California Competes Tax Credit – An Update
Tax Incentives in General
Statutory tax credits are helpful to businesses looking to expand their operations within a state. As is often headlined in mainstream media, states compete with one another to entice companies to build plants, new headquarters operations, etc. within their state. And companies (particularly large ones) are happy to be courted for these often lucrative incentives which can include income tax credits, sales tax rebates, alternative financing, property tax incentives and infrastructure improvements – to name a few.
But over the years, state tax incentive programs have been criticized by many as “corporate giveaways” because companies often receive the tax breaks but don’t live up to the agreed upon investment (generally headcount). When companies fail to meet their milestones, it is often difficult for states to claw that money back and states are left to decide how to deal with the shortfall.
Are Remote Workers A Tax Liability? It Depends.
Are your employees still working remotely? When the pandemic first hit, many businesses were forced to transition to a remote working model for safety reasons.
In the time since, some companies have returned to the office, while others have adopted a hybrid model or continued with remote working due to ongoing concerns regarding COVID-19 variants.
Regardless of your specific situation, one thing that every company should be paying close attention to is how these workers can impact tax obligations. In this article, we'll share updates to the situation and how they might impact your business.
In previous posts, we've delved into the history of this situation. The short version of the story is that ordinarily, remote workers that live in a different state than they work can create "nexus," which is the amount of contact from a company needed in order to be obligated to collect sales tax in a state, or to be subject to income tax or gross receipts type taxes.
Due to the pandemic, many states chose not to assert nexus on companies whose employees were working remotely specifically due to the pandemic, while others simply waived these nexus obligations for a period of time. Other states did not offer guidance at all.
Now, fast forward to today. Similar to other pandemic-era tax waivers or forgiveness programs, these remote working tax programs may soon be ending (or have already ended) and businesses will be required to deal with the full brunt of the tax liabilities created by their remote employees.
Starting July 1, Pennsylvania resumed enforcement of its pre-pandemic telework tax policy, which includes corporate income tax, withholding tax and sales and use tax.
New Jersey made headlines when its Division of Taxation released guidance stating that the temporary rules put in place, that waived certain tax obligations created by remote workers, will be lifted starting on Oct. 1. This guidance applies to sales tax and business tax purposes, as well as employer income-tax withholdings.
A long-standing situation in New England also saw an update recently. In June, the U.S. Supreme Court denied a motion for leave from New Jersey, which challenged controversial regulations from Massachusetts. These regulations required that nonresident employees who worked in the state prior to its state of emergency would have to source their wages to Massachusetts, "in the same proportion as immediately before the pandemic, regardless of the location from which these employees telecommuted to Massachusetts."
While many workers are hoping to stay remote, a recent survey by Bloomberg Tax & Accounting shows that under "normal" circumstances, a majority of states would find "a minimal number" of remote workers who do not conduct solicitation activities would be enough to create nexus. Mississippi was the only state to respond that a remote employee would not create nexus under any of the circumstances included in the survey.
In the long run, the pandemic has undoubtedly pushed many businesses towards a remote or hybrid work model, but there will be tax ramifications to be dealt with. To stay ahead of these obligations and ensure compliance, companies must be proactive about their tax liabilities. That's where Miles Consulting can help.
To stay on top of your tax obligations due to remote workers, or any other state tax situations, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Focus on Kansas
This month brings us to the center of the country, the Great Plains state of Kansas. Kansas is a Midwestern state that epitomizes the U.S. Heartland with its Great Plains setting of rolling wheat fields. For thousands of years, what is now Kansas was home to numerous and diverse Native American tribes. Tribes in the eastern part of the state generally lived in villages along the river valleys. Tribes in the western part of the state were semi-nomadic and hunted large herds of bison.
The western two thirds of the state, lying in the great central plain of the United States, has a generally flat or undulating surface, while the eastern third has many hills and forests. The land gradually rises from east to west. It is a common misconception that Kansas is the flattest state in the nation. In fact, Kansas has a maximum topographic relief of 3,360 ft, making it the 23rd flattest U.S. state.
Is Wayfair Simplification On The Horizon?
If you're a business owner, accountant or involved in the tax world in any way, you've undoubtedly been made aware of the Wayfair decision.
In short, that decision, which said that South Dakota's economic nexus law was constitutional and opened the door for other states to do the same, effectively made it easier for companies to create nexus in a state for sales tax purposes, thus creating a collecting and filing responsibility.
