Jul 19, 2017
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The Tax Cuts and Jobs Act of 2017 (“TCJA” P.L. No. 115-97) significantly changed the interest deductibility rules for business interest expense for tax years beginning after December 31, 2017. As many businesses are coming to the close of their taxation year, it may be prudent to review how these changes will impact current year taxable income.
On November 27, 2018, Treasury and the IRS released proposed regulations (REG-106089-18). These proposed regulations addressed the business interest expense limitation under IRC §163(j) as amended. The proposed regulations provide guidance as to the application of IRC §163(j) to C Corporations, consolidated groups, pass-through entities (partnerships, LLCs and S-corporations), and foreign corporations.
IRC §163(j) sets a limitation on the amount of business interest that may be deducted in computing taxable income. The amount, allowed as a deduction, shall not exceed the sum of:
Adjusted taxable income as defined means “the taxable income of the taxpayer
(A) computed without regard to
(B) computed with such other adjustments as provided by the Secretary.”
Business interest expense would not include any other interest expense that is permanently disallowed as a deduction pursuant to another provision of the Internal Revenue Code. Any business interest expense which is not, currently, deductible, will be carried forward and treated as business interest expense paid or accrued in the succeeding taxable year.
Small businesses, however, are excluded from this limitation. IRC §163(j)(3) specifically provides that paragraph (1) does not apply to such taxpayer for such taxable year if they are under the gross receipts test of IRC §448(c). In general, a corporation or partnership will meet the gross receipts test, for any taxable year, if the average annual gross receipts of such entity for the 3-taxable year period ending with the taxable year, preceding the current year, does not exceed U.S. $25,000,000.
Many small private business (for example Canadian controlled private corporations) will be under this gross receipts test threshold. As such, IRC §163(j) will have little or no impact on them and their shareholders. For larger businesses, however, these new limitations need to be considered in terms of both computing taxable income and the potential after-tax cost of financing additional investments in the company (I.e., fixed asset additions, etc.)
Given all the changes, and their respective implementation dates, taxpayers need to be cognizant of all the changes that the Tax Cuts and Jobs Act encompassed.
We at Cadesky U.S. Tax strive to keep our clients up to date on all relevant U.S. tax issues. If you have any questions or needs please do not hesitate to reach out to your Cadesky U.S. Tax team member.
All United States persons (citizens and green card holders) are required to obtain a Social Security Number (“SSN”). This number, which stays with an individual for life, is used for all U.S. government benefits and services, including tax administration. A U.S. person should never apply for an Individual Taxpayer Identification Number (“ITIN”) through the IRS as these numbers are for U.S. Nonresident Aliens only.
An SSN is used for many purposes outside of government benefits and taxes. It is also used as an identification number for most state governments, universities, and in the private sector for things like an individual’s credit history or banking information. For this reason, the Social Security Administration is quite cautious when assigning new Social Security Numbers and advises individuals to keep their number secure at all times.
There are three types of Social Security cards issued. The first is for U.S. citizens and residents (green card holders) which entitles an individual to government benefits and to work in the US. The second type of card is issued to individuals who are admitted to the U.S. on a temporary basis and will be marked as “Valid for work only with DHS authorization.” The third type, which is marked “Not valid for employment” is for those individuals who are required to have an SSN but are not authorized to work in the U.S.
Applications for a new Social Security Number or a replacement card can only be made in person at a Social Security Administration office. There are no Social Security offices in Canada, but there are specific offices in the U.S. that are designated to assist Canadian residents. A list of these offices can be found on the Social Security website at www.ssa.gov/foreign/canada.htm. The office closest to the GTA is in Niagara Falls, New York.
Individuals are encouraged to check the Social Security Administration website or call the local office before visiting to determine what documentation will be required. Generally proof of citizenship and other identifying information will be required. In addition, for adult individuals who are U.S. citizens and who are applying for a new Social Security Number, they will be required to provide documentation supporting their foreign residency. Several of our clients have reported that this documentation requirement has included obtaining school and employment records for the entire period they were resident outside of the United States. It can be quite a challenge to collect all this information, so best to check first before a trip to the office is made.
