On-Demand: New Jersey Tax Reform, TCJA & Wayfair--Update and Planning for State and Local Tax
November 01, 2018
This webinar helps participants understand the ways that the Tax Cuts and Job Acts and the Wayfair will impact state and local tax departments.
You may submit questions using the questions box on the GoToWebinar panel. We will try to address questions submitted during the program. However, if we are unable to address your questions, we will connect with you after the webinar. The presentation is available for download through the handout box on your GoToWebinar panel. For those will meet the criteria, you will receive a CPE certificate from EisnerAmperU@EisnerAmper.comm within 14 business days of confirmed course attendance.
Moderator: Let's welcome our speakers today, Gary Bingel, partner at EisnerAmper, and Bill Gentilesco, Director at EisnerAmper. Welcome.
Bill Gentilesco: Thank you. Today we're going to be talking ... this is Bill Gentilesco. Today we're going to be talking about the New Jersey tax reform, Wayfair Decision, and touch on some TCJA Federal tax reform as it impacts the interest of corporate tax return. Starting with a polling question. What do you think the biggest issue is for you for 2018 and '19? Wayfair related issues, federal tax changes, TCJA impacting state taxes, New Jersey budget changes, or the economic outlook? Give you a minute or so to answer that.
Moderator: And please remember that in order to receive your CPE certificate, you must remain logged on for at least 50 minutes and responded to at least three polling questions. And again, we'll leave it up there for another few seconds. So please remember that in order to receive your CPE certificate, you must remain logged on for at least 50 minutes and respond to at least three polling questions. And this is the first one. Okay, we are now closing the poll and sharing the results.
Bill Gentilesco: Okay, it looks like almost 60% are concerned about the federal tax changes, and their impact on state, and followed by Wayfair sales tax related issues. Thank you. Okay, I'm just going to go back to my agenda. I'm going to be covering the New Jersey upcoming amnesty program, some personal income tax changes that were part of New Jersey tax reform, as well as corporation business tax changes. And then Gary Bingel is going to touch on Wayfair and sales tax.
Okay, starting with amnesty, I think this is the fourth New Jersey amnesty that I've seen in my career. Similar to the last one, this upcoming amnesty, it must end by January 15. It was allowed, per the law to be a maximum of 90 days. So it hasn't started yet, which is kind of surprising but-
Gary Bingel: And they haven't announced when it's going to start either.
Bill Gentilesco: No, but we're hearing sometime in November, if I had to guess it would be mid-November. But similar to the prior amnesty program, all penalties will be waived and 50% of interest, otherwise due for payments made as part of that program. Eligible years include all state tax liabilities from February '09 to September 2017. It doesn't apply to recent from 9/1/17 the current tax period
Amnesty is available to all taxpayers that have not been contacted by the Office of Criminal Investigation, and again, as with prior amnesty programs, there's a 5% penalty for liabilities that could have been resolved during amnesty but weren't, and that's a non-waiveable penalty.
Personal income tax, the millionaire's tax is back starting in 2018. The highest tax rate will now be 10.75%, for New Jersey personal income tax purposes, and that's for those with a taxable income of over $5 million, regardless of taxpayer status. Whether they're filing single or married filing jointly. If you're over $5 million that incremental income over that $5 million amount will be subject to with 10.75 rate. That's quite a jump from the prior 8.97. It's almost 2%.
Starting with the 2018 year, employers must start withholding at a rate of 15.6%, for those employees that will exceed that $5 million income threshold. Employers and employees won't be subject to underpayment penalties for wages and salaries paid prior to September 1, 2018.
Another tax reform change in New Jersey was an increase in the real estate or property tax deduction. Starting in 2018, the maximum property tax deduction is increased to $15,000 from $10,000. Moving on to corporate tax changes, most ... By the way, New Jersey, the governor signed major tax reform on July 1, 2018. That includes the personal income tax changes that I just went through. But most of the changes impact corporation.
So, for financial statement purposes, that's going to be a Q3 event for most of our calendar year tax payers. You're going to want to record the impact of that in your Q3 provisions. Okay, first thing is the CBT-
Gary Bingel: And then, they did also just recently, a couple weeks ago in the first week, or maybe a month ago in the first week of October, actually made some changes already of quote unquote, correcting legislation changes, although some of them were significant to that, you know, July 1 legislation. And I've incorporated those in this presentation. So this is based on the current law, including recent updates.
Bill Gentilesco: Good point. Thank you. So there's a CBT surtax for four years, 2018 through 2021. And for '18 and '19, there's an additional 2.5% CBT tax, and for '20 and '21, it drops to 1.5%. Importantly, this surtax only applies to corporations with an allocated net income of over $1 million. Once you're over that million dollar threshold, though, it's on all of your income.
In other words, it's not 9% on the first million and then 11.5 after that. It's a cliff, I guess. And one thing I want to mention, in July it wasn't clear but now it is the surtaxes do not apply to S-Corporation. The taxes apply to allocated income, and there's no credits allowed against the surtax.
Gary Bingel: So any folks that are planning on using purchasing credits, grow credits, whatever, they cannot be allowed against surtax. The only thing they do allow against surtax are actual cash payments. So obviously if you made an estimated payment you take that as a credit against the tax, but none of the other economic development credits.
