Think about 2018 Taxes Now!

We’ve had a lot of questions from clients about the impact of the Tax Cuts and Jobs act on normal, working Americans. IRS did a clumsy job with implementation, although in their defense the TCJA probably raised more questions than it answered. Also, one of the most surprising effects will be felt by taxpayers who live in high tax jurisdictions and who itemize their deductions.

A combination of factors may mean a higher bill.

Three things are conspiring against us to create a perfect storm of annoyance and large tax payments.

  • First, IRS came out with new withholding tables that may have significantly under-withheld for a large part of 2018. The General Accounting Office says this snafu will have an impact on approximately 73{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} of US taxpayers.
  • Second, Oregon is a jurisdiction with a relatively high personal income tax rate. In 2018, you can only deduct $10,000 state tax (income plus property) on your income tax return if you itemize. So, if you pay $8,000 in state income tax and have $5,000 in property taxes, you can’t deduct the full $13,000 on your Federal schedule A. You can only deduct $10,000.
  • Finally, many of us did not adjust our exemptions on Form W-9 after the TCJA passed. While some folks will not be itemizing their deductions this year, due to the increase in the standard deduction, the combination of the first two factors may mean that you have a stiff bill to pay on April 15 (and not a moment sooner!!!!!).

We also wanted to encourage folks to reach out to their CPA early this year. Get your organizers completed and shoe box of receipts assembled early and to your tax preparer. We have heard from our friends who prepare personal income tax returns that the complexity of the 2018 tax season will mean that some shops don’t have enough people to do the work. If you wait too long, you may end up doing your return yourself! (I may be the only one out there who finds that entertaining).

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.

Ballot Measure 104: Oregon Gets Down & Dirty With What It Means To Raise Revenue

Vote - Oregon Ballot Measure 104

All summer we have been talking about the fallout from the Supreme Court’s decision in South Dakota v. Wayfair. We analyzed the opinion when it came out; we looked at the initial state responses in August; and we looked at one of the early Federal proposals in September. It’s been an exciting ride!

One of the things we’ve come to realize is that the Wayfair decision signals a convergence of the disparate state nexus thresholds for different types of tax. Correctly or not, the Commerce Clause and Due Process nexus thresholds for sales tax and income tax regimes are converging around the idea that a taxpayer needs to have “minimum contacts” with a taxing jurisdiction and must “purposefully avail” themselves of the jurisdiction’s economic market. Thanks to Public law 86-272 (codified at 15 USC §§ 381-384), nuance still exists in the areas of sales of solicitation of sales of tangible personal property. Also, the requirements of internal and external consistency help limit the deleterious impact of having thousands of taxing jurisdictions each doing their own thing.

The challenge, of course, is that there isn’t a good definition of how to distinguish a “fee” from a “tax.”

Because there are all of these limitations and restrictions on a state’s ability to tax activity within its borders (however that may be defined), states in the last few years have been relying more and more heavily on “fees.” The challenge, of course, is that there isn’t a good definition of how to distinguish a “fee” from a “tax.”

Much like obscenity, jurists tend to think that they should be able to identify a fee when they see it (apologies to Justice Stewart). However, it’s not that simple. A fee payment may be defined as a “fixed charge” or “a sum paid or charged for a service.” From practical perspective, what this means is that specific line items in a governmental budget need to be tied to a charge or schedule of charges. Taxes, on the other hand, are typically understood to be general assessments to pay for government services. Taxes are subject to constitutional limitations. It remains to be seen if the same restrictions apply to fees.

The Oregon Constitution, Article I, §32 states: “No tax or duty shall be imposed without the consent of the people or their representatives in the Legislative Assembly; and all taxation shall be uniform on the same class of subjects within the territorial limits of the authority levying the tax.”  At Article IV, §25(2), the Oregon Constitution states: “Three-fifths of all members elected to each House shall be necessary to pass bills for raising revenue.” Courts have generally limited the impact of this to legislation defined as tax increases. There are no corollaries for fees. Certain things, such as state level professional licensure and county inspection services seem directly tied to benefits provided in a way that would be difficult to capture with what we commonly think of as a tax. The bigger issue comes when a fee looks a lot like a tax assessment in disguise.

For example, when the City of Tigard decided that it wanted to enter into a massive water project with the City of Lake Oswego, it was able to enact a rate increase in the guise of a fee to pay for that project. What this meant in practical terms was a hypothetical, impoverished baby lawyer who had only paid $85 every other month for water/sewer service now had to pay that same amount every month. When that hypothetical baby lawyer contacted the City of Tigard to ask why this wasn’t funded through a separate property tax assessment, which would have been more appropriate, she was told that the City didn’t have to go that route so it didn’t. As an aside, it was a pretty facile and not very satisfying answer to provide to a beleaguered, hypothetical baby tax lawyer.