After an SSN is obtained, it is important to keep your information up-to-date. Name changes must be made directly with the Social Security Administration and cannot be made by individual government agencies (such as the IRS). Your address should also be regularly updated to make sure that all communication is reaching you.
Individual Taxpayer Identification Numbers (ITINs) are tax processing numbers, issued by the U.S. Internal Revenue Service (IRS), for certain resident and non-resident aliens, their spouses, and their dependents. In general, no U.S. personal tax returns can be filed without a proper tax identification number (except when you are filing form W-7, “Application for IRS Individual Taxpayer Identification Number” with your initial U.S. personal tax filing).
An ITIN is used when a taxpayer does not qualify for a U.S. Social Security Number (SSN). IRC §6109(i) provides the Secretary the authority to issue an individual taxpayer identification number.
On November 29, 2012 the IRS issued IR-2012-98, which indicated that ITINs, issued after January 1, 2013, would automatically expire after five years, even if used properly and regularly by taxpayers. On June 30, 2014 the IRS issued IR-2014-76 changing the policy. The revised policy was that ITINs would expire if the number had not been used in the last 5 years. ITINs would stay in effect as long as a taxpayer continued to file U.S. tax returns. The policy was then amended again, on August 16, 2016, such that ITINs will expire if not used in the last 3 years.
Each year a series of issued ITINs will expire. Those taxpayers whose ITINs will expire should submit their renewal as soon as possible. Failure to renew them by the end of 2018 may cause refund and processing delays when their 2018 return is filed in 2019.
The following ITINs are now expiring and need to be renewed as soon as possible.
Taxpayers who’s ITINs expired due to lack of use, should only renew their ITIN if they have a filing requirement for 2019.
To renew their ITIN, taxpayers must complete a new W-7 application and submit all required documentation. Copies of documents must be certified by the issuing agency. Those using a Canadian passport as proof, must have Passport Canada provide and certify the copy. It has been our experience that if this is done, the W-7 application process is much smoother and more accurate.
Cadesky U.S. Tax Ltd. is a full service U.S. tax advisory and compliance firm. If you need assistance with your W-7 application we would be glad to assist. Please contact us for an appointment to discuss your situation.
On August 3, 2018 the IRS issued “final” proposed regulations implementing new section 965 of the Internal Revenue Code. IRC §965 is the “Treatment of Deferred Foreign Income Upon Transition to Participation Exemption System of Taxation”, aka the “repatriation tax”.
The document came in at 248 pages and attempts to clarify many of the questions proposed by the legislation itself. The IRS believes that IRC §965 will impact 100,000 taxpayers and that each taxpayer will spend approximately 5 hours complying with the law. Based on our Firm’s experience the 5 hours is vastly understated! That could, however, be the fact that very few, if any, U.S. citizens resident in Canada, who are “United States shareholders” in controlled foreign corporations, actually tracked earnings and profits (E&P) as required by U.S. tax law.
There is one clarification that will have a negative impact on these taxpayers.
First a little background. IRC §965 imposes either a 15.5% or 8% tax depending on whether the underlying E&P (tax retained earnings) is reflected on the balance sheet as cash (or near cash) or other assets.
For example, let’s assume that E&P, as of December 31, 2017, was $1,000 and that the cash balance on the balance sheet was $800. $800 of the $1,000 would be taxed at an effective rate of 15.5% and the remaining $200 would be taxed at an effective rate of 8%.
The U.S. corporate tax rate, however, prior to January 1, 2018 was 35%. In order to get an effective rate of 15.5% or 8% the legislation introduced a deduction from gross income known as the “participation exemption”. The deductions were computed as follows:
|Cash (and near cash)||(.35-.155)/.35 = .5571|
|Other E&P||(.35-.08) /.35 = .7724|
For the $800 of cash (near cash) E&P we would include $800 in gross income and then take a “participation exemption” of $446 ($800 x .5571) leaving taxable income of $354. $354 x 35% = $124. This is equal to the targeted rate of 15.5% of $800 = $124. A similar computation is done for the remaining E&P of $200. Include $200 in gross income and then take a “participation exemption” of $154 ($200 x .7724) leaving $46 of taxable income. $46 x 35% = $16. This is equal to the targeted rate of 8% of $200 = $16.