Over three years later and every single state that has a general sales tax has implemented some form of Wayfair-related legislation, whether economic nexus or marketplace facilitation. However, because each state has the freedom to do so independently, tax rates and the triggers for these Wayfair laws vary wildly. For businesses, this lack of cohesion has created a tax burden that, for some, is nearly unbearable.
As previously mentioned, much of the complexity regarding Wayfair laws comes from the lack of uniformity on a national scale. However, additional complexity can be found in the application of this legislation, with many states also utilizing different components for measurement (gross sales vs. taxable sales) for Wayfair thresholds, on top of thresholds that differ state to state.
The other problem comes from the catch-22 that Wayfair legislation has created for online retailers. Companies need a certain amount of sales to keep making a profit, but if they do too much business in certain states, they may trigger economic nexus, resulting in additional money spent to stay tax compliant. To stay ahead of these costs, retailers need to do more business, but that may result in additional tax liabilities.
Previously innocuous things, like Black Friday, surges in online shopping and tax holidays, have suddenly become hidden traps for online retailers. A sudden surge in business can get these retailers caught in the sticky web of economic nexus and leave them unprepared for the tax consequences that follow.
The final hold-out state enacted Wayfair-related legislation earlier this year. As a result, remote retailers face economic nexus, marketplace facilitation or both in 46 states, plus Washington D.C. and Puerto Rico.
Ever since the Wayfair decision, various entities have proposed simplification solutions but there are more calls now than ever thanks to the pervasiveness of Wayfair laws.
The Streamlined Sales Tax Project and the resulting Streamlined Sales and Use Tax Agreement are two such efforts and actually pre-date the Wayfair decision. However, while the agreement proved popular in certain circles, only about half of states have adopted it since its implementation, limiting its effectiveness in regards to the Wayfair situation.
Companies like Etsy, which recently asked sellers on its platform to join it in advocating for a federal solution, have also spoken out regarding the increased burden Wayfair creation.
Over the last three years, some states, including Alabama, Louisiana and Texas have taken steps to simplify tax remittance for remote sellers. Several have also adjusted economic nexus thresholds to provide additional safe harbor for smaller business more heavily impacted by Wayfair legislation. (That said, other states have widened the net instead.)
Legislative bodies have also reviewed Wayfair legislation, with many acknowledging the complication these laws create but stopping short of proposing a specific solution.
However, despite all the discussion, there remains no overarching solution to the complexity of Wayfair legislation as of now. As states continue to feel the effects of the pandemic and look to the taxation of online retail as a source of income, it's unlikely many will want to make concessions on their own Wayfair-related legislation.
While these conversations continue, retailers will have to deal with the ramifications. To stay tax compliant, businesses need to stay proactive about their tax liabilities and seek professional assistance if the burden becomes too great to bear on their own.
We answer questions around this topic daily - so if you call us to ask questions, you're in good company!
If you have questions regarding your online sales tax liabilities, or any other state-related tax questions, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Avoiding Common Exemption Certificate Mistakes
If you’re manufacturer, wholesaler, or a reseller, you know that collecting resale and tax exemption certificates is par for the course. Like most things tax related though, it’s often not as simple as collecting a document and calling it a day. Rules for collecting certificates can vary based on the state, products involved, business relationships and a variety of other factors. If that wasn’t hard enough, the rules themselves are prone to frequent regulatory changes.
One of the most common mistakes that businesses make when collecting exemption certificates is not collecting the right resale or tax exemption form. To know which form must be collected, a business must be familiar with a variety of rules pertaining to sales tax nexus and compliance. For instance, if you’re a business based in Rhode Island shipping goods for resale to your customer across state lines into Massachusetts, your customer must provide you with a valid Massachusetts Resale Certificate in order to substantiate that the sale is indeed tax exempt. This is due to the nature that sales tax rules for transactions are typically based on the ship-to-state. If your customer were to provide you with a Rhode Island Resale Certificate, and you accept this certificate without charging sales tax and forget to remediate this, you may find your business taking on an expensive liability during your next sales tax audit.
What To Know About Intercompany Service Receipts In Washington
Washington state is known for its evergreen forests, beautiful mountains and for being the home of Starbucks. That said, for remote retailers, it should also be known as a state with several unique tax situations, one of which is its treatment of intercompany service receipts.
