What Will Come of Maryland’s Unique and Controversial Digital Advertising Tax?

Posted in E-Commerce, Maryland

On February 12, 2021, overriding the Governor’s veto, Maryland enacted a first-of-its-kind tax “Digital Advertising Gross Revenues Tax” that has already sent shockwaves through the industry. As widely anticipated, within one week of the enactment four trade associations representing industry leaders filed suit in Maryland federal court to attempt to overturn the tax. Continue Reading

In Search of Revenue – Chicago Issues Bulletin on Economic Nexus For Streaming and Cloud Services

Posted in Chicago, E-Commerce, Illinois, Nexus, Sales Tax

On January 21, 2021, the City of Chicago’s Department of Finance issued an informational bulletin clarifying its position regarding economic nexus for Chicago’s amusement tax as applied to streamed amusements and Chicago’s personal property lease transaction tax (“PPLTT”). It also announced a “safe harbor” that businesses can rely upon when analyzing nexus. Chicago states that it will utilize the state of Illinois’ thresholds (i.e., (i) the sales of tangible personal property or services to customers in Illinois are $100,000 or more; or (ii) the retailer or service provider enters into 200 or more separate transactions for sales of tangible personal property or services to Illinois customers in the past 12 month period[1]) as applied to customers in the City to analyze whether a business has nexus with the City. Continue Reading

Summary of Tax Provisions in the Consolidated Appropriations Act, 2021

Posted in Federal Tax

On December 27, 2020, President Trump signed the new $900 billion stimulus package – the Consolidated Appropriations Act, 2021 (the CAA), which, among other things, advances legislation intended to provide additional help for Americans and businesses to survive a continued public health and economic crisis due to COVID-19. This article provides a summary of certain key tax provisions in the CAA. The CAA also extended various expiring tax provisions, which are not included in this summary.

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Illinois’ New Fast Track Resolution Program: A Tax Appeal Option Worth Considering

Posted in Illinois, Use Tax

The Illinois Audit Fast Track Resolution (“FTR”) program is now available for all Illinois sales and miscellaneous tax audits except for Motor Fuel Use Tax. The Department published Informational Bulletin FY 2021-01 this month highlighting the details of the program, including information on the application process, the program’s advantages, the conference process, and withdrawals. Additionally, the bulletin clarifies that if a resolution is not reached through FTR, the taxpayer will retain all its original statutory review, protest, and appeal rights.

The idea behind the FTR program is simple — provide a forum for the prompt resolution of disputed audit issues while the case is still under the jurisdiction of the Audit Bureau.  It started out as a pilot program to reduce the appeal backlog and was modeled after the IRS Fast Track program. This is also similar in concept to New York’s Conciliation Program. The two main advantages of the program are (1) expedited review (the Department anticipates that the FTR conference would be held approximately 60 days after being accepted into the program); and (2) the Department can involve its legal team to consider both legal and factual issues as well as “hazards of litigation.” This is in contrast with the Department’s current Informal Conference Board program in which the potential hazards of litigation are not considered.

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IRS Issues Limited Guidance On Employee Payroll Tax Deferral and Puts Onus on Employers

Posted in Federal Tax

On August 8, 2020, President Trump issued a Memorandum to the Secretary of the Treasury authorizing the deferral of payroll taxes for certain employees from September 1, 2020 through December 31, 2020. Employers and payroll processors have eagerly awaited guidance from the IRS to address significant questions regarding implementation of the deferral.

Late Friday, just days in advance of the September 1st implementation date, the IRS released Notice 2020-65, 2020-38 IRB 1, implementing the deferral set forth in the Memorandum. The Notice officially defers the due date for payroll taxes for certain employees, but provides that the deferred taxes must be repaid ratably between January 1 and April 30, 2021. Further, if any of the deferred tax remains unpaid on May 1, 2021, interest, penalties and additions to tax will begin to accrue. The Notice provides that each employee’s deferral eligibility is determined separately for each pay period – if an employee’s pay is not consistent throughout the year, the employee may be eligible for deferral for certain pay periods and not others.

Notably, the guidance places the burden on employers either to collect the tax from employees’ paychecks or pay it themselves in early 2021. The guidance is silent as to what employers should do if an employee ceases employment before April 30, 2021.  Presumably, the employer remains on the hook for repaying the deferred taxes, and must pay the taxes if it cannot collect the funds from the employee. Continue Reading

Impact of White House Memorandum Deferring Payroll Taxes For Certain Workers

Posted in Federal Tax

On August 8, 2020, President Trump issued a Memorandum to the Secretary of the Treasury authorizing the deferral of payroll taxes for certain employees from September 1, 2020 through December 31, 2020. This issuance is in the form of a Memorandum rather than an Executive Order, and since any modification to taxes falls within the authority of Congress, it is possible that there may be legal challenges to this action.

