What states are coming up with amnesty programs of their own?
Across the U.S., amnesty seems to be a popular topic these days. The Multistate Tax Commission’s (MTC) special amnesty program for marketplace retailers recently ended. And a few other states have recently announced their own amnesty programs so that they can benefit from potential increased compliance as well. Connecticut (CT), Ohio (OH) and Rhode Island (RI) are the latest states to roll out amnesty programs of their own. And we expect others to follow. The states administer amnesty programs because they want to induce companies to become compliant by waiving, or limiting penalties and interest for prior unpaid taxes.
Recent MTC amnesty program
Many states just took part in a special amnesty program. The MTC had negotiated this special program for online sellers using marketplace fulfillment services (such as Fulfillment by Amazon) that created nexus and thereby had sales tax and income tax obligations. Twenty five states participated, including CT and RI. To find out more about this amnesty program, click here.
This special amnesty program waived taxes in addition to interest and penalties. We’ve cautioned our clients not to expect amnesties to be that generous in the future. Most state amnesties allow taxpayers to waive penalties and some interest, but rarely the tax itself.
An update on the new amnesty program.
Last month, we updated our readers on an ongoing amnesty program for state taxes that is currently taking effect. As this program could be helpful to sellers utilizing fulfillment marketplaces, we wanted to provide an update on this program so qualified companies can take advantage of the potential benefits of the amnesty.
What exactly is it?
Despite certain online sellers, like Amazon, volunteering to collect tax across the U.S., many online sellers are not collecting tax in states where they may have (intentionally or inadvertently) created nexus. Amnesty programs encourage companies to become compliant in a given state. This one is a grand-scale amnesty, covering many states.
The nexus committee of the Multistate Tax Commission (MTC) approved the MTC to participate in a multistate sales tax amnesty program for third-party sellers whose only nexus with a state is the use of fulfillment services offered by third-party marketplaces. The Multistate Voluntary Disclosure Program (MVDP) provides a way for a taxpayer with a potential tax liability in multiple states, to negotiate a settlement, using a uniform procedure.
Could an Amnesty Program erase your tax burden?
There is a new scheduled amnesty program that may help businesses correct overlooked tax obligations if they have been selling products and services in other states. Many companies engage in multi-state sales through an intermediary, like Amazon, eBay and similar organizations called “fulfillment services.” The fulfillment centers place a seller’s inventory in warehouses in multiple states to expedite shipping, but in the process, create nexus for the seller in those states. As such, the sellers have an obligation to collect sales tax and pay income tax. Unfortunately, unpaid taxes may incur penalties and interest. Now there may be a short time window to correct these errors and avoid interest and penalties.
On Monday, July 31, the nexus committee of the Multistate Tax Commission (MTC) approved the MTC to participate in a multistate sales tax amnesty program for third-party sellers whose only nexus with a state is the use of fulfillment services offered by third-party marketplaces. The MTC is an intergovernmental state tax agency working on behalf of states and taxpayers to facilitate the equitable and efficient administration of state tax laws that apply to multistate and multinational enterprises.
I just returned from an amazing vacation – a cruise of the Mediterranean. We started in Athens, Greece; spent just a couple days there enjoying the history, and then boarded our ship. The cruise took us to the Greek isles of Santorini and Crete, and then we sailed to Italy, the beautiful St. Tropez, France, and finally Barcelona, Spain. We finished our vacation by sampling many, many tapas and wines in Barcelona. About midway through our vacation, I found myself wondering – how could I do US multistate tax consulting somewhere in Europe? I’m still working on that angle, and will certainly keep you posted.
But meanwhile, on the flip side of that equation, we’ve been engaging with several foreign companies who have US operations and find our state tax laws to be, well, challenging! As I tell all my foreign clients – trust me, they are challenging for US companies too! Here are some of the main things for foreign companies to think about as they begin doing business in the US.
A colonial house set amongst vibrant trees.
This month we travel across the country to Virginia. One of the original 13 colonies, Virginia possesses a lot of living history with the Jamestown Settlement and Colonial Williamsburg being notable historic landmarks.
The Shenandoah National Park lies in the eastern part of the state deep in the Blue Ridge Mountains. Mostly forested, the park features wetlands, waterfalls and rocky peaks, like Hawksbill, and Old Rag mountains. It is also home to many bird species, deer, squirrels and the elusive black bear.
If you’re a start-up company with annual gross receipts of less than $5 million, you can now apply up to $250,000 of your R&D credit against your payroll tax liability.
Featured Guest Blogger- Carolyn Driscoll
The federal R&D tax credit is a dollar-for-dollar reduction of federal income tax liability for qualified expenditures incident to the development or improvement of a product, process, software, formula or invention. It was recently made permanent by The Protecting Americans from Tax Hikes Act of 2015 (“PATH” Act).
Previously, a company had to actually generate a profit and taxable income to utilize the R&D tax credit. Now the PATH Act allows start-up companies to utilize the credit against their payroll taxes, if the companies perform “qualified research”.
