sales taxes according to each state’s laws.

If your business has transactions out-of-state and you would like to review whether your business has nexus in another state, contact your CPA to review the latest guidelines.

Wake up with REM: Pretty fly for a WiFi

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A lot has changed since the early 1990s. The internet is no longer an amenity; it’s a utility. In our current corporate culture, WiFi connectivity has come to be considered more of a right than a privilege. Right or wrong, the internet is here to stay—and today’s tax news reflects that. Read on, Macduff…

  • Sales tax bonanza for towns with an Amazon warehouse has other cities eyeing a cut. [Sacramento Bee]
  • The Inevitable Clash Between Seattle and Amazon Has Begun [Slate]
 
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  • Stormy Daniels, Michael Cohen, Giuliani, Trump, and (drumroll) TAXES! Oh, come, now. You know we're a tax blog, right? How could we be talking about anything else? [Forbes]
  • Keep your head in the cloud, because that's where your ledgers will be. 5 key tech innovations helping accountants transform their businesses. [Accountancy Age]
  • Tennessee tax breaks are poaching Wall Street businesses and bringing them to Nashville. [Bloomberg]

And in keeping with our internet theme, here's how we ended up with the word "meme." It's probably not what you think...

 
 

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.

Wake up with REM: Pi Day edition

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As accountants, we get excited about numbers. It’s kind of what we do. That’s why we’re tipping the hat to our favorite mathematical constant one day early here at the REM Cycle. March 14 is traditionally Pi Day, a global celebration of π, or Pi. Pi is the ratio of the circumference of a circle to its diameter, approximately 3.14159. (March 14 = 3.14 … get it?) So while we’ve got some great tax-related content for you today, you can also delight in some smart and quirky pi facts, courtesy of Raich Ende Malter & Co. LLP. You’re welcome.

Retiring soon? Forbes has an excellent guide to 12 retirement investment options. [Forbes]

Philadelphia accountants overlooked sales tax for a food service client. Waterfront Gourmet Corporation of Philadelphia is now on the hook for over $70,000 in back sales tax, including penalties. What happened? [PennRecord] (Full disclosure: Waterfront does not sell pies. We checked.)

Not everyone can effectively use Health Savings Accounts. But it’s definitely worth learning the ins and outs of HSAs—and how they can fit into your tax deductions. [The Motley Fool]

“A host of errors and ambiguities.” Ouch. Apparently, rushing a bill through Congress can result in costly mistakes—especially when it's a set of laws that fundamentally change our tax structure. Here’s what happened, and what the government is doing to address it. [New York Times]

ICYMI: The rich are happier about their taxes than the poor. Huh? [MotherJones.com]

8 National Pi Day 2018 Freebies and Deals: [Parade]

RECIPE: Bake the perfect Pi. [Pillsbury.com]

VIDEO: Calculating pi with real pies. We are So. Hungry. Right. Now. [YouTube]

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.