On June 21, 2018, the U.S. Supreme Court (the Court) issued a decision in South Dakota v. Wayfair, overturning the physical presence standard requirement for states to impose sales and use tax filing obligations on companies doing business in a state. As a result, companies are in the process of understanding how the Wayfair decision impacts their sales and use tax filing requirements.
We are alerting our clients that the Wayfair decision could also have other state tax filing implications, including income and franchise taxes as examples.
The Court observed in their Wayfair ruling that targeted advertising and electronic sales may allow a business to have “substantial virtual connections” to a state without traditional physical presence. The Court noted that other functions of e-commerce, such as websites leaving cookies on customer hard drives and applications that can be downloaded on customer phones, may be considered to create something akin to a physical presence in a taxing state.
Given the Court's conclusion that “physical presence is not necessary to create substantial nexus”, the Wayfair decision could impact other state taxes, such as state income or franchise taxes, for companies conducting business activities in a state without necessarily having a physical presence.
For example, even prior to Wayfair, many state and Federal courts have taken the position that the physical presence standard does not apply for purposes of state income taxes. Many states have been emboldened to enact “factor presence” laws tied to sales, property or payroll in their state. Wayfair decision type states have attempted to subject companies to their state tax regime if they are doing business in their state even without physical presence.
The Court has declined to hear challenges to economic nexus laws for state income tax filing purposes. With the test announced in Wayfair, more states may enact aggressive legislation. Effects are likely to be especially pronounced in the handful of states that have taken the position that physical presence is not necessary for the state to assert income tax nexus against a company doing business in their state. Physical presence is not required to establish nexus with Nebraska. [Neb. Rev. Stat. §77-2734.04(5)].
We believe the Wayfair decision may empower states to not only enact legislation, but also pursue audit and collection activities against companies doing business in their state that currently are not subject to their state taxing regime.
Therefore, we believe it is necessary for companies that have customers or clients in multiple states to actively review their state filing positions in light of the recent Wayfair decision.
Please contact us if you need assistance with such a review or have questions about the Wayfair alert.
Congress is currently working on a massive tax reform proposal that could change many aspects of income tax law. It is uncertain what the final version of the bill will look like or if anything will get passed at all, but there are still income tax planning opportunities available under the current law. We highlight below a few strategies you may want to consider before the end of the year to reduce your 2017 taxes.
- Postpone income until 2018 and accelerate deductions into 2017 including:
- Maximize your charitable contributions including prepayment of athletic event seating donations.
- Prepay real estate taxes, state income taxes and miscellaneous itemized deductions (e.g., investment fees) unless you are in an alternative minimum tax situation.
- Defer any year-end bonuses.
- If you have a health savings account (HSA), maximize your contributions for 2017 in December.
- For individuals age 70 ½ or older, consider making charitable gifts up to $100,000 per person directly from your individual retirement account (IRA).
- Maximize your retirement plan contributions.
- Reduce potential capital gains by selling securities in a loss position.
We also want to alert you to some new rules that will affect our partnership and LLC clients.
- Beginning with partnership tax years starting on or after January 1, 2018, the partnership will be liable for any assessments levied on prior years’ tax returns.
- This will eliminate the need to proceed against individual partners.
- Current partners will be held responsible for tax liabilities of prior partners.
- The “tax matters partner” will be replaced with a “partnership representative.”
- This person will have complete authority to act on behalf of the partnership and the partners when dealing with the IRS.
- This person also has the authority to make various elections.
In light of these changes, we recommend you review your partnership or LLC agreement with your attorney as soon as possible to ensure it addresses the significant changes required.
If you would like our assistance with any of your year-end planning questions, please let us know.