In addition, it is unclear whether the Treasury Department is bound by the Memorandum and whether the IRS could assess interest and penalties for the amounts actually deferred (although the argument for penalty waiver under the IRS regulations would be strong). Moreover, if the deferral is elective (as Treasury Secretary Steven Mnuchin recently announced), the IRS will need to clarify whether an employer would have liability to employees for failing to make the deferral available.

The Memorandum directs the Secretary of the Treasury to use his authority to defer but not eliminate the payroll tax obligations of certain employees. Thus, this relief action temporarily increases some worker’s take-home pay, but with an obligation to repay the tax in the future. By its terms, the Memorandum applies only to the employee’s portion of Social Security tax, and not Medicare tax. Continue Reading

Tennessee, North Carolina’s Changing Nexus Standards – Seeking Revenue, and Reducing Economic Nexus Thresholds

Posted in Nexus

On June 30, 2020, the Tennessee legislature passed SB 2932 which reduces the economic nexus sales threshold for remote sellers from $500,000 to $100,000 in the past 12-month period. It also makes the same reduction in the sales or sales facilitated threshold for marketplace facilitators for sales made through the facilitator’s platform. The law becomes effective on October 1, 2020. Interestingly, this bill was introduced on May 19, 2020, a mere six weeks prior to its passage and signage by the Governor.

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Updated: A 50-State Guide to State and Local Tax Responses Amid the COVID-19 Pandemic

Posted in Uncategorized

As state and local governments continued to announce extensions and other relief, we revise our guide to include the most recent announcements.

As state and local governments continued to announce various tax, lending and filing relief measures in response to the COVID-19 pandemic, we have revised our original post to include the most recent announcements. We will continue to revise as more information is made available.

State and local governments, like the federal government, have enacted a wide-range of changes with respect to administration and tax collection, among others. Some of these measures are more surprising than others, and sometimes they are announced in advance of the necessary  guidance needed to ensure successful implementation of such measures. The most common response by state and local governments has been the extension of filing and payment deadlines, however, some states are responding in other ways such as promising to assist with small business loans or changing the qualifications for unemployment benefits.

Ultimately, states and local governments are trying to find a balance between assisting their citizens while also having enough revenue to meet debt covenants and to properly run its governmental functions. Some states, such as Texas, indicated that they would not extend all filing or payment deadlines (such as the February sales and use tax filing and payment) as these funds were needed to continue to provide emergency services across the state.

Below is a summary of various state and local actions, which may continue to change and evolve over time as each jurisdiction seeks different remedies and incentives.

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Update: IRS Provides Relief for U.S. and Non-U.S. National Non-Residents with Substantial Presence Due to the Coronavirus

Posted in Federal Tax

With the restrictions on travel both into and out of the U.S. as a result of the rapid spread of the coronavirus (COVID-19) pandemic, non-U.S. or non-resident individuals (NRA) have been forced to spend a significantly greater amount of time in the U.S. than they originally projected during the current year possibly causing these NRAs to become tax residents under the Internal Revenue Code.

On April 21, 2020, the IRS released Rev. Proc. 2020-20 and Rev. Proc. 2020-27 to provide relief to individuals and businesses affected by travel disruptions arising from the COVID-19 pandemic. These Revenue Procedures and the Frequently Asked Questions (FAQs) that accompanied them provide relief for NRAs who have exceeded their days of presence in the U.S. or conduct business while physically present in the United States.

1.  Impact of the Substantial Presence rules prior to Rev. Proc. 2020-20

Normally, an individual who is not a U.S. citizen or lawful permanent resident is treated as a U.S. tax resident during a particular taxable year, and is thus, subject to U.S. federal income tax on a worldwide basis (unless an applicable treaty provides otherwise) if such individual is physically present in the U.S. for 183 days or more in the calendar year, the “Substantial Presence Test” (SPT). However, a foreign individual may also be treated as a U.S. tax resident under the SPT if the sum of (i) the number of days of his/her physical presence in the U.S. in the current calendar year, (ii) one-third (1/3) the number of days of his/her physical presence in the U.S. in the first preceding calendar year, and (iii) one-sixth (1/6) the number of days of his/her physical presence in the U.S. in the second preceding calendar year, equals or exceeds 183 days.  Under this test, a person will generally not be classified as a U.S. tax resident unless he or she spends on average more than 121 days per calendar year within the U.S.