In general, the Washington Department of Revenue (DOR) takes a fairly aggressive stance in regards to the taxation of remote companies providing services to customers within the state.
However, companies have several avenues that could provide potential relief for these tax burdens.
As previously mentioned, Washington state is aggressive in its approach to the taxation of remote companies. In regards to economic nexus, Washington was among the first to enact it, with a version of it being implemented on Oct. 1, 2018. The state also enforces economic nexus for its business and occupation (B&O) tax on gross receipts.
Washington state is also proactive when it comes to the taxation of technology products, which makes sense given the number of technology companies that have headquarters within the state, including giants such as Microsoft, Amazon and Nintendo of America. In short, all digital products are taxable. Prewritten computer software that is electronically downloaded is taxable. However, custom computer software that is electronically downloaded is exempt. Lastly, Software as a Service (SaaS) is also taxable.
When it comes to intercompany services receipts, the location of the main beneficiary of the services is a primary factor in determining the sourcing of those receipts, as opposed to where the services are performed. According to ReedSmith, businesses that perform support or management services, such as human resources or accounting, for an affiliate that is a wholesaler or retailer of tangible personal property often get caught by Washington's nexus web.
Specifically, "Both [companies] are based outside Washington and may have little or no property or payroll in the state. [The affiliate and operating company] makes sales nationwide and pays B&O tax, while [the service provider] has no filing history in Washington prior to being audited by the [DOR]. On audit, the Department sources a portion of [the service provider's] intercompany receipts from [the affiliate] to Washington, resulting in B&O tax liability for [the service provider]."
According the ReedSmith, a recent Washington state Court of Appeals decision on LendingTree, LLC v. Department of Revenue provides guidance in regards to these situations. In the opinion, the court determined, "the benefit of LendingTree's services were received at the location where its customers were physically located, not at the location of its customers' market (the borrower location)."
Depending on how the sourcing of receipts is determined, the B&O tax liabilities of the provided services can be mitigated, providing relief to companies providing services and with nexus in Washington state.
If you have questions regarding your online sales tax liabilities in Washington, or any other state, please contact us today. We're happy to clarify any multi-state tax issues you're trying to navigate.
Focus on West Virginia
Known for its mountainous landscape and rolling hills, this month we travel north to West Virginia. The state has a rich history and is embedded in the Appalachian Mountains.
West Virginia is known for a wide range of outdoor recreational activities, such as skiing, whitewater rafting, fishing, hiking, backpacking, mountain biking and hunting. The state offers many golf courses as well.
It is also one of the most densely Karstic areas in the world, making it a choice area for recreational caving and scientific research. Karstic topography is a landscape formed from the dissolution of soluble rocks such as limestone, dolomite, and gypsum. It is characterized by underground drainage systems with sinkholes and caves. These underground hydrology systems contribute to much of the state’s cool trout waters.
How The Paycheck Protection Plan Is Impacting Businesses One Year Later
For companies in many industries, staying in business throughout 2020 was a struggle. It meant constantly adapting to new challenges, working harder than ever to just stay afloat and strategically taking advantage of state and federal relief efforts, like the Paycheck Protection Program (PPP), wherever possible.
As a small business, we felt those struggles ourselves, and even as life starts to go back to 'normal,' we understand that the financial concerns of the last year are not going to just magically disappear.
Depending on what relief was utilized, many business owners are now considering their best strategy for repayment. In this blog, we'll discuss your options and help you decide what's best for your company.
The CARES Act, signed into law by former President Trump on March 27, 2020, initially set aside $349 billion in COVID-19 relief funds for small businesses through the PPP. Additional rounds of funding were later passed by Congress, with the final applications for the program accepted May 31, 2021.
Through the program, certain businesses could apply for and receive forgivable loans for payroll and other qualified expenses.
Loan amounts are applicable for forgiveness "if all retention criteria are met, and the funds are used for eligible expenses," according to the U.S. Small Business Association.
More specifically, eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period:
- Employee and compensation levels were maintained
- The loan proceeds were spent on payroll costs and other eligible expenses; and
- At least 60% of the proceeds were spent on payroll costs
Businesses who utilized a second draw PPP loan are eligible for forgiveness under the same terms as their first PPP loan.
