California's Partial Manufacturing and R&D Exemption
The California Manufacturing Partial Sales and Use Tax Exemption allows manufacturers and certain research and developers to exempt a portion of sales and use tax. In general, this partial exemption allows a qualified person, who purchases qualified tangible personal property and used that property in a qualifying manner, to purchase the property at a reduced tax rate, according to the CDTFA. While it’s been around for a few years, in 2017, California amended the exemption to expand the partial sales and use tax exemption for purchases of certain tangible personal property used in manufacturing or research and development activities.
What You Need To Know About Long-Term Impacts of the Pandemic On Online Retailers
In the last 10 months, much of daily life has been turned upside down. Large events have been canceled, schools have switched to distance learning and many workplaces are still depending on remote setups for employees.
One of the many other consequences of the pandemic is the temporary closure of in-person retailers. Between this and understandable safety concerns, many consumers have turned to online shopping as their default.
This has offered many retailers the lifeline they needed to stay afloat during the pandemic, but it’s also creating problems for those that were unprepared for the complex tax burdens associated with online retail.
A Crash Course On Economic Nexus
Seasoned online retailers and frequenters of this blog are likely quite familiar with economic nexus, but small business owners who have just started to dip their toes in because of the pandemic can easily be caught unaware. Even retailers who previously sold online and are familiar with the concept may have found themselves caught off guard by the increased tax burden when online sales took off earlier this year.
So, what is economic nexus?
In short, states that have passed economic nexus legislation (more than 40 as of this writing) can require out-of-state retailers to collect and remit online sales taxes even if they have no physical presence within the state. Economic nexus is generally triggered through sales or transaction thresholds (which vary by state) and can be as little as 200 transactions and/or $100,000 in sales.
After the 2018 Wayfair v. South Dakota ruling, many states rushed to put economic nexus in place. Many have also implemented marketplace facilitator legislation, which shifts the burden of collecting and remitting sales taxes from the seller (who might be a small business) to marketplace facilitators (like Amazon or eBay).
How Is Economic Nexus Related To The Pandemic?
Several months ago, we shared an article discussing how COVID-19 is affecting economic nexus and other related legislation. While many states initially relaxed enforcement on tax collection, those states are now looking for additional revenue sources and ways to reduce fiscal shortfalls.
A handful of states have already lowered sales thresholds within the last year or made other changes to economic nexus or marketplace facilitator legislation. While some of these changes were already in the works before the pandemic hit, many were rushed through the legislative process as a result.
Tax professionals expect even more changes as we head into the 2021 legislative session. While the 2020 sessions were largely tied up with health and wellness concerns, there will be ample opportunity in the coming year for Wayfair-related legislative changes.
What Should Small Online Retailers Do?
The economic impact of the pandemic will be far reaching, and regardless of how well individual states weather the storm, small online retailers should expect that the thresholds may continue to lower, and states will become even more aggressive when it comes to tax compliance. Also, we expect audit enforcement to pick up as well, as states try to fill the deficit gap.
The best way for small business owners to protect themselves is to be proactive about fully understanding nexus concepts (yes, we can help with that too!) and preparing themselves for multi-state sales tax compliance. Don’t wait until a state comes knocking to check whether you’re triggering economic nexus. Likewise, make sure you’re up to date on marketplace facilitator laws in your state and how they might affect your online business. Hint – while these laws were supposed to make it easier for small businesses, there are still likely filing ramifications and the rules can be confusing.
To learn more about marketplace facilitation, follow this link for a previous blog we did on the subject.
Do You Want Help With Your Online Sales Tax Compliance?
If you have questions about your tax liability from online sales or any other state sales tax compliance questions, please contact us today. We’re happy to clarify any multi-state tax issues you’re trying to navigate.
Focus on New Mexico
New Mexico, nicknamed as “The Land of Enchantment,” is located in the Southwest part of the United States. The state was admitted to the union as the 47th state on January 6, 1912. It is one of the mountain states and shares the Four corners region with Utah, Colorado, and Arizona.
The dramatic climate, a sharp diversity of people, and famous landscapes are some of the things that make New Mexico a unique state. The state’s climate is generally semiarid to arid, though portions of the state have a continental and alpine climate, and its terrain is mostly covered by mountains, high plains and desert. The state is home to prospering art communities, colleges, and historic sites that inspired many influential early artists.
How Colorado Is Easing The Tax Burden For Retailers
Over the last two years, retailers across the U.S. have needed to adjust to the widespread implementation of economic nexus. As of today, only two states with a general sales tax have yet to implement it. However, a handful of states add an additional layer of complexity. These states, known as home rule states, create a tax burden that can be overwhelming. Colorado is included in this number.
However, much to the relief of retailers, Colorado is now looking to simplify local sales tax collection for remote sellers within the state.
What Makes Colorado So Complex?
A home rule state gives local government entities, including municipalities and counties, the authority to establish and levy their own sales taxes, separate from state sales tax regulations. Much like economic nexus laws, tax regulations vary wildly between home rule jurisdictions, even within the same state.
