Judge Puts Temporary Injunction on Colorado’s Amazon Law

A Denver judge has granted a request to temporarily block a 2010 law aimed at requiring remote sellers, including online merchants, to collect sales tax. The injunction comes after an August decision, where a U.S. court of appeals reversed a previous injunction that was put into place by U.S. District Court Judge Robert Blackburn. The previous injunction was reversed on the grounds that Blackburn had overstepped his authority with the injunction (see story here). The current injunction is only temporary, and will stay in place until the case is resolved further.

Read more:

Denver Judge Temporarily Blocks Colorado’s “Amazon Tax” Law

Pass-Through Entity February Withholding Requirements

This is just a reminder that there are some February due dates for certain pass-through entity withholding related filings

Michigan Flow-Through Withholding Annual Reconciliation –
Flow-through entities (FTEs) that are required to withhold on members that are non-resident individuals or corporations are also required to file an annual reconciliation using Form 4918, Annual Flow-Through Withholding Reconciliation Return. This return is in addition to the quarterly filing of Form 4917, Flow-Through Withholding Quarterly Return. The annual reconciliation is due to the Department on February 28th, or the last day of the second month following the end of the tax year for fiscal year FTEs.

Wisconsin Pass-Through Entity Withholding Exemption –
Pass-through entities, other than S corporations, may file an annual exemption withholding affidavit (Form PW-2) within two months following the close of the entity’s taxable year, February 28th for a calendar year entity. The deadline for filing this exemption for S corporations was January 31st for entities with a calendar year end (within one month following the close of the S corporation’s taxable year).

California Franchise Tax Board Ponders New Federal Income Tax Changes

The California FTB has released a document summarizing how the new federal tax laws correspond to California law. It also details whether or not the new laws will have any effect on California’s revenue.

Read the report:

Summary of Federal Income Tax Changes 2013

CHANGES IN TAX LAW PRESENT POTENTIAL TAX SAVINGS FOR COMMERCIAL RENTALS IN ARIZONA

The Arizona State Legislature enacted HB 2324 removing a burdensome tax weighing on a common leasing arrangement. Prior to HB 2324, the cities of Arizona were allowed to tax commercial leases between affiliated businesses, where the same leases were exempt from the Transaction Privilege Tax (TPT), Arizona’s version of the sales tax. Specifically, the new law exempts commercial leases of real property between “affiliated companies, businesses, persons or reciprocal insurers,” from city sales tax as well as Arizona TPT.

Prior to the enactment of HB 2324, LLCs, partnerships, trusts and even sole proprietors were subject to tax on their commercial leases between affiliated businesses. However, rentals between affiliated corporations were not. The law essentially treated economically similar transactions differently based on the form of the parties, rather than differences in the leases themselves.

The complexity of the old law became apparent to lessors of real property, whose rental of such property to a related entity was subject to city sales tax, but not the State TPT. The divergent treatment between related parties received at the state level versus the city level made compliance difficult. In an effort to remedy this complexity, the Arizona State Legislature broadened the exemption to include commercial leases to include many more forms of the same leasing transaction.

Affiliated Persons

HB 2324 broadens the TPT exemption to include commercial leases of real property between “affiliated companies, businesses, persons or reciprocal insurers.” These terms are defined as:

• A lessor that holds a controlling interest in the lessee;
• A lessee that holds a controlling interest in the lessor;
• An affiliated entity that holds a controlling interest in both the lessor and the lessee; or
• An unrelated person that holds a controlling interest in both the lessor and lessee.

Furthermore, the term “controlling interest” means direct or indirect ownership of “at least 80% of the voting shares of a corporation or of the interests in a company, business or person other than the corporation.” Direct ownership is fairly straight-forward as it is readily apparent how much of a company is owned by another. However, determining “indirect ownership” is slightly more complex and requires taxpayers to look at the relationship between the lessee and lessor, at the individual level to determine if either of them owns at least 80 percent of the other party.

Cities’ Broader Interpretation

Strangely enough, the cities affected by HB 2324 allowed the broadened exemption to take effect over two months earlier than the law became effective at the State level. In addition, the affected cities took it upon themselves to add some clarity on what constitutes an “affiliated person” for purposes of the broadened exemption on related party leases.

