State & Local Tax News

Interstate Commerce Speed Trap – Wayfair Supreme Ct. Decision Rears Its Ugly Head

February 11, 2020 by Frank

Bensalem PA Business Owner Receives $1.6 Million Sales Tax Bill from California

Background

It was reported by the Philadelphia Inquirer that Brian Freifelder, who sells clothing, shoes, and groceries on Amazon.com out of a small warehouse in Bensalem, received an assessment notice from California that he could owe as much as $1.6 million for sales tax (just for the first six months of the year). CA says he is liable for the tax that he didn’t collect from consumers who bought his goods through Amazon. His tax attorney called this “an interstate commerce speed trap.”

Freifelder is among what is believed to be hundreds of thousands of third-party merchants on Amazon who were informed by the CA Department of Tax and Fee Administration that they should have been collecting taxes on sales to CA residents as far back as 2012.

When Amazon opened its first warehouse in California in 2013, it escaped the obligation to collect the taxes on sales by third-party merchants on the company’s site, apparently by convincing state officials that it was not the retailer obligated to collect sales tax in those cases — a distinction that has since been undermined by court decisions in South Carolina, Pennsylvania, and elsewhere.

CA’s position is that when Freifelder’s goods showed up at an Amazon warehouse in CA, he had the same obligation to collect sales tax as any retailer with a store there — even if he had no idea where Amazon was storing his goods.

Current Tax Rule

CA and other states now require “marketplace facilitators” to collect sales taxes. PA has issued its rules in Sales and Use Tax Bulletin 2019-01 which became effective for transactions that occurred on or after July 1, 2019. We discussed the revised economic nexus standards for PA and Philadelphia in our August 7, 2019 blog and NJ and PA’s reaction to the Wayfair court case in our December 19, 2018 post.

The Wayfair nexus standard not only affects sales taxes. PA Updated its corporate income tax nexus standard as we discussed on November 7, 2019.

We discussed the 2018 U.S. Supreme Court Wayfair decision on July 24, 2018 which did away with the decades-old standard that states could force retailers to collect sales tax only if they had a physical presence in the state, making marketplace facilitator laws possible.

Tax Planning Tip:

If you are a seller of tangible goods and you have not already contacted your tax professional to evaluate your nexus tax exposure, do so today rather than wait to receive your $1.6 million tax assessment notice.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA Updates Its Corporate Income Tax Nexus Standard

November 7, 2019 by Frank

PA Adopts Wayfair Nexus Decision that Physical Presence is Not Needed for PA to Tax Out-of-State Corporations that Receive an Economic Benefit from Their PA Marketplace Presence

Physically Presence is Not Required

PA declares that corporations do not need to be physically present in Pennsylvania in order to have nexus for corporate tax purposes. Out-of-state corporations doing business in Pennsylvania must file tax reports if they are taking advantage of the Pennsylvania economic marketplace.

Wayfair Decision

As reported in our July 24, 2018 blog, the U.S. Supreme Court decision in South Dakota v. Wayfair would have a profound affect on the nexus standard. “Nexus” being the amount of contact a business would have in a state before being subject to that state’s taxes. Whereas the former standard that a business needed a physical presence in a state before the state could tax it, Wayfair replaced the physical presence test with an economic test.

Pennsylvania states that the decision in Wayfair v. South Dakota made certain that no physical presence standard exists to limit the ability of a state to impose a net income tax on an out-of-state taxpayer. The decision confirmed that out-of-state corporations are doing business in the Pennsylvania and/or carrying on activities in Pennsylvania to the extent they are taking advantage of the economic marketplace. Taxpayers taking advantage of the economic marketplace will be required to file tax reports if they meet the minimum nexus thresholds under the U.S. Constitution.

Economic Presence Test

Pennsylvania will require taxpayers with economic nexus to file corporate tax reports after 2019. Pennsylvania will presume taxpayers without a physical presence have to file a corporate net income tax report if they have $500,000 or more of direct or indirect gross receipts sourced to the state. The presumption is rebuttable.

The gross receipts must be from the:

sale, rental, lease, or licensing of tangible personal property;
sale of services; and/or,
sale or licensing of intangibles, including franchise agreements.

amended law revised the definition of “transient accommodation” to limit it to the rental of a room, group of rooms, or other living or sleeping space for the lodging of occupants, including but not limited to residences or buildings used as residences, that is either:

Obtained through a transient space marketplace; or
Is a professionally managed unit.