Oregon’s Nonconformity

This long-simmering issue has come to a head in the debate over Ballot Measure 104 (“Measure 104”), on the November 6, 2018 ballot. This would add a definition to the Oregon Constitution’s §25 of “raising revenue” to include changes to tax exemptions, credits, and deductions that result in increased state revenue, as well as the creation or increase of state taxes and fees. Interestingly, the impetus for this measure doesn’t seem to be primarily fee increases. Rather, it was Oregon’s nonconformity with the Tax Cuts and Jobs Act’s addition of IRC 199A, which in most cases decreased the effective tax rate on pass through entities.

A recent article by Oregon Public Broadcasting highlights some of the issues associated with Measure 104, including the challenges involved in our system of conformity to the federal definition of taxable income. The authors correctly highlighted the issue that an opt-out of a federal tax exemption could be construed in Oregon as legislation to raise revenue. Therefore, the legislation specifically opting-out of the federal exemption may be seen as revenue raising and subject to a 3/5 majority approval requirement.

Proponents of Measure 104 have argued that politicians have created a climate that is not friendly to taxpayers because it is not predictable how much a taxpayer will have to pay over to state government from one year to the next. Opponents of Measure 104 have made a variety of arguments that mostly seem to come back to “if you pass this, it will tie the hands of legislators to do what needs to be done.” It may be that both sides are correct. At the end of the day, Oregon voters will have to decide how much they trust the politicians (that they elected) to protect both their wallets and the various things that the state does.

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.

Life after Wayfair: Congress Steps In

We’re not ashamed to admit we’re a bit nerdy when it comes to tax matters. We always love talking/reading/studying (… eating/sleeping/living) tax and tax-related things. But even we think it’s been more exciting than usual in the world of state tax this summer!

The Supreme Court handed down its opinion in South Dakota v. Wayfair on June 21, 2018. You can see our initial attempt to summarize the opinion here. Immediately after that, there was a flurry of activity as each state tried to address implementation of the “new” regime that would allow them to tax out of state vendors of tangible personal property into their states. Our initial look at Washington’s and California’s responses is here. Since then, lawmakers in dozens of states have proposed or introduced versions of the South Dakota law that attempt to tax remote sellers.

The language of the Wayfair opinion raised all kinds of issues; ranging from what is the appropriate standard to when will retroactive tax legislation been permissible. There were also practical considerations involving when a marketplace facilitator will need to force sales tax collection and compliance. We’ve gotten a lot of questions this summer about what is really meant by minimum contacts.

One of the key points of the Quill opinion, which Wayfair overturned, was a suggestion that Congress act to address remote sales in an evolving economy. The Supreme Court in Wayfair lamented the fact that the US Congress had not acted in the 26 years since it decided Quill. The Court felt that Congress needed to act. Failing that, the Court decided that it could expand its understanding of what the Commerce Clause allowed states to tax by holding that Quill had been incorrectly decided.

On Friday, September 14, 2018, a bipartisan group of Representatives (Jim Sensenbrenner (R – Wisconsin), Anna Eshoo (D – California), Jeff Duncan (R – South Carolina), and Zoe Lofgren (D – California)) introduced the “Online Sales Simplicity and Small Business Relief Act.” (Interestingly, only Rep. Eshoo put a link to their statement on her congressional hompage – link above)  This fairly short bill, as introduced, has two major points and a “sense of Congress” statement.

I. The OSS/SBRA bans retroactive taxation of internet commerce

The proposed act bans states from compelling collection of sales tax for sales that occurred before the June 21, 2018 Wayfair opinion. It pairs this with a phase it that, in the initial draft, begins on January 1, 2019. This raises the question, of course, of what to do with sales that occur in the intervening period.

II. The “Sense of Congress” statement can be read to say “We don’t want to tell you (states) what to do but you’re making us do it”

The “Sense of Congress” statement essentially says that Congress really wants the States to develop an interstate compact that identifies a minimum substantial nexus, that simplifies registration and compliance, and that eliminates the need for the “Small Business” remote seller exemption.

III. The OSS/SBRA creates a rather large “small business” remote seller exemption

The proposed act also proposes to restrict States from collecting sales tax from customers that have $10 million in annual gross receipts during the preceding calendar year where: (1) the sale is made on or after June 21, 2018 and (2) before the date 30 days after the date where the States develop and Congress approves an interstate compact, applicable to the State and sale, “governing the imposition of tax collection duties on remote sellers.”

Setting aside the rather valid question/criticism of whether $10 million in gross receipts is a “small” business, it’s our thought that there is a question about whether purported requirement for Congressional approval of a multistate remote seller tax compact meets the criteria of Virginia v. Tennessee, 148 US 503 (1893), and it’s progeny. The Supreme Court in Virginia v. Tennessee, first articulated the idea that only agreements which would increase the power of the states at the expense of the federal government require Congressional approval.  It’s hard to see how federal sovereignty is imperiled by 45 different state approaches to Wayfair. Other tax compacts between the states, including the Multistate Tax Compact, have not received congressional approval. Therefore, it seems unlikely that the states who are struggling to address the application of Wayfair to their state tax collections will be thrilled about this bill as written.

