New information on California Competes Tax Credit

Frequently Asked Questions – California Competes Credit

The Governor’s Office of Business and Economic Development (GO-Biz) administers the California Competes Tax Credit (CCTC). Applications for the credit are available to businesses that want to locate or stay and grow in California. Tax credit agreements are negotiated between taxpayers and GO-Biz and are approved by the California Competes Tax Credit Committee (Committee). The Committee consists of the State Treasurer, the Director of the Department of Finance, the Director of GO-Biz, and one appointee each by the Speaker of the Assembly and Senate Committee on Rules. For more information on how to obtain a credit agreement, visit the GO-Biz website.

Businesses will commit to certain employment or project investment requirements, we refer to as “milestones,” as part of the credit agreements. The legislation that enacted this credit requires us to review certain businesses books and records to ensure that businesses are in compliance with the agreed upon milestones.

We designed these Frequently Asked Questions (FAQs) to assist businesses with the credit and our review process. The GO-Biz website has additional FAQs available.

General Credit Information

  1. What taxable years is the credit available?
  2. Can the credit reduce tax below tentative minimum tax?
  3. Is this credit refundable?
  4. Can my business carry the credit forward to future years?
  5. Can my business assign the credit to an affiliated corporation under R&TC Section 23663?

Credit Usage

  1. The credit agreement requires my business to meet the project milestones before it earns a credit. How do I report the credit?
  2. How does my business claim the credit on its tax return?

CCTC Reviews

  1. Once my business obtains a credit agreement from GO-Biz, what is FTB’s role?
  2. Which businesses will be subject to a review?
  3. What is a “small business” for CCTC purposes?
  4. Is the CCTC Review the same as when your Department audits my business tax return?
  5. My business provided GO-Biz with a lot of information when it applied and will continue to provide it to them during the entire agreement period.  Will your Department have access to this information?
  6. What is the purpose of the review?
  7. What are some examples of acceptable records to show that my business met the milestones?
  8. What procedures and guidelines will your Department follow for these reviews?
  9. Will your Department perform a review only once or multiple times?
  10. How will your Department contact me for a review?
  11. What happens during a review?
  12. Will the information I provide to your Department during the review remain confidential?

Breaches and Recapture 

  1. What happens if your Department determines that my business is not in compliance with the credit agreement?
  2. What does GO-Biz consider a breach?
  3. What happens after your Department notifies GO-Biz of a possible breach?
  4. Who decides on a credit recapture?
  5. How does my business report a recapture on its tax return?

Miscellaneous Information


General Credit Information

  1. What taxable years is the credit available? It is available for all taxable years that begin on and after January 1, 2014, and before January 1, 2025.
  2. Can the credit reduce tax below tentative minimum tax? Yes.
  3. Is the credit refundable? No.
  4. Can my business carry the credit forward to future years? Yes, the carry forward period is 6 years.
  5. Can my business assign the credit to an affiliated corporation under R&TC Section 23663? Yes, get more information about credit assignment.

Credit Usage

  1. The credit agreement requires my business to meet the project milestones before it earns a credit. How do I report the credit?  In general, if your business meets the milestones for a taxable year as specified in the credit agreement, then the credit for that year is earned and may be claimed on its tax return. If the milestones for a taxable year are not met, the credit is not earned for that taxable year.
  2. How does my business claim the credit on its tax return? They use credit code 233 to claim it.

CCTC Reviews

  1. Once my business obtains a credit agreement from GO-Biz, what is FTB’s role?   We may review your business’ books and records to determine compliance with the credit agreement. We call this review activity a “CCTC Review” or “review.”
  2. Which businesses will be subject to a review?  We must review every business that receives a credit agreement, unless it is a small business. We may review a small business when it is appropriate.
  3. What is a “small business” for CCTC purposes?In general, it is a trade or business with less than $2 million gross receipts. GO-Biz specifies if a credit agreement is for a small business.
  4. Is the CCTC Review the same as when your Department audits my business tax return?No. The CCTC review is to determine if your business is in compliance with the credit agreement. It is not an income tax audit. Your business tax return remains subject to audit.
  5. My business provided GO-Biz with a lot of information when it applied and will continue to provide it to them during the entire agreement period. Will your Department have access to this information? The information you provide to GO-Biz is available to us. We use it during our review to determine if your business is in compliance with the credit agreement.
  6. What is the review’s purpose?The review’s purpose is to determine credit agreement compliance. The credit agreement has yearly milestones for California full-time employment, salary levels, and project investment. Our primary focus is to verify these milestones.
  7. What are some examples of acceptable records to show that my business met the milestones? Employment and Compensation Levels