Bill Gentilesco: Right, and yeah, there was some confusion where some people I spoke with, they thought that the surtax was on your tax. So in other words, if you're New Jersey tax was $100,000 they thought it was 2.5% of the 100,000. No, it actually increases your rate effectively to 11.5. So that's important to know.
CBT, or Corporation Business Tax dividends in New Jersey, eventually addressed the 965 treatment for the CBT, and the 965 fee participation exemption or deduction is disallowed. You must add that back on your CBT returns. I realized that most people have filed their 2017 CBT returns at this point but if you haven't maybe your fiscal year or some people might have to amend the return but not bad about your 965 C deduction.
Also, starting in 2017, New Jersey used to have 100% dividend received deduction for corporations that were owned 80% or more that's dropped now to 95% dividend received deduction. That remaining 5% non deductible dividend for 2017 and 2018 only, New Jersey is letting you use a couple of apportionment options, whichever is more favorable. You can multiply that by 3.5%, so it will be the 5% non taxable times 3.5, times your tax rate, or you can use your three year average New Jersey allocation factor for 2014 '15 and '16.
Unfortunately, the 2017 forms no changes were made, there was no way to reflect the 95% DRD, or do these different allocation options. A couple of weeks ago New Jersey came out with a form to do that CBT-DIV. So if you filed your 2017 return based upon the old rules, you're going to need to file the CBT, you might have deducted too much of a dividend received deduction, you might use the wrong apportionment, you'll need to file this new form by January, 31 2019.
There was no changes to the 50% dividend received deduction, and that says owns more than 50% and less than 80% of a subsidiary, those rules remain in place.
Gary Bingel: And I think the division is looking for the CBT-DIV for basically everybody that has, especially the repatriated dividends under 965 or anything like that, but essentially looking forward to most everybody.
Bill Gentilesco: Anyone that received a dividend, and had ownership of 80% or more. If you earned up to 50% ownership it might not apply.
Gary Bingel: Yeah.
Bill Gentilesco: Okay. Also, there were significant changes to the CBT Net Operating Loss rules. Losses incurred in 2018 and subsequent periods can be carried forward for 20 years going forward, NOL's will be earned and carried forward on a post apportionment, or post allocation basis. Also, any discharge of indebtedness that a taxpayer has that will reduce your New Jersey NOL, that wasn't the case before this law change.
As a result of going from a pre-apportioned NOL, to post apportioned NOL's, your old or your accumulated NOLs now must be converted to a post apportionment basis. Some of you will remember that New York did this a few years ago. New Jersey's kind of following suit, And to do that, you'll take all your underutilized NOL's, and multiply it times the taxpayers in New Jersey allocation factor for the last privilege period prior to the effective date of this change. So for most taxpayers, they're going to be using their 2018 apportionment factor, to do this conversion of their NOL's.
Now, importantly, you have up to 20 years, but your NOL carry forward when you originally earn those losses that 20 years starts, you're not getting more time. You're 20 years starts from when you originally earned loss, if you will.
Gary Bingel: Yeah, for people that are familiar with the way New York did it, as Bill mentioned, calculation is very similar to New York's calculations from a couple years ago, except in New York's since you basically took all your NOL's and converted them, and those holding periods started over.
Bill Gentilesco: Right, they gave them more time. New Jersey is making you stick with your old ways.
Gary Bingel: Yeah, and you need convert them on a year by year basis that year you had a loss-
Bill Gentilesco: Exactly.
Gary Bingel: ... not in aggregate, as New York allowed.
Bill Gentilesco: Right. There was a change to the New Jersey add backs for interest in royalties. Previously, interest in royalties paid to a related member and a treaty country, were not subject to add back. That's still the case provided now, the interest paid to these treaty countries you have to meet these two tests. The related member in the foreign nation must be including that interest or royalty in their tax base in their foreign country. And the related member also must be subject to a tax or have an effective tax rate that is equal to, or greater than a rate of three percentage points less than New Jersey's tax rate.
Basically, they're putting the foreign treaty related members on the same par as interest in royalties paid to related members in the US. Those two tests supply to the US have applied since the law changed many years ago. Now they're putting the treaty countries on a par with them.
163(j), because New jersey starts with federal taxable income, New Jersey is also adopting the federal or the Internal Revenue Code 163(j) limitations. When applying this limitation, where there's interest paid to both related and non related parties, the 163(j) limitation applies on a pro rata basis. Interest paid between members of an affiliated group filing a combined return which we'll talk about later, they're eliminated.
Market sourcing, New Jersey is following New York and frankly many other states. At this point, I think most states when it comes to services previously for CBT you sourced service to where the work was done, where the employees were that actually did the services. Now, New Jersey beginning in, for years ending on or after July, 31 2019 market sourcing applies.
You're going to source receipts revenue to where the customer, or the client received the benefit of those services. And if the benefit is received within and without New Jersey, the portion that goes to New Jersey is based upon the value of that benefit, or pro rata share. Generally, for services rendered to individuals, the benefit is deemed to be received that the billing address.
For services to a business, if you don't know where the value is received, or you can't determine that, then you source that to where the services or where your customer ordered the services. If you don't know that, then you source the revenue to the customer's billing address. I think that's similar to quite a few other states.
Gary Bingel: Yeah, this market sourcing rules are going to ... like a lot of states they've got, you know, those hierarchies that they'll go through, which often fall down to the last line to the billing address. And New Jersey is very similar there. They have a slightly different hierarchy for personal income tax purposes or services rendered to individuals versus other businesses. But it's a pretty straight forward hierarchy compared to what we've seen in some other states.