We’ll keep you updated as this continues to evolve!

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.

Life after Wayfair: The States Begin to Respond

We wrote our initial analysis of South Dakota v. Wayfair on June 21, 2018. Since the Supreme Court issued its Wayfair, we have heard from clients with sales into sales tax-imposing jurisdictions who are concerned about what this means for their businesses.

Many states already had tax systems that would require a seller with no physical presence in their state to collect sales tax, which was the core issue in Wayfair. Other states (for example, Louisiana, North Dakota, and Vermont) adopted systems that would only go into effect if Wayfair was decided in a way that eliminated the physical presence requirement that the earlier Quill Corp. case had endorsed. Not all states had taken proactive measures to implement sales tax economic nexus. Some states are adopting additional, parallel nexus tests in the wake of Wayfair.

California, for example, did not adopt sales tax economic nexus thresholds prior to Wayfair. As it’s a significant market state for many companies, we have eagerly awaited guidance from state revenue authorities about what it will do following Wayfair. The California Department of Tax and Fee Administration (“DTFA”) accidentally posted draft rules containing guidance that requires retailers to register with the DTFA if they deliver $100,000 or more of products into California or if they sell tangible personal property into California in 200 or more separate transactions. These are the same thresholds adopted in Wayfair. This inadvertent guidance also said that the effective date of the rules would be August 1, 2018.  California pulled the guidance off its website, so we don’t know what the final thresholds are going to be as of this date.

Washington, on the other hand, did adopt economic nexus standards prior to the issuance of the Wayfair decision. What they’ve chosen to do, post-Wayfair, is layer one on top of the other. The Washington Department of Revenue published guidance on July 1, 2018, that leaves them with a two-prong nexus regime. The first prong is essentially the same thresholds as South Dakota – Retail vendors must collect and remit sales tax if they have $100,000 of sales into Washington or engage in 200 or more transactions. These requirements are effective for periods October 1, 2018 and subsequent. However, due to economic nexus standards already in place in Washington, there is a second prong whereby, if a vendor does not rise to the level of activity of the first prong with the state, but has a mere $10,000 of sales into the state, the vendor must either: (1) collect and remit sales tax to the state or (2) comply with use tax notice and reporting requirements (i.e., disclosure of Washington customers to the Department of Revenue to aid in use tax compliance initiatives).

We expect that as other states adopt nexus standards similar to that in the Wayfair decision, we will also see some variation in the effective date of such legislation.  Most of the states that have adopted legislation already seem to advocate for prospective application. Essentially, they pick a date and the new standards apply for transactions after that date.  However, because some states have explicitly said that they will apply their taxing authority to the full extent of the law, the specter of retroactive application still exists. This means, that a state could assess a vendor for failing to collect sales tax on a transaction that occurred prior to the issuance of the Supreme Court’s Wayfair decision. While this seems unfair, we’ve seen application of nexus standards for income tax retroactively in several jurisdictions. We will continue to update you as these new rules evolve.

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.

 

Hitting a Pothole at the Beginning of Oregon’s Vehicle Sales & Use Tax Jurisprudence

When “Use” ≠ “Use”

The Oregon Supreme Court, sitting en banc, issued its opinion today in AAA Oregon/Idaho Auto Source, LLC v. State of Oregon. This is the first opinion from that Court to address the new tax that the 2017 legislature implemented to pay for the Zero-Emission Incentive Program and the Connect Oregon Fund. At issue in this case was whether the funds collected under Oregon’s new vehicle tax is a tax subject to Article IX, Section 3a of the Oregon Constitution. It held that it was not subject to this provision. Therefore, the money collected under both the sales and use tax components of the new law does not have to be used for the State Highway Fund (or other uses that the Constitutional provision specifically lists).

The new tax is alternately called a “Section 90” tax (from its origin in Oregon Laws 2017, Chapter 750, section 90), a “privilege tax” (imposed on vehicle dealers for the “privilege of engaging in the business of selling taxable motor vehicles at retail in this state.”), or a sales tax (because it is imposed at a 0.5{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} rate on the purchase price of vehicles at retail and has a corresponding use tax). We all know that Oregonians are allergic to sales taxes, so the Court elected to refer to the tax as a Section 90 tax throughout its opinion. The Court also refers to the corresponding use tax as a Section 91 tax, in reference to its position in Chapter 750.

In this opinion, the Court answered the narrow question of whether the Section 90 tax and its corresponding use tax are taxes on the “ownership, operation or use of motor vehicles.” It held that the Section 90 tax was a tax on the sale of a vehicle rather than the status of owning the vehicle. Through rather tortured language, and relying heavily on the fact that the use tax is reduced by the Section 90 tax already paid, the Court additionally held that the corresponding Section 91 “use” tax was not a tax on the “operation or use” of motor vehicles. Rather than relying on the plain language of the statute, the Court examined the legislative history of both Article IX, Section 3a of the Constitution and the Section 90 tax. The Court was persuaded by amicus curiae, counsel for the Oregon Legislature, that “the purpose of the Section 91 use tax is to protect Oregon vehicle dealers from losing business to non-Oregon vehicle dealers, who are not subject to the Section 90 tax.”