Since the legislation was introduced one potential form of planning was to pay a large enough dividend in 2018 (assuming the IRC §965 tax was reported on the 2017 U.S. tax return) to create enough Canadian tax that can be used as a foreign tax credit in the US to offset the 2018 U.S. tax, and then carry the excess foreign tax credit back to 2017 and file an amended 2017 U.S. tax return.
When the amount of IRC §965 “income” is included on the 2017 return it goes into a pool called “previously taxed income” or PTI. Any subsequent actual distributions (dividends) from the company would be tax free from further U.S. tax to the extent that there is a balance in the PTI pool (since the taxpayer has already paid U.S. tax on this income). If a dividend was paid in 2018 it would be tax free from U.S. tax (since it would first come out of the PTI pool) but be subject to Canadian tax. This would create an excess foreign tax credit position in 2018 since there is no corresponding U.S. income to claim the foreign tax credit against. At the time the tax community believed that the Canadian taxes could be claimed $1 for $1 as a foreign tax credit. The IRS had not issued any guidance on this issue.
The issued proposed regulations, however, state that is not the case. For foreign tax credit purposes, if previously taxed income will be claimed as a FTC against the IRC §965 tax, then the foreign taxes must be reduced by the amount of the “participation exemption.”
For example let’s assume that we only had $800 of cash E&P. As we see above the U.S. tax (pre-FTC) would be $124. If the taxpayer is at the highest 2018 Ontario marginal tax rate, to create Canadian tax of $124 (we are obviously not considered the foreign exchange issues) the company would need to pay a “non-eligible” dividend of $265. ($265 x 46.84% = $124) or an eligible dividend of $315 ($315 x 39.34% = $124).
Now, however, the amount of actual Canadian tax needs to be “grossed-up” to factor in the participation exemption. For cash E&P the gross up factor is .4429 (1-.5571) so the Canadian non-eligible dividend would need to be $265/.4429 = $598.
$598 x 46.84% = $280 of Canadian tax. Multiply this by .4429 = $124 of taxes eligible for FTC treatment against the IRC §965 tax. The required dividend is more than 2 times what was previously thought.
Many writers have expressed the opinion that this amounts to potential double taxation and is in violation of the Canada-United States Tax Convention (1980). The CBC also reported (on August 14th) that Finance Minister Bill Morneau revealed that “The Canadian government is talking to the U.S. government about the impact a retroactive tax signed into law by U.S. President Donald Trump is having north of the border.” It is clear, however, that a larger Canadian dividend would also enrich Canadian coffers first!
Whether these talks are successful or not, many U.S. citizens, who are resident in Canada, will now require a potentially larger Canadian tax bill to settle their U.S. taxes to avoid double taxation. This is potentially forcing taxpayers to take out larger amounts of dividends (and sooner) that what they may have originally planned (so much for saving for retirement)! Taking a larger dividend could also move them into a higher Canadian tax bracket.
Cadesky U.S. Tax Ltd stays on top of the latest U.S. developments. If you have any questions please do not hesitate to reach out to your Cadesky U.S. Tax contact.
The Internal Revenue Service was handed a defeat with respect to its ability to assess some penalties with respect to late filed FinCEN Form 114, “Report of Foreign Bank and Financial Accounts.” In the case of United States v. Colliot (W.D. Texas, Austin Division, Case No.: AU-16-CA-01281-SS) the court ruled in favor of Ms. Colliot. The case revolved around the ability of the IRS to impose FBAR penalties in excess of US $100,000. The potential imposition of significant FBAR penalties has been one of big hammers the IRS has used in its ongoing efforts to combat tax evasion.
FBAR civil penalties are imposed under Title 31 of the United States Code of Federal Regulations (“C.F.R.”) Chapter X Subpart H §1010.820. The provision states:
(“g) For any willful violation committed after October 27, 1986, of any requirement of § 1010.350, § 1010.360 or § 1010.420, the Secretary may assess upon any person, a civil penalty: …
(2) In the case of a violation of § 1010.350 (Reports of foreign financial accounts) or § 1010.420 (Records to be made and maintained by persons having financial interests in foreign financial accounts) involving a failure to report the existence of an account or any identifying information required to be provided with respect to such account, a civil penalty not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000.”
