Tax News & Views Sales Tax Woe Roundup

Senate Committee’s Wayfair Hearing Focuses on Compliance Burden - Benjamin Valdez, Tax Notes ($):

“As long as the Wayfair ruling stands, Congress ought to step in and give small businesses some relief,” Senate Finance Committee Chair Ron Wyden, D-Ore., said during a June 14 committee hearing examining the 2018 ruling's impact on small businesses. “That ought to start with exempting small businesses that have revenues under a certain threshold, and Congress ought to create clear, standardized rules that lay out what states can require of small businesses outside their borders.”

Ranking member Mike Crapo, R-Idaho, added that a “sales tax system with more consistent thresholds and standards would allow businesses to more efficiently comply, and provide tax certainty, reducing the risk of future audits and penalties.” He emphasized that any relief for businesses should be balanced in a way that allows states to continue to effectively collect sales tax revenue.

The Wayfair decision allowed states to require businesses to collect sales tax from outside the state once the sales exceed a certain threshold. Prior to Wayfair, states could not require businesses with no physical connection to the state to collect sales taxes.

Senate Panel Urged To Simplify Sales Tax Regime After Wayfair - Asha Glover, Law360 Tax Authority ($):

Michelle Huie, the CEO of VIM & VIGR Compression Legwear, asked lawmakers during a full committee hearing to simplify the process for e-commerce businesses to meet their state sales tax obligations. Huie said taking the first step of creating uniformity around the criteria to calculate sales tax nexus would help provide transparency.

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Lawmakers should also provide a single sales tax rate for e-commerce sales to make calculating sales tax amounts easier and help reduce businesses' reliance on expensive technology following the Wayfair decision, Huie said... Huie also asked lawmakers to create a centralized clearinghouse for registering and paying sales tax.

Senate GOP Targets Inflation With Tax Cuts, SALT Extension - Doug Sword, Tax Notes ($).

Senate Finance Committee Republicans would boost capital gains and net investment income tax thresholds, exclude the first $300 of interest income, and increase the savers credit by 25 percent under a proposal that immediately drew fire from Democrats.

But it wasn’t the tax cuts in the new GOP bill that Democrats questioned so much as the proposed pay-for — an extension of the $10,000 state and local tax deduction cap past its 2025 expiration. The SALT cap in the Tax Cuts and Jobs Act hit taxpayers in Democratic congressional districts much harder than in GOP ones, and Democrats’ campaign promise to repeal the cap was a key driver in their winning the House majority in 2018.

As the GOP has no way to enact legislation with Democrats controlling Congress and the White House, this bill is best read as an election-year gesture. It does indicate that the GOP has not softened its opposition to increasing itemized deductions for state and local taxes. The bill does not address the increasingly widespread use of pass-through entity taxes to work around the SALT cap.

The dirtiest tax scams for 2022 - Jeff Stimpson, Accounting Today. "U.S. citizens or residents try to dodge taxes with contributions to foreign individual retirement arrangements in Malta (or other countries). The individual typically lacks a local connection, and local law allows contributions in a form other than cash or does not limit the amount of contributions. By improperly asserting the foreign arrangement is a 'pension fund' for U.S. tax treaty purposes, the taxpayer improperly claims an exemption."

Michigan Governor Vetoes Income Tax Cut Bill - Emily Hollingsworth, Tax Notes. "H.B. 4568 would have lowered the state individual income tax from 4.25 percent to 4 percent starting in 2023; increased the personal exemption amount from $4,900 to $6,700; raised the EITC from 6 percent to 20 percent of the federal credit; and created a $500 nonrefundable child tax credit starting in 2023."

The Final Foreign Tax Credit Rules: Complaints and Confusion - David Stewart, Carrie Brandon Elliot, and Raymond Stahl, Tax Notes Opinions:

The main concern about these Section 901 and 903 regs is that they curtail creditability of foreign taxes that were previously more easily creditable. That applies to net income taxes where new requirements, such as a net gain requirement and a cost recovery requirement, can curtail a taxpayer's ability to take FTCs for net income taxes paid to a foreign country.

There's also concerns regarding withholding taxes, where certain nexus jurisdiction and source rules also can work to curtail a taxpayer's ability to take a credit for a withholding tax. Another issue is how treaty benefits are affected by these new regs.

