IRS today provided additional information on how to comply with the transition tax payment when a triggering event occurs with S – Corporations (IR-2019-128). The updated FAQ explains when, how and where to file the Consent Agreements.
As per the provisions, S- Corporations are allowed to defer Section 965 transition tax liability after making the 965(i) election. Generally when the triggering event occurs (when S Corporation ceases to be an S Corporation, when a liquidation or sale of substantially all the assets occurs or when the shareholder of S- Corporation transfers the stock – whichever occurs first), the entire tax liability will be assessed on the shareholder’s tax return for that year. However, shareholder can make election under Section 965(h) and pay the tax liability in eight installments. Section 965(i)(4)(D) provides that the shareholder in such cases, must obtain consent of the Commissioner in order to pay in installments.
IRS explains in the updated FAQs that in such cases,
- shareholder must file a Consent Agreement within 30 days of the occurrence of the triggering event.
- IRS further clarifies that it is not possible for S Corporation to obtain the consent on behalf of the shareholders.
- The Consent Agreement may be filed with IRS Memphis Compliance Service Collection Operations at the following address: Memphis CSCO, 5333 Getwell Road MS 81, Memphis, TN 38118
- It is still required that the shareholders make Section 965(h) election on the tax return to pay the tax liability in eight installments.
- Form 965-A and 965-B, whichever is applicable must be updated as well.
- S-Corporation and the shareholders are jointly an severally liable to pay the triggered tax in installments.
FAQs have also been updated with some examples when there is an excess remittance of the transition tax.
You may have seen a headline or heard a discussion about “Wayfair”. What is this? “Wayfair” refers to the most significant state tax case to come before the U.S. Supreme Court in decades.
For more than 50 years, state sales and use tax laws have held that a seller’s requirements are based on a “physical presence” test. In other words, a company generally must collect sales tax in a given state only if that company had a physical presence (branch office, warehouse, etc.) in that state.
In 2016, South Dakota contested this law, pointing out that the physical presence test was obsolete in the Internet era. The physical presence test gave remote sellers an unfair advantage, as they could sell into the state without collecting sales tax, while in-state competitors were forced to collect sales tax.
On June 21, 2018, the U.S. Supreme Court issued a decision, stating that the physical presence test was invalid. The Court explained that a company has nexus (or connection) with a jurisdiction when that company “avails itself of the substantial privilege of carrying on business” in a jurisdiction.
In practical terms, this is means that when a company makes sales into a state over a certain threshold of sales or transactions, that company is required to collect sales tax in that state. For example, South Dakota law states that any company that has at least $100,000 in sales or 200 transactions in the state must begin to collect and remit South Dakota sales tax.
Since this decision in June, more than 30 states have (or will soon have) sales and transaction thresholds. Retailers of all types should examine their obligations and be prepared to collect sales tax in additional jurisdictions.
Each state can create its own standards and guidelines for nexus standards. Twenty-four states have adopted the same $100,000 annual sales or 200 transactions test as South Dakota. Eight other states have differing thresholds. Also, some of the states have required marketplaces (such as Amazon) to collect sales tax on behalf of vendors.
Another important issue to remember that the states are not party to the income tax treaty signed by the Federal government and they may or may not conform the treaty articles. This creates an added burden for the foreign sellers.
Retailers/ Amazon sellers should review the requirements state by state. Although the thresholds may be the same, the measuring periods and basis for measuring sales may vary. The beginning date of enforcement also varies. Penalties for non-compliance can be quite severe.
Tax Planning & Compliance
– Do not simply register in states once you determine you have nexus without considering several additional steps.
- Determine nexus
- Review the wording of your contracts and invoices. A change in wording could reduce the risk of sales tax requirements.
- Decide whether the risk is material. It may be that the cost of registration and compliance is greater than your risk of exposure.
- Implement a sales tax compliance software. Several commercial systems are available.
- Consider a system to store and track certificates.
CPA Global tax can help you with all questions you may have in complying with the state tax issues.
United States is an attractive place to do business and multinational companies from various countries have operated successfully over a number years. Many foreign inbound companies operate either remotely or by physical presence in United States and are selling in number of states. Until recently these companies were advised by the experts that they were not required to register and collect sales tax in number of states based on their activity due to the protection accorded by the then governing case Quill v. North Dakota. But now this is the thing of the past. On June 21, 2018 the SCOTUS (Supreme Court of United States) determined the physical presence rule was “unsound and incorrect,” and “economic and virtual” contacts between a business and a state were sufficient grounds for nexus – the connection between a state and a business that triggers a tax collection obligation.
Once a business determines it’s reached an economic nexus threshold in a new jurisdiction and has an obligation to collect, it must register to do so with the state tax authority. Under no circumstances should it collect and remit tax in a new jurisdiction before registering to do business there. More than one license and permit may be required in each jurisdiction, and in some states, it may be necessary to register with local tax authorities, as well as the state taxing authority. As a result, registering in a new jurisdiction is likely to be a multi-step process that involves multiple departments, including state and local tax departments, and the secretary of state.
Affected foreign owned businesses must consult and seek help from the advisors in order to avoid playing afoul as non-compliance can be very costly.