    Payroll reports and records to support:

    • Hire dates, hours, or weeks worked.
    • Wages and salary levels for new employees and compensation paid.

    Project Investment

    • Authorization for expenditures, invoices, deeds, contracts, lease/rental agreements etc.
    • Project documents, timelines, capitalized costs, schedule of project costs etc.
    • Summary analysis of changes in property, plant, and equipment.
    • Depreciation records.
    • General ledger records.

    The above is not all inclusive. Acceptable records depend upon the specific project. We may also consider alternative documents.

     

  8. What procedures and guidelines will your Department follow for these reviews?We will follow the procedures and guidelines in FTB Notice 2014-02.
  9. Will your Department perform a review only once or multiple times?In general, the credit agreements are for 5 years with an additional 3 years to maintain employment increases and salary levels. Since the credit agreement period may be up to 8 years, we may conduct a review once or multiple times.
  10. How will your Department contact me for a review?We will send you a contact letter to begin a review.  It will include the reviewer and supervisor contact information.
  11. What happens during a review?We will request information to determine if your business is in compliance with the credit agreement. When we finish the review, we will send you a letter that states whether your business is in compliance with the credit agreement or there is a possible breach.
  12. Will the information I provide to your Department during the review remain confidential?Yes. We consider any information that you provide during the review confidential. However, in the event that we determine that your business is not in compliance with the credit agreement, we will provide GO-Biz with information that explains the basis for our determination.

Breaches and Recapture

  1. What happens if your Department determines that my business is not in compliance with the credit agreement? We would consider this a possible breach. We will provide information to you and GO-Biz that explains the basis for our determination.
  2. What does GO-Biz consider a breach? A breach includes one or more of the following:
    • Failure to furnish us or GO-BIZ with information.
    • Material misstatements in any information your business provided to GO-Biz.
    • Failure to materially satisfy or maintain the milestones.
  3. What happens after your Department notifies GO-Biz of a possible breach?In general, GO-Biz will contact you and allow you some time to resolve it. If you are unable to resolve the breach, GO-Biz may recommend a recapture to the Committee.
  4. Who decides on a credit recapture?GO-Biz will recommend a credit recapture to the Committee. If the Committee makes the decision to recapture a credit, GO-Biz will notify you and us about the recapture and the amount.
  5. How does my business report a recapture on its tax return? Your business will report it on its tax return for the taxable year the Committee makes the recapture decision. If your business does not report it on its tax return, we will send you a bill.

Miscellaneous Information

If I have questions about our CCTC review process, who do I contact?

Email us at:  GEDI@ftb.ca.gov

Link: Governor’s 2013 Economic Development Initiative

If you have suggestions or comments, send us an email to: taxnews@ftb.ca.gov

Crunch Time: New Tax Law Effect on Tax Returns Filed Before and After July 1, 2015

As previously reported, the Louisiana legislature passed a variety of bills modifying the state’s tax laws, many of which will be effective July 1, 2015. Given tax return filing cycles, these bills may affect tax returns not yet filed for prior years. Interestingly, these bills also specifically state that the laws, if signed by the Governor, are applicable on the effective date of the legislation regardless of the year to which a tax return filed on or after the effective date relates. Taxpayers should, while waiting to be sure the Governor has signed these, carefully review changes and consult their tax advisors to determine if filing returns or extensions before July 1, 2015 is beneficial.