The PA Department of Revenue recognizes that taxpayers with or without physical presence in the Commonwealth can still potentially claim exemption from the imposition of the Corporate Net Income Tax under the provisions of P.L. 86-272. Taxpayers claiming P.L. 86-272 (physical presence) protection should still file a tax report and complete the necessary schedules to claim the exemption. Corporation Tax Bulletin 2019-04, Pennsylvania Department of Revenue, September 30, 2019.

Tax Planning Tip #1:

States will continue their efforts to tax out-of-state businesses rather than face the wrath of in-state business when taxes are increased. If you have not already consulted with your tax adviser to determine if you have nexus exposure, you need to do so.

Tax Planning Tip #2:

While reading this post, keep in mind that other states have already changed their nexus standard from physical presence to an economic benefit test, or are considering doing so, thus your activities outside of PA may be creating nexus in those states where you have activities. Refer to Tax Planning Tip #1.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

NJ Amends its Sales Tax Law Regarding Transient Accommodations

October 29, 2019 by Frank

Rental of a Transient Accommodation Obtained Directly from the Owner is No Longer Subject to NJ Sales Tax

Background

In our blog post of October 30, 2018, we alerted our readers that New Jersey had enacted legislation that imposed a fee on transient accommodations on or after October 1, 2018. The new law imposed Sales Tax, the State Occupancy Fee, and the Meadowlands Regional Hotel Use Assessment on charges associated with the rental of transient accommodations.

This law supposedly targeted homeowners who rented their investment properties themselves (classified ads, referrals from friends and family, rental signs on the lawn, Airbnb, VRBO, etc.) rather than using a realtor.

Amended NJ Sales Tax Law on Transient Accommodations

Beginning August 9, 2019, the rental of a transient accommodation obtained directly from the owner is no longer subject to Sales Tax, the State Occupancy Fee, and other applicable taxes and fees, unless it is a professionally managed unit, as defined below.

A rental obtained through a transient space marketplace, which now includes a travel agency, or a rental of property that is considered to be a professionally managed unit, is subject to the applicable taxes and fees.

What is a Transient Accommodation?

The amended law revised the definition of “transient accommodation” to limit it to the rental of a room, group of rooms, or other living or sleeping space for the lodging of occupants, including but not limited to residences or buildings used as residences, that is either:

Obtained through a transient space marketplace; or
Is a professionally managed unit.

Therefore, a transient accommodation that is obtained through a transient space marketplace or is a professionally managed unit is subject to New Jersey Sales Tax, the State Occupancy Fee, and other applicable taxes and fees.

What Type of Rental Is NOT Subject to the NJ Amended Sales Tax Law?

The following rentals are no longer subject to Sales Tax, the State Occupancy Fee, and other applicable taxes and fees as long as the owner does not offer three or more units for rent (a professionally managed unit):

A rental of a transient accommodation obtained directly from the owner (such as through local newspaper ads, personal referrals, signage, etc.); or
A rental of a transient accommodation which is not obtained through a transient space marketplace.

In addition, rentals executed by a real estate broker remain not subject to the taxes and fees.

When Is a Rental Considered Obtained Through a Transient Space Marketplace?

A rental is “obtained through a transient space marketplace” where the agreement for the rental is made through the marketplace or travel agency and where payment for the accommodation is made through a means provided by the marketplace or travel agency, regardless of who receives the payment. Transient space marketplaces will continue to collect Sales Tax, the State Occupancy Fee, and other applicable taxes and fees imposed on a transient accommodation when the rental is “obtained through a transient space marketplace.”

However, a transient space marketplace does not include a marketplace or travel agency that exclusively offers transient accommodations in New Jersey that are owned by the owner of the marketplace or travel agency.

What Is a Professionally Managed Unit?

A professionally managed unit is a transient accommodation that is directly or indirectly owned or controlled by a person who offers three or more units for rent in New Jersey, and the rental unit does not share living or sleeping space with other units. A professionally managed unit is a transient accommodation that is subject to the applicable taxes and fees, regardless of how the rental is obtained.