From a federal tax perspective, that forgiveness amount isn't reported as taxable income and the qualified expenses related to the loan are also deductible, which was a major benefit of the PPP loans. However, as you'll see below, not all states are in conformity.
When it comes to forgiveness, borrowers can apply once all loan proceeds have been utilized that the borrower is requesting forgiveness for. From that point forward, business owners can apply for forgiveness any time up to the maturity date of the loan. However, "if borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender."
The application process for forgiveness can be found on the SBA website and requires certain documentation to be provided, including payroll and non-payroll records.
That said, the biggest question that many business owners are now facing is whether they should apply for forgiveness at all.
Another federal relief program, the Employee Retention Credit (ERC), is offered to companies that, within specific periods:
- Were forced to shut down the operation of their business because of governmental orders limiting "commerce, travel or group meetings due to COVID-19."
OR
- Saw a decline of gross receipts in a specified calendar quarter that were less than 80% (50% in 2020) of the gross receipts in the same calendar quarter of 2019.
The program allows eligible businesses to claim a tax credit equal to 70% of the qualified wages they paid to employees for the period they are applying for.
While businesses were not initially allowed to utilize both programs, later legislation has allowed employers that received PPP loans to also claim the ERC for "qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan."
What this means is that if qualified businesses choose to defer forgiveness and apply for the ERC, they could see overall greater savings and receive more funds in the long run, in part due to the low interest rates on PPP loans.
Businesses that have yet to take advantage of the credit for 2020 or 2021 have until April 15, 2025 to amend prior payroll tax returns, but the clock is ticking for PPP forgiveness applications.
That all said, it's also important to factor in state responses to federal treatment of COVID-19 relief. Depending on the state, they may or may not treat PPP funds as taxable income.
A recent survey conducted by Bloomberg Tax & Accounting and reported on by CPA Practice Advisor found that 29 states indicated they will follow federal treatment of PPP loans, under 1160(i) of the CARES Act.
Our own home state of California has only partially conformed to the federal legislation on forgiveness of income and deductibility of expenses related to PPP loans. As explained in this article by Grant Thornton, businesses have to meet the qualifications of an eligible business. To be eligible to deduct the expenses, a taxpayer must have experienced a 25% or greater reduction in quarterly gross receipts for the first, second or third quarters of 2020 as compared to the same quarter of 2019.
As you decide the best path forward for your business, it's important to consider your own state's treatment of PPP funds. If you have questions regarding your loan, the SBA offers resources on its website to help clarify any concerns you have regarding it or other programs through the CARES Act.
If you have specific questions about state tax matters, please contact us today and we can clarify any aspects you're trying to navigate.
Wayfair Three Years Later- What Has Changed?
It’s hard to believe that it has been three years since the landmark decision in the Supreme Court Case of South Dakota v. Wayfair (2018) that changed the sales tax landscape. The high court’s decision was that South Dakota’s economic nexus law was constitutional and that the state could require companies who met certain sales thresholds to collect and remit sales tax on sales to South Dakota customers, even if the company had no physical presence in the state. The decision effectively added another means that states can create nexus in a state for sales tax purposes.
The Supreme Court’s ruling did not automatically make this the law of the land for all 50 states. It was a South Dakota case, so the ruling just applied to South Dakota. However, since then, states have been jumping on the economic nexus bandwagon and enacting laws similar to those of South Dakota. States have long been searching for new ways to bring revenue into their state and the Wayfair case gave them a long-awaited opportunity to do so.
Focus on Georgia
The last of the original thirteen colonies is Georgia, the Peach State. Georgia is also known as the Empire State of the South. The state’s terrain spans coastal beaches, farmland and mountains.
There are also many points of interest that attract visitors to Georgia. In Atlanta, there are the World of Coca-Cola and the Georgia Aquarium. Stone Mountain, just north of Atlanta, is Georgia’s most popular attraction, receiving over 4 million visitors per year. Callaway Gardens, in western Georgia, is a family resort. The area is also popular with golfers.
The Golden Isles are a string of barrier islands off the Atlantic Coast of Georgia near Brunswick that include beaches, golf courses and the Cumberland Island National Seashore.
Sports play a large role in Georgia. In professional sports, the Georgia Dome in Atlanta has hosted a few Superbowls, while also supporting college championships for basketball and football. Georgia has teams in three of the major professional arenas of basketball, football and baseball. The state capital was home to the 1996 Olympic Games. The city of Augusta is known for hosting the Masters golf tournament each year.