The penalties, as outlined in the instructions to Form 114 state, “A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation.”
At issue was whether the IRS had the ability to issue a willful violation penalty in excess of the $100,000 minimum. Given the current language of the regulations, the court ruled that it could not. On page 5 of the Order the Court states:
“In sum, § 1010.820 is a valid regulation, promulgated via notice-and-comment rulemaking, which caps penalties for willful FBAR violations at $100,000. 31 C.F.R. § 1010.820. Rules issued via notice-and-comment rulemaking must be repealed via notice-and-comment rulemaking. See Perez v. Mortgage Bankers Ass ‘n, 135 S. Ct. 1199, 1206 (2015) (requiring agencies to ‘use to the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance’). Section 1010.820 has not been so repealed and therefore remained good law when the FBAR penalties in question were assessed against Colliot. Consequently, the IRS acted arbitrarily and capriciously when it failed to apply the regulation to cap the penalties assessed against Colliot. 5 U.S.C. § 706(2) (requiring agency action to be ‘in accordance with law’); see also Richardson v. Joslin, 501 F.3d 415, (5th Cir. 2007) (‘[A]n agency must abide by its own regulations.’) (citing United States ex rel. Accardi v. Shaughnessy, 347 U.S. 260 (1954)).
If FinCEN or the IRS wished to preserve their discretion to award the maximum possible penalty for willful FBAR violations under § 5321(a)(5), they might easily have written or revised § 1010.820 to do so. For example, § 1010.820 might have incorporated § 5321 (a)(5) ‘s maximum penalty thresholds by reference, or alternatively, the IRS might have revised § 1010.820 to reflect the increased penalty limits. Instead, FinCEN and the IRS enacted and then left in place the $100,000 penalty cap.”
While this is a win for the taxpayer, the IRS believes the judgement to be error. Further, what happens when a government loses a case? They change the law. In this case, they update the Regulations.
The moral of the story is that if you have not (yet) properly disclosed all of your foreign financial accounts to FinCEN you need to do so while the various IRS voluntary disclosure programs are still in effect. Even a US $100,000 penalty is too much.
We at Cadesky US Tax strive to keep our clients up to date on all relevant U.S. tax issues. If you have any questions or needs please do not hesitate to reach out to your Cadesky US tax team member.
U.S. citizens abroad are burdened with the same federal tax compliance obligations as U.S. residents. In fact, one can argue that U.S. citizens abroad have more compliance obligations, as they typically have foreign asset, foreign corporation and/or foreign trust filing obligations. Historically, however, the Internal Revenue Service (“IRS”) has not provided the same level of service to U.S. citizens abroad as they to do U.S. residents. As the IRS expands its online service offerings this uneven level of service seems destined to continue.
Many U.S. citizens abroad have had the frustrating experience of trying to reach the IRS by telephone, only to discover that the toll-free “800” telephone numbers, published for IRS service lines, do not work for telephone calls made from outside the United States. This means that U.S. citizens abroad can only reach the IRS at their own expense while it is a free call for U.S. residents. This gets even more frustrating when one discovers that certain departments and individuals only have “800” contact numbers and no published local number, leaving access to these telephone lines impossible for those outside of the United States. [Hint: try using Skype, Google Hangouts, or some other VOIP phone service in order to call these “800” numbers.]
The ability to provide original documentation to the IRS is also limited for those outside the country. When required to provide original documentation, taxpayers residing in the United States have the ability to visit a local IRS Service Center or Social Security office. Until recently, taxpayers abroad were able to visit a U.S. embassy or consulate to have their original documentation certified and then forwarded to the IRS or the Social Security Administration. Last October, these services were suspended. This means that taxpayers must now return to the United States and visit an office in person. For those of us in Toronto, our “local” Social Security office is in Niagara Falls, New York. For those in the Ottawa area, it is Ogdensburg, New York.
As the IRS expands its online service offerings, it appears that they have again neglected to consider the needs of U.S. citizens abroad. Last year the IRS launched “View Your Account” where taxpayers are able to view their basic tax information online. Basic information includes copies of the recent years’ tax return transcripts, account balance information, and payment plan information. Taxpayers can also pay their outstanding taxes with a debit or credit card through this site. While the information is not as robust or as sophisticated as the CRA’s “My Account”, at least it’s a start.