An owner who offers three or more units for rent in New Jersey and who directly rents (such as through local newspaper ads, personal referrals, signage, etc.) continues to be required to collect Sales Tax, the State Occupancy Fee, and other applicable taxes and fees because the transient accommodation is a professionally managed unit.

Are Lessors Required to Register with NJ?

An owner who offers three or more units for rent in New Jersey must be registered to collect the applicable taxes and fees unless all of the rentals are obtained through a, transient space marketplace or through a real estate broker. In addition, transient space marketplaces, including travel agencies, must be registered to collect the Sales Tax, the State Occupancy Fee, and other applicable taxes and fees on all transient accommodations obtained through the transient space marketplace. However, d address any conflicts; work with the Office of Chief Counsel to see if they need legislation to use tax data to identify potential conflicts; and better manage the OES, both in terms of requiring employee compliance and management review.

Tax Planning Tip #1:

Lessors of rental properties in NJ need to consult with their tax advisor ASAP. Determinations need to be made if the lessors are subject to the amended NJ sales tax law on transient rentals, if they need to be registered to collect the sales tax, if they need not be registered by nevertheless are required to collect and remit the sales tax, and due to the effective dates of the previously enacted law and the amended law, renters may be entitled to refunds and how lessors should handle those refunds as well as the filing of a Final Tax Return if appropriate.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA LESSEES REQUIRED TO WITHHOLD PA PERSONAL INCOME TAX ON LEASE PAYMENTS MADE TO NON-PA COMMERCIAL LANDLORD

October 8, 2019 by Frank

Lessees Required to Withhold PA PIT on Lease Payments Made to non-PA Commercial Landlords

PA 72 P.S. §7324.4 Withholding Requirement

PA 72 P.S. § 7324.4 states “Every lessee of Pennsylvania real estate who makes a lease payment in the course of a trade or business to a nonresident lessee shall withhold Pennsylvania personal income tax on rental payments to such nonresident lessor.”

Who Is Subject to this Withholding?

This withholding requirement only applies to non-resident individuals, estates or trusts or disregarded entities owned by such non-resident entities.

Who Is Not Subject to this Withholding?

Payments to any of the following are not subject to this withholding requirement: Partnerships, Corporations, Multi-Members LLCs, Residents, and disregarded entities (LLCs) owned by partnerships, corporations, multi-member LLCs or residents.

What is Subject to Withholding?

Lessor withholding only applies to commercial lease payments (which are broadly defined). Residential lease payments are exempt from the withholding requirement.

Any Threshold Withholding Requirement?

The PA Dept. of Revenue states that withholding is optional if annual lease payments are less than $5,000. Out-of-state lessors may prefer that PA personal income tax be withheld to lessen their PA tax remittance requirement.

Tax Planning Tip #1:

PA lessees should protect themselves from failure to withhold. To determine if the lessor is a non-resident individual of PA or a disregarded entity owned by one, have the lessee complete PA Form REV-1832, 1099-MISC Withholding Exemption Certificate form. This form lists the reasons the payee is not subject to the PA 3.07% withholding tax. The payee simply checks the appropriate box which the landlord can normally accept in good faith.

Tax Planning Tip #2:

Determine the annual lease payment to the non-resident lessor. If not more than $5,000 in a calendar year, no withholding is required. If it is unknown whether the $5,000 threshold will be met, the PA DOR encourages withholding.

Tax Planning Tip #3:

If lessor will likely be paid more than $5,000 or if the lessee wishes to withhold, register for a 1099 withholding account on E-Tides. Withhold tax at 3.07% rate for lease/rental payments made to non-PA resident lessors on PA situs property.

Copyright © 2019 Keystone Financial Solutions, Inc. All rights reserved. BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA MOTOR VEHICLE UNDERSTATED VALUE PROGRAM REVISITED

September 19, 2019 by Frank

Philadelphia Inquirer Interested in PA Motor Vehicle Understated Value Program

Do You Want to Become Famous?

Do you want to become famous and to see your name mentioned in a story in the Philadelphia Inquirer? Okay, we exaggerate. You likely will not become famous if your name were included in a newspaper article.