The cities’ clarity took the form of guidance issued by several cities imposing the tax on related-party rentals. The long and short of the guidance is: cities are taking into consideration family members when determining the exemption. Further, some cities are requesting that entities provide proof that they qualify for the common ownership exemption. The counties follow the state effective date and definitions.

Examples of some leasing scenarios that will no longer be subject to a city sales tax include:

• ABC Company (lessor), a limited liability company, leases a warehouse located in Scottsdale, Arizona to XYZ Company (lessee), a limited partnership. ABC Company owns 80 percent of XYZ Company.
• Op-Co (lessee), a subchapter S corporation, leases an office building in Phoenix, Arizona from Building-Co (lessor), a limited liability company. Op-Co owns 100 percent of Building-Co.
• Land-Co (lessor), a limited liability company, leases a parcel of vacant land located in Chandler, Arizona to Invest-Co (lessee), a limited liability company. Hold-Co, a subchapter S corporation, owns 75 percent of both Land-Co and Invest-Co. John Smith owns 100 percent of Hold-Co and 5 percent of both Land-Co and Invest-Co.
• Bob owns a building, and leases the building to his sister Jane, a sole proprietor. Bob, through family attribution, will be considered an affiliated entity of Jane and Jane’s payment of rent to Bob will not be subject to city sales tax.

Finally, since this is an exemption from city sales tax, as opposed to a deduction, if your business was previously filing only to report the commercial leases of real property between affiliated entities, in some cities you will be able to file a final return and close your TPT account relating to those affiliate leases.

The considerations above are just the tip of the iceberg. The questions raised by leasing activities are very complex and it is therefore vital to seek the advice of a trusted tax advisor. Certain taxpayers that own property and commercially lease it to a related party will pay less tax in Arizona. But, in order to determine the extent of the exemption, it is important to look at the facts and circumstances surrounding the lease.

SALT Issues Created by the Final Tangible Property Repair Regulations

On January 1, an additional degree of uncertainty was introduced to the area of state income taxation. Recently, the Internal Revenue Service issued final regulations on the treatment of repairs to tangible property. The rules in these regulations are collectively referred to as the “Repair Regulations,” and they clarified and added new provisions to the previous federal rules dictating the capitalization of certain repairs made to tangible property.

In typical fashion following an announcement of a substantial federal tax law change, the states are pondering the effects and have yet to issue guidance. As such, the impact of the Repair Regulations on state income taxes is still uncertain, but is bound to create another layer of complexity to tax compliance.

From a state income tax perspective, the Repair Regulations are likely to create timing differences between federal and state taxable income. In the coming months, we anticipate guidance from the states to trickle in. But until we hear otherwise, we can only surmise the treatment based on a state’s adoption, or lack thereof, of the Internal Revenue Code (IRC).

Flavors of Federal Conformity

Generally speaking, states piggyback off of federal taxable income (either before special deductions like net operating losses or after such deductions) and then make modifications to that figure. Some of these modifications are dependent upon how the state incorporates the IRC into its tax regime. States will either:

  • Adopt the IRC on a rolling basis (“Rolling Conformity”)
  • Adopt the IRC as of a fixed date (“Fixed-Date Conformity”)
  • Pick and choose provisions of the IRC that suit the needs of their taxing regime (“Hybrid”)

Setting aside those Hybrid states—which are the minority of states—most of the Rolling and Fixed-Date Conformity states decouple from IRC provisions that they don’t like. States tend to dislike provisions that accelerate deductions, and as such, we suspect add-back provisions targeting the Repair Regulations are on the horizon.

If you’re thinking that a Rolling Conformity state is going to automatically follow the federal treatment prescribed in the Repair Regulations, think again. As previously mentioned, decoupling from certain federal provisions throws a wrench in what might otherwise be a fairly easy evaluation of state tax treatment. Let’s look at some examples of how Rolling and Fixed Date Conformity states have historically handled bonus depreciation in hopes of drawing a baseline for their yet undecided handling of the Repair Regulations:

Rolling Conformity: State such as Colorado, North Dakota, and Utah adopt the IRC on a rolling basis and do not decouple from the federal bonus depreciation provisions. But then there are the states with Rolling Conformity such as District of Columbia, New York, and Rhode Island that specifically decouple from federal bonus depreciation provision.