The Oregon sales tax on vehicle purchases and the Oregon use tax on vehicle usage (without previously paying the sales tax) are different, but complementary, taxes. The Court’s analysis today begs the question of why, when the legislature drafted the statute to include the word “use” we are not reading that word to mean “use”.

This is only one issue that our new tax has raised. There remain several unanswered questions about the application of Oregon’s new sales and use tax regime to businesses and individuals. We expect that those will lead to additional litigation. This, however, is not the most auspicious start to Oregon’s Sales and Use tax jurisprudence.

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.

TCJA Expands Contribution Options for ABLE Accounts

Congress passed the “Stephen Beck Jr., Achieving a Better Life Experience” Act in 2014 to expand the types of assistance available to help disabled individuals maintain health, independence and quality of life without interfering with access to means-tested government benefits.  The most beneficial change to result from these legislative efforts was the establishment of 529 ABLE accounts.  In the last several years, many state legislatures, including Oregon, have implemented their own version of ABLE accounts and several others are in the process of starting their own programs. The new tax law also made several important changes to 529 ABLE accounts that expand the contribution options for account holders. The purpose of this post is to inform generally about 529 ABLE accounts, provide recommendations on how to use the accounts to their fullest potential, explain how they differ from 529 College Savings plans, and also give a brief status update on Oregon’s ABLE program and the progress neighboring states have made towards establishing their own programs.

What is an ABLE Account?

ABLE accounts are tax-advantaged savings accounts for individuals with disabilities.  Whereas parents and grandparents are usually the owner of a 529 College Savings plans established for their beneficiary children, the 529 ABLE account beneficiary has ownership of the account.  The beneficiary or account holder controls how to spend their funds.  The account holder, family, friends or others can all make contributions to the account, but only with post-tax dollars that will only qualify for a state income tax deduction, if permitted.  Despite this limitation, account holder will not owe any tax on income the account earns during the year.  Typically, individuals that make annual contributions to the account for a single tax year are limited to $15,000, the maximum amount an individual can gift to someone without reporting it to the IRS. Any income the account earns will not be taxed to the account holder.

How are ABLE Account Funds Spent?

Generally, ABLE accounts only allow for an account holder or authorized individual to allocate funds for a “qualified disability expense”.  The Treasury Department and Internal Revenue Service (IRS) have issued proposed regulations that recommend a broad definition of “quality disability expense” to allow dispersal of funds for all expenses that assist the beneficiary in increasing or maintaining their health, independence and/or quality of life.  Qualified disability expenses include but are not limited to basic living expenses, education and tuition costs, medical costs, transportation, assistive technology, personal support services, legal fees, communication devices such as smartphones, housing, oversight and monitoring, mental health services, job training support and financial management services.  ABLE account holders do not need to submit documentation of their expenses to any governmental agency, but ABLE advocacy groups strongly recommend retaining documentation to justify expenses in case of an IRS or Social Security audit.

Who Qualifies?

In order to qualify for an ABLE account, an individual must have significant disabilities that substantially developed before the age of 26.  If the individual already receives SSI/SSDI and meets the age criteria, they will automatically qualify for ABLE.  If the individual does not receive SSI/SSDI but meets the age criteria, they can still establish an account as long as they meet the Social Security criteria for a significant disability and they receive a certification letter from a doctor.

What are the Limits?

Customarily, disabled individuals that wish to qualify for public benefits such as SSI, SNAP, and Medicaid must meet a resource test that limits eligibility to earning more than $700 a month or having $2,000 of owned accessible financial sources.  This threshold forces disabled individuals to remain poor in order to continue qualifying for public benefits.  Congress established ABLE accounts for the purpose of supplementing but not supplanting, financial aid provided by public benefits, private insurance and other resources.  Many states have set the total account limit to around $300,000, with some notable exceptions, and the first $100,000 in ABLE accounts are considered exempt from the SSI $2,000 resource limit.  If an ABLE account exceeds this $100,000 limit, the beneficiary’s SSI cash benefit will be suspended until the account falls back below $100,000.  In contrast, SNAP benefits and Medicaid do not consider ABLE accounts a countable resource for eligibility, and therefore the amount of money in the ABLE account does not affect eligibility for those programs.  With 529 college savings plans, SSI does not consider them as countable resources generally since the parent or grandparent owns the account. Distributions to the disabled beneficiary that exceed the $2,000 resource limit can still trigger ineligibility issues.