But, there’s a catch. This IRS is using a U.S. credit agency to verify the identity of those registering to use the “View Your Account” service. Taxpayers must provide a U.S. credit card, or information from a U.S. mortgage or auto loan in order to pass the online security and register. Those without a current U.S. credit history are not able to clear the security and thus cannot register for this service. There are currently no alternatives available. [For those who want to try and register, you can access the “View Your Account” web page at https://www.irs.gov/payments/view-your-tax-account].
Similarly, the U.S. Social Security Administration (“SSA”) has been encouraging U.S. citizens to sign up for “My Social Security” to manage Social Security benefits online. With “My Social Security”, a U.S. citizen can view projected Social Security benefits, register to begin receiving benefits, and can manage administrative tasks such as a change of address. In fact, SSA no longer mails out Social Security benefit statements to those paying in to the system — this information is now only available online.
However, registering for this service is even more difficult than “View Your Account.” In addition to requiring a U.S. credit history, the user must also have a current U.S. address in order to register. This precludes U.S. citizens abroad from registering for this service, and arguably this is the group of persons that would be best served by using online services. [For more information, visit https://www.ssa.gov].
At Cadesky U.S. Tax, we believe that part of our mission is to advocate for U.S. citizens abroad. We recently sent a member of our staff to the IRS Nationwide Tax Forum in Atlanta, GA, where we had the opportunity to raise some of the obstacles facing international taxpayers. We provided feedback directly to IRS and Social Security staff regarding the online registration limitations, and these staff are taking our feedback under advisement. We also participated in a focus group on the delivery of IRS services, sponsored by the Taxpayer Advocate Service, where we provided feedback about international taxpayers.
The IRS does not seem to recognize that there is the imbalance of service offerings between U.S. citizens abroad and U.S. resident taxpayers. Until these services offerings are better balances, we will continue to speak up. We encourage all U.S. citizens abroad to do the same.
In light of the United States Supreme Court South Dakota v. Wayfair et al decision, 585 U.S.__(2018) (see U.S. Tax Tip Volume No. US-18-14) many states are moving to enact legislation allowing them to impose sales tax collection requirements on out-of-state sellers. The Wayfair case dealt with the Commerce Clause and a state’s ability to require out-of-state sellers to collect and remit the state’s sales tax. The Streamlined Sales Tax Governing Board, Inc. (www.streamlinedsalestax.org) is moving forward on this issue.
In the prior Quill Corp. V. North Dakota, 504 U.S. case, the majority of the Supreme Court expressed concern that “a state tax might unduly burden interstate commerce, by subjecting retailers to tax collection obligations in thousands of different taxing jurisdictions.” 504 U.S., at 313, n.6.
In his Wayfair opinion, Justice Anthony Kennedy, stated:
“That said, South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens against interstate commerce. First, the Act applies a safe harbor to those who transact only limited business in South Dakota. Second, the Act ensure that no obligation to remit the sales tax may be applied retroactively. Third, South Dakota is one of more than 20 States that have adopted the Streamlines Sales and Use Tax Agreement. (Italics added) This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability.”
The Streamlined Sales Tax Governing Board, Inc. has set an emergency meeting for July 19th and 20th in St. Paul, MN. Per their website “The focus of this meeting will be discussions related to implementation of remote sales tax collection authority in light of the United States Supreme Court’s decision in South Dakota v. Wayfair et al, to ensure smooth, efficient and transparent implementation.”
There are 24 SSUTA member states including: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming. 12 of the member states have already enacted economic nexus models that impose sales tax collection duties.
What is clear is that individual states are starting to move on this issue.
Cadesky U.S. Tax continues to be on top of the latest U.S. sales tax developments. We can assist in determining whether you have sales tax nexus with a state, registering with that state and the filing of any returns. Please reach out to your Cadesky U.S. Tax Ltd contact for more information.