Bill Gentilesco: And a couple of things I want to put, this is just for Corporation Business Tax only. They have not changed ... partnerships are still under their old sourcing rules. And again, the market sourcing is applicable to years ending after July 31, 2019. So 2018, we're still under the old rules.
Another change for New Jersey, is the New Jersey R&D credit is no longer refundable. Which surprised us because we weren't aware of the New Jersey R&D credit ever being refundable? And we spoke to New Jersey about that, I'm not sure we got a clear answer about whether ... it was some sort of narrow section that they were trying to address.
Gary Bingel: Yeah, they said they thought it wasn't clear and they ended up just it. They pretty much said the same thing they didn't think it was ever deductible either, or refundable.
Bill Gentilesco: Okay. There's no IRC section 199 section allowed for Corporation Business Tax purposes that was put to the legislation to clarify no PBI deduction on CBT returns. The big change is New Jerseys adoption of combined reporting. And for my 30 plus years, every time somebody asked a division "Hey, you know, another state went to combined reporting. Is New Jersey going to do that?" the answer was always no, never happen. We're going to be a separate filing state forever.
Well, it finally happened. The years ending on or after July 31, 2019, New Jersey has adopted or enacted a combined unitary reporting system. And the default is water's edge unitary. Meaning generally companies in the United States. But the water's edge group also includes any entities incorporated in a territory or possession of the United States. And also, an entity, wherever incorporated is 20% or more of it's property and payroll or in the US.
In addition, and lastly includes any member that earns more than 20% of it's income from intangible property, or related activities that are deductible by other members of the combined group. So if you're paying interest or royalties to a foreign company, and that makes up 20% or more of that foreign company's earnings, they're going to be brought into the New Jersey combined group.
Similar to other states, New Jersey has an affiliated group election, where if made the New Jersey combined group includes members of the New Jersey affiliated group, whether or not they are unitary. So, from a planning standpoint, you might have a loss company that's part of your affiliated group, but you're not sure they're unity, but you want to make sure you get those losses into your New Jersey combined return the affiliated group election, it's something that you should consider.
And the definition of affiliated group for New Jersey, they use the 1504 definition, expanded to include all domestic corporations that are commonly owned directly or indirectly by any member of the affiliated group. Regardless of whether or not they file a federal consolidated return, and the election is binding for six years. So you can't go back and forth with water's edge, affiliated, etc.
A couple of points I want to make about the affiliated group election though. It looks like if you make that election, you may end up having a higher New Jersey sales factor.I'm going to address it a little bit later, but the New Jersey combined return uses the Joyce rule. Meaning a member of the combined group that doesn't have Nexus is a non taxable member. And they don't have to pick up their new Jersey sales in the numerator. They pick them up in the denominator combined member, and their income is included in the return, but the non taxable members don't pick up their new jersey sales in the factor in the combined return. And that's known as the Joyce rule.
It appears by making this affiliated group election. You might not fall within the choice rule anymore. In other words, you might be viewed as one tax payer for sales tax purposes. So non taxable members might have to pick up their New Jersey sales in that case. It's unclear, but that's something to be looked at before you make the selection.
And then another occasionally favorable thing within New Jersey affiliated group election is, let's say you have your foreign own company, and that foreign owned company, maybe it owns a US affiliated group that's filing a consolidated return. But then it might also own some brother sister entities directly, the foreign owner. It looks like by making the affiliated group election, I might be able to exclude those directly owned entities, which I might want to do if those companies are very profitable, and are going to drive up the New Jersey unitary tax. That's also unclear, and I think it needs more study. But something to think about.
Gary Bingel: Yeah, there's a lot with the combined reporting. I think that's one of the issues that New Jersey itself it's going to be struggling with, is how to implement some of these. As we saw, it just came out with some guidance on what to do about the foreign dividend inclusions and things. Basically, when the returns were due to be filed, and I have a feeling for a lot of these corporate combined issues, we're going to see the same thing.
A guidance is going to be somewhat sparse, right up to the data filing and it's going to be a lot of open questions like that as to how they're going to treat a lot of the issues when the rubber hits the road on who's included, who's not included, what was really meant Bill Gentilesco: Yeah, at this point, all we have is the statue.
Gary Bingel: Yeah.
Bill Gentilesco: Yeah. So hopefully, there will be some guidance, but as you said, it may come, unfortunately, close to when the returns are due.
Gary Bingel: Yeah. Which won't help for estimated payments or anything else.
Bill Gentilesco: Yeah, although we do have awhile for calendar year tax payers the combined isn't going to apply until 2019, and presumably those returns will be filed for most taxpayers in October 2020.
Gary Bingel: But they have to make their estimated payments.
Bill Gentilesco: Oh, that's a good point, yep. Good point. There's also a worldwide group election. If the election's made and a New Jersey combined group includes all commonly on unitary members wherever incorporated or formed, the worldwide election is also effective for six years. And similar to California and other worldwide states, you're going to have to do some type of a conversion of the foreign income to US gap, and then to US tax purposes, and then make any state for New Jersey type of addition and subtraction modifications.
However, the director is allowed to provide guidance on the simplified calculation and allow it if it's reasonable and applied consistently by the taxpayer. California allows for certain ... they don't make you do every last adjustment on a foreign owned company. Hopefully, sounds like New Jersey might get something similar.
