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.

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.

Tax Reform Now: Five Actions to Consider Before December 31, 2017

Tax and Business

Congress officially passed the Tax Cuts and Jobs Act on December 20th. Despite conflicting reports on when President Trump will sign the Act, he will sign it. Here are five last-minute actions you should consider for tax planning before the New Year to minimize your 2017 and 2018 tax liability.

One: Make Your Oregon Fourth Quarter Estimated Tax Payment by December 31st

Individuals who pay quarterly state income taxes should consider making their fourth quarter payment by December 31st. The Act limits the deduction for state and local taxes to $10,000 unless the taxes are paid and accrued in carrying on a trade or business.  In Oregon, the fourth quarter estimated payment is due on January 16, 2018. Paying by December 31st assures that these individuals can maximize their 2017 state and local tax deduction one last time. Strongly consider this action if you receive substantial investment income or are self-employed. The final version of the Act only allows a deduction for payments made for tax years on or before 2017, so do not make an estimated payment for 2018 taxes.

Two: Give More to Your Favorite Charities

Give and you shall receive . . . more in 2017 than 2018. For itemizing taxpayers, charitable contributions are one of the most well-known and utilized deductions. The Act’s decease to the marginal tax rates and the doubling of the standard deduction means a charitable deduction claimed on a 2017 tax return will yield more tax savings than the identical deduction on future tax returns. If you expect your marginal tax rate to decrease, or if you itemize now but might not under the new law, consider talking to your tax advisor about how some last minute giving could be the best gift you receive this holiday season. If you do not have a charity in mind, consider donating to Oregon’s Campaign for Equal Justice, whose mission is to make equal access to justice a reality for all Oregonians.

Three: Pay Your Local Property Taxes in Full for 2017-2018

Starting in 2018, individuals will not be able deduct more than $10,000 of their state and local income taxes and their local property taxes. While Oregon allows property taxes to be paid in installments, to be assured an individual can deduct the maximum amount of property taxes paid for the 2017-2018 year, consider writing a check for the installments due in 2018 to your county before the year end. Check with your tax advisor if you are subject to the AMT. The AMT limits the amount of the property tax deduction.

Four:  Pay and Claim Those Unreimbursed Employee Expenses and Other Miscellaneous Deductions Now – Including Your Tax Preparation Fees and Certain Legal Fees

As of 2018, miscellaneous itemized deductions will become a deduction of the past. This includes the deduction for tax preparation expenses, certain legal fees, and unreimbursed employment expenses. Unreimbursed employment expenses can include everything from tools & supplies, union dues, expenses for work related travel, subscriptions to business journals, attending seminars and more. If you expect to pay these expenses next year you should consider paying for them before December 31st. Of course, if you are self-employed or own a business, you will still be able to deduct some of these expenses against business income under the new law. In short: Consider paying your CPA for 2017 tax advice and your 2017 tax filing by December 31st.

Five: Delay That Taxable Gift

Taxpayers considering gifts that would result in the payment of gift taxes or GST may want to wait until 2018. The exemptions for both double in 2018 and a delay in the timing of the gift could reduce or eliminate any tax liability incurred. However, do not hesitate to make that 2017 annual exclusion gift!

Stay Tuned

This article is the first in a series planned to address the numerous changes to tax law imposed by the Tax Cuts and Jobs Act. We strongly recommend you consult with your tax attorneys and tax advisors on the impact of the act on your 2017 taxes and to plan for future years.

Caitlin M. Wong brings her passion for tax law and her commitment to empowering others to her practice at Samuels Yoelin Kantor LLP. Caitlin has experience with all aspects of both federal and state taxation, including tax planning for companies as well as individuals, audits, appeals, tax court litigation, estate planning and trust and estate litigation.

Death of the Death Tax?

On January 10, 2017, Rep. Kristi Noem (R-S.D.) introduced H.R. 631, the “Death Tax Repeal Act of 2017.” While this bill resembles a similar bill that failed to become law in 2015, with the 2016 elections, the political landscape in Washington has changed considerably. In brief, H.R. 631 provides that:

  • The estate tax will be repealed for descendants dying on or after the date of enactment.
  • The generation-skipping transfer (GST) tax is repealed for GST transfers occurring on or after the date of enactment.
  • The gift tax is retained with its current lifetime exemption of $5.49 million, but its tax rate is reduced to 35% (down from 40%). The gift tax exemption amount will continue to be adjusted annually for inflation.
  • The special “anti-freezing” tax rules, also known as Chapter 14, are retained, presumably to maintain the overall effectiveness of the current gift tax system.
  • The estate tax will continue to be imposed on principal distributions from pre-existing qualified domestic trusts (also known as “QDOTs”) with respect to non-citizen decedents dying before the date of enactment, but only for the 10-year period following the date of enactment.

