These slides are at Chapter 6. C Corporations. California and Multistate Developments. California

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1 These slides are at C Corporations Chapter 6 California and Multistate Developments California 2

2 2 What about TCJA conformity? 3 Considerations CA conforms to IRC as of 1/1/15 with limited exceptions. CA still has corporate AMT. Lots of non-conformity: Accounting methods Section 118 Entertainment and fringe benefit changes Definition of capital asset under 1221 Technical termination of a partnership ( 708) CA does conform to repeal of IRC 1044 because it not available for federal, is not available for CA. 4

3 Cautions!! 3 Consider non-conformity in planning and any needed changes in recordkeeping. Watch for legislative action in 2019 and its effective date. Help client understand. 5 Links + Other Information Changes/ pdf See links on first page of Appendix in e-book FTB Stakeholder meeting on conformity held 11/15/18 Watch for legislative action. 6

4 January 2, 2019 Deadline to Apply to Donate to College Access Trust for 2018 NOTE!! REG (8/27/18) calls for donations yielding state tax credits greater than 15% to reduce the federal donation amount. Effective for donations after 8/27/ If donation made by business entity in exchange for business benefit, not a donation; likely a 162 expense. But what is treatment under state law? 7 8

5 5 FTB Business Due Date Chart 9 AB 2503 Administrative Dissolution Chapter 679 (9/22/18) Allows FTB with specified notice procedures to administratively dissolve a domestic corp or LLC for inactivity. Prevents tax bills from accruing on inactive entity that failed to dissolve. Also allows FTB to abate certain unpaid taxes upon written request if entity declares it was not engaged in business. 10

6 2018 Doing Business Thresholds 6 Factor Sales Property Payroll Dollar amount $583,867 $58,387 $58, EDD Information for 2019 Employment Training Tax remains at 0.1%. UI and ETT taxable wage limit remains at $7,000/employee. SDI withholding rate remains at 1%. Taxable wage limit is $118,371/employee (up from $114,967). 12

7 SB 274 Conformity to Partnership Audit Regime SB 274 (Chapter 729; 9/23/18) Follows model statute of AICPA, ABA, MTC and others Amends R&T 19311, adds R&T Uses reporting method and payment approach of federal law Model partners report and pay tax on amended returns Separate state election per the model P/S to report federal changes to FTB within 6 months of final federal determination 7 html?bill_id= sb Secure Choice Retirement Plan On Its Way Legislation enacted in 2016 (SB 1234 (9/29/16) Effective 1/1/17 but delayed Goal get more people into retirement plans Sponsor 7.5 million Californians work for employers who do not offer plans. 14

8 Secure Choice more 8 Employers with > 100 employees need to participate within 12 months (about July 2020) Those with > 50 within 24 months (about July 2021) All others within 36 months (if have at least 5 employees) (about July 2022) Employers cannot contribute to the employee account unless there is a change in federal law that permits contributions without triggering ERISA requirements. Portable - But if new employer offers a plan, is not required to handle automatic payroll contributions announcement that would not go into effect any earlier than Federal challenges regarding regulations and some lawmakers oppose this It s a BIG endeavor

9 FTB s Gig Economy Tax Center Cannabis Resources CDTFA Bureau of Cannabis Control CalCannabis Cultivation Licensing within CA Dept. of Food & Agriculture Manufactured Cannabis Safety within CA Dept. of Public Health 18

10 OTA Hearings Live Streamed New Local Taxes & Application Mountain View Measure P passed on 11/6/18 Increased business license taxes starting 1/1/20 San Francisco Measure D, Marijuana Business Tax Increase If marijuana business has gross receipts over $500K Medicinal exempt Starts 1/1/21 Expands nexus for all SF business taxes even if no physical presence in SF, but have over $500K of gross receipts in the city. Effective 1/1/19. Measure C, Gross Receipts Tax for Homelessness Services Homelessness Gross Receipts Tax on each person engaged in business in the City that receives or is a member of a combined group that receives, more than $50,000,000 in total taxable gross receipts. Starts 1/1/

