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.


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 have revised our original post to include the most recent announcements. We will continue to revise as more information is made available. As we practice social distancing during the COVID-19 (coronavirus) outbreak, our state and local governments, like the federal government, are working through their response to the outbreak. 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.

Deadline extensions are extremely beneficial to many businesses that may not currently have the human resources required to file such returns, or possibly the funds to pay due to impacted business operations and are a welcome reprieve to those in that situation. Some states, such as Texas, indicated that they could not extend all their 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. While this is a catch-22, many taxpayers appreciate their government’s flexibility in these trying times.

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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Summary of Key Tax Provisions in Historic $2.2 Trillion CARES Act Law

Posted in Federal Tax

On March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act),  legislation intended to help Americans and businesses survive a public health and economic crisis due to COVID-19. This article provides a summary of key tax provisions in the CARES Act.

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Federal Government Responds to Coronavirus with Tax Measures

Posted in Federal Tax

The federal government has enacted two tax measures to combat the financial downturn resulting from the coronavirus pandemic. The President signed into law a bill that includes a 100 percent payroll tax credit for certain employers providing COVID-19 related sick and family leave wages for employees. In addition, the IRS has issued an extension for the payment of Federal income taxes and for filing such tax returns. Continue Reading

SALT Response to COVID-19

Posted in Alabama, California, Colorado, Connecticut, District of Colombia, Florida, Illinois, Indiana, Iowa, Kenntucky, Louisiana, Maryland, Michigan, Minnesota, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Refund Claims, South Carolina, Utah, Washington

As we practice social distancing during the COVID-19 (“coronavirus”) outbreak, our state and local governments, like the federal government, are working through their response to the outbreak. 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. Continue Reading

SCOTUS to decide who gets a consolidated group’s tax refund when a bankruptcy intervenes?

Posted in U.S. Supreme Court

The U.S. Supreme Court heard oral arguments on December 3, 2019 in Simon E. Rodriguez v. Federal Deposit Insurance Corp., 18-1269 (Sup. Ct.). At dispute in the case is whether a $4.1 million tax refund belongs to a failed bank (the FDIC, as receiver for defunct United Western Bank) or its corporate parent in bankruptcy (Rodriguez, as trustee for United Western Bancorp Inc.). The Supreme Court granted certiorari in Rodriguez to decide whether state law or federal common law decides who owns the tax refund, but at oral argument, it became apparent that the issue may not be the subject of, in the words of Justice Ginsburg, “adversarial confrontation” and thus improper to decide in the context of this case. Continue Reading

Kansas Surprises By Removing Nexus Thresholds and Seeks to Create Rebirth of “Slightest Presence” Nexus

Posted in E-Commerce, Nexus

The Kansas Department of Revenue recently released Notice 19-04 (the “Notice”) which provides that all remote sellers making sales into the state are required to register for and begin collecting and remitting sales and use tax effective October 1, 2019, raising significant Constitutional concerns. Notably, the Notice cites no transaction or dollar thresholds for determining remote seller nexus with Kansas. The only predicate for nexus is that the remote seller makes a sale of tangible personal property or services to a customer located in the state. Continue Reading

New Hampshire Passes Anti-Wayfair Remote Tax Legislation

Posted in E-Commerce, Sales Tax

Most states impose sales or use tax on tangible personal property sold or consumed in the state. However, five states – Alaska, Delaware Montana, New Hampshire, and Oregon – do not impose such a tax. In its landmark South Dakota v. Wayfair decision, the U.S. Supreme Court ruled that out-of-state sellers can be required to collect and remit tax on sales into another state in which the seller had no physical presence. The response from New Hampshire was swift and to the point. Governor Chris Sununu immediately tweeted that the Court’s ruling was “outrageous” and that “if they think we are just going to take this without a fight, well then they have another thing coming.” Continue Reading

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