Click here to view the Effect on Returns

Florida – Notice of proposed assessment is not a timely assessment for statute of limitations purposes

On June 11, 2015, the Florida Court of Appeal First District concluded that a Notice of Proposed Assessment (NOPA) is not an ‘assessment’ for purposes of Florida’s statute of limitations. Florida law generally requires that the Department may ‘assess’ an amount of tax within three years after the tax is due. The court determined that the assessment contemplated in the statute of limitations is a ‘final assessment,’ not a proposed assessment. The final assessment in this case occurred at the expiration of the 60-day protest period following the issuance of the NOPA, which was after the expiration of the statute of limitations. Accordingly, the court found that the Department’s assessment was untimely.

Although the tax at issue in this case was a sales tax, the court’s ruling appears to be applicable to income tax matters as well. Taxpayers that received NOPAs fewer than 60 days prior to the expiration of their statute of limitations period and are challenging an assessment should review whether the Department’s assessment is timely consistent with the guidance in this case.

Click here to continue reading: pwc-florida-proposed-assessment-not-timely-statute-limitations

Texas enacts permanent Franchise Tax rate reduction

Link: Read more

On June 15, 2015, Texas Governor Greg Abbott signed H.B. 32, which permanently reduces the Texas Franchise Tax (Margin Tax) rates by 25% to 0.375% of taxable margin for taxpayers primarily engaged in retail or wholesale trade and to 0.75% of taxable margin for all other taxpayers.  The reduction is applicable to tax reports originally due on or after January 1, 2016. Prior to H.B. 32, the 2016 report year tax rates were due to revert to their general rates of 0.5% for retail or wholesale trade businesses and 1% for all other taxpayers.  For reports due in 2015, the rates were temporarily reduced to 0.475% for retailers or wholesalers and 0.95% for other taxpayers. For reports due on or after January 1, 2016, H.B. 32 sets an EZ tax rate of 0.331% and allows a taxpayer to elect the EZ Computation if its revenue is no more than $20 million.  For reports due in 2015, the Franchise Tax imposes a rate of 0.575% for those entities with $10 million or less in total revenue electing the EZ Computation.

New LA Tax Laws Require Quick Decisions (Before July 1) to Preserve Favorable Tax Treatment

 

The Louisiana Legislature has completed its work and critical decisions must be made between now and the effective date of most of the bills: July 1, 2015. The tax legislation that passed, if not vetoed, will address the state’s budget issues by dipping into the pockets of business, certain industries and S corporation shareholders, and even individuals, but there are time-limited opportunities to avoid some of the impact of the new legislation by acting quickly. That is, for some taxpayers, there is a brief window of opportunity to save taxes by filing 2014 income/franchise tax returns, S corporation shareholder returns and individual income tax returns before the effective date. Other significant legislation that passed includes a bill specifically expanding Louisiana’s ability to require remote vendors to collect Louisiana use taxes and legislation severely curtailing solar tax credits and making significant changes to Louisiana’s film tax credit program. Please note that no bill is final until the Governor signs it (with the exception of HCR8), however, the governor promised the legislature not to veto its tax increases if the legislature passed the “SAVE” Act, which it did. The following is a summary of some of the tax bills that passed:

 

