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.
IRS recently announced that the Individual Taxpayer Identification Numbers (ITIN) will need to be renewed every 3 years. The new release states that the ITIN is temporary and cannot be permanently used. In order to renew the ITIN, non-residents will need to file a new application on Form W-7 after 3 years, otherwise their tax returns will be rejected.
The IRS announced changes which require certain taxpayers to renew their ITINs. The renewal of ITINs requirement does not apply to ITIN holders who do not need to file their tax returns in 2017.
The following taxpayers require renewal of ITINs:
- Taxpayers with ITINs not used on federal tax returns for at least once in last 3 years i.e. 2013, 2014 and 2015. Such unused ITINs will require renewal and will not be valid for filing tax returns in 2017.
- Taxpayers who were issued ITINs prior to 2013. Their ITINs will begin expiring this year and the taxpayer must renew them to prevent rejection of their tax returns.
IRS further states that Taxpayers will need to renew their ITINs on a rolling basis which means that the first ITINs that will expire are the ones with middle digits of 78 or 79 and the ones that are not used for one of the 3 prior years. These ITINs will need to be renewed with the period beginning October 1, 2016.
The taxpayer who has an expired ITIN and who does not renew it before filing the tax returns in 2017, may have a delay in refund and may be ineligible for certain tax credit like American Opportunity tax credit and child tax credit till the time new ITIN is not received.
Taxpayers should check their ITINs as soon as possible. Taxpayers with an ITIN with middle digits of 78 or 79 can apply for ITINs for the entire family at the same time. Family members include taxpayer, spouse and dependents claimed on their tax returns.
Other important changes for dependents of taxpayers:
Following are the new requirements for dependents whose passport do not have the date of entry in the U.S.:
- The IRS will not accept passport as stand-alone identity document if the passport does not have the date of entry in the US for dependents from countries other than Canada and Mexico or dependents of military members overseas.
- All such applicants who do not have a date of entry in the US on their passports will now be required to submit medical records for dependents under the age of 6 or U.S. school records for dependent under the age of 18 along with the passport.
All dependents aged 18 years or above can submit the rental or bank statement or utility bill having full name of the applicant and US address along with the passport.
CPA Global Tax & Accounting is an IRS approved Certifying Acceptance Agent. Generally, taxpayers are required to send their original passports and/ or other original documents, however, we can certify these documents, ensure that the Form W-7 is correctly prepared and submit them to IRS.
Foreign investors are generally not subject to US tax on US source capital gain unless it is effectively connected with a US trade or business, or it is realized by an individual who meets certain physical presence requirements.
Gain from the disposition of a U.S. real property interest (USRPI), however, is treated as income effectively connected with a US trade or business under the Foreign Investment in Real Property Tax Act (FIRPTA). This FIRPTA gain is subject to tax and withholding under Code Sec. 897 and Code Sec. 1445.
Stock or a beneficial interest in a US real property holding corporation (USRPHC) is a USRPI.
Under pre-2015 PATH Act law, in the case of any disposition of a USRPI by a foreign person, the transferee was required to deduct and withhold at the rate of 10% of the amount realized on the disposition.
Effective dispositions made on or after February 16, 2016, the new PATH Act increases the FIRPTA withholding rate to 15% on the dispositions of USRPIs and other prescribed transactions.
However, the PATH Act provides for a reduced FIRPTA withholding rate of 10% in the case of a disposition of property which is acquired by the transferee for use by the transferee as a residence, and the amount realized for the property does not exceed $1,000,000, provided the exemption for a residence bought for $300,000 or less does not apply.
Last month IRS made changes to the instructions of Form 1042 – Annual Withholding Tax Return for US Source Income of Foreign Persons. As the readers may recall, IRS made some changes to Form 1042 earlier to coincide with the newly issued FATCA regulations under Chapter 3 and 4. The updated instructions were released to assist the withholding agents in preparing the Form. It is pertinent to note that although 2014 and 2015 versions of the Form are identical, IRS has made certain parts of the Form which were optional in 2014, as mandatory for 2015.
Following parts of Form 1042-S are accordingly mandatory for 2015:
- Withholding agent’s Chapter 3 and 4 status code must be entered on page 1 under the withholding agent’s name.
- Reconciliation of U.S. source fixed or determinable annual or periodical (FDAP) income in section 2 of Form 1042 must be completed. This schedule reconciles the total U.S. source FDAP income subject to withholding under Chapter 4 with the total amount of U.S. source FDAP income reported on Forms 1042-S.