Under the medical exception, days of U.S. presence are ignored if the NRA “was unable to leave the United States because of a medical condition that arose while such individual was present in the United States.” The Treasury Regulations require an NRA establish: (i) whether the NRA would have remained in the U.S. anyway if the medical problem had not occurred; and (ii) whether the medical condition arose before the NRA’s arrival in the U.S. To claim the medical exception, an NRA must file Form 8843, “Statement for Exempt Individuals and Individuals with a Medical Condition”, together with a statement from the NRA’s U.S. physician that the NRA was indeed prevented from leaving the U.S. because of his/her condition and that “there was no indication that his/her condition … was preexisting.” If neither of these conditions apply, prior to Rev. Proc 2020-20, NRAs who exceed their days of physical presence in the U.S. as a result of the COVID-19 travel restrictions would have been deemed U.S. tax residents.

Residents of tax treaty jurisdictions earning dependent personal service or employee income in the U.S., are generally able to exclude salaries, wages and other similar remuneration derived while present in the U.S. This exclusion is available for those foreign employees who i) are present in the U.S. for a period or periods totaling less than 183 days in the taxable year; ii) the employee’s remuneration is paid by or on behalf of a non-U.S. employer; and the remuneration is not borne by a permanent establishment in the U.S. of the foreign employer. Prior to recent IRS guidance, the days of presence required for this exception would have included the days an NRA could not leave the U.S. due to the COVID-19 travel restrictions.

2.  Relief provided by Rev. Proc 2020-20

Rev. Proc. 2020 specifically provides relief for NRAs who, but for COVID-19-related emergency travel disruptions, would not have been in the United States long enough to meet the SPT during 2020. Under the procedure, an NRA can exempt up to an additional sixty (60) consecutive calendar days of U.S. presence that are presumed to arise from travel disruptions caused by the COVID-19 in calculating the SPT. The COVID-19 travel restrictions will be considered a medical condition, that prevented the NRA from leaving the U.S. on each day during the 60-day period and will not be treated as a pre-existing medical condition. Further, the guidance clarifies there is a presumption a person intended to leave the U.S. but was unable to do so as a result of the COVID-19 pandemic. Note that an NRA can choose any date from February 1, 2020 to April 1, 2020 to begin counting the 60 days of exclusion.

Under Rev. Proc 2020-20, in determining an NRA’s eligibility for tax treaty benefits with respect to income from employment or the performance of other dependent personal services within the United States, any days of presence during the 60-day period in which the individual was unable to leave the United States due to COVID-19, will not be counted. Therefore, in most cases residents of tax treaty countries who perform dependent personal services while present in the U.S. will be able to avoid U.S. taxation while physically present in the U.S. due to COVID-19.

The IRS provided further guidance in their FAQs with Rev. Proc. 2020-20 where employees of a foreign corporation working in the U.S. could potentially give rise to a U.S. trade or business (“USTB”) or permanent establishment for their foreign employer. The FAQs clarify that services or activities conducted by an NRA employee of a foreign corporation (not otherwise engaged in a USTB) affected by the COVID-19 travel restrictions, will not be treated as engaged in a USTB as a result of such NRA’s services for the 60-day relief period.  The guidance further states an NRA with a tax home outside the U.S. will not create a PE for a foreign corporation for activities during their days of presence due to the COVID-19 emergency.

3.  Relief Provided by Rev. Proc 2020-27

The IRS also provided relief to U.S. nationals living abroad and earning income outside the U.S.  As announced in Rev. Proc. 2020-27, days spent away from the U.S. person’s foreign tax home due to the COVID-19 travel restrictions will not prevent those individuals from qualifying for the foreign earned income exclusions from gross income under Sec. 911 of the Internal Revenue Code. This relief is only available to a U.S. national  that reasonably expected to become a “qualified individual” for purposes of claiming the foreign earned income exclusion under section 911 but left the foreign jurisdiction during the corresponding relief period. The relief period for U.S. nationals living in China commenced on December 1, 2019. For residents of all other countries, the relief period begins February 1, 2020. This relief will expire on July 15, 2020 if not further extended.

By allowing an NRA to exclude their days of presence involuntarily caused by the COVID-19 travel restrictions, Treasury has helped alleviate the high level of anxiety felt by these “trapped visitors” to the U.S. Employees of certain foreign corporations are also relieved of the burden of creating U.S. source income for themselves or, potentially, for their employers as a result of being forced to work remotely in the U.S. Finally, U.S. nationals who cannot return to their foreign tax homes as a result of the COVID-19 travel restrictions can also breathe a sigh of relief that they can still exclude their foreign earned income. Hopefully, the 60-day relief period offered by the IRS will be sufficient to avoid trapped visitors becoming accidental U.S. taxpayers.

Given the complexities involved with the possible tax impact of continued physical presence in the U.S. , it is essential that any NRA in danger of exceeding the number of days of physical presence in the U.S. consult with a tax adviser to properly plan for this circumstance.