11 US Supreme Court Nixes 1992 Quill Physical Presence Test for Sales Tax Nexus decision finding physical presence rule of 1992 Quill decision unsound and incorrect. Upheld South Dakota s 2016 law (SB 106) (remand to SD court to check) Sales tax nexus if over $100,000 sales to SD or 200 or more sales SB 106 did not apply retroactively SD is in Streamlined Sales & Use Tax Project so provides free software to vendors Dissent better for Congress to address Relevance? State legislatures and possibly tax agencies can adopt economic nexus for sales tax; likely will do similar to South Dakota law; some states already have something in place. Some states adopted laws similar to SD even before USSC decision (such as Illinois and Iowa). Congress could step in to exercise its commerce clause authority to set minimum levels of what states can do Wayfair Hearing in California 22

12 Wayfair News in California 12 Stakeholder Meeting on 10/24/ CDTFA Observations R&T 6203(c) provides the authority that state follows federal interpretation of commerce clause Oct Leaning towards South Dakota thresholds with start date to be announced. District taxes Wayfair also affects in-state California sellers If meet threshold in the district of destination, must collect district tax there. Pre-Wayfair only if had physical presence there or sold from that location. 24

13 Rev. & Tax. 6203(c) 13 (c) Retailer engaged in business in this state as used in this section and Section 6202 means any retailer that has substantial nexus with this state for purposes of the commerce clause of the United States Constitution and any retailer upon whom federal law permits this state to impose a use tax collection duty. 25 Supplement CDTFA Official Wayfair Announcement on 12/11/

14 Remote Sellers 14 4/1/19 must start to collect California use tax No need for physical presence in California If in prior or current calendar year, have: Sales into California > $100,000, or Sales into California in 200 or more separate transactions No retroactive application. Authority: R&T 6203(c) Reg South Dakota v. Wayfair (USSC, 6/21/18) CDTFA Special Notice L-565 (Dec. 2018) 27 In-State Sellers District Tax Obligation Changes CDTFA Notice L-591 (Dec. 2018) Starting 4/1/19 Must collect district tax if during prior or current calendar year, have Sales into the district > $100,000, or Sales into the district in 200 or more separate transactions CDTFA suggests might want to always collect the district tax even if threshold not met or have no physical presence there, as a courtesy to customer. Rates 28

15 Wayfair Due Diligence Engagement letter If you re not helping client with sales/use tax best to say that. Clients should assume all states follow Wayfair threshold for tracking purposes. If cross threshold, double check what state requires. Also check for local tax application Alabama, California, Colorado, and Louisiana. Accounting: Appropriate software, internal controls, employee understanding Looking Forward Possibly Litigation! Who might have 200 or more transactions in CA in a calendar year? Etsy seller of sheets of stickers costing $1 each Emerging business using Kickstarter and selling items for $20 Vendors anywhere in world selling via FBA App seller (at least in states where that is taxable) South Dakota has population of 987,000 California has almost 40 million So, California will have more remote vendors meeting SD nexus standard. 30

16 16 Multistate 31 Polling Question The US Supreme Court s decision in Wayfair will affect: A. Only sellers with customers located outside of the state. B. Only large retailers like Wayfair and Overstock.com. C. Possibly any seller. D. None of the above. 32

17 History of the Wayfair issue USSC rules in Quill Vendor must have physical presence that is more than de minimis for state to require sales tax collection Commerce clause issue Congress can address 1994 present various bills introduced Highest action S. 743, Marketplace Fairness Act of 2013 passed in Senate by Streamlined Sales and Use Tax project created States try to streamline and simplify their laws in hopes USSC would rule favorably or Congress would reverse Quill for them