- It is required that withholding agents now summarize the reasons why the amounts were not subject to Chapter 4 withholding such as amounts paid with respect to grandfathered obligations, amounts paid that were characterized as excluded nonfinancial payments, etc.).
International legal and independent professionals consulting in India often have issues receiving funds from their clients in India. India has stringent exchange control regulations contained in the Act called Foreign Exchange Management Act – FEMA. Accordingly all foreign remittances must go through certain procedures. Additionally, Income Tax Department asks for “Tax Residency Certificate” (TRC) from the US service provider so that the treaty benefits can be allowed. If TRC is not produced, the payer must withhold tax from the income remitted to US service provider. This is true regardless of where the services were provided.
Until recently, it was mandatory that TRC issued by foreign tax authority must contain all items required by the government of India in order to exempt any tax withholding requirements. As many of us are aware, Internal Revenue Service issues the US tax residency certificate in Form 6166 which cannot contain additional information as required by government of India. Due to this, in many cases, the Indian income tax department rejected the TRC issued by IRS and that resulted in withholding tax in India.
However, after a few representations, the government of India and the tax department agreed to accept the US residency certificate in its present Form 6166.
Accordingly the following documents are required to successfully receive payments form Indian companies without any withholding:
- Form 10F
- Permanent Account Number (PAN or tax ID number)for India
- US Form 6166 for the relevant tax year
- Signed letter on US law firm’s letterhead stating that the law firm does not have a permanent establishment (PE) in India under the US – India tax treaty article.
Since the tax year in India runs from April 1 to March 31st, it is possible that some clients in India may request that the firm provide TRC issued by IRS in 2015 for payments processed in January through March 2015. Therefore US law firms may want to begin the process of collecting relevant data and partner signatures in advance, so as to file Form 8802 in a timely manner. This will expedite the process to receive TRC from IRS soon. Note that currently IRS charges a $85 user fee and processes the TRC within 45 days.
Please contact us to receive our assistance on both sides of the border.
French open is around the corner! Some French tennis broadcasting channels will broadcast the matches live via satellites in US. Ever imagined how the tax law would apply to the royalty income paid by US companies to foreign channels?
Interesting issue recently arose when a US subsidiary sought a Private Letter Ruling from IRS to clarify whether the royalty paid by US subsidiary to its foreign parent was subject to any tax withholding.
Facts of the case were, foreign broadcasting company created a subsidiary in US to distribute to US distributors that showed foreign television channels. US subsidiary would collect fee from US distributors and pay royalties to its foreign parent. Income tax treaty between US and the country where the foreign parent was resident of had a tax treaty and a provision for taxing royalty income. However, the royalty article in the US- and foreign country income tax treaty exempts all royalties from US income tax, except royalties or rentals from motion picture films.
IRS ruling favored the Taxpayer. IRS treated the royalties paid by US subsidiary to Taxpayer (foreign parent) as royalties that are exempt from U.S. income under the royalties article of the income tax treaty between both countries.
It would be interesting to see if the royalties article will include royalties from television broadcasting when the treaty is up for negotiation again!
In a recent court case, the taxpayer who argued that by living in Germany for many years and selling his US properties a long time back, he had relinquished his Lawful Permanent Residence (LPR) or a green card and hence should not be subject to US taxes on his income. However, IRS did not accept this and court agreed with IRS making the taxpayer liable for the tax.
IRS contended that the taxpayer was liable for income tax deficiencies for 2004 and 2006 – 2009 (almost all of which was attributable to the gain on his installment sale of stock). IRS argued that (1) because the taxpayer did not formally abandon his LPR status (obtained in ’77) until 2010, he remained an LPR during the years in issue, and (2) because he was not taxable by Germany as a German resident during those years, he was not a German resident under Article 4 of the Treaty. Therefore, he was not exempted from U.S. taxation by the Treaty.
The Tax Court reasoned that the taxpayer did not formally renounce or abandon that status until Nov. 10, 2010, when he filed a Form I-407 and surrendered his green card to the USCIS consistent with the requirements of Reg. § 301.7701(b)-1(b)(3).The Court rejected the taxpayer’s argument that he “informally” abandoned his LPR status. The Court held that for Federal income tax purposes, the taxpayer’s LPR status turns on Federal income tax law and was only indirectly determined by immigration law. The taxpayer’s reliance on an immigration case that recognized “informal” abandonment was misplaced. Unlike immigration law, the Code and regs were not silent on the point at which a taxpayer’s LPR status was considered to change. The requirements set out in Code Sec. 7701(b)(6)(B), Reg. § 301.7701(b)-1(b)(1), and Reg. § 301.7701(b)-1(b)(3) for abandoning LPR status