Tag Archives: Business Law

South Dakota v. Wayfair Rejects the Physical Presence Standard

States desperate for an influx of cash just received a blessing from the United States Supreme Court through the Court’s decision in South Dakota v. Wayfair. The decision reverses prior decisions in Quill v. North Dakota and National Bellas Hess v. Department of Revenue of Illinois, which provided that only a business with a physical presence in a state could be required by that state to collect sales tax. In South Dakota v. Wayfair, the Court found that a “substantial nexus” with a state, rather than physical presence, is all that is required for a state to have the power to require an out-of-state business to withhold and pay sales tax.

For years, businesses have avoided the collection of sales tax on online sales by working around the physical presence requirement. Catalogs and phone orders were the original avenues allowing a business to reach more customers without establishing a physical presence in new jurisdictions. The growth of online sales has only compounded the problem faced by state budgets.

Until South Dakota v. Wayfair, a business making an online sale to a customer located in a state where that business does not have a physical store could not be required to collect sales tax on that sale. The sales tax owed would, in theory, be paid directly by the customer, with the customer required to report the sale and pay a use tax to his or her home state. Such use taxes are nearly impossible for states to enforce, with less than two percent of taxpayers ever reporting the use taxes they owe. Unfair competitive advantages have arisen as online retailers sell their goods for a lower, tax-free price than what could be offered by a local store selling from a physical location and required to collect sales tax at the time of sale.

States have attempted to fight back against the physical presence requirement through a number of different tax laws and strategies. The law brought before the Supreme Court in South Dakota v. Wayfair required any business with $100,000 or more of sales delivered to South Dakota or engaging in 200 or more separate transactions for the delivery of goods into the state to withhold and pay sales tax directly to the state.  In upholding the law, the Court defined substantial nexus as when a taxpayer “avails itself of the substantial privilege of carrying on a business in that jurisdiction.”

With states having broader reach to directly tax sales, we can expect a more level playing field between online retailers and brick and mortar shops. We can also expect states looking to expand the reach of their sales tax laws to pass new legislation affecting a broader number of businesses. Businesses conducting sales online to customers in other states must be aware of new requirements a state may impose on the collection and payment of sales tax and what sales may be subject to the withholding of tax by the seller.

Jamie E. Koepsel
jkoepsel@williamsparker.com
(941) 552-2562

Business Tax Changes Under the Tax Cuts and Jobs Act

The Tax Act passed at the end of 2017 brought with it a number of changes to how businesses both big and small are to be taxed moving forward. While the most visible change has been the lowering of the corporate tax rate to a flat 21 percent rate, most businesses should be able to find additional benefits from changes in how business equipment is to be depreciated, how net operating losses can be carried forward into future years, and what improvements to non-residential real property are eligible for an immediate deduction.

A recent presentation given to FICPA discusses the aspects of the Tax Act, other than the Qualified Business Income Deduction, which are most likely to affect the tax savings of your business.

Jamie E. Koepsel
jkoepsel@williamsparker.com
(941) 552-2562

Join Us: FICPA’s The Tax Cuts and Jobs Act CPE Seminar May 1

Williams Parker will lead a discussion on the Tax Cuts and Jobs Act tomorrow for the FICPA Gulf Coast Chapter at the Sarasota Yacht Club. Beginning at 8:30 a.m., the seminar will focus on the new carried interest rules, the new Section 199A qualified business income deduction, changes in the estate and gift tax and certain international provisions, and updates on tax controversy and IRS practice and procedure. Presenting on these topics will be attorneys from our Estate Planning, Corporate, and Tax practices. Three CPE credits will be provided.

John Wagner is a board certified tax attorney and chair of Williams Parker’s Corporate and Tax practices. He represents executives, entrepreneurs, and real estate investors in tax, transactional, capital raising, estate planning, and estate administration matters.