On July 2nd, the IRS Large Business and International division (LB&I) announced five new additional compliance programs. This will bring the total to 40 new compliance programs since January 31, 2017. The five most recent programs additions are
Restoration of Sequestered AMT Credit Carryforward
The recently enacted Tax Cuts and Jobs Act eliminated the corporate alternative minimum tax (AMT). Before it was repealed, a corporate taxpayer that was subject to AMT could carry forward, indefinitely, the AMT taxes paid as a minimum tax credit (AMT credit). This credit could be utilized against the corporation’s regular tax liability in future years. For tax years beginning after 2017 and before 2022, 50 percent of the excess AMT credits are either claimable against corporate taxpayer’s federal tax liability or refundable. Any remaining AMT credits are fully refundable in tax years beginning in 2021.
Pursuant to the requirement of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended by the Budget Control Act of 2011, the Office of Management and Budget (OMB) had determined that corporations claiming refundable AMT credits were subject to sequestration (automatic spending cuts made to deal with the government’s budget deficit).
Refund payments and credit elect and refund offset transactions processed on or after October 31, 2017 and, on or before September 30, 2018 will be reduced by the fiscal year 2018 sequestration rate of 6.6% irrespective of then the IRS received the original or amended return.
LB&I is initiating a campaign for taxpayers improperly restoring the sequestered Alternative Minimum Tax (AMT) credit to the subsequent tax year. Refunds issued or applied to a subsequent year’s tax, are subject to sequestration and are a permanent loss of refundable credits. Taxpayers may not restore the sequestered amounts to their AMT credit carryforward.
S Corporation Distributions
The IRS has identified three issues with respect to S Corporation distributions: (1) when an S Corporation fails to report gain upon the distribution of appreciated property to a shareholder; (2) when an S Corporation fails to determine that a distribution, whether in cash or property, is properly taxable as a dividend, and (3) when a shareholder fails to report non-dividend distributions in excess of their stock basis that are subject to taxation.
In IRS Notice 2014-21 the IRS opined that virtual currency is property for U.S. federal tax purposes. The Notice also provided information on the U.S. federal tax implications of convertible virtual currency transactions. Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical. The IRS is NOT contemplating any type of voluntary disclosure programs to specifically address tax non-compliance regarding virtual currency.
Repatriation via Foreign Triangular Reorganizations
In December 2016, the IRS issued Notice 2016-73, which curtailed the claimed “tax-free” repatriation of basis and untaxed controlled foreign corporation earnings following the use of these transactions. The IRS is hoping to identify and challenge these transactions.
Section 965 Tax
Section 965 requires United States shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Taxpayers may elect to pay the transition tax in installments over an eight-year period. For some taxpayers, some or all of the tax will be due on their 2017 income tax return. The tax is payable as of the due date of the return (without extensions).
The IRS updated their Section 965 webpage on June 26, 2018. The IRS wishes to raise awareness of these filing and payment obligations.
We are Cadesky U.S. Tax strive to keep you up to date on the latest U.S. tax news. If you have any questions please do not hesitate to reach out to any member of the Cadesky U.S. Tax team.
As Canadian companies grow their business into the United States one area of planning that is often overlooked is the potential impact of state sales tax. In general, sales tax is imposed on sales of tangible personal property. Many, but not all companies, plan for U.S. federal income taxes (and whether they have a permanent establishment or not) and some even look at state corporate income tax nexus but it has been our experience that many companies do not address the state sales tax issue.
Historically, out of state sellers have relied on the Commerce Clause of the United States Constitution (Article 1, Section 8, Clause 3). The clause states that the United States Congress shall have power “to regulate Commerce with foreign Nations, and among several States, and with Indian Tribes.”
In a prior United States Supreme Court decision (Quill Corp. v. North Dakota, 504 U.S. 298) the court ruled that the ability of a state to impose sales tax on an out of state seller, that had no physical presence in the state, was prohibited under the Commerce Clause. The court opinion stated “The State’s enforcement of the use tax against Quill places an unconstitutional burden on interstate commerce.” The Commerce Clause required the seller to have a “substantial nexus”.
The basic rule for collecting sales tax from online sales is: if your business had a physical presence or “nexus” in that state, the company was required to collect and remit applicable sales taxes from on-line customers in that state. If the company did not have a physical presence in that state, the company did not generally have to collect sales tax from on-line sales into that state. That has now changed.