Recent Changes

The new tax law signed late last year made several important changes to ABLE accounts.  First, under the ABLE to Work Act, an ABLE account holder who works can contribute an additional amount beyond the $15,000 maximum.  The new limit is either the lesser of the Federal poverty limit for a one person household ($12,060) or the individual’s overall compensation for the whole year.  The legislation also allows an account holder to claim a credit for contributions made to their ABLE account.  The credit is a nonrefundable tax credit for eligible taxpayers making qualified retirement savings contributions.  Second, the ABLE Financial Planning Act, also included in the new tax law, allows ABLE account holders to roll over funds from a regular 529 College Savings plans to ABLE accounts tax free up to the maximum contribution level.  This change helps families who originally established 529 College Savings plans for their children before receiving a child’s diagnosis or for older children who suffered a life-changing event and now need to use their 529 College Savings funds for alternate purposes.  Disability Advocates have proposed legislation to raise the age of onset of disability from 26 to 46 in order to help individuals that incur disabilities later in life to qualify for ABLE accounts but the current 26 age limit is still in effect as of this year.

Differences Between the States

While ABLE is a federal program, the accounts are managed at the state level.  Qualified individuals will need to sign up for either their state’s program or if their state does not offer ABLE, a state’s program that accepts out of state residents.  Currently 30 states offer ABLE and each state often has different program managers, different account limits, state tax deductions for in-state residents, different monthly account/debit card fees and more.  Below is a summary the Oregon, Washington, and Idaho programs.

Oregon

Oregon has launched their own state ABLE program for in-state residents, and even allows out-of-state residents to establish ABLE accounts through the ABLE for ALL Savings Plan.  BNY Mellon manages Oregon plans with four investment options and an additional fee of 0.30% on the investment.  State residents who sign up with the Oregon ABLE Savings Plan will have to pay a $45 annual fee and out-of-state residents who sign up for the ABLE for ALL Savings Plan will have to pay a $35 annual fee.  Oregon allows out-of-state ABLE accounts to roll over into the Oregon ABLE Program without a fee but will charge a $50 fee if rolling over an Oregon plan into a different state.  Oregon does have an income tax and offers a state income tax deduction for Oregon residents who make contributions up to $2,330 for single filers ($4,660 for joint) to ABLE accounts with beneficiaries under the age of 21.  Account holders can also set up a gifting page online where friends and family can contribute funds to the ABLE account directly.  Oregon has set the account limit to $310,000.  A recent Oregonian article highlighted the way that the Oregon program may improve the quality of life for Oregonians.

Washington

Washington State planned to have their own state ABLE account program launch in Fall 2017, but due to unforeseen circumstances referenced in a message from the Washington State Department of Commerce, the program will not launch until sometime in 2018.  Until then, the State recommends that Washington residents establish an Oregon ABLE account and then transfer the account to Washington once the program finally rolls out.  BNY Mellon will manage Washington State plans with four investment options, and there is an annual fee of $35 plus an investment fee ranging from 0.30%-0.38%.  Washington will allow out-of-state residents to create ABLE accounts and will also allow Washington residents to transfer out of state ABLE accounts into a Washington State account with no fee. Since Washington does not have an income tax, there is no state tax deduction offered for in-state residents.  The most important difference to note regarding ABLE accounts established in Washington State is that the total account limit caps at $86,000 to start, far lower than other states with established programs.

Idaho

Idaho does not currently offer its own state ABLE program but allows its residents to open an ABLE account in another state that allows out-of-state residents to register.  The Idaho legislature is currently considering adopting ABLE laws to start its own program but unlike Washington State’s program, there is no current timeframe of when their program will launch.

Come See Us

Both the ABLE to Work Act and ABLE Financial Planning Act included in the new tax law greatly expand the contribution options available to established ABLE account holders and families still deciding.  Every family situation is different and the new options that allow the rollover of 529 College Savings plans could be greatly beneficial to the long-term quality of life for your disabled child or close family member.  While Oregon is currently the only state in the Northwest that has established a state program, we recommend that residents of Washington, Idaho, and other states who are interested in ABLE accounts potentially look into establishing an Oregon account and then rolling the account over once their respective state finally launches their program.

Breaking down the Wayfair decision for Oregon businesses: Why you should now care about sales tax

The US Supreme Court’s decision in South Dakota v. Wayfair.

Earlier today, the United States Supreme Court issued its opinion in South Dakota v. Wayfair, et al.  In 2016, South Dakota passed a law that requires out of state vendors to collect its sales tax if those vendors had: (1) $100,000 of sales into the state or (2) more than 200 separate transactions for the delivery of goods or services into the state.  Wayfair (an online furniture retailer) sold goods from its website to customers in South Dakota and did not collect sales tax on those transactions.  South Dakota sued to compel Wayfair (among others) to collect its sales tax.  Justice Kennedy’s majority opinion, finding in favor of South Dakota overruled 26 years of judicial precedent in this area.  Prior to Wayfair, states could only make companies with a physical presence in the state collect and remit sales tax on transactions with in-state customers.