In the state tax world, one of the most important concepts is that of “nexus”. Nexus is the term that we use to describe the minimum connection that a company (taxpayer) must have with the state in order for the state to be able to subject that company to its state taxing scheme (including sales tax, income tax, gross receipts tax, and others); otherwise known as “taxable presence”. Great! So what does that all really mean? And can we really cover it all in this blog article? (The short answer is no – but it’s a good start to a series!)
Let’s start with the basic premise that physical presence in a state will give a company nexus. Thus, if a company has “boots on the ground” in terms of employees or third party contractors working in the state, or has inventory or other personal property or real property in the state, the company likely has nexus with the state.
People: When we consider the people that a company may have in a state and that can create nexus, note that it can be more far reaching than people think. All of the following can create nexus (both for sales tax and income tax purposes) if engaged in activities in the state:
- Engineers or salespeople working from their homes,
- Employees traveling regularly into the state from other states (often this includes salespeople or consultants engaged on-site with customers),
- Third-party contractors (“1099’s”) working on the company’s behalf or representing the company. (An example would be independent contractors that engage in training or trouble-shooting at customer locations periodically, or those that engage in product installation.)
Note that there is a “safe harbor” for income tax only under Public Law 86-272. The Federal P.L. 86-272 prohibits a state from imposing its income tax on a company if the company’s only activity in the state is the solicitation of orders of tangible personal property, where those orders are approved from out of state AND shipped to the customer from inventory located outside the state. (Note that all of these requirements must be met in order for the activity to be protected from creation of nexus under the Public Law.) While this may seem like a broad exception, it is actually fairly narrow considering today’s more service-based economy. We often encounter clients that would meet the exception for their sales of widgets into a state (at first), but then the complete customer service package often includes the installation of the widget, training on how to use the widget or frequent visits to the customer location to customize the widget. Once the company begins to sell services or engage third party contractors for training and installation, the protection of P.L. 86-272 is lost. Continue reading
Picture from inside the new Levi’s Stadium in Santa Clara, CA on December 28, 2014. Miles Consulting Group was invited by the Arizona Commerce Authority to watch the San Francisco 49ers play the Arizona Cardinals.
Last month the Arizona Commerce Authority (“ACA”) hosted an event to watch the San Francisco 49ers take on the Arizona Cardinals at the new Levi’s Stadium in Santa Clara. Gilbert Gonzalez, Vice President of Business Attraction Northern California, of the ACA invited us to attend. While we had a great time at the game, we also got to learn more about what the ACA offers to businesses expanding or relocating into Arizona. The state offers various appealing tax credits and incentives (some very similar to what California offers, watch out Golden State!) as well as a great business climate that may just steal a few California businesses.
As our way of saying thanks, we decided to put our focus on the Grand Canyon State for this feature of the State of the Month.
The manufacturing industry in Arizona plays a pivotal role in serving other industries. The state has over 4,500 establishments and employs over 155,000 people in manufacturing. The average wage of a manufacturing position is 50% more than the average wage for any position in Arizona. In 2012, the total manufacturing output was $23.66 billion, equivalent to more than 10% of Arizona’s Real GDP.
Another key sector in Arizona’s economy is the aerospace & defense industry. This industry has over 1,200 companies including major contractors such as Raytheon Missile Systems (11,900 employees) and Honeywell Aerospace (10,100 employees). This sector represents over 150,000 jobs and contributes $15 billion to the gross state product. Continue reading
The cloud confuses traditional rules surrounding property
On its surface, the cloud is a relatively simple idea…except where sales taxes are concerned. Individuals and businesses use the cloud to access programs or store data via the Internet. There is usually no tangible property or service you can physically hold, nor can these materials be downloaded. However, you can often use them as you would previously have used the tangible version (i.e. digital music vs. a CD or software off the shelf vs. software as a service (“SaaS”) and that’s where this issue gets complicated. The cloud challenges standard definitions of property and raises serious questions about taxation, both for sales tax and income tax.
Good or Service?
Say you purchase the use of “software” from a cloud provider for use in your business. Does it count as a tangible good even though the traditional rules don’t apply? A key component of personal property is whether or not the item can be touched or otherwise “perceived by the senses.” For instance, a house is real estate, a car is personal property. These are important distinctions because classification determines what kinds of taxes apply. The water only gets muddier when you consider how the software is accessed. Chances are your business uses some form of cloud hosting service. Does this make the good a service? This is an argument that will need to be addressed as more and companies move toward cloud commerce. Continue reading
The Supreme Court’s decision could affect tax laws across the US
The United States Supreme Court has agreed to hear a case that has major tax implications. The central issue in Maryland State Comptroller v. Wayne is the extent to which states can tax income earned in another state by one of its residents. Maryland collects income tax at the state and county level. Residents are allowed to deduct income taxes paid to other states. However, the deduction doesn’t apply to taxes collected by the county.
Brian and Karen Wynne held a stake in an S corporation which did business in 39 states. S corporations, like Limited Liability Companies and Partnerships, are pass-through entities which means income from the business can be applied to individual tax returns. Prior to deductions the Wynnes reported over $126,000 in Maryland state income tax. They claimed credits of more than $84,000 in taxes paid to other states. The Maryland Comptroller allowed the Wynnes to claim a credit from the state income tax but not the county. Continue reading