Across the Board Reduction in Tax Benefits HB 624 contains several different measures intended to increase revenue that all operate in the same manner. Specifically, this bill, as engrossed, reduces the complete exclusion from certain taxes for credit unions, mutual savings banks, and electric cooperatives to a 72% exclusion. In addition, this bill reduces the complete exclusion from gross income for both interest received from Louisiana obligations and funds accrued by a corporation operating a public transportation system to a 72% exclusion. HB 624 also reduces a number of deductions from a complete deduction to a 72% deduction, including refunds of Louisiana corporate income tax receiving during the year, funds received by a corporation engaged in operating a public transportation system, interest on Louisiana obligations and securities, deductions related to certain casualty losses, certain dividends, and certain benefits provided for hurricane recovery. In addition to these deductions, this bill also proposes to reduce the net operating loss available for use in a given year to 72% of the Louisiana loss incurred in the preceding year. This bill also reduces the allowances and deductions related to depletion for oil and gas wells. Some of these measures are applicable to returns that are filed after July 1, 2015, even if filed pursuant to timely extension. Alternatively, filing prior to July 1, 2015 may preserve the greater tax benefits available under prior law. Some taxpayers may want to file before July 1 and amend later. While these revenue increasing measures may seem extreme, they are set to expire as of June 30, 2018.
Reduction/Delay of Refundability of Inventory Tax Credit HB 805 changes the tax credit structure for ad valorem taxes paid on certain inventory held by manufacturers, distributors, and retailers and on natural gas held or consumed in providing natural gas storage services or operating natural gas storage facilities. Whereas taxpayers are currently entitled to a 100% credit of the taxes paid with a complete refund for any allowable credit which exceeds their aggregate tax liability, HB 805 proposes to alter the tax credit from a refundable credit to one in which only 75% of the excess credit is refundable and the remaining 25% is carried forward and may be applied against subsequent income tax liability for up to five years. In addition, HB 805 modifies the research and development credit and the Small Business Innovation Research Grant Credit, making them nonrefundable, but able to be carried forward for a period not exceeding 5 years. Importantly, the bill provides that these provisions will not apply to any returns filed before July 1, 2015 where the credits at issue are claimed, even if those returns are subsequently amended on or after July 1, 2015. HB 805 was forwarded to the Governor on June 12.
Reduction of Certain Tax Credits HB 629 provides for a reduction of certain tax credits including the corporation tax credit, the neighborhood assistance tax credit, the tax credit for contributions to educational institutions, credits arising from refunds by utilities, certain job credits, the credit for employee or dependent health insurance coverage, the rehabilitation tax credit, and the Louisiana Basic Skills Training tax credit, along with other miscellaneous credits. These reductions in tax credit will be effective from July 1, 2015 until June 30, 2018. Importantly, these reductions will not apply to tax returns claiming a credit filed before July 1, 2015 regardless of the taxable year to which the return applies, even if such return is subsequently amended. If, however, the tax return is filed after July 1, 2015 pursuant to an extension executed before July 1, 2015, then the excess disallowed credit can be carried forward equally to tax years 2017, 2018, and 2019. This bill was sent to the Governor on June 15.
Changes to Credit for Taxes Paid to Other States HB 402 modifies the requirements that must be met in order for an individual taxpayer (including S corporation shareholders) to claim a credit against Louisiana income/franchise tax for taxes paid to another state. Specifically, this bill states that the credit will only be allowed if the other state allows a similar credit for Louisiana taxes paid and only to the extent of the amount of Louisiana tax that would have been due had the income been earned in Louisiana. Finally, the credit will not be allowed with respect to states that give a nonresident a credit against income taxes for the nonresident state for taxes payable to other states. Texas does not currently offer such a credit against Louisiana income taxes for its margin tax. As with respect to HB 629, this modification will not apply to tax returns claiming the credit filed before July 1, 2015 regardless of the taxable year to which the return applies, even if such return is subsequently amended. If, however, the tax return is filed after July 1, 2015 pursuant to an extension executed before July 1, 2015, then the excess disallowed credit can be carried forward equally to tax years 2017, 2018, and 2019. On June 12, this bill was sent to the Governor for approval.
Increase in Tax on Business Utilities HCR 8 temporarily suspends the 0.97% tax exemption for all business utilities on the state sale and use tax levied on the sales of steam, water, electric power or energy, and natural gas. HCR 8 is drafted to be operative for only the period from July 1, 2015 to 60 days after final adjournment of the Louisiana Legislature’s 2016 Regular Session. This resolution was enrolled and signed by the Speaker of the House on June 12 and subsequently sent to the Secretary of State.