18 History Direct Marketing Association v Brohl, Exec Dir, Colorado Dept of Revenue, No (3/3/15) USSC on procedural matter regarding CO notice law for certain vendors Justice Kennedy concurring opinion: Quill now harms States to a degree far greater than could have been anticipated earlier. The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess History - 3 A few states enact laws or change regs to allow economic nexus for sales tax Goal is to get a case to USSC! Alabama reg change economic nexus with over $250K sales/year SD SB 106 (3/22/16) seller must collect sales tax if over $100K of sales in year, or over 200 transactions Litigation ensues (as SD wanted) SD loses at SD Supreme Court (as expected) 1/12/18 USSC grants cert to SD 4/17/18 oral arguments 36

19 South Dakota v. Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc. 19 Issue Should this Court abrogate Quill's sales-tax-only, physical-presence requirement? USSC page (briefs including over 40 amicus) Transcript of 4/17/18 oral arguments C-SPAN recording 37 Arguments of the Parties South Dakota Physical presence std outdated more today than in 1992 Today s technology makes compliance easier Wayfair, et al Burden due to over 10,000 taxing jurisdictions Congress better equipped to address Use tax gap overstated 38

20 Select comments from oral arguments on 4/17/18 20 Alito if Quill is overruled, what incentives do the states have to ask for any kind of congressional legislation? Sotomayor So what are we going to do with the costs that you're going to put on small businesses? Kagan Congress is capable of crafting compromises and trying to figure out how to balance the wide range of interests involved here. Ginsburg isn't that the very kind of question that Congress would be equipped to deal with, establishing a minimum? 39 US Supreme Court Nixes 1992 Quill Physical Presence Test for Sales Tax Nexus 5-4 decision finding physical presence rule of 1992 Quill decision unsound and incorrect. Upheld South Dakota s 2016 law (SB 106) (remand to SD court to check) Sales tax nexus if over $100,000 sales to SD or 200 or more sales SB 106 did not apply retroactively SD is in Streamlined Sales & Use Tax Project so provides free software to vendors Dissent better for Congress to address Relevance? State legislatures and possibly tax agencies can adopt economic nexus for sales tax; likely will do similar to South Dakota law; some states already have something in place. Some states adopted laws similar to SD even before USSC decision (such as Illinois and Iowa). Congress could step in to exercise its commerce clause authority to set minimum levels of what states can do

21 State Reactions to SD v. Wayfair Decision Many adopting or have adopted SD thresholds Many were effective 10/1/18! California R&T 6203(c) provides that retailer in the state includes "any retailer that has substantial nexus with this state for purposes of the commerce clause of the U.S. Constitution." Wayfair Considerations Must a state have the SSUTA features? Relevance to income tax where PL n/a: Physical presence not needed. Are thresholds relevant in light of end of Quill? Will states reduce other taxes or rates in light of likely increase in use tax? Will Congress step in? House Judiciary held hearing on 7/24/18 42

22 Wayfair follow up 22 Several states have already put the South Dakota thresholds in place. Calif R&T 6203(c) allows for the SD thresholds. BUT we don t offer free software with audit protection to remote vendors. Is this a problem? Can CDTFA handle the possible 1 million new remote vendors that would meet the 200 or more transactions in California? SD has 987,000 people and California has 39 million + lots more business buyers. What will cities with their own sales taxes do? California s district taxes likely follow the SD thresholds. Alabama, Colorado, and Louisiana? 43 States and the Federal Partnership Audit Regime AICPA Position Paper on State Conformity to the Federal Partnership Audit Regime Overview to issues What states have done to date. Includes a model statute created by AICPA, COST, TEI, IPT, ABA, MLPA, MTC cuments/aicpa-position-paper-on-state-partnership-audits pdf 44

23 H.R to Update PL H.R. 6978, Business Activity Tax Simplification Act Covers more types of transactions (digital and services) and taxes Income Taxes measured by the amount of, or economic results of, business or related activity conducted in the State (but not a sales tax) Must have a physical presence. If < 15 days during year, it is de minimis and ignored. 45