Michael Wilson is a board certified tax attorney with Williams Parker in Sarasota. He practices tax, corporate, and business law handling sophisticated tax planning and tax controversy matters and advising clients on their most significant business transactions.

Jamie Koepsel is a corporate and tax attorney with Williams Parker in Sarasota. His experience includes handling federal and state tax issues for individual and business clients.

Daniel Tullidge is a trusts and estates attorney with Williams Parker in Sarasota. He focuses on taxation, estate planning, and estate and trust administration.

Nicholas Gard is a corporate and tax attorney with Williams Parker in Sarasota. His experience includes work on a variety of tax matters, including federal tax litigation, tax disputes with the Internal Revenue Service at the examination and appeals levels, and international tax issues involving tax treaties, transfer pricing, and cross-border investments and business operations.

When:
Tuesday, May 1, 2018
8:30 – 11:30 a.m.
(Add to calendar)

Where:
Sarasota Yacht Club
1100 John Ringling Blvd, Sarasota, FL 34236

Breakfast and CPE credits will be provided. 

Register now at FICPA.org or by phone at (800) 342-3197.

We look forward to seeing you tomorrow as we share technical information, new developments, and practical advice on the Tax Cuts and Jobs Act.

For Want of a Nail? How Long-Term Capital Gain Eligibility Can Turn on a Single Piece of Paper

An old proverb teaches that the absence of a horseshoe nail can cause the downfall of a kingdom. A recent Tax Court cases suggest a real estate owner’s eligibility for long-term capital gain can turn on something just as trivial:  a single piece of paper.

The Sugar Land case involved real estate businesspersons who, though various entities, held some land for investment purposes and other land for development purposes. During 2008, they decided to abandon development plans for raw land they originally intended to develop. In 2008, they executed an owner resolution expressing their change of intent. Their land holding company subsequently sold most of the property to an unrelated homebuilder in three transactions in 2011 and 2012. The company then sold substantially all the remaining property to related entities in four transactions spanning 2012 through 2016. The related entities developed that land for resale.

The IRS asserted that the 2012 sales should have generated ordinary income instead of long-term capital gain. Despite several factors militating against capital gain eligibility—including nearby development activity by related entities–the Tax Court found that the sales qualified as long-term capital gain. The court identified the 2008 owner resolution as the critical factor showing their intent.

The Sugar Land opinion is a bookend to the Fargo case we discussed in 2015. In Fargo, the Tax Court held that a taxpayer who held land without developing it for over a decade recognized ordinary income on its sale. The court reasoned that the long holding period did not overcome the absence of an owner resolution or other documentation evidencing the abandonment of the owner’s original development plan. The taxpayer could not recognize long-term capital gain.

Lesson learned? Silly or not, documenting the non-development intent for holding raw land can make a big difference in the income tax bill when the property is sold. If you want long-term capital gain, take a few minutes to make sure the owners execute a contemporaneous resolution or governing documents expressing the intent to hold the property for investment, not development. Otherwise you might tell a tale of losing your own financial kingdom, for want of just one piece of paper.

Helpful Resources:

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

When is a Rose Not a Rose? IRS Tries to Plug Carried Interest Loophole by Claiming Roses are Not Flowers

The sweeping tax law passed in December requires partners holding some “carried interests” (partnership interests disproportionately large as compared to the relative capital contributed) to recognize gain at ordinary income tax rates (up to 37%) if their holding periods do not exceed three years, as opposed to the one-year holding period normally required to qualify for 20%-tax-rate long-term capital gain. The idea is that these interests are associated with services — often performed by hedge fund and private equity managers — that don’t carry the investment risk associated with a normal capital asset, and therefore holders of these partnership interests should have to own the interests longer to qualify for a low tax rate.

The statute categorically exempts partnership interests held by “corporations” from the new rules. Without explanation, the IRS announced this week it will take the position that “S corporations” are not “corporations” for the purposes of the carried interest law, even though by definition the opposite is true throughout the Internal Revenue Code. Their interpretation is akin to claiming roses aren’t flowers.