Reduction of Certain Business Tax Incentives HB 635 provides for the reduction and modification of certain business tax incentives. Specifically, the bill requires that certain businesses who enter into contracts after July 1, 2015 that would entitle them to Enterprise Zone credits are ineligible for the credits unless an advance notification form was filed before July 1, 2015. In addition, the bill modifies the Louisiana Mega-Project Energy Assistance rebate to 80% of severance taxes imposed on natural gas used, directly or indirectly, in the project. With respect to the Louisiana Quality Jobs Program Act, incentive rebate is reduced to the statutory benefit rate multiplied by 80% of the eligible gross payroll for those whose advance notification was filed on or after July 1, 2015. HB 635 also reduces the amount of the contract administration rebate by 5% related to projects for which the Secretary invites application on or after July 1, 2015. Similarly, this bill reduces the amount of new payroll eligible for the Competitive Projects Payroll Incentive Program and the percentage of the project facility expense rebate for projects that the Secretary invites application on or after July 1, 2015. These reductions will be effective from July 1, 2015 until June 30, 2018.
Remote Vendor Nexus Bills HB 555, which provides for the collection of sales and use taxes by remote dealers, has been passed and sent to the Governor for executive approval. This bill expands the definition of “dealer” for sales and use tax purposes and requires remote dealers to collect and remit sales and use tax and to electronically file Louisiana sales and use tax returns. The definition of “dealer” will also include manufacturers of tangible personal property; those who solicit business by compensating Louisiana-based referral sources (with a rebuttable presumption of dealer status if the person derives over $50,000 in cumulative gross receipts during the preceding 12 months from sales of tangible person property to customers in Louisiana as a result of such referrals); those who sell the same or substantially the same line of products as a Louisiana retailer; those who solicit business and develop a market in Louisiana through the use and compensation of a Louisiana-based affiliated agent; persons holding a substantial ownership interest, directly or through a subsidiary, in a retailer maintaining sales locations in Louisiana; and persons who are owned in whole or substantial part by a retailer maintaining sales locations in Louisiana. Taxpayers from whom dealers collect this tax may obtain a refund if the taxpayer either shows that the appropriate use tax return has been filed, along with proof of payment, or provides an affidavit affirming that the delivery and use of the property will be in a parish with no use tax imposed. These provisions would apply to tax periods beginning on and after July 1, 2015.
Film Tax Credit Changes The Louisiana Legislature has enacted significant changes to the state’s film investor tax credit program by implementing several new restrictions on program eligibility and the amount of credits available to investors per fiscal year, as well as other areas. Chief among these changes is the program-wide cap on investor tax credits proposed under HB 829, which the Senate has currently placed at $30 million per production and $180 million per year on a first come, first served basis, with redeemed credits from previously withheld productions counting towards the yearly cap. In addition to a credit cap, other measures modify and/or restrict qualifying expenditures, such as SB 100, which limits production expenditures on related party transactions; SB 102, which limits tax credits if expenditures for “Above-the-Line” exceed 40% of total production expenditures; and SB 103, which excludes finance fees, insurance fees, and travel fees as eligible expenditures. Further, some of the proposed legislation seeks to identify and remove eligibility for “bad actors” (not a pun) while protecting those who purchase credits, even from bad actors, in good faith (SB 98 imposes a background check for certain participants, and SB 106 and HB 748 disallow credits for those who applied for or received credits through fraud or misrepresentation, while simultaneously protecting the authorized transfer of credits of third-parties without knowledge of such fraud or misrepresentation). Still other changes stem from a tightened credit verification process aimed at securing certification from the Louisiana Workforce Commission or disinterested, third-party CPAs or tax attorneys (SB 101 and HB 604, respectively), a requirement that actor salaries be withheld as individual income tax (HB 735), or that a production simply use Louisiana promotional graphics in their marketing (HB 678).
Solar Tax Credit Changes HB 779 makes drastic changes to the state’s solar energy systems tax credit, including a repeal of the credit for solar thermal systems, and a phase-out of the credit itself. At a minimum, the revised law reduces the solar tax credit available for purchased systems, modifies when the tax credit may be claimed, and reduces the maximum amount of the credit allowed when such systems are installed during portions of the new effective period. Similar treatment is also given to leased systems. The new law also adds an annual cap for both purchased and leased systems in the amount of $10 million, $10 million, and $5 million, which cap is effective in calendar years fiscal years starting in 2015, 2016, and 2017, respectively. The statute distinguishes between leased and purchased systems however as it relates to 2014 installations which won’t be claimed on returns until 2015. The cap for leased systems installed in the 2014–2015 fiscal year but with respect to which credits were not granted prior to June 1, 2015, is $19 million. There is no similar provision for purchased systems. Credits are granted on a first come, first served basis until the annual cap is reached so it is important to file sooner rather than later. HB 779 also requires the submission of certain information when claiming a solar tax credit, regardless whether the system was purchased or leased, such as proof of installation, information on the solar panels, the terms of any financing for the system, and forms for the sworn statements to be issued by the dealer and installer regarding the system’s size.