Public Companies deduction. Public companies are allowed a deduction for any aggregate increase in their net deferred liability or any aggregate decrease in their deferred tax asset resulting from New Jersey's adoption of combined reporting. The deduction is taken over 10 years and to starts after a five year waiting period. So, if combined reporting is unfavorable, and you're a public company, and it's going to basically be a hit to your financial statements, it's going to increase your deferred tax liability, or decrease your assets, or flip you from an asset to a liability, you qualify for this deduction.
Any combined group intending to claim that deduction must file a statement with the director on or before July. Following the first year a combined return is required. Which for a calendar year would be 2019. So it's be July 1, 2020, when you'd have to file the statement of your intent, claim this deduction. The division is supposed to be releasing, and I mean, they have a while, before they need to release anything, but I think they're going to come up with some type of a form. They're going to want to know, number one that you're going to be claiming and how much it is, at a minimum, per the statute.
But if you're a public company, you still need a book that if your intent is ... let's say New Jersey combined reporting is going to cost you $5 million. You're going to get an offsetting asset, essentially. You're going to need to book that Q3 to offset your deduction. So, you know, you won't be claiming for a couple of years, it looks like you're probably going to have to record that asset sooner rather than later.
Dividends between combined members or eliminated business income from inter-company transactions generally follows the federal consolidated rules. An intercompany deferral is recognized if the item is sold outside the group, or the buyer or seller ceases to be a member of the group. And the law has all administrative requirements. There must be a managerial member that's designated, that's going to handle estimates, extensions, audits, etc.
It's generally the common parent of the group, if there is one. If there's no common parent, then the manager considered a member must be selected amongst the New Jersey's taxable members. NOLs earned by a member in years prior to the inclusion in the combined group, or SRLY, a prior NOL conversion carryover can only be used by the member that generated the law. However, NOLs earned while in a combined return can be shared amongst the members.
Tax credits, pre 2019 credit carryovers, in other words, credits generated prior to New Jersey's adoption of combined reporting can be shared with other group members. Which is different than the NOL situation. So that's a surprise, that's a good surprise. Credits generated in 2019 or later years that are generated within the combined return can be shared amongst the members.
However, credits generated in '19 and later by members that weren't in the combined, if maybe you bought a company in 2025 and they had credits, it looks like those are SRLY, which kind of makes sense. A little unclear, but it looks like if I buy a member with credits, that they're going to be SRLY to that member. Or maybe you buy a group, I think they're SRLY to that group.
Gary Bingel: Yeah, I think that's right. It is unclear, but I think that when you read everything together, that's what it's getting at.
Bill Gentilesco: Yeah. Apportionments, I talked a little bit about that. Each taxable member completes an apportionment factor using the combined group sales factor denominator, and that taxable member's numerator, plus non-taxable members aren't going to have a numerator, otherwise known as the Joyce rule, which is favorable. Again, if you make the affiliated group election, no. It appears that you might not be using Joyce rule, which would be unfavorable.
Gary Bingel: Yeah. And that could be a big hit for a lot of people with entities that are protected under number 862672 or they may not otherwise have Nexus with New Jersey that'll be a big hits. I'm hoping that's one we get some clarification on soon because it could have a material impact on companies for both cash, and how they file returns and financial statements and such.
Before we get to this next polling question, I wanted to bring up just a couple ... there were two other items ... or one other item really, that was included in the, I'll say correcting legislation last month in New Jersey that related some of the Federal items. For federal purposes, under the FDII and guilty regimes, you get a deduction under Section 250 for federal purposes, and the FDII deduction is 37.5% and the guilty deduction is 50% on your computing your federal income.
The New Jersey legislation that was passed last month also included those and made explicit that New Jersey will allow those deductions for FDII and guilty as well. To the extent you have those, so I just wanted to throw that in.
Bill Gentilesco: Right, so they're following the federal level. But I think there's a question, Gary on whether the guilty, and the FDII income might qualify for New Jersey dividend received deduction?
Gary Bingel: Yeah.
Bill Gentilesco: I saw a draft of the federal tax return, and it looks like those amounts are going to be picked up on the federal dividends schedule of return, and they're going to flow through to page one as a dividend. And by the way, those deductions that you mentioned, they're following federal to the extent you're not deducting them elsewhere on New Jersey. So, if you get a 95% VRD, then you're going to have to hair cut your internal revenue code.
Gary Bingel: Yep, so basically, it'll be the 50% deduction will be applied to that remaining 5% that's not subject to the DRD.
Bill Gentilesco: Exactly.
Gary Bingel: That's a good point, yup.
Bill Gentilesco: Polling question number two, what do you think the overall impact of combined reporting will be on your company? Huge impact, favorable, less tax or unfavorable, more tax, no impact, most or all of our companies already file in New Jersey, some impact, but not significant or no idea? And we'll give you a minute or so for that.
Moderator: Please remember that in order to receive your CPE certificate, you must remain logged on for at least 50 minutes, and respond to at least three polling questions. Give you a few more seconds here to answer. Okay, we are now closing the poll and sharing the results.
Gary Bingel: So it looks like most say there will be some impact, but it won't be significant. Which, to be honest, is fairly surprising. So I think it's going to be a fairly big impact for a lot of companies. You know, if whoever you have is already filing here, I could see there being no impact or maybe if all your companies and your footprint fairly consistent, and you don't have a lot of subsidiaries out of state or whatnot. So that'll that'll be interesting. Maybe we'll include the same poll next year, or two years and see what people say.