There are common sense reasons why S corporations should not be exempt from the carried interest statute. Because S corporations are pass-through entities, there is no practical difference between an individual owning a carried interest directly, as opposed to owning it through an S corporation. Yet read literally, the statute produces different results in these practically comparable situations.

Still, statutes are supposed to mean what they say. S corporations are corporations, just like roses are flowers. Unless Congress changes the statute, the Internal Revenue Service may have a hard time defending its position in litigation.

See our prior discussion of the new carried interest law:

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Accrual-Method Taxpayers with Audited Financials May Have to Recognize Income Sooner

Section 13221 of the 2017 Tax Cuts and Jobs Act amended IRC section 451 to link the all events test for accrual-method taxpayers to revenue recognition on the taxpayer’s audited and certain other financial statements. Specifically, new IRC section 451(b) (old 451(b) through (i) were redesignated as 451(d) through (k)) provides that for accrual-method taxpayers “the all events test with respect to any item of gross income (or portion thereof) shall not be treated as met any later than when such item (or portion thereof) is taken into account in revenue in” either (1) an applicable financial statement or (2) another financial statement specified by the IRS. In other words, taxpayers subject to this rule must include an item in income for tax purposes upon the earlier satisfaction of the all events test or the recognition of such item in revenue in the applicable or specified financial statement. For example, any unbilled receivables for partially performed services must be recognized for income tax purposes to the extent the amounts are taken into income for financial statement purposes, instead of when the services are complete or the taxpayer has the right to invoice the customer. The new rule does not apply to income from mortgage servicing rights.

The new rule defines an “applicable financial statement” as (1) a financial statement that is certified as being prepared in accordance with generally accepted accounting principles and that is (a) a 10-K or annual statement to shareholders required to be filed with the SEC, (b) an audited financial statement used for credit purposes, reporting to shareholders, partners, other proprietors, or beneficiaries, or for any other substantial nontax purpose, or (c) filed with any other federal agency for purposes other than federal tax purposes; (2) certain financial statements made on the basis of international financial reporting standards filed with certain agencies of a foreign government; or (3) a financial statement filed with any other regulatory or governmental body specified by the IRS. It appears that (1)(b) would capture accrual-method taxpayers that have audited GAAP financial statements as a requirement of their lender or as a requirement of their owners, such as a private equity fund owner.

This new rule should also be considered by affected taxpayers in relation to the relatively new and complex revenue recognition standards in ASC 606, Revenue from Contracts with Customers, which becomes applicable to nonpublic GAAP companies later this year (unless adopted earlier). For example, a taxpayer’s tax function and financial accounting function would need to coordinate to ensure that the sales price of contracts containing multiple performance obligations (i.e., bundles of goods and services, such as software sales agreements that include a software license, periodic software updates, and maintenance and support services) is allocated to the separate components in the same manner for financial statement and tax purposes.

The new tax rule is effective for tax years beginning after 2017.

Discussion of the new tax rule begins on page 272 of the new Tax Cuts and Jobs Act Conference Report.

Michael J. Wilson
mwilson@williamsparker.com
941-536-2043

Williams Parker to Participate in International Trade Symposium at Port Manatee

On Thursday, February 22, 2018, Williams Parker will be participating in an International Trade Symposium organized by the International Trade Hub at Port Manatee hosting an association of trade commissioners from Chile, Colombia, Costa Rica, Ecuador, Spain, Guatemala, Honduras, Mexico, Peru, Uruguay, Dominican Republic, Brazil, Argentina, and Canada. These trade commissioners cooperate to expand and facilitate the international commercial relations with Florida and are mainly based in Miami. Following the symposium at Port Manatee, a luncheon will take place at the Manatee Chamber of Commerce featuring a brief presentation by Williams Parker attorney Jamie Koepsel regarding the international aspects of the recent tax legislation.