 

Other less time-sensitive legislation that passed includes:

 

Unclaimed Property Law Tweaks This bill (HB 692) proposes changes relating to the unclaimed property law impacting banks and financial institutions. Specifically, this bill expands the ways in which an owner can show “interest” in his property thereby interrupting the abandonment period. Under this bill, an indication of an owner’s interest in the property would be shown by a one-time or recurring electronic transaction authorized by the owner as well as accessing a deposit account through the website of the financial organization. This bill was sent to the Governor for approval on June 9.
BTA Clean Up Bill HB 338, which introduces a number of procedural provisions, primarily with respect to the Board of Tax Appeals (“BTA”), has been passed and sent to the Governor for approval. As explained in our prior coverage, key provisions of this bill include establishing the Local Tax Division of the BTA as an independent agency within the BTA and tweaking the local tax judge position; adding remedies for the collection of taxes by collectors, such as reconventional demand and third-party demand, in any court or before the BTA; providing additional circumstances in which prescription of both assessment and refunds may be suspended; establishing an Escrow Account for the BTA; and increasing notice requirements and allowing taxpayers to rely on the date of a notice of disallowance of a refund claim in determining timeliness of an appeal to the BTA.
Sales and Use Tax Modernization Study Commission Authorized Members of the Louisiana legislature have realized that the current state and local sales tax system in Louisiana is rapidly becoming dated with the introduction of new types of business and sales platforms. HB 471 seeks to help Louisiana modernize its state and local sales tax statutes through creation of the Sales Tax Streamlining and Modernization Commission. This Commission will be compromised of 19 members consisting of a variety of individuals and stakeholders including members of the legislature, the Department of Revenue, and local taxing interests. The thrust of the Commission’s duty will be to conduct studies relating to how current Louisiana state and local sales tax policy affects the economy of the state in comparison to areas with similar demographics and economies. Specifically, the Commission will be tasked with studying how the introduction of a broad-based tax on services might impact revenue, the efficiency of Louisiana’s sales tax collection and audit procedures, and a comprehensive study of special tax treatment, including credits, deductions, exclusions, exemptions, and rebates. During its time in the Senate, the Senate amended the bill to require that the Louisiana Legislative Auditor be included in the Commission. The House of Representatives concurred in this amendment, and, after the bill was signed by the Speaker of the House and the President of the Senate, it was forwarded to the Governor on June 11.

Map: State and Local General Sales Tax Collections Per Capita

Link:  You can find the data used to create this map here.
June 11, 2015

State and local governments obtained 23 percent of their combined tax collections from general sales taxes in the 2012 fiscal year (the most recent year available). This week’s map shows the amount of state and local sales tax collections per capita in each state.

Click on map to enlarge. (See our reposting policy here.)

On average state and local governments collected a combined $1,007 person in the 2012 fiscal year—but some states vary significantly from this average. For example, four states have no sales tax: Delaware, Montana, New Hampshire, and Oregon. Alaska does not have a state sales tax, but does have local sales taxes.

The five states with the highest state-local sales tax collections per person in 2012 were Wyoming ($2,103 per person), Hawaii ($2,088 per person), Washington ($1,907 per person), North Dakota ($1,850 per person), and Louisiana ($1,451 per person). Rounding out the top ten are New Mexico, South Dakota, Nevada, Tennessee, and Arizona.

Alternatively, the five states with the lowest sales tax collections per capita (not including those states that don’t have a sales tax) were Virginia ($559 per person), Vermont ($561 per person), West Virginia ($688 per person), Maryland ($695 per person), and Kentucky ($698 per person).

You can find the data used to create this map here.