What this means, is that an out-of-state retailer who makes sales into Colorado will need to individually contact each local tax authority to determine whether they are obligated to collect and remit sales tax on their products, and what rate they will need to collect at. Then, they must file a separate return with each tax authority.
It can be a horrific situation for smaller retailers that trigger economic nexus within Colorado but do not have large accounting departments.
What Is Colorado Doing To Reduce The Burden?
In 2017, lawmakers in Colorado established the Sales and Use Tax Simplification Task Force. As a group, they study “sales and use tax simplification between the state and local governments, including home rule municipalities … to adopt innovative revenue-neutral solutions that do not require constitutional amendments or voter approval.”
Two solutions have emerged as a result. The first, the Sales & Use Tax System (SUTS), a statewide portal for tax collection implemented by the Department of Revenue (DOR), launched earlier this year. So far, 28 percent of home rule jurisdictions have started the process of securing signatures for the agreement, and 38 percent of the jurisdictions have signed the agreement and are currently onboarding. An additional 32 percent are currently reviewing and evaluating the system, while the final 1 percent have delayed reviewing until they are fully staffed.
The second solution, a model ordinance for home rule municipalities developed by the Colorado Municipal League and the DOR, was created in early 2020. Home rule municipalities that have joined SUTS are also encouraged to adopt the model ordinance. On the flip side, those municipalities that do not join SUTS are asked not to adopt the language on economic nexus and move forward with voluntary compliance. This is because, “The risk of a lawsuit under the United States Commerce Clause if you were to enforce economic nexus without the single point of remittance is high.”
A number of municipalities, including Silverthorne, Pueblo, Carbondale and Gunnison have already adopted the model ordinance.
These two solutions working in tandem should simplify sales tax compliance for remote sellers to a reasonable degree, especially as municipalities continue to adopt them.
Do You Have Questions About Taxation in Colorado?
If you have questions about your tax liability in Colorado, or any other state, please contact us today. We’re happy to clarify any multi-state tax issues you’re trying to navigate.
State Tax Issues Associated with Troubled Companies: Part Two- Sales and Use Taxes
Sales taxes are often overlooked when a company is experiencing an economic crisis. Given that some jurisdictions can have rates over 10%, this can be very costly at a time when a company can least afford this expense. With the exception of bankruptcy situations, there are no “special” rules with regard to sales or use taxes when a company is experiencing financial difficulties. So, how can a troubled company minimize their sales and use tax obligations?
State Tax Issues Associated with Troubled Companies: Part 1- Corporate State Income Tax Issues Associated with Cancellation of Debt Income
As we hear about the increase in bankruptcies and debt restructuring, corporations often assume that the state income tax treatment will mirror that of the Internal Revenue Service. This is far from the truth in many states. In our experience, the state tax consequences are often thought of at the last minute or ignored entirely. In fact, it is not unusual for these issues to be addressed during the preparation of the state income tax returns and are rarely analyzed in depth. We’d rather see our clients be proactive!
Cancellation of Debt
Income from the cancellation of debt (COD) can be excluded from federal income. This is dependent on the level of insolvency. If a corporation has excluded COD income, they are required to reduce tax attributes (net operating losses, credits, capital loss carryovers, basis of property, passive activity loss and credits carryovers and foreign tax credits). Federal rules dictate an ordering of the attribute reduction unless certain elections are made. To the degree you are able to consider the state consequences prior to the execution of any debt restructuring, a corporation may be able to preserve state income tax attributes. Further, in some instances, a state income tax gain could be inadvertently generated, causing a tax liability for state purposes even when none was generated for federal tax purposes.
The Trouble With Home Rule Jurisdictions
Over the past two years following the 2018 Wayfair decision, which has allowed more than 40 states to implement economic nexus legislation, we’ve seen these laws affect retailers in sometimes unexpected ways.
Take, for example, home rule jurisdictions. In a post-Wayfair world, the tax burden they create can come as a rude awakening for retailers and legislators alike.
In an already complex online sales tax environment, where every state has its own economic nexus thresholds and requirements, home rule jurisdictions add yet another layer of complication.
What Is Home Rule Jurisdiction?
In this context, “home rule” refers to local governments, including cities and counties, that are given the authority to establish and levy their own sales taxes, separate from state sales tax regulations.
A handful of states, including Alabama, Alaska, Arizona, Colorado and Louisiana, allow self-administering local tax authorities. Much like economic nexus laws, tax regulations vary wildly between home rule jurisdictions, even within the same state.
What Does This Mean For Retailers?
Ever since the Wayfair decision, retailers have been scrambling to properly comply with economic nexus legislation and correctly collect and remit online sales taxes. For smaller companies that trigger economic nexus through sales thresholds (which also vary depending on the state) but don’t have extensive accounting departments, this new tax burden is daunting.
While there has been progress made to simplify and streamline economic nexus across the country, the regulations remain a drain on resources for many smaller businesses.
As stated above, home rule jurisdictions add an additional level of complexity. The complication comes from three main sources: the regulations themselves, the need to submit separate returns for each jurisdiction and the fact that each jurisdiction can choose to audit the seller.
What States Are Doing To Ease The Tax Burden
To the relief of many retailers, a number of states are taking the burden these home rule jurisdictions create seriously and have regulations to simplify the process.