States have been trying to get around the physical presence requirement for years.  There was a whole stream of affiliate nexus, agency nexus, and flash nexus cases in the early 2000s.  These cases have only gotten weirder as business has evolved and our societal relationship with the internet has changed.  Most recently, we’ve seen Massachusetts assert that a company has physical presence in a state when that company’s website places a “cookie” on a customer’s web browser.  This is based, in part, on the theory that electronic information has a physical component, which is beyond the scope of this discussion.

One of the problems states have had in eliminating the physical presence rule is the legal concept of stare decisis – to stand by things decided.  This means that a court must give deference to the applicable prior legal opinions.  The majority in Wayfair glossed over the deference that it must give the prior opinion with the broad pronouncement, “If it becomes apparent that the Court’s Commerce Clause decisions prohibit the States from exercising their lawful sovereign powers in our federal system, the Court should be vigilant in correcting the error.” (no citation given).  The court also stated: “Though Quill [the earlier cases] was wrong on its own terms when it was decided in 1992, since then the Internet revolution has made its earlier error all the more egregious and harmful.”  So contrite was the court that Justice Thomas used his separate concurrence to express remorse that he hadn’t joined in Justice White’s dissent in the original Quill decision.  Chief Justice Roberts, joined by Justices Breyer, Sotomayor, and Kagan, state that State had not overcome the burden of proof necessary to overturn the earlier cases.

In Wayfair, the Supreme Court opinion focused on the evolution of online sales and the “significant revenue loss” to the states that has resulted from the requirement that vendors have a physical presence.  Justice Kennedy’s opinion specifically called out a statement on Wayfair’s webpage that stated, correctly, “[o]ne of the best things about buying through Wayfair is that we do not have to charge sales tax.”  The irony of this position is that each state that has a sales tax also has a use tax.  Use taxes are complementary taxes whereby an individual resident of that state is required to remit use tax, if they don’t pay sales taxes on the transaction, at the same rate that they would pay sales tax if the sale “occurred” in Oregon.  Use taxes are unpopular and many states are incompetent at compelling their residents to remit use tax.  If the states were better at collecting use tax, there wouldn’t be any revenue loss at all.  Prior to this decision, while Wayfair didn’t have to collect sales tax, its customers in South Dakota still did have to self-assess and remit use tax.

The court said that the South Dakota thresholds, noted above, created the presumption of a company having “minimum contacts” with a state sufficient to survive constitutional scrutiny.

The Court’s decision in Wayfair is going to open the floodgates for state sales tax audits on out of state companies that sell goods or perform enumerated services for customers in their states.  Many of these states have statutes that allow them to impose their tax systems “to the fullest extent allowed by law” (i.e., under the Constitution).

There has been a question for some years about whether Congress would act to address the question about when physical presence is required for states to tax transactions.  In part, the question has been gaining traction because many states have started to impose their non-sales taxes (income, franchise, etc.) on out of state vendors that have so-called “economic nexus” with the state.  Justice Gorsuch’s separate concurrence invited a discussion of whether there is a discussion that needs to take place about the role of Article III courts to invalidate state laws.  Specifically, Justice Gorsuch does not appear to agree entirely with the Court’s prior dormant commerce clause holdings, preferring to defer to Congressional action to regulate interstate commerce.  Chief Justice Roberts’ dissent correctly noted that “A good reason to leave these matters to Congress is that legislatures may more directly consider the competing interests at stake.  Unlike this Court, Congress has the flexibility to address these questions in a wide variety of ways.”

From a practical perspective, one of the biggest issues with this case is that the majority opinion basically ignores the issue of how horrifically complicated it will be for companies to report sales and use tax to all taxing jurisdictions where they are over the minimum thresholds.  It states “Eventually, software that is available at a reasonable cost may make it easier for small businesses to cope with these problems.”

In 2018, there are over 10,000 state and local jurisdictions that impose a sales tax on their customers.  Most of these overlap in one way or another, so (for example) a taxpayer could buy a widget for $10 and pay $1 of tax.  This may be broken up as: (1) a state level tax at 6%; (2) a municipal tax at 2.5%; (3) a school district tax at 1%; and, (3) a cultural district tax at 1%.  This taxpayer’s neighbor, across the street is located outside of the cultural district, but may be located in a football stadium district that imposes a rate of 2%.  If the widget vendor rises to the minimum economic level, its invoicing systems will have to distinguish between the different taxing districts and assess the correct rate of tax on both sales (10% and 11%, respectively).  Therefore, the widget vendor is going to have to buy complex and expensive software and then integrate it with its existing systems to know whether transactions are subject to tax.  Chief Justice Roberts’ dissent correctly called out the majority: “The Court, for example, breezily disregards the costs that its decision will impose on retailers.  Correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers.”

Why Should Oregon Business Care?

Oregon, emphatically, does not have a sales tax.  Except on heavy equipment, bikes and cars…. So, ya know….   But we don’t have a sales tax!

Oregon business owners, however, sell things to customers outside of the state to jurisdictions that do assess a sales tax on their residents.  Therefore, if the Oregon business crosses the state’s economic nexus thresholds it will now be required to collect and remit sales tax to that state.  Each state has different thresholds and we expect that we’ll see states asserting economic nexus that have previously abstained from doing so as a way to export their tax collection obligation to out of state folks.