The Resurrection of the Marketplace Fairness Act

What your clients need to know about changes to Internet sales tax laws

Link:  Learn how it works

Avalara

It seemed, in the spring of 2013, that Internet sales tax would soon become a reality. The Senate had overwhelmingly passed the Marketplace Fairness Act of 2013 (MFA) and sent it to the House for consideration. Amazon.com was collecting sales tax in a growing number of states, including New York, where the company’s efforts to battle the state’s Amazon tax law failed. Small business owners and lawmakers across the nation were increasingly calling for remote retailers to collect sales tax like their brick-and-mortar counterparts. Numerous states were considering or enacting some sort of remote sales tax legislation.

And then momentum stalled. Several federal lawmakers said they would work to ensure the bill would not become law. In September 2013, Chairman of the House Judiciary Committee Bob Goodlatte (R-VA) expressed concerns that the bill was too complex and released Seven Basic Principles on Remote Sales Tax to guide future discussions. And then the issue went dark until March 2014, when a hearing was held on the matter.

2014 was then going to be the Year of Online Sales Tax, although MFA did nothing but gather dust in the House. When the measure failed to come to a vote during the regular session, pundits said it would come up during the Lame Duck Session. House Speaker John Boehner said it absolutely would not. He proved correct, and 2015 arrived with no remote sales tax law.

Nonetheless, optimism reigns among proponents of Internet sales tax legislation. Perhaps 2015 will be the year. And if it is, now is a good time to talk to clients about how this could impact them.

There are currently three versions of remote sales tax legislation floating around the nation’s capitol. Each one would create different consequences for remote retailers. The best thing you can do for your clients is to help them understand all three – and help prepare them to eventually collect in states where they do business. The lack of a federal solution has sparked a plethora of remote sales tax legislation at the state level.

The Marketplace Fairness Act of 2015

The new version of MFA is similar to the 2013 bill and is, in fact, sponsored by many of the same lawmakers.

Under MFA 2015 (Senate Bill 698):

  • States with simplified tax code are given additional taxing authority over remote sales.
  • There is a small seller exception for sellers with gross annual receipts of less than $1,000,000 in total U.S. remote sales.
  • Sales are destination-sourced (the sales tax rate is based on the location where the buyer receives the product or service).

The 23 member states of the Streamlined Sales and Use Tax Agreement (SSUTA) are well positioned to take advantage of this legislation. They are authorized to collect and remit sales and use taxes on remote sales “pursuant to the provisions of the Streamlined Sales and Use Tax Agreement… beginning 180 days after the State publishes notices of the State’s intent to exercise the authority under this Act, but no earlier than the first day of the calendar quarter that is at least 180 days after the date of the enactment of this Act.”

States that are not full members of the SSUTA must adopt and implement certain “minimum simplification requirements” in order to collect and remit sales and use taxes on remote sales. For example, they must have a system in place to provide remote sellers and certified software providers with 90 days’ notice of a state or local rate change. The authority to collect “shall commence beginning no earlier than the first day of the calendar quarter that is at least 6 months after the date that the state” implements the minimum simplification requirements.

States could not “begin to exercise the authority” under MFA 2015:

  • Before the date that is one year after the date of the enactment of this Act; and
  • Between October 1 and December 31 of the first calendar year beginning after the date of the enactment of this Act.

MFA 2015 would have no effect on nexus; it would neither alter existing nexus nor create nexus between a state and a seller. Sales made to states with no sales tax would not be subject to tax.

In addition, it would have no effect on seller choice: “Nothing in this Act shall be construed to deny the ability of a remote seller to deploy and utilize a certified software provider of the seller’s choice.” Finally, MFA 2015 would not impose new sales and use taxes or affect intrastate sales or the Mobile Telecommunications Sourcing Act.

Remote Transactions Parity Act of 2015

The Remote Transactions Parity Act of 2015, drafted by Rep. Jason Chaffetz (R-UT), is similar to the MFA in that it would allow states to apply sales tax to remote sales. The measure is still a draft.

