State and local tax laws continued to change at a dizzying pace in 2019. As in 2018, they again did so in response to the landmark 2017 Tax Cuts and Jobs Act and the U.S. Supreme Court decision six months later in South Dakota v. Wayfair, Inc
Sifting through the headlines, there were 10 really important developments the SALT news this year.
1. Rapid post-Wayfair implementation of sales tax economic nexus
The U.S. Supreme Court’s 2018 Wayfair
decision has spurred all but two states to adopt laws establishing sales and tax economic nexus provisions for remote sellers, and those two states, Florida and Missouri, have pending legislation for this. But not all state sales tax nexus laws are alike. Remote sellers face plenty of challenges attempting to comply with these laws, where cost and transaction thresholds can depending on the state.
2. The next frontier: Extension of Wayfair to income tax nexus
Using the Wayfair
nexus standards, sellers operating should be aware that Hawaii, Pennsylvania and Massachusetts now impose a gross receipts tax on out-of-state sellers, with similar legislation being considered in Texas. Business operating in multiple states may need to conduct a complex sale sourcing analysis to determine how best to source their own sales (particularly where services and intangibles are concerned) to lessen tax liability.
3. Continued state reaction to the TCJA
The Tax Cuts and Jobs Act has led many states to focus on treatment of international tax provisions, enacting a wide variety of laws reacting to the TCJA’s new global intangible low-tax income (GILTI) inclusions and the foreign-derived intangible income (FDII) deductions. Increasingly, a business’s specialists in state and local taxes must collaborate with their counterparts in international tax to properly address the multitude of new state laws governing how foreign profit is taxed.
4. The rise of pass-through entity tax regimes
The TCJA’s SALT cap, limiting the amount of state and local taxes that can be deducted for federal tax purposes, pushed some states to respond with pass-through entity laws that shifted the imposition of taxes from an owner to a business entity. While mandatory in Connecticut, if you operate a pass-through business in Louisiana, Oklahoma, Rhode Island and Wisconsin, you can elect to use this method. But beware – the IRS has yet to rule whether these types of laws will stand.
5. U.S. Supreme Court decides Kaestner Trust
In June, the U.S. Supreme Court unanimously decided, in North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Trust
, that North Carolina cannot tax a trust’s undistributed income based solely on the fact that the trust’s contingent beneficiaries are North Carolina residents. Trusts paying North Carolina taxes on undistributed trust income based only on the presence of in-state beneficiaries should have their tax obligations re-examined. Even trusts in similar circumstances in other states could be bound by this ruling.
6. Widespread adoption of marketplace facilitator nexus provisions
Forty states have enacted laws interpreting the Wayfair
decision as applying to marketplace providers whose online marketplaces serve as a forum for retailers to market and sell products and services. One nagging issue for some businesses is that many terms, particularly the term “marketplace provider,” have a wide range of definitions in these state laws. A careful, state-by-state assessment of collection responsibilities is a must-do for many marketplace sellers.
7. Adoption of sales tax economic nexus standards by local taxing authorities
States that allow local jurisdictions home-rule authority saw some of them impose sales and use taxes for remote sellers, as permitted by Wayfair
. Alaska, which allows home-rule, saw localities across the state, including in Nome, pass such standards. But businesses should be award that because Wayfair
addressed a state law, there is no guarantee they will recognize this authority for municipalities if challenged.
8. Further adoption of market-based sourcing
Six states have adopted market-based sourcing rules for services, but they vary on how and where they are applied. Your business may have difficulty knowing just where to source a sale, since the differences between “billing address” or “delivery” or “benefit received” approaches used by various states can lead to much confusion. Businesses may need to improve how their information systems capture the location of sales activity to address these variations.
9. Combined reporting expanded and clarified
Efforts to shift from separate to combined reporting for affiliated corporations slowed this year (New Mexico was the only state in 2019) but Kentucky and New Jersey passed laws or adopted guidance with the intent of “cleaning up” uncertainties in the method. Affiliated corporations in Kentucky, New Mexico and New Jersey should closely follow these changes.
10. Adoption of the Oregon CAT
Oregon imposed an entity-level commercial activity tax (CAT) imposes a 0.57% tax on Oregon-sourced “taxable commercial activity” over $250, effective Jan. 1. Businesses with a significant market base in Oregon should plan a relatively conservative first quarter to account for the interpretive uncertainties that remain.
Want to know more? Download our complete guide to these important SALT developments in our article “Top SALT stories of 2019.”
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