If you are in the retail industry or simply interested in international trade and want to learn more about how you can expand your business to international markets, you may want to consider participating in the event. A great number of the trade commissioners have already confirmed their participation in the event. Establishing relationships with the trade commissioners will be valuable to your business growth plans. The trade commissioners will help you navigate the markets and cultures of the countries where you want to do business.

Please contact Williams Parker attorney Juliana Ferro for more information.

Tax Savings Estimator: Qualified Business Income Deduction

If you own a business taxed as a sole proprietorship, partnership, or S corporation, the new Section 199A Qualified Business Income Deduction offers one of the biggest potential tax benefits under the recently-enacted Tax Cuts and Jobs Act. It allows you to deduct up to twenty percent of your business income. If your income exceeds $157,500 ($315,000 for a married joint filer), the deduction is limited by filters tied to your company’s employee payroll and depreciable property ownership. There are other restrictions, but for most business owners our calculator offers a useful, simplified estimate of tax savings from the new deduction.

Curious whether you should change the tax status of your company? Read our analysis here: Should You Reform Your Business for Tax Reform?

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

A Guide to the Toll Charge of the Tax Act

Shareholders in foreign businesses could find themselves hit with an immediate tax on offshore earnings under the recently passed “Tax Act,” officially known as “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.”  Before the Tax Act, most foreign income earned by US shareholders through foreign corporations would only be subject to US taxes when the foreign income was paid to those US shareholders as dividends. The Subpart F rules were a way for the United States to capture some of this offshore income in the US tax base, but careful planning meant many US shareholders with foreign companies could keep money offshore and out of the US tax system for years. Some estimates put the amount of this offshore money at nearly $3 trillion, so any change to how the United States treats foreign taxes would look into how best to address these offshore earnings.

The Tax Act will look to capture some of this offshore income through a one-time immediate increase in the Subpart F income of certain US persons investing in foreign corporations.  The amount of income immediately taxed by the United States will increase by the greater of (i) accumulated post-1986 deferred foreign income determined as of November 2, 2017, or (ii) the accumulated post-1986 deferred foreign income determined as of December 31, 2017.  The tax rate on this deferred foreign income will be 8 percent for non-cash E&P and 15.5 percent for cash E&P.  This one-time tax has been referred to as a “Toll Charge” for how it may allow offshore income to flow back into the United States.

The Toll Charge is not a routine E&P calculation for US shareholders of foreign corporations.  Year-by-year ownership percentages, whether E&P is cash or non-cash, and the availability of certain foreign tax credits will all affect the final tax due.  The Tax Act has allowed for the payment of the Toll Charge in installments if sufficient cash to make payments is unavailable.

For more information regarding the Tax Act, please see our recent related blog posts linked below:

Jamie E. Koepsel
jkoepsel@williamsparker.com
(941) 552-2562

Welcome the New Year With Our Updated Tax Reform Review

On December 22, 2017, President Trump signed into law the most important rewrite of the US tax code in decades. The federal law, which is entitled “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution of the budget for the fiscal year 2018” (the Act), has no other name, as its short title, the Tax Cuts and Jobs Act, was stricken from the bill shortly before being signed.

We have prepared a summary of the Act as a non-exhaustive discussion of key changes to the tax code. We will continue to analyze the Act and will post updates and recommend planning strategies on this blog.

For more information regarding the Act, please see our previous related blog posts linked below:

On behalf of everyone at Williams Parker, we hope you and your family have a healthy and happy 2018.

Please note this post was co-authored by Elizabeth Diaz, Colton Castro, and Nicholas Gard. 

Elizabeth P. Diaz
ediaz@williamsparker.com
941-329-6631

Colton F. Castro
ccastro@williamsparker.com
(941) 329-6608

Nicholas A. Gard
ngard@williamsparker.com
(941) 552-2563