The U.S. Department of the Treasury and the Internal Revenue Service (IRS) recently finalized the federal government's answer on the charitable contribution work-around certain states have attempted to implement to reduce the effect of the cap on state and local tax deductions for federal filing purposes. Citing Internal Revenue Code section 170, the IRS determined that contributions made by taxpayers to a fund or entity designed as an alternative to paying property taxes, for example, is not a charitable contribution, because the donation is not made with a charitable intent, and the taxpayer receives a privilege or benefit in exchange for the donation.
Help may be coming for retailers concerned with the abrupt change in the law last year that may require many retailers to begin collecting tax on sales to customers in a state regardless of whether the retailer has a physical presence in the state. In 2018, the U.S. Supreme Court's holding in Wayfair v. South Dakota allowed states to require remote retailers to collect taxes and fees on sales in their state if the seller was deemed to have an economic nexus with the state, regardless of any physical presence. On January 9, 2019, relief legislation was announced, known as the "Protecting Business from Burdensome Compliance Cost Act," which would delay the imposition of new laws to January 1, 2020, and would require states to streamline the tax rate and submission requirements. Click here to read about HR 379.
On September 13, 2018, a bill was introduced in the U.S. House of Representatives "to prohibit States from retroactively imposing a sales tax collection duty on a remote seller," among other purposes. H.R. 6824, also called the Online Sales Simplicity and Small Business Relief Act of 2018, seeks to limit the impact of the recent Wayfair decision, which eliminated the need for a business to be physically present in a state in order to have economic nexus in that state.
The Internal Revenue Service (IRS) announced this week that business payments to charities that result in state or local tax credits will be deductible expenses in most cases. This is unlike the manner in which the IRS has said it will treat payments that individuals make to charities (details here). For more information on SALT deductions available to businesses, click here.
The Tax Cuts and Jobs Act of 2017 limits the annual federal tax deduction for state and local taxes to $10,000. In response to this limit, some states with higher tax rates (including California) considered programs that would allow taxpayers to characterize tax payments as charitable donations instead.
The Internal Revenue Service recently issued a notice about proposed regulations that will address the deductibility of state and local tax payments for federal income tax purposes, specifically reminding taxpayers that the IRS position is that federal law controls the characterization of payments, regardless of the treatment under state law. To read the IRS press release, click here.
Efforts are already underway to reduce the slap many Californians are feeling from the $10,000 limit on federal deductions for state property or income taxes paid. Senators De Leon, Allen, and Hill have introduced SB 227, the "Protect California Taxpayers Act," which would effectively eliminate the cap on these federal deductions by providing a dollar-for-dollar tax credit against the state income tax liabilities of taxpayers who make a charitable donation to the California Excellence Fund. Donations would be used to fund California government programs typically funded through state tax revenues. Any credit that exceeds the taxpayer's income tax liability would be carried over to the next year, and would not be refundable.
The California Franchise Tax Board (FTB) issued Chief Counsel Ruling 2017-01 on August 2, 2017, regarding market-based sourcing rules for performance of "non-marketing" services. Where a subcontractor performed administrative or non-marketing business services for a health plan client, the members or sponsors of the health plan are not considered the direct customers of that subcontractor, but rather only the health plan entity.
The Board of Equalization is attempting to respond to the California Legislature's mandate to turn over most of its authority to two newly created agencies, the California Department of Tax and Fee Administration, and a Department of Administrative Tax Appeals. It's obvious that the short time frame and political climate have the Board of Equalization members and management scrambling to meet the July 1, 2017 deadline for most of the changes to occur. The Governor is expected to sign the Taxpayer Transparency and Fairness Act of 2017 into law any day now.
The temporary statewide sales and use tax increase approved through California's Proposition 30 expires on December 31, 2016. Effective January 1, 2017, the state sales and use tax rate in California will decrease by 0.25% to the new rate of 7.25%. The California State Board of Equalization notes, however, that in many cities and counties the total tax rate will be higher due to local voter-approved district taxes.