Bill Gentilesco: It's a simple sales factor in New Jersey so that might impact the fact that it might not be- There was a question here. Are no Nexus members sales included in the sales factor denominator under the tax reform? Yes, in the combined returns, whether you have Nexus or not, your sales and your income will be included in the combined return if you're part of the unitary group. Now we're going to move on. Gary's going to cover Wayfair.
Gary Bingel: Yeah, Wayfair and some of the sales tax issues. I'm going to fly through a lot of the slides here that kind of give the background, because I'm going to assume most people have heard about Wayfair, and are familiar with at this point, since it was one of the biggest tax cases out there in the last 20, 30 years. Really was a game changer or see change as far as Nexus.
And I think the biggest as far as kind of introductory remarks, the biggest issue I still see when talking to clients and businesses, is that many of them still don't realize, they look at Wayfair like it's purely a sales tax case for people selling on Amazon or Ebay or something. When really, it has very far ranging and far reaching ramifications.
Basically anybody that is selling across state lines, this impacts and as we're going to talk about, has such potential major income tax ramifications, as well as the sales tax ramifications. So it is very far reaching and kind of the more businesses look at this, the more they get surprised and the radar sirens start to go off that there might be more there they need to be concerned about than they originally thought.
So just real briefly, South Dakota's provisions, essentially, and I've got an outline here to say that anybody selling tangible personal property, electronic products or services, et cetera into South Dakota in the previous or current calendar year, such that those sales exceed $100,000 or are done in more than 200 or more separate transactions, that that gives rise to a sales tax filing requirement.
In theory, they did not explicitly say South Dakota's provisions were past constitutional muster. They just said you don't need physical presence. And basically, as far as I've heard, nobody has come up with any other issues that, you know they may have on this. It was remanded back to the South Dakota Supreme Court, and actually, I saw it today. I haven't had time to read it. But the parties Wayfair, New Egg and such, did actually reach their settlement with South Dakota today, I believe they're going to start collecting and remitting as of January one of '19 if I remember correctly what I saw just today.
So, they did do away explicitly with a physical presence requirement. The majority just focused on the modern economy and, looked at, kind of the old Quill case and such, and came to a conclusion, in today's world physical presence isn't needed to create a substantial presence and, get away with a physical presence requirement. Unfortunately they did not ... actually, I'm going to fly through some of these. They did not really come out with another reason or another test to look at that is, I'll say, bright line or concrete.
One of the issues I did want to highlight here, is there were 41 states, plus DC and two territories that did petition the court to get rid of the physical presence requirement. As I talked about in a little bit, there's currently about 31 states that have some sort of economic Nexus provision that have come out with it. Either through statute, or some sort of administrative pronouncement, since this case came down over the summer.
So we've got at least, I would be shocked if any of these 41 states, these 10 or 12 additional states are out there, don't pass something or either administratively or pass a new law within the next, six to 12 months I would say. If they petition the courts to overturn it I have to imagine they've got something in the works. So as I said physical presence was overturned, they did leave the door open slightly, basically saying, if you have a specific set of facts that you think may be unconstitutional, left it open for taxpayers to fight on those grounds. But I think that's going to be very difficult to fight and obviously very costly.
So, before we get to this polling question, I just want to go through, you know, the net result of this. Again, it applies to basically anybody with any sort of remote sales or sales across state lines. And it's not just, you know, people selling tangible personal property, things it may apply to are a lot of folks selling any sort of software or any sort of service across state lines. A lot of these provisions really also impact, when you're doing the calculation of $100,000 or 200 transactions. It doesn't just of taxable items.
So maybe you're selling a lot of exempt items, and you think your taxable items don't meet that. In a lot of states, you have to aggregate your total sales. Now, if you have a lot of items that are exempt, basically, that might just mean you need to start collecting a lot more exemption certificates than you're used to collecting in the past. And while auditors historically have been, I'll say lenient, in letting you collect those exemption certificates after the fact, they may not be so in the future. So I think there's going to be a lot of additional burdens there.
Also, what I'm really going to talk about in the next few minutes, is the income tax and non-sales tax aspects, which are really yet to be decided, but they are going to be very potentially negative for a lot of companies once you start getting into what you're going to talk about. So getting to polling question number three now. How impacted will your company be by Wayfair? Extremely impacted, somewhat impacted or not at all? And I would ask when you're answering that, to keep in mind, like I said, thanks to potential income tax, we may have economic Nexus for things like income taxes and such.
Moderator: Please remember that in order to receive your CPE certificate, you must remain logged on for at least 50 minutes and respond to at least three polling questions. Okay, we're going to give you a few more seconds to answer. Okay, we are now going to close the poll and share our results.
Gary Bingel: So we have someone impacted at about half, and then somewhat evenly split between extremely impacted, and not impact at all. So, you know, but three quarters, or actually maybe 80%, almost of the folks responding think they're either going to be somewhat or extremely impacted. And, I think the more we look at this, the more and more companies are going to be surprised by how they may be impacted, and how there may be a bit of a trickle down or a domino effect in some of this.