Notably absent from this bill is any reference to a change in the current system in which the tax basis of an appreciated asset received from a decedent’s estate is “stepped-up” to the fair market value of such asset on the decedent’s date of death. This system effectively eliminates the capital gains on the pre-death appreciation of the value of such inherited assets. In earlier reports, many speculated that this rule would be changed either to a carryover basis system (where inherited assets would retain the same tax basis of the decedent), or even the “Canadian system” (whereby capital gains would be immediately recognized on the appreciated assets of a decedent, with such a tax payable shortly after death).

H.R. 631 is unlikely to pass simply as a stand-alone piece of legislation. Rather, as Congress begins to assemble a larger tax reform bill later in 2017, many tax experts feel that it’s likely that such legislation will include provisions that will repeal the current estate tax rules. Whether the tax basis rules will be changed, and whether a tax reform bill ultimately passes, will ultimately depend upon the political and fiscal realities that arise as the legislative process moves forward.

If the New England Patriots can win the Super Bowl from 25 points down, then anything can happen in 2017!

Bitcoin – Is It Really Money?

Is bitcoin money?

Florida court dismisses money-laundering case, saying that bitcoin is not money.

Recently, a Florida judge dismissed a money laundering charge against a man who sold $2,000 worth of bitcoin to an undercover agent. The agent claimed he was using the bitcoin to purchase stolen credit card numbers. The judge held that the digital currency is not money. Therefore, it does not fall within Florida’s money laundering statute. The judge stated that trying to regulate bitcoin using a statutory scheme regulating money is “like fitting a square peg in a round hole.” This leaves the door wide open for the Florida legislature to regulate bitcoin and other virtual currency.

Bitcoin was released in 2009. Since that time, courts and legislatures have struggled to fit it into existing legal framework. There are few laws or regulations specifically governing bitcoin and its price fluctuates widely. One expert witness compared bitcoin to “poker chips that people are willing to buy from you” (this expert was paid in bitcoin to appear as a defense witness). The currency isn’t printed, like the euro or the U.S. dollar. The IRS considers bitcoin to be property, as opposed to currency, so any exchanges are deemed to be bartering exchanges. New York now requires “BitLicenses”. They are needed for any businesses that buy, sell, or process bitcoin in the state. New York institutes a multitude of consumer and fraud protections on the businesses. Most notably, the business will have to maintain records of their customers’ names and addresses. This eliminates the anonymity that made bitcoin so appealing in the first place.

It is not just the US that struggles to define bitcoin. In Australia, bitcoin is double taxed. That is because in the country it is considered to be a commodity, not a currency. There is a 10% tax when consumers purchase the currency. They are taxed again when consumers use the bitcoin to purchase goods. Bitcoin is exempt from value-added tax (VAT) in many European countries, indicating that they do not see it as a good but instead as a legitimate currency. In Switzerland, the city of Zug is allowing citizens to pay for public services using virtual currency.

While the trend certainly seems to be towards treating bitcoin as currency, there is still plenty of uncertainty as to what its future will look like. The Florida case may have set precedent for how the rest of the United States will treat virtual currency. It may also encourage legislators to create more laws regulating bitcoin. Only time will tell.

Individual Kicker Credit Amounts Announced for Oregon

On August 26th, state economists announced that taxpayers will be getting a kicker rebate for the first time in eight years.  This is Oregon’s unique system of refunding taxes paid when general fund revenue exceeds 2% of projections.  For this period, revenue exceeded estimates by $111 million so folks who paid taxes in 2014 will be seeing a credit on their 2015 tax returns.

The credit looks to be about 5.8% of individuals’ “Total Tax Before Credits” (line 31 on the Oregon form 40).  To figure out what your kicker credit will look like, the Oregonian has set up a webpage to help calculate 5.8% or estimate if you don’t have access to your tax return.

Although the state used to send out checks, the cost of mailing was deemed prohibitively high, so the 2011 legislature changed the program to a refundable tax credit.

Get Your Discounts Before They Are Gone

The IRS is talking rule changes again.  It may be time to take another look at your estate plan.

Family-owned businesses often gift ownership interests in the business to younger generations in an effort to reduce gift or estate tax liability.  The reported tax value of those gifts is discounted to reflect the fact that the new owners lack the ability to control the business and cannot market the interest to other buyers.  The IRS now thinks it may be time for that practice to end.

The WSJ has recently reported that the IRS may soon greatly restrict or even disallow those discounts for family businesses. Exactly how and or when the IRS will inhibit discounts is still uncertain unclear, but, if the agency does act, the impact will be substantial.  Have you considered how such a change might impact you and your family?  Call the estate planning attorneys at SYK today to see how the proposed change affects you.