One thing to keep in mind as well in this new world order is the fact that sales tax is imposed on the sale of tangible personal property at retail AND certain specific enumerated services.  Most service business owners in Oregon don’t think of what they are providing as taxable, so they should confirm that they are still not subject to tax in the states where they provide services to customers.  Areas that are often taxed by states may include: Services related to tangible personal property (decorating, repair, etc.); Services to real property (landscaping, maintenance, decorating, etc.); personal services; Business services; Professional services (lawyers, accountants, physicians, etc.); and amusement/recreation services.  We’ve seen a tremendous rise in the last few years of services provided remotely or over the internet and of “software as a service.”  These may also be subject to tax.

Stay tuned.

A large number of our clients are now going to be subject to sales tax collection and remittance requirements.  Therefore, we’re going to do a few blog posts in the next few weeks — sales tax 101 — for our Oregon business owners.

Oregon Shifts Heavy Equipment Personal Property Tax Burden to Contractors starting in 2019

Large and small heavy equipment rental providers throughout the state of Oregon recently scored a huge victory when Governor Brown signed HB 4139 into law earlier last month.  The new law replaces Oregon’s existing personal property tax system for heavy equipment with a 2 percent tax on every heavy equipment rental transaction starting in 2019. While many states have either eliminated personal property tax or have exempted certain manufacturing and construction businesses from ad valorem property tax, Oregon was one of the few remaining that offered no relief or reform of any kind for heavy equipment rental providers.

Critics often cited the compliance costs associated with the business personal property tax as complex and burdensome in a way that discouraged many companies from accurately reporting. The old system was a location-based tax. This means that a company would be taxed on heavy machinery it owned based on where it was sitting on January 1 of that year. Heavy equipment rental businesses often rent their equipment out all over the state and beyond. Tracking location of constantly moving equipment for tax purposes proved difficult and also created the potential of requiring companies to pay additional tax in multiple counties or states on the same equipment where assessment dates varied.

Under the new law, the location-based tax goes away and now a sales or value-added tax of 2 percent will be collected by the heavy equipment rental business at point-of-sale and remitted to the Department of Revenue. The Department is authorized to use up to 5{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} of the revenue for administrative costs needed to enforce the tax. The remaining money will distribute out to the local counties based on where each rental transaction occurred. This ensures that the heavy equipment rental businesses have a much simpler system for determining the tax they owe and local counties receive revenue based on the number of heavy equipment rental transactions occur within its borders.

Many surrounding states such as California and Idaho have adopted state and local sales taxes on similar transactions. Supporters of this change say this makes Oregon more competitive in the construction market and will attract more business in general to the state.

According to Section 3 of the new law, every heavy equipment provider will need to register with the Department of Revenue by December 15 of this year to certify that they qualify for the rental tax program and exempt them from the old ad valorem property tax system. The providers will then be required to collect the rental tax on each transaction and file a return each calendar quarter to report the tax due. The change is meant to be revenue neutral, meaning that the amount of monies paid under the new system should equal to what the providers would have been paid under the old system. Section 5 states that any amount paid by a qualified heavy equipment provider that exceeds the old tax threshold will receive a refund in the amount of the excess.

While overall this new change will likely benefit both providers and local counties alike, heavy equipment rental businesses may receive more of a windfall from this change than initially planned. This is a quirk of the Oregon law that is different from other jurisdictions. Based on how the new law is worded, the providers are tasked with merely collecting and ensuring the proper amount of tax is transmitted to the Department of Revenue. The incidence of tax is on the party renting the equipment. So, the renter will remit the new tax to the equipment rental company along with the rental price, and if the amount of tax exceeds the amount “paid” under the old system, then the providers will receive a refund of any excess.

Based on the wording of the new law, it does not appear the Oregon Legislature has thought about this windfall possibility. It remains to be seen whether any modifications to the law will address this potential for abuse. We understand that the Oregon Department of Revenue is currently working on regulations to administer this new assessment.

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.

Special thanks to guest SYK co-author Nicholas Rogers. Nicholas is a 3L and 2019 J.D. candidate at Lewis & Clark Law School.

Grounded: Delinquent Tax U.S. & International Travel

Delinquent tax debt can now potentially ground U.S. taxpayers from international travel

Starting this year, The Internal Revenue Service (IRS) and U.S. State Department have teamed up in a manner that may affect the future travel plans of certain taxpayers that owe a large amount of money to the Treasury. In late 2015, President Obama signed the Fixing America’s Surface Transportation Act (FAST Act) to address long-term funding for surface transportation infrastructure planning and investment. Embedded deep in the law is Section 32101, which requires the IRS under § 7345 of the Internal Revenue Code (IRC), to notify the State Department of taxpayers certified to have “seriously delinquent tax debt”. Upon certification from the IRS, the State Department is then required to deny a passport application for such individuals and also potentially revoke or limit passports already issued to said taxpayers.