So what's it mean to your business, right? When you're trying to determine and again, economic Nexus or economic presence is really the key issue here. So they did away with physical presence, and they didn't replace it with like I said, a hard and fast rule. They said, "Well, if you simply look as to whether you have substantial Nexus, and that can be determined when you avail yourself of the privilege of carry on business and estate, or any sort of virtual or economic contacts."
And the court explicitly went on to say, you couldn't have substantial Nexus unless ... if you have $100,000 in sales or 200 transactions in a state, that in and of itself basically is prima faci evidence that you have substantial Nexus. So it's a little bit of a circular argument, but what they're really looking at, look in today's economy, of the information you can get out there, just selling into a state and having these levels of activity in a state, pretty much means you're availing yourself of that state's market. And that's enough.
So what that really means is, you need to start looking at everywhere you are meeting some of these thresholds. These are all factors, I'm flipping through here, that states need to look at to implement these rules. I think generally, like I said about 31 states that currently have enacted some sort of Wayfair legislation, or said they're going to be. It guarantees Wayfair economic Nexus rules.
Most have said that they're not going to be looking for retroactive application, at least for tax, and we're going to talk about income taxes in a minute. Rhode Island, Massachusetts, made an exception to that. They do currently still seem like they're looking to go back on the 2017 for sales taxes even as far as enforcing it, because they feel their provisions are more in place then and were broad enough that they were constitutional even under the old test.
Bill Gentilesco: Now Gary, the old rules still apply too. So let's say, under $100,000 and 200, but I have a salesman traveling into the state.
Gary Bingel: Correct, correct. The old rules still apply. This is just an additional arrow in the states quiver so to speak. So that if you have you know, remote sales people traveling to a state two or three times a year, that gives you old physical presence Nexus, even if you have under $100,000 in sales in the state. Some states may be using ... I think there's a couple states that are using this as a safe harbor, or that may not be the case, but they are the rare, rare exception.
Bill Gentilesco: Okay.
Gary Bingel: Like we said, it's not just an e-commerce case. I think that the big unknown, this is really the major piece I want to touch on. It does strengthen states positions regarding economic Nexus for income taxes. Hopefully most folks know, we've had economic Nexus for income tax for years, you know, back since Quill was decided in '92 and I think '93 was when the Jeffrey case came out. Which, while not a US Supreme Court case, was the first case really looking at economic Nexus for income taxes. And the US Supreme Court refused to take income tax cases over the years-
Bill Gentilesco: And economic Nexus, right?
Gary Bingel: ... or economic Nexus, and there have been numerous state cases. So we have had that for several years for income taxes. And I think this just strengthens the state's positions and how aggressive they're going to be. Wells Fargo, right after this case came out, I think as a Q2 issue, set up a reserve or took a hit on their financial statements for about $480 million, as a result of the Wayfair decision, not for sales taxes, but actually for income tax. So they use this essentially as a triggering event to say, "Hey, you know, we've got economic Nexus all over under the NBNA and Capital One cases.", I assume, and basically said, "The fact or position of fighting this in all these states just got so weak that we think it's time to take a big hit on this.
And I think that's one of the issues a lot of companies need to look at. As they are looking at the sales tax ramifications, they need to also consider the income tax ramifications.
Bill Gentilesco: But we still have 86272.
Gary Bingel: That's right, Bill. So we still have 86272, to the extent you have 86272 in a protection in a state that should trump these economic Nexus thresholds the issue becomes, in today's economy, companies are doing so much more than just selling tangible personal property, maybe selling warranties, service agreements or servicing items, doing some sort of professional service, whether it's systems requirements or something else. So that 86272 in today's economy gets kind of narrower and narrower.
One of the issues we also saw for a lot of large companies, Bill and I were at a tax round table just the other night talking to some folks they said when we talked about this, the light kind of went on for a few of them, they said, "We do an exempt service. We're all over the country." You know, very large company, our service is exempt from sales tax, so from a sales tax standpoint, may not be a big issue for us. And then they started to realize, but wait, we do have some small subsidiaries and things that may be selling some software.
It's a very small part of our business, maybe selling literally an app on someone's phone for access. It maybe could be inventory, tracking, Or some other item that really is almost like a throwaway, but they do charge for it and they do sell it. They said, you know, all sudden that subsidiary may have sales tax Nexus somewhere, maybe it's exempt, maybe it's minimal, but all of a sudden, that's going to bring them in for income tax, and they realize, holy cow, we may now have, especially in combined reporting states ... be filing combined reporting because of this little, you know, fractional sort of revenue we're getting somewhere, that nobody really thought about, and all of sudden we're going to be falling income taxes all over the place. And something they started looking at.
The other thing to look at is, a lot of companies I know, from an audit perspective, they might have either set up some small reserves under Finn 48, or things like holding companies or finance companies and such. And, not really disclosed or maybe they went through the analysis and said, Well, these amounts are material and went from there and didn't really go too far With it, as far as pursuing Voluntary Disclosures.
Well now might be the time where you need to pursue those voluntary disclosures because last thing you want to do is register for sales tax and estate or do a voluntary disclosure for sales tax in a state and then have the state come back and say, "Okay, this is great where are your other taxes?" You can't tell me, "Hey, we're getting your sales taxes now." And yeah, it's just under Wayfair, we've got a million dollars of sales here, that didn't just happen overnight, where have your income tax returns been?
And like Bill said, if you got 86272 protection, you may be okay. But if you're any other type of business, a software provider or service company, or you have subsidiaries that do something along those lines, you don't want to get caught, unaware by that and all sudden have a huge liability, that possibly you could have, remedied through doing a voluntary disclosure.