As with MFA, the 23 member states of the SSUTA would be authorized to require remote sellers to collect and remit sales tax “beginning 180 days after the State publishes notices of the State’s intent to exercise the authority under this Act.” And as under MFA, remote sales tax could not begin “before the date that is 1 year after the date of the enactment of this Act,” and during the October 1 – December 31 holiday shopping period “of the first calendar year beginning after the date of the enactment of this Act.”

Non-member states would have to adopt and implement certain minimum simplification requirements. Only after such requirements have been met may remote sales tax collection start, and then only as early as the first day of a month and commencing “no earlier than the first day of the calendar quarter that is at least 6 months after the date that the state enacts legislation to exercise the authority granted by this Act.”

The small remote seller exception is different from the small seller exception under MFA. In the Remote Transactions Parity Act, remote sellers must:

  • “Have gross annual receipts exceeding $10,000,000 in the calendar year preceding the first calendar year any State can exercise the authority provided under this Act.”
  • Have gross annual receipts exceeding $5,000,000 in the “second calendar year any State can exercise the authority provided under this Act.”
  • Have gross annual receipts exceeding $1,000,000 for the “third and subsequent calendar year any State can exercise the authority provided under this Act.”

In addition, the December 2014 draft bill provides for a catalog seller exception. Sellers that sell only through catalogs and do not engage in any “sales activity on the Internet of any kind whatsoever, whether directly or through another person, including advertising, order acceptance, solicitation, and payment processing” may not be required to collect remote sales tax.

The Remote Transactions Parity Act, like MFA, would have no effect on nexus; sales made to states with no sales tax would not be subject to tax. In addition, it would create no new taxes and have no effect on intrastate sales or the Mobile Telecommunications Sourcing Act.

Online Sales Simplification Act

House Judiciary Chair Bob Goodlatte (of 7 Principles to Guide Online Sales Tax fame) and Rep. Anna Eshoo (D-CA) quietly distributed a draft version of the Online Sales Simplification Act (OSSA) to committee members in January.

OSSA is quite different from MFA 2015 and the Remote Transactions Parity Act. Most notable, perhaps, is that it does not provide for a small seller exception and it would allow states to require in-state sellers to collect sales tax on all interstate sales.

Under OSSA:

  • Sales are origin-sourced (the sales tax rate is based on the location of the seller instead of the purchaser).
  • A lowest combined rate of sales tax is established for remote sellers from states with no sales tax.
  • Sellers remit the collected sales tax to the origin state.
  • States “determine the total tax imposed on remote sales for which that State was the origin State” each month.
  • The taxing authority of each participating state “shall distribute the tax collected on remote sales for which that State was the origin State to each State that was a destination State for such sales, in proportion to that State’s share of the collected tax on remote sales, using a single entity (including with respect to funding and staffing)….”

The Sales Simplification Act adds layers of complexity to remote sales tax collection. Under it, “the lowest combined rate within any of the contiguous 48 States that do impose a sales tax” would be determined and remote sellers located in states without sales tax would be required to collect that “flat tax” on all remote sales.

Also, the origin-sourcing makes it so a Washington State resident who purchases an item on the Internet from a seller based in Florida would pay the Florida rate of sales tax instead of the Washington rate (eventually, Washington State would receive that revenue).

States that opt to not participate in this method would be prohibited from imposing sales tax on remote sales.

The Next Step

The issue of remote sales tax has long been brewing and eventually it will come to a head. Earlier this year, Supreme Court Justice Kennedy spoke of “a serious continuing injustice faced by Colorado and other states.” He was referring to the fact that the Court had, in the past, determined that “States cannot require a business to collect use taxes… if the business does not have a physical presence in the State.” He continued with this:

“There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently ‘substantial nexus’ to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet…”

Prepare your clients for the eventuality of collecting sales tax in states where they do business. Such a requirement could grow out of federal legislation like the three examples above; it could be triggered by legislative changes at the state level; or it could be caused by a United States Supreme Court decision.

A nexus study can help your clients understand where they currently have nexus and how various proposed changes to remote sales tax legislation could impact their business in the future. Automated sales tax Software-as-a-Service will enable your clients to stay on top of new rules and obligations, facilitating sales tax management and increasing compliance. In addition, it frees resources for more profitable activities. Learn how it works.