This information has been updated for the 2019/2020 tax season. Read more: Top 10 State and Local Tax Planning Considerations.
As you look to close out 2018 and look ahead to 2019, there are several tax issues worth considering. Many of the issues have been addressed in articles or blogs throughout 2018, but we thought a summary of some of the top issues would be helpful:
Top Seven State and Local Tax Issues to Keep in Mind for 2019
In June, the U.S. Supreme Court ruled in South Dakota v. Wayfair that states can impose sales/use tax registration requirements on remote sellers selling into their states. Thus, the requirement that a business have a physical presence in a state in order to be subject to the state’s sales/use tax requirements is no longer valid in most states. The Wayfair case has potential ramifications for most businesses. Thirty-five states have adopted economic nexus rules where out-of-state sellers (of taxable products or services) whether by internet, phone, fax, or otherwise that generally have $100,000 or more in sales or 200 separate transactions in a state have tax collection requirements. However, if sellers have physical presence in the state (and many do, through sales people, etc.) the thresholds do not apply; they have tax collection requirements – period. Also, sales tax collection requirements can and do apply to providers of services in states that tax services. While not all states have adopted economic nexus provisions, those that have not are expected to do so in 2019. If you are not up to speed on the Wayfair case and how it affects your business, we recommend you focus on this immediately.
Much has been written and discussed about federal income tax reform this year, however there is little to report to-date on Virginia income tax reform. Virginia is a fixed date conformity state and has not yet adopted legislation conforming to the federal tax reform. The issue will be addressed by the 2019 General Assembly. Typically, tax conformity legislation is passed early in the General Assembly Session to allow taxpayers, tax practitioners, and the Virginia Department of Taxation time to appropriately prepare for the “Busy Season.” However, early (emergency) passage by the General Assembly of conforming legislation requires affirmative votes of eighty percent of the members. Since this is an election year and the Governor and Democrats and Republicans have different approaches to tax conformity and tax reform there is concern conforming legislation will not be passed early thereby compressing/stressing tax compliance efforts by tax practitioners and businesses alike. The Virginia Society of CPAs is encouraging taxpayers to reach out to their legislators to encourage them to support early adoption of tax conformity.
This is an issue that businesses often overlook and really only come to terms with when a state tax auditor audits their business. All businesses should be paying sales/use tax on their purchases of tangible personal property for their own use, unless a specific exemption (i.e., resale, manufacturing, nontaxable item/service) applies. Typically, if purchases are made locally, tax is collected by vendors. However, if purchases are made online a seller may or may not collect the tax. Amazon does collect Virginia tax but many third party sellers selling through Amazon do not. We strongly encourage you to review your online purchases (credit card statements) and purchases otherwise from out-of-state sellers to determine potential use tax that may be due. The tax that is identified should be self-assessed and reported to the Department of Taxation. Hopefully some of the use tax issues will go away once Virginia adopts economic nexus provisions requiring remote sellers to collect Virginia’s use tax. It is expected that the General Assembly will address this issue in 2019.
- Sales/Use Tax – See Wayfair above – Economic nexus rules apply (or soon will) in most states but as noted above do not overlook physical nexus issues. If a business has a physical presence (assets, inventory (even if stored in an Amazon fulfillment or other distribution facility), an office, warehouse, employees, or independent contractors in a state, it has sales/use tax collection requirements on sales of taxable goods and services into the state. Employees working from home (even if not engaged in soliciting sales) or occasionally traveling into states create nexus. The economic nexus thresholds noted above do not apply in situations where a business has physical nexus. We recommend you review where you have physical presence to determine potential sales/use tax requirements and take corrective measures where appropriate.
- Income/Franchise Tax – Federal law, Public Law 86-272, provides protections against income tax filing requirements if a business is solely engaged in soliciting sales of tangible personal property in a state. However, the Public Law 86-272 protections do not apply if a business goes beyond soliciting sales of tangible goods or if the business is providing services. Further, it is not applicable to franchise, gross receipts and other alternative base taxes, such as the Texas Franchise Tax, the Ohio Commercial Activity tax, the Washington B&O tax, and various others. It is important to note that most states now have economic nexus provisions meaning states may require income tax returns/payments where a business has mere sales into a state. The economic nexus provisions typically apply to income and franchise/gross receipts taxes. Thus, as noted above while the Public Law 86-272 protections apply to income tax, they do not apply to the other tax types nor do they apply to service providers. Service providers may find they have filing requirements due to economic nexus in various states.
Many businesses still are not aware of their requirements to report to the states AUP such as uncashed payroll checks, expired gift cards, overpayments by customers/credit balances, unrefunded deposits, etc. after the property has been dormant (unclaimed by the owner) for a specified period of time (typically 5 years). Penalties for noncompliance can be high, however many states offer voluntary compliance programs through which property can be reported and penalties waived. We recommend that businesses at a minimum start evaluating potential AUP they hold.
Local business license taxes are in effect in most localities in Virginia (may also apply in other states). If a business has moved from one locality to another during the calendar year it generally is entitled to a refund of business license taxes paid in the former locality for a portion of the year. Some localities require businesses to submit forms notifying them of the moves. If your business has moved during the year, do not overlook possible local tax refunds. Refunds generally are not allowed on payments of personal property taxes, though.
If business owners are contemplating an exit or sale in the next three to five years we suggest they consider a top level review of potential state and local tax exposure. Often we find that SALT liabilities discovered through due diligence are deal-breakers.
Obviously, the above are not ALL the issues businesses should consider – just some of the top ones. Where there are potential tax filing/payment oversights, the sooner measures are taken to correct them, the lesser the penalties and interest that may be applicable. At a minimum, now that you are aware of some of the issues you can develop a plan to address them. Your Keiter advisor is available to assist you with any questions or assistance you may need. Please reach out to us.
Additional State and Local Tax Resources:
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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.