In Alabama, remote sellers can apply for a Simplified Sellers Use Tax, which allows them to collect, remit and report at a flat 8 percent for all sales into the state. The Louisiana Department of Revenue has a similar program, offering a Direct Marketer Sales Tax Return, with a flat combined rate of 8.45 percent.
In Alaska, the Alaska Intergovernmental Remote Seller Sales Tax Agreement, created by local governments and facilitated by the Alaska Municipal League, serves as a central organization for seller registration, return collection, tax fund distribution and audits.
As the online sales tax environment continues to evolve post-Wayfair, we expect to see additional refinements to economic nexus legislation and home rule regulations from states to make the process easier for both retailers and state agencies.
Do You Have Questions About Home Rule Jurisdictions?
If you have questions about economic nexus or home rule jurisdictions please contact us today. We’re happy to clarify any multi-state tax issues you’re trying to navigate.
Focus on New Jersey
City, New Jersey
Nicknamed the Garden State, New Jersey is the fourth smallest of the 50 U.S. States. It is also the 11th most populous state.
New Jersey’s most famous city, Atlantic City, is best known for its famous boardwalk. This four-mile-long promenade was constructed in 1870 and to this day remains the place where the majority of the city’s attractions are found. Among its most popular tourist spots is Steel Pier, a carnival-style amusement park that has rides for all ages, including a massive observation wheel with climate-controlled gondolas that gives riders amazing views over the city and the ocean year-round.
What You Need to Know About Virtual Currency
You’re probably familiar with the common question, “Cash or card?” However, over the last decade, a newcomer has entered the race. Virtual currencies, and its subset “cryptocurrencies,” which use cryptography to validate and secure transactions, have exploded onto the scene, offering a brand-new avenue for commerce.
However, similar to the lack of consistency among economic nexus and marketplace facilitator laws, legislation concerning virtual currencies also varies wildly state to state.
A Brief History of Virtual Currency
While most people have at least heard of them at this point, there is still a great deal of confusion regarding virtual currencies, how they work and what exactly they are.
Bitcoin is the most popular form of virtual currency, first introduced in 2009 and valued for the first time in 2010.
The technical details of the currency are complex, but as shared by Investopedia, the most important aspects are as follows:
- Bitcoins are “mined” through complex computer systems which solve “complicated puzzles in an effort to confirm groups of transactions called blocks.”
- When this occurs, miners are rewarded with bitcoins. A distributed ledger called a “blockchain,” records the transactions.
- The currency can then be used to make purchases wherever its accepted.
Bitcoin made headlines several years ago as the value skyrocketed, reaching a staggering $19,783 per unit in December 2017. As of Sept. 1, 2020, Bitcoin is currently trading at $12,019, according to CoinDesk.
Despite Bitcoin’s dominance over the market, it’s far from the only option for those interested in virtual currency. Since Bitcoin’s introduction, over 1,600 cryptocurrencies have followed, each with its own pros and cons.
Federal Regulation of Virtual Currency
On a federal level, all virtual currencies that have, “an equivalent value in real currency, or that acts as a substitute for real currency,” are referred to as “convertible” virtual currency, as described by the IRS. These convertible virtual currencies, when sold, exchanged, used to pay for goods or services or used to hold an investment, are generally subject to tax laws and may be subject to tax liability.
The IRS issued guidance in IRS Notice 2014-21 to, “describe how existing general tax principles apply to transactions using virtual currency.”
Virtual Currencies on the State Level
As mentioned above, there is little consistency when it comes to the way states are handling the taxability of virtual currencies.
One of the most well-known attempts at comprehensive regulations came from New York with its BitLicense framework. Issued by the New York State Department of Financial Services in June 2015, the regulations resulted in what the New York Business Journal termed the, “Great Bitcoin Exodus,” with a majority of Bitcoin companies leaving the state as a result of the strict rules and requirements.
For many other states, current legislation does not specifically include language regarding virtual currencies. However, some of these states, such as North Dakota and New Mexico, have issued guidance regarding the sale, transmission or usage of virtual currencies.
Others, such as Vermont, directly apply existing legislation, such as money transmission laws, to virtual currency.
In regards to paying taxes, Ohio became the first state to allow taxes to be paid with Bitcoin in November 2018. However, the state flipped its stance in October 2019, suspending their program for cryptocurrency tax payments.
Overall, virtual currencies are still in their infancy as far as mainstream usage. However, as more states issue guidance regarding its use, it’s important your business is complying with state and federal regulations should you choose to accept virtual currencies for payment.
Do You Have Questions About Virtual Currencies?
If you have questions about virtual currencies and the tax liability that comes along with them, please contact us today. We’re happy to clarify any multi-state tax issues you’re trying to navigate.
Focus on Idaho
Nicknamed the Gem state, Idaho is the 14th largest, the 12th least populous and the 7th least densely populated of the 50 U.S. States.
Humans may have been present in Idaho as long as 14,500 years ago. Excavations at Wilson Butte Cave near Twin Falls in 1959 revealed evidence of human activity, including arrowheads, that rank among the oldest dated artifacts in North America.