Fixed-Date Conformity: These states are all over the board when it comes to when and what provisions of the IRC they adopt. For instance, California adopts the IRC as of a fixed date, yet decouples from the federal bonus depreciation provisions.

What’s the take away? Don’t assume Repair Regulation conformity based solely on Rolling and Fixed-Date Conformity. Take the additional step to see if the state(s) have historically decoupled from federal provisions that provided for accelerated deductions.

Basis Discrepancies

The Repair Regulations contain substantial changes regarding the capitalization of certain repairs made to tangible property, which may create discrepancies in the adjusted basis of certain items of tangible property for federal purposes, which could then be compounded at the state level. States that do not implement the Repair Regulations could create a situation where the adjusted state basis of the property is different than the adjusted federal basis.

A couple of examples where a state may choose to depart from the Repair Regulations are with the partial disposition deduction and the de minimis election. The Repair Regulations allow taxpayers to elect to deduct the net book value of a portion of an asset in certain circumstances. If a state chooses not to adopt this it would create a basis difference in an asset for federal and state purposes. Another example is the de minimis election where taxpayers may substitute a higher capitalization threshold used on their financial statements instead of the tax threshold. If a state chooses not to adopt this provision it would capitalize items as fixed assets where the federal rules allow for immediate expensing.

IRC Section 481(a) Adjustment

The Repair Regulations will inevitably lead to accounting method changes, which calls IRC Section 481(a) into play. When Section 481(a) is applied, a taxpayer must determine income for the taxable year preceding the year of change under the old method and income for the year of change and subsequent years under the new method—as if the new method had always been used. What does this mean for state income tax? It means that you’re going to pick up income or loss relating to prior years in the current year and have to decide how to apportion it. The question becomes, does it make sense to apply the current year apportionment factor to income or loss that’s related to the prior year(s)? Unfortunately, this is an undeveloped area of state taxation with little guidance. Taxpayers should consider alternative apportionment when a Section 481(a) adjustment results in a distortion of state tax liability.

It is uncertain how states will treat the new Repair Regulations, but it could create even more complexity in the way state taxes are reported. If you have questions or want additional information, please contact your Eide Bailly service provider or Kathleen Clark or John Worden in Eide Bailly’s SALT group with questions or for additional information.

California FTB is Coming For You!

From the California Franchise Tax Board:

Franchise Tax Board News Release

01.23.2014

Franchise Tax Board Contacting Income Tax Nonfilers

SACRAMENTO– More than one million people who did not file a 2012 state income tax return are receiving letters seeking those returns or to verify that they do not have a tax filing requirement, according to the Franchise Tax Board (FTB).

Since the 1950s, FTB has contacted people who have California income, but did not file a tax return. Last year, FTB collected more than $727 million through these efforts.

Each year FTB receives more than 400 million income records from third parties such as banks, employers, state departments, the IRS, and other sources. FTB matches these income records against its records of tax returns filed. While this program mainly identifies wage earners and self-employed individuals who have not filed, it also detects other nonfilers through information sources such as occupational licenses and mortgage interest payments.

Those contacted have 30 days to file a state tax return or show why one is not due. For people who do not respond, FTB issues a tax assessment using income records to estimate the amount of state tax due. The assessment includes interest, fees, and penalties that can total up to 50 percent of the tax.

FTB provides more information for those receiving a letter at ftb.ca.gov. Taxpayers can search for: Respond to request/demand for tax return. Using this online service, individuals can request more time to reply, retrieve information that can assist in filing a tax return, request tax forms, learn about payment options, sign up to receive an email reminder to file, and access other services. They can also call FTB at 866.204.7902 for help.

The extended deadline to file a 2012 state tax return was October 15, 2013. Last year, California taxpayers filed more than 16 million tax returns.

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