Business Climate
Atlanta, the capital of Georgia, is a global city, an important node in the global economic system. It is also home to many large companies. There are 17 Fortune 500 companies and 26 Fortune 1000 companies with headquarters in Georgia, including Home Depot, UPS, Coca-Cola, TSYS, Delta Air Lines, Aflac, Southern Company, Anthem, Inc., and Sun Trust Banks. Georgia is home to Hartsfield-Jackson Atlanta International Airport, one of the world’s busiest airports, measured by both aircraft traffic and passenger traffic.
Aside from the metropolitan centers in the state, farms paint the landscape of the southern part of the state. They produce peanuts, corn, and soybeans. Georgia’s agricultural outputs include poultry and eggs, pecans, peaches, cotton, peanuts, rye, cattle, hogs, dairy products, turfgrass, timber (particularly pine trees), tobacco and vegetables.
Major products in the mineral industry include a variety of clays, stones, sands and the clay palygorskite, known as attapulgite.
As noted in the introduction, tourism also plays a role in Georgia’s economy. Tourists are attracted to the rich history of Georgia from its origins as a colony and because of some great leaders who have shaped America today. The final resting places of Martin Luther King Jr. and Coretta Scott King are in Atlanta. The Carter Presidential Center is in Atlanta and his hometown is Plains, Georgia.
Tax Climate
The top individual income tax rate is 5.75% and the top corporate income tax rate is also 5.75%.
Apportionment: Georgia taxpayers apportion income using a single sales factor formula.
Georgia follows market-based sourcing for the receipts of intangibles.
Sales Tax Structure
The state sales tax rate is 4%. However, like many states, Georgia’s counties and cities also add onto the sales tax rate. As such, the rate can be as high as 8.9%. Atlanta’s current combined sales tax rate is 8.5%.
Sellers who lack physical presence in Georgia and have sales into the state that exceed $100,000 or who have more than 200 transactions in the previous or current calendar year must register and remit sales tax to the state. Gross revenue from retail sales of tangible personal property delivered electronically or physically to a location in the state for consumption, use, or storage in the state. Taxable services are not included in the threshold. Exempt sales, except resales, are included but exempt services are not included in the threshold. This legislation went into effect on January 1, 2019.
A marketplace facilitator that makes or facilitates taxable retail sales of $100,000 or more in aggregate in the previous or current calendar year is the retailer for each taxable retail sale it facilitates in Georgia on behalf of a marketplace seller. A franchisor is not considered a facilitator with respect to any dealer that is its franchisee. This legislation went into effect on April 1, 2020.
All digital books, digital audio works and digital audio-visual works are not subject to taxation. Prewritten software which is electronically downloaded is nontaxable. It is taxable if sold in a tangible medium. Custom software is nontaxable, regardless of how transferred to the customer. Software-as-a-Service is exempt from taxation, as are all cloud services. How products are produced, sold and delivered is critical to determining the tax status.
Many states have annual sales tax holidays, during which certain items the state wants to promote the purchase of (like school supplies emergency preparedness supplies, or energy efficient appliances) can be purchased sales tax free. Georgia allows you to purchase the following items tax-free during their annual sales tax holidays: In July: $20 in school supplies, $100 in clothing, and $1,000 in computers for the Back To School sales Tax Holiday. In October: $1,500 in Energy Star/ WaterSense certified efficient products and appliances.
Our team at Miles Consulting Group is always available to discuss the specifics of your state tax situation, whether in Georgia or other states, we can help you navigate the complex tax structures arising from your multistate operations. Call us to help you achieve the best tax efficiencies.
Random Facts
- Georgia is the largest state east of the Mississippi River in land area.
- The main headquarters of The Weather Channel is in Atlanta.
- Georgia is one of the leading states in frequency of tornadoes, though they are rarely stronger than F1.
- With a coastline on the Atlantic Ocean and its proximity to the Gulf of Mexico, the state is vulnerable to hurricanes.
- The port of Savannah is the fourth largest seaport in the United States, importing and exporting a total of 2.3 million TEUs per year. A twenty foot equivalent unit (TEU) is a unit of measure used for capacity in container transportation, as in a container ship.
- Georgia is in the top five blueberry producers in the United States.
- In 1829, gold was discovered in the North Georgia Mountains.