Like I said, what it means to your business, and it frankly state's economic Nexus position. So who's impact, and I think, like I've said, anybody who's selling tangible personal property across state lines, regardless of if it's mail order, regardless if business to business or direct to consumer, et cetera. Really a lot of software and service companies, it may not be your main offering, but if that's going on anywhere in your company, which a lot of folks today we're doing these for customer relations and other things. That's where these things may end up cropping up or may end up cropping up and kind of biting you before you realize it.
There are some kind of unknowns here, like what about companies that giveaway samples, and how are those, thresholds going to be associated? 200 transaction thresholds, how are those going to be calculated? One thing, we've got several companies that end up, having like a subscription of some sort, maybe they charge you. Instead of charging you annually they charge you monthly. Is each one of those monthly charges going to be a separate transaction? Or is it all being just a payment on one transaction? Things like that, that still need to be thought about.
Every company is different. What we're recommending is for folks to really take a look back, determine what you're more likely to meet overall, based on your business, you know, is it $100,000 in sales threshold or the 200 transactions, and reevaluate your Nexus footprint from there. Obviously, starting with the most major states and most exposure and working your way down.
Bill Gentilesco: Again, I just need to point this out here. It seems like the states are kind of taking a perspective, only approach here. So if you've had some past issues, this might be the time to try, and get in going forward only.
Gary Bingel: Exactly.
Bill Gentilesco: If you wait a few years, you're going to be-
Gary Bingel: It's going to be behind, and this gets down to, you know, some nuances, I'll say, or some of the other items that you really need to think about here. Most Companies I deal with are not capable just literally flipping a switch and starting to go from collecting sales tax in two or three states to 30 or 40 states. And so here's just some basic information you need to make sure your systems have it, you need to start talking to them.
Invariably, we talk to companies about these issues, and they say, "Yeah, we're pretty good, they're used to filing here, especially to New Jersey or PA where there's only one or two different rates per state. And they don't really realize that there's 12,000 different rates across the country in different taxing jurisdictions. And they think they're in pretty good shape, and then once they start getting ready to actually start collecting they tell their IT and systems folks, luckily, as of November 1, like Bill mentioned, a lot of these are perspective, but a lot kicked in, you know, October 1, November 1, December 1, and January 1.
Once they started looking at it, they say oh, well, this isn't as easy as we thought. They're realizing that it's going to take a lot more legwork to implement these and get the systems up to snuff just even getting rate packages implemented. We do have a couple questions here, I just want to address real quickly. If, if basics 272 trumps economic Nexus, would it make sense to put a salesperson in a state with high sales and no other Nexus?
If you're selling tangible personal property, in theory, you wouldn't have put a salesperson there. Right? At least the way it's currently interpreted. If you don't have anything in a state, remember, 86272 only applies to net income taxes, does not apply to sales tax, network tax, gross receipts, taxes, or anything else. So you wouldn't have to put someone in that state, because if all you're doing is selling widgets, into a state, even if you meet these thresholds, and you never set foot in there never, provide any other services, I think the current thought process is that at 86272 would apply to you for income tax only you wouldn't need to put someone in there to get 86272 to apply.
Another question, if you technically meet the test in the state, but you have an exemption certificates, do you still have to register and file? And that comes down to a couple things. One, it comes down each individual state. Some states, even though you may have a zero liability, still want you to file a zero return, so they can track you. Others say don't waste the paper and kill the trees. If it's all zeroes, we don't need you here.
So it really comes down to state by state. There's also a little bit of business decision in there. And as far as even if the state requires you to file if it's all zeros, and they don't have any sort of super onerous penalty, and you have exemption certificates for everything. You know, some companies may desire to forgo the registration under the theory that even if I get caught my exposure is pretty minimal.
Bill Gentilesco: But you would want to update those certificates.
Gary Bingel: You do want to make sure you're updating those certificates. That's right, the exemption certificate management process has gotten a lot more important with this. We went over any prior exposure, you may have just to make sure you know, both for income tax and sales tax, you need to address. Some additional costs, a lot of times folks think it's really easy to register in a state, and if you're doing one state it is, if you're looking at registering 20 or 30 more states, it can get quite onerous just the paperwork. And a lot of states will require you to first be registered with the Secretary of State.
So you need to register with the Secretary of State in many instances and then register with the Department of Revenue, so it can take a little bit longer there. And you need to be aware of some of these, what I'll call nuisance fees, like the business licenses are going to be expanded. You're going to have ... if you need to be registered with the Secretary of State you generally need to have a designated agent for service of process in the state, which most folks outsource. So there's a lot of those, kind of what I'll call ancillary issues out there.
If you're going to enter into a lot of VDA's or Voluntary Disclosures in a lot of states, you may need to recruit for this where you didn't in the past because all of a sudden you look at it harder and you realize what's been out there. There are financial statement impacts, this is really addressing just the sales tax, potential sales tax financial statement impacts, but obviously, for income taxes there may be as well, like, we saw with Wells Fargo. If you're going to be unable to comply with the laws right away, maybe that's something you need to disclose. And what about if you need to, totally revamped your ERP systems and software and such and it's going to be a significant cost for you. Maybe that's something you need to disclose.
