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State & Local Digital Economy and More www.pwc.com/il Alon Sherer, Senior Tax Manager, PwC Israel November 2018
State & LocalDigital Economy and More
www.pwc.com/il
Alon Sherer, Senior Tax Manager, PwC Israel
November 2018
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Agenda
Sales Tax – Wayfair ruling
1. General Overview
2. States Action
3. What should Companies Do
Qualified opportunity funds - tax incentives for investors
1. General Overview
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Sales Tax – Wayfair ruling
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Sales tax: quick overview
• Sales Tax Nexus - allows a state to exercise its taxing authority over a company.
• Pre-Wayfair federal law required some sort of physical presence.
• The Supreme Court first held in the 1960s that only businesses with a physical presence had to collect Sales Tax. This view was ratified by its decision in Quill vs North Dakota (1992)
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Sales tax: quick overview
• The internet age – e-commerce sales revenue
• Since 2008, various nexus expansion legislation by state:
Click-Through Nexus
Affiliate Nexus
Economic Nexus
Marketplace Nexus
Use Tax Notice and Reporting Requirements
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South Dakota v Wayfair case
• South Dakota passed a law in 2016 requiring online retailers to charge sales tax
• Once passed it sued four retailers – among them, Wayfair – for not complying
• Historical Decision - On June 21, 2018, the US Supreme Court overturned prior Court decisions and ruled that a physical presence is not required for the imposition of sales and use tax.
Israeli Remote Seller
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Sales Tax Post Wayfair
• Foreign / US remote seller and E-commerce
• 45 states with sales tax - Approximately 30 states impose some form of economic nexus– the rest are likely to follow
• Economic Threshold – most of the states have adopted economic thresholds equal to or higher than South Dakota’s (100K annual sale of good or service or 200 transaction), but NOT ALL
• Anticipated enforcement actions – Watch out for Audits
• After Wayfair, states may seek to enforce economic nexus provisions for income taxes
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201920182017Jurisdiction10/1/2018Alabama
12/1/2018Colorado
12/1/2018Connecticut
1/1/2019Georgia
7/1/2018Hawaii
10/1/2018Illinois
10/1/2018Indiana
1/1/2019Iowa
10/1/2018Kentucky
1/1/2019Louisiana
7/1/2018Maine
10/1/2018Maryland
10/1/2017Massachusetts
10/1/2018Michigan
10/1/2018Minnesota
9/1/2018Mississippi
1/1/2019Nebraska
10/1/2018New Jersey
11/1/2018North Carolina
10/1/2018North Dakota
1/1/2018Ohio
7/1/2018Oklahoma
3/1/2018Pennsylvania
8/17/2017Rhode Island
11/1/2018South Carolina
11/1/2018South Dakota
1/1/2019Utah
7/1/2018Vermont
10/1/2018Washington
10/1/2018Wisconsin
Sales Tax Economic Nexus Effective Date
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Considerations for foreign sellers
• Nothing in Wayfair decision limits holding to domestic US companies
• Income tax treaties do not protect foreign companies from sales tax collection responsibilities in any U.S. state.
• At the same time, there is also currently no treaty between any foreign country and the U.S. to collect sales tax based on a state judgment. (“Revenue Rule”).
• Enforcement of online sellers of digital products with no physical presence in the US?
• Possible state actions –
- Warrants, liens, credit rating, M&A hurdles, U.S. bank accounts
- Reputational considerations, publicity and public relations
• Federal enforcement? Congress – potential foreign transactions provision
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What should companies do?
There will be more of everything!
• Filing - review the physical and economic footprint in each jurisdictions
• Taxability - determine product/service taxability or exemption
• System & Process - computer system or outsourcing
• Continuing Monitoring - state guidance varies and still developing
• Financials – evaluate ASC 450 (sales tax reserve) positions
• Foreign sellers – compliance is a complex issue- should move forward to evaluate its action.
Slide 10
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State Income Tax Considerations
• Wayfair implication to state corporate tax should not overlooked
• Economic income tax nexus and factor presence tests. Approximately 30 states already impose some form of economic income tax threshold
• Market-based sourcing – 27 states ( CO & NJ effective 2019)
• Federal Public Law 86-272 – protect remote sales of tangible personal property - Will it apply to foreign retailers?
• ASC 740 implication - Wells Fargo – reported $481 million income tax expense because its affiliated entities may now face income tax assessments for jurisdictions where they do business but have no physical presence.
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Qualified opportunity funds - tax incentives for investors
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Qualified Opportunity Zones (“QOZ”)
• The 2017 Tax Act, includes a new tax incentive program, Internal Revenue Code Subchapter Z – Opportunity Zones. IRS released proposed regulation on October 19,2018
• Promote investments in certain economically distressed communities
• An QOZ is a community nominated by the state and certified by the Treasury Department as qualifying for this program. List of opportunity zones is found in Notice 2018-48
• Over 8,700 QOZ in the US (all 50 states)
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Amazon’s New York Headquarter location qualifies as Opportunity zone
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California - Bay Area - Opportunity zones
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Opportunity Zones – Tax Benefit
Taxpayers with capital gain are given the opportunity to defer and possibly reduce the tax on recognized capital gains.
Temporary deferral of Tax
Elimination of up to 15% of the deferred
gain
Potential exclusion of
tax gain of the appreciated investment
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How Does This Program Work?
• Taxpayer – Individual, corporation, partnership & other pass-through entities.
• Eligible capital gains - Taxable for federal income tax, not arising from sale or exchange with related person
• Taxpayer has 180 days from date of sale to invest in QOZ
• QOZ Fund must be organized as a domestic corporation or a partnership (“Entity Test”).
• Hold on the investment to defer tax and increase in basis. Mandatory deferred gain recognition in year 8.
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Opportunity Zones – Tax Benefit example
Fact: Taxpayer sells stock with a realized gain of $1M. On 12/1/18 he invests in QZF (within 180 days). If Taxpayer sells interest in QOF:
• Prior to 12/1/2023 – recognize gain on the $1M.• After 12/1/23 and before 12/1/25 recognize gain on $900k.• After 12/1/25 and before 12/31/26 recognize gain on $850k.• After 12/31/26 and before 12/1/28 recognize gain if exceed $1M.• After 12/2/28 Tax free withdrawal (FMV election)
August 1,2018 –Capital gain
December 1,2018 – Fund Investment
5 years
December 1,2023 –10% basis increase
2 years
December 1,2025 –5% basis increase
December 31,2026 – mandatory recognition of deferred gain
3 years
December 2,2028 –Tax free withdrawal
©2018 Kesselman& Kesselman. All rights reserved.
In this document, “PwC Israel” refers to Kesselman & Kesselman, which is a member firm of PricewaterhouseCoopers International Limited, each
member firm of which is a separate legal entity. Please see www.pwc.com/structure for further details.
PwC Israel helps organisations and individuals create the value they’re looking for. We’re a member of the PwC network of firms with 250,000 people in
more than 157 countries. We’re committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by
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Thank You!
Alon Sherer, Senior Tax Manager, PwC [email protected]
Larry Croock, Senior Tax Manager, PwC [email protected]