Related: Eide Bailly International Business Services. 

Today, June 15, is Tax Day for filers abroad, estimated tax payers, and some Puerto Rico residents - Kay Bell, Don't Mess With Taxes. "June 15 also is the due date for the second estimated tax payment of 2022. This applies to folks who make money that isn't subject to withholding tax."

Health care sharing ministries ruling leaves a critical question unanswered - Wolters Kluwer Tax & Accounting. "Health care sharing ministries are nonprofit groups in which members share each other's health care costs. Such groups have existed for many years. They became more popular after enactment of the Affordable Care Act because their members are exempt from the Act's minimum essential coverage requirement."

Application of Foreclosure Proceeds Could Create Deductible Interest Expense, But Taxpayer Failed to Show It Actually Did So - Ed Zollars, Current Federal Tax Developments. "The taxpayers claimed over $100,000 of mortgage interest deductions for the year of the foreclosures, a year in which the only payment on the notes came from the foreclosure transactions."

Missing Document Dooms Taxpayer's Charitable Donation Deduction - Parker Tax Pro Library. "The Tax Court held that a taxpayer who donated Native American jewelry and artifacts to a museum was not entitled to a charitable donation deduction because she failed to provide a contemporaneous written acknowledgement of the donation from the museum stating that the museum provided no goods or services in return for the donation as required under Code Sec. 170(f)(8)."

Many Producers with 2020 or 2021 Disaster Losses Eligible for ERP - Kristine Tidgren, Ag Docket. "Specifically, these ERP phase one payments cover losses to trees, bushes, vines, and all crops for which federal crop insurance or noninsured crop disaster assistance program coverage was available, except for crops intended for grazing. Qualifying natural disaster events include the following: wildfires, hurricanes, floods, derechos, excessive heat, winter storms, freeze (including a polar vortex), smoke exposure, excessive moisture, qualifying drought, and related conditions."

The Impact of Individual Income Tax Changes on Economic Growth - Timothy Vermeer, Tax Policy Blog. "The mobility of higher-skilled and higher income earners in an open economy works against the effort of progressive state and local tax systems to achieve long-term redistribution of income."

Court Finds Disallowed Deductions Qualify Only as Start-Up Costs - Mary Katherine Browne, Tax Notes ($). "The Tax Court found that a taxpayer’s aim for long-term profit allowed for most of his disallowed business expenses to be deducted as start-up expenditures and not research or software development costs."

This case highlights a tax law provision that comes as an unpleasant surprise to many new entrepreneurs. Internal Revenue Code Section 195 requires taxpayers to capitalize "start-up expenditures," rather than deduct them in the year incurred. The capitalized expenditures may be amortized over 180 months once the "start-up" period ends. But when does that happen?

Tax Court Judge Greaves explains the basics:

Section 195(a), on the other hand, generally denies a deduction for start-up expenditures, which section 195(c)(1)(A)(iii) defines in pertinent part to include any amount paid or incurred in connection with “any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business.” Without any regulations to tell us when an active trade or business begins, we rely on a test developed by the U.S. Court of Appeals for the Fourth Circuit, the appellate venue for this case absent a stipulation by the parties. In the Fourth Circuit, a taxpayer does not begin carrying on a trade or business “until such time as the business has begun to function as a going concern and performed those activities for which it was organized.”

The taxpayer in this case was developing Vizala, a business information website. This meant the business didn't fit into traditional start-up cost rules. For example, somebody opening a store exits the start-up period when they open the doors to customers. From the Tax Court opinion: 

Vizala does not fit this traditional archetype. Petitioner doubted that any of his revenue strategies could succeed until Vizala built rapport with users and advertisers. He therefore prioritized web traffic over revenue by charging no user fees and marketing the site to institutional customers. Even though petitioner made no attempt to earn revenue in 2015, his business began providing the services “for which it was organized,” with an eye to long-term profit, once he opened the website. 

The IRS still succeeded in requiring capitalization of significant expenses incurred before that date, convincing the Tax Court that the expenses failed to qualify as currently deductible research expenses.

The Moral? When starting a new venture, remember that you don't deduct your expenses until the business is past the "start-up" phase. 

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