Finally, polling question number four. Based on what we went through, how prepared do you think your company is to deal with the changes resulting from Wayfair? Both for income taxes and sales taxes, even if you think it may not have a huge impact, how prepared or unprepared are you currently?
Moderator: Please remember that in order to receive your CPE certificate you must remain logged on for at least 50 minutes and respond to at least three polling questions. Alright, we're going to give you guys 10 more seconds. Okay, we are now going to close the poll and share the results.
Gary Bingel: Somewhat prepared. So it look likes 70% feels they're somewhat prepared, only about 11% say they're very prepared and all over it. Which is not surprising. Actually, a little surprising, I would have thought the 11 was actually a bit lower, but maybe that makes sense. Totally Unprepared about 18% so one in five give or take. And that doesn't surprise me at all because most companies I'm looking at I'm talking to are constantly, especially once you start getting into some of these nuances we're talking about, it seems like it just keeps growing and growing like a spider web, and so they really do start to feel unprepared.
Moving along, just real quickly, New Jersey, like many states didn't just jump on the bandwagon here for Wayfair, they did pass legislation. They first came out with an administrative pronouncing, through the division of revenue then in late September, I think, it was actually signed the first week of October. They did pass their own economic Nexus provisions, where they codified the economic Nexus threshold similar to South Dakota's, the 100,000 and 200 transactions. And they also impose sales tax on marketplace facilitators. And that was effective November 1, of 2018, so today.
So congratulations, if you didn't know about it go back and start collecting sales tax. The thresholds do mimic South Dakota's like I said. They do include both exempt and taxable sales are aggregated for purposes of developing the thresholds. And, probably the big change here is for marketplace facilitators. I will say that is a very, very broad ... and you know, what they're doing is requiring the folks like Amazon, eBay, or anybody who's the marketplace facilitator to collect sales tax. I'll say the definition of marketplace facilitator is extremely broad. Basically, if you think you're doing anything whatsoever on the internet to help facilitate any sort of sale, whether it's your sale, someone else's sale, someone who's facilitating someone else's sale, you are a marketplace facilitator, and these may apply to you.
If you say, "I don't even have a computer in my office." I'd say there's a chance it may not apply to you. But it's pretty much that broad. I gave that definition actually in a presentation with the Division of Revenue Director, and he pretty much said, "Yeah, that's pretty much right on. It is that broad." So it requires marketplace facilitators to collect on behalf of the sellers, regardless of whether or not the seller itself is already registered to collect.
So there are some issues as to how that is going to be implemented. New Jersey cannot collect tax on both parties, and they'll go to the facilitator first, but there is a provision, which I think we need some more guidance on that says the facilitator and the seller record can actually contract as to who's liable for that. If the sellers already registered and collecting, I think they can contract and basically the facilitator can get out of the collection responsibility then.
We do have just a quick shameless plug. We do have the link here for our own Wayfair hub that has some quick links to most of the states legislations. As they come out, we put it up there. We've been doing our best to keep it updated it's a pretty good map, and it's also got some other presentations and webinars and some quick blogs and one, two minute videos and things like that. Just one or two other questions here real quick, and then we'll we'll be closing up.
Any feel for the federal legislation? There's federal legislation, I don't think it's going anywhere anytime soon. There's been federal legislation out there for last 15 years that hasn't gone very far. And the legislation that comes up, you see one bill on one side, one bill and other side. You see some bills that will pull back the reach of this and other bills may actually expand the reach of this. So I don't think anything anytime soon is going to come up at the federal level.
How does streamlined sales tax project affect sales tax in the States? Well, it really doesn't streamline has yet to be implemented. States have, you know, kind of passed to get in conformity with it, but it's still nowhere near actually taking hold. States aren't going to be jumping on the bandwagon. There was some talk in the case about how you know, states need to adhere to the principles of streamline, which really just was trying to do away with the issues you've seen, like Alabama, and Colorado, and Louisiana, where you have all these localities and their own fiefdoms. So there are a hand full of states where it's still an issue.
And finally, if first revenue is looks like less than 100,000 less than 200 transactions, is it necessary to register in these states? Well if you have a physical presence like Bill said you have salesman going in, or doing something to give you next to some of the old rules where you have someone going in there maybe even twice a year, that gives you physical presence, you may still need to register. Or if you have inventory in the state, you know, even inventory at third party warehouse and such gives you physical presence.
Bill Gentilesco: Or inventory in an Amazon warehouse.
Gary Bingel: Yeah, an Amazon warehouse, anything like that would make you required to register. So I think that's really what it comes down to as far as that and then sometimes, some folks may want to register just to get a hold of it. I mean, if you're just under, if you're at $95,000, technically you don't have to, but you, want to keep monitoring every month. And I think that the final issue on that is ... It just went out of my head now.
Oh, it has to do with the other ... or a handful of states that have these reporting requirements where the thresholds are below that, like Colorado and Louisiana, there's probably five or 10 states that have that. And they'd say, I think some of those thresholds are down to like, $10,000. And that has been upheld by the Supreme Court that you don't have to collect and remit, but you have to adhere to certain reporting requirements in those states. And those reporting requirements are actually more onerous than just collecting and remittance.
So, that's where you get into the business decision. Some of those do have quite onerous penalties for not adhering to them. So you know, it's really a state by state, company by company analysis. And I'm we're a minute or two over here, so I'm going to ... That's the end of it. I'll turn it back over to Niky to close it up.
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