Opportunity to Share Your Personal Experience with a Reporter

We were contacted by a reporter from the Philadelphia Inquirer about our October 2018 blog posting. The posting dealt with the PA DOR & PA Dept Motor Vehicles assessing PA residents sales tax on private car sales after-the-fact. These are situations where the all-knowing PA DOR (tongue-in-cheek) makes a tax assessment on a private car sale where PA determines that the stated value of the car on the title transfer paperwork was understated and additional PA sales tax is due.

The reporter would like to speak with persons who received one of these deficiency notices and what happened next. If you had such an experience, please call me a 610-594-2601 so we can discuss your situation and if the reporter wishes to speak with you directly.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA REQUIRES PA COMPANIES TO WITHHOLD PA PERSONAL INCOME TAX ON PAYMENTS MADE TO NON-PA BASED CONTRACTORS

September 17, 2019 by Frank

Brief Overview of the PA PIT Withholding Requirement When PA-Based Companies Make Payments to Non-PA-Based Contractors

PA 72 P.S. §7316.2 Withholding Requirement

PA 72 P.S. § 7316.2 states that a person that (1) makes payments of income from sources within PA to a non-resident individual or an entity that is disregarded that has a non-resident member and (2) who is required to file Form 1099-MISC with the PA Department of Revenue, shall deduct and withhold the PA Personal Income Tax (PIT) at the rate of 3.07%.

Who Is Subject to this Withholding?

This withholding requirement applies to payments made to non-resident individuals, estates or trusts or disregarded entities owned by such non-resident entities.

Who Is Not Subject to this Withholding?

Payments to any of the following are NOT subject to this withholding requirement: Partnerships, Corporations, Multi-Members LLCs, Residents, and disregarded entities (LLCs) owned by partnerships, corporations, multi-member LLCs or PA residents.

What Types of Payments Are Subject to Withholding?

Payments for services rendered in PA by non-residents of PA are subject to the PIT withholding requirement.

Withholding Examples

Ex. 1: PACo, a business located in West Chester, PA, hires Stephanie, a MD resident individual, to perform customer surveys from her home in MD. PACo (the payor) pays Stephanie (the payee) $10,000 for her consulting services. PACo will report the $10,000 on Form 1099-MISC since it exceeds the $600 dollar filing requirement threshold.

However, since Stephanie performed no services within PA, she is not subject to PA PIT withholdings.

Ex 2: If we change the facts to show that Stephanie spent time in PA to perform some of her services, then PA withholding is required for the services provided within PA by this non-resident individual. PACo has the compliance burden of devising a process to substantiate the time Stephanie spent in PA to perform her services and withhold PA PIT on the fees she earned for her work performed within PA.

Ex 3: The facts are the same as in Example 2, except Stephanie is a single owner of her LLC and the LLC (not Stephanie) was contracted to perform the consulting services in PA.

The PA payor is required to withhold PA PIT because the LLC is a disregarded entity.

What Types of Payments Are Not Subject to Withholding?

Payments made related to goods or materials (inventory), sale of property, and interest and dividend income are not subject to the PA withholding tax requirement.

Tax Planning Tip #1:

PA payors should protect themselves from failure to withhold. To determine if the payee is a non-resident individual of PA or a disregarded entity owned by one, have the payee complete PA Form REV-1832, 1099-MISC Withholding Exemption Certificate form. This form lists the reason(s) the payee is not subject to the PA 3.07% withholding tax. The payee simply checks the appropriate box which the landlord can normally accept in good faith.

Tax Planning Tip #2:

Estimate the annual calendar year payments to the non-resident payee. If not more than $5,000 in a calendar year, no withholding is required. If it is unknown whether the $5,000 threshold will be met, the PA DOR encourages withholding.

KEEP IN MIND THAT IF IT WAS ANTICIPATED THAT THE PAYEE WOULD BE PAID LESS THAN $5,000, BUT THAT THRESHOLD WAS EXCEEDED, THE PAYOR IS LIABLE FOR THE FULL 3.07% PIT WITHHOLDING AMOUNT ON THE ENTIRE MONIES PAID TO THE PAYEE.

Tax Planning Tip #3:

If payee will likely be paid more than $5,000 or if the payee wishes to have tax withholdings, register for a 1099 withholding account on E-Tides. Withhold tax at 3.07% rate for payments made to non-PA resident service providers working in PA.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.