The U.S. Supreme Court on June 21, 2018, in the case of South Dakota v. Wayfair, Inc. et al, in a 5-4 decision, has overturned Quill. The court held, “Because the physical presence rule of Quill is unsound and incorrect, Quill Corp. v. North Dakota, 504 U.S. 298, and National Bellas Hess, Inc. v. Department of Ill., 386 U.S. 753m are overruled.” Thus unless Congress acts to change the law, states will now be allowed to collect sales tax from out of state sellers, including internet sellers.
Many states have access to U.S. customs documents showing the sale and delivery of goods into their state. Historically, because of Quill, state sales tax authorities did not approach the sellers as they did not have the constitutional authority to collect the sales tax. No doubt, this will change. As states have revenue shortfalls they will look at collecting as much revenue as possible. An easy target is foreign sellers (since in reality they don’t vote and wouldn’t have a say in the law).
It should be noted, however, that the nexus standard for the imposition of state corporate income tax and state sales taxes are, in many cases, different and indeed vary state by state. Though the initial Quill decision was in the context of collecting sales tax, The Interstate Income Act of 1959 (P.L. 86-272, Sept. 14, 1959) had previously restricted a state’s ability to impose state corporate income tax on out-of-state sellers.
In light of the Wayfair decision, a question may be raised as to whether a state may now try to impose state corporate income taxes as well. Many states have introduced, in addition to the current physical nexus standard, an economic nexus standard.
Anyone who is remote seller selling tangible personal goods into the U.S., whether directly or via a third party distributor (i.e., Amazon) needs to review their sales tax exposure and take appropriate action. Absent any sales tax exemption certificate they may be liable for collecting and remitting state sales tax.
They may also wish to review their state nexus to determine if they may now also be subject to any state income tax.
We can help
Cadesky U.S. Tax can assist in determining whether you have sales tax nexus or income tax nexus with a state, registering with that state and the filing of any returns. Please reach out to your Cadesky U.S. Ltd contact for more information.
On June 4, 2018 the IRS issued News Release IR-2018-131. In this release the IRS address some concerns in regards to penalties associated with the late payment of the first instalment of the transition tax.
New IRC §965, enacted on December 22, 2017 as part of the Tax Cuts and Jobs Act (P.L. 115-97), imposes a one-time tax on untaxed foreign earnings and profits (E&P) of foreign corporations owned by “United States shareholders”, as defined under the Internal Revenue Code, by deeming those earnings to be repatriated as a subpart F income.
Earnings and profits held in the form of cash and cash equivalents are taxed at an effective rate of 15.5 percent, for corporations, and up to 17.5 percent for individuals. The remaining earnings and profits are taxed at an effective 8 percent rate, for corporations, and up to 9 percent for individuals.
The transition tax generally may be paid in installments over an eight-year period when a taxpayer files a timely election under section 965(h).
Many taxpayers have struggled with understanding these new rules especially given the fact that the IRS continues to issue guidance. Much of this guidance has been issued AFTER the filer’s original due date. Though extensions can be filed, the first instalment payments were due by the original due date.
The Release states:
“In some instances, the IRS will waive the estimated tax penalty for taxpayers subject to the transition tax who improperly attempted to apply a 2017 calculated overpayment to their 2018 estimated tax, as long as they make all required estimated tax payments by June 15, 2018.
For individual taxpayers who reside outside the United States, the IRS has previously announced that they would allow the first instalment payment to be made by June 15th, 2018, the “normal” due date for these taxpayers. This is evident in the last sentence of the first bullet point. It is not clear, however, if the IRS would also allow nonresident taxpayers to defer their first instalment payment to April 15, 2019.
While providing penalty relief is a step in the right direction, we would hope that the IRS and/or Congress would see fit to exclude United States expatriates from the provisions altogether. It is clear that the intent of this legislation was to encourage (force?) large U.S. based multi-national enterprises to bring the offshore money back “home” and re-invest in the U.S. to create U.S. jobs. For individual United States shareholders abroad, it is doubtful that any of these “repatriated” funds would actually be re-invested in the U.S. In many cases the foreign countries would be the beneficiaries as planning is being undertaken to accelerate foreign tax to eliminate any potential double taxation. We are hopeful that further IRS guidance will be forth coming.