The IRS issued Notice 2018-01 on January 16, 2018 to explain the criteria for which taxpayers qualify and how they plan to enforce the new law.  Under § 7345(b)(1), a “seriously delinquent tax debt” is an unpaid legally enforceable, and assessed federal tax liability of an individual, greater than $51,000, subject to inflation and for which:

  • A notice of lien has been filed under IRC § 6323 and the Collection Due Process (CDP) hearing rights under IRC § 6320 have been exhausted or lapsed; or
  • A levy has been made under IRC § 6331.

The IRS calculates this $51,000 federal tax liability threshold based on an aggregate of the total amount of all current tax liabilities for all taxable years. Even if a taxpayer does not owe over $51,000 for one year, they could still end up targeted under IRC § 7345 if the total federal tax they owe across all years exceeds $51,000. This figure also includes any penalties and interest, which can accumulate rather quickly.

Taxpayers that qualify as having “seriously delinquent tax debt” but have entered into alternative arrangements with the IRS to pay should not be too concerned. IRC § 7345(b)(2) provides exceptions to taxpayers that have agreed to:

(1) An IRS-approved installment agreement,

(2) An offer in compromise accepted by the IRS,

(3) A settlement agreement with the Department of Justice, or has

(4) A pending due process hearing or,

(5) Requested innocent spouse relief

Taxpayers in Currently Not Collectible (CNC) status, in a bankruptcy proceeding or are currently in the process of obtaining one of the five exceptions also are excluded.

Before denying a passport, the State Department will first wait 90 days after receiving certification from the IRS about a taxpayer’s seriously delinquent tax debt. This time allows the taxpayer to try to resolve any erroneous certification issues, pay the full tax debt, or enter into one of the above alternative payment arrangements with the IRS. Meeting any of those requirements will require the IRS to reverse the certification within 30 days and provide notification to the State Department as soon as reasonably possible.

Most surprising to note, however, is that the IRS is not required to notify the taxpayer that they plan to certify their tax debt to the State Department. A taxpayer will likely only find out about the certification after it has already happened. The Taxpayer Advocate Service (TAS), an independent office within the Internal Revenue Service that represents the interests of taxpayers, has wholly criticized this process, citing the potential of infringing on Constitutional due process protections because the taxpayer does not have the option to contest the certification before taking place. They also question whether 90 days is enough time for taxpayers to resolve their tax liabilities, likely because taxpayers with seriously delinquent tax debt over $51,000 have more complicated issues that cannot always be resolved quickly.

Domestic travelers may also want to pay attention to whether their home state is in compliance with the REAL ID Act. This federal law passed during the Bush Administration established new federal standards for state driver’s licenses and ID cards that can be accepted by the federal government for “official purposes”, including boarding commercially operated airline flights. As of the last few years, the Department of Homeland Security has ramped up implementation of the new requirements and currently full enforcement will begin tentatively on October 1, 2020. Theoretically, if a taxpayer’s driver’s license or ID card did not meet the new federal standards, they may be required to show alternative identification that meets the new requirements. The only form of identification that currently meets the REAL ID standards for many taxpayers is a U.S. Passport. Currently, all 50 states are either in compliance or have been granted extensions but many states have passed resolutions against implementing identification cards in compliance with REAL ID.

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.

Dynasty Disasters – Intergenerational Wealth

The Pitfalls of Intergenerational Wealth & Business Management

Running an intergenerational family-owned company can be very challenging. How do you balance present family and lifestyle goals, with operating a successful and growing company? How do you choose what is best for the family and its individual members, while also considering the future and thinking ahead to the next generation of the business?

While some family business dynasties such as the Mars Candy company and the descendants of William Randolph Hearst continue to thrive, other dynasties have crumbled. Frances Stroh was born an heiress to one of the largest beer companies in America, Stroh Brewery Company. In her new book “Beer Money: A Memoir of Privilege and Loss” she writes about her wealthy family’s downward spiral leading to the loss of their approximately 130 year brewing legacy. Ms. Stroh documents the missteps an intergenerational family-run company can make which could result in its collapse.

In a New York Times article discussing Ms. Stroh’s book, they highlight some of the unique issues that arise in intergenerational wealth and business management. For instance, in the Stroh family they chose successors of business management positions along patriarchal family lines. Instead of including women family members and outside talent, they assumed male heirs would automatically be talented and qualified in running the business.

As the Stroh family multiplied, many of the heirs relied on large annual dividends to support lavish lifestyles. Even when business profits dwindled, the dividends to heirs continued, resulting in company principle being drained.

Struggles within the nuclear family also contributed to the collapse of Stroh Brewery Company. Ms. Stroh recalled her father’s alcoholism and her brother’s drug addiction, coupled with the stress of losing the family business, causing her immediate family to unravel.

To read more about the Stroh’s struggle with intergenerational wealth management see the New York Times article.

Learn more about Frances Stroh’s book here.