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Archive for TL Fahring

Congress Hears From Small Businesses About Problems Caused By Wayfair

Congress Hears From Small Businesses About Problems Caused By Wayfair

On June 14, 2022, the Senate Finance Committee heard testimony on the impact on small businesses and remote sales of the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 201 L. Ed. 2d 403 (2018).

In Wayfair, the U.S. Supreme Court ruled that a business’s physical presence in a state (or lack thereof) wasn’t determinative for purposes of whether a state could require the business to collect sales and use taxes from customers located in the state.[1] Overturning decades of precedent, the decision effectively gave states the green(ish) light to force remote sellers to collect sales and use taxes.[2]

Witnesses before the committee discussed a number of difficulties that remote sellers were having in complying with tax collection requirements across multiple states. These include dealing with varying dollar and transaction thresholds, different items subject to sales and use tax, the complexity of local taxes, and costs associated generally with staying compliant across multiple jurisdictions.

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Highlights From The Lummis- Gillibrand Responsible Financial Innovation Act (Introduced)

Highlights From The Lummis- Gillibrand Responsible Financial Innovation Act (Introduced)

On June 7, 2022, a bill was introduced in the U.S. Senate that would provide greater clarity regarding the taxation and regulation of digital assets. Here are some of highlights.

Definitions

The bill would provide definitions in connection with digital assets that would be generally applicable in such areas of law as federal income tax, commodities regulation, and securities regulation. Terms that the bill would define would include the following:

  • “Digital asset” would be defined as “natively electronic asset that . . . confers economic, proprietary, or access rights or power . . . and . . . is recorded using cryptographically secured distributed ledger technology.”[1]
  • Distributed ledger technology” would mean “technology that enables the operation and use of a ledger that . . . is shared across a set of distributed nodes that participate in a network and store a complete or partial replica of the ledger; . . . is synchronized between the nodes; [and] . . . has data appended to the ledger by following the specified consensus mechanism of the ledger . . . .”[2]
  • Smart contract” would mean “computer code deployed to a distributed ledger technology network that executes an instruction based on the occurrence or nonoccurence of specified conditions . . . or any similar analogue . . . and . . . may include taking possession of a digital asset and transferring the asset or issuing executable instructions for these actions.”[3]
  • “Virtual currency” would be defined as “a digital asset that . . . is used primarily as a medium of exchange, unit of account, store of value, or any combination of such factors; . . . that is not legal tender . . .; and . . .  does not derive value from or is backed by an underlying financial asset . . . .”[4]

Federal Income Tax

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Texas: Administrative Judges Rulings On Tax Matters

Texas: Administrative Judges Rulings On Tax Matters

Proposed Rules

General

34 Tex. Admin. Code § 3.9 (Electronic Filing of Returns and Reports; Electronic Transfer of Certain Payments by Certain Taxpayers) (proposed at 47 Tex. Reg. 3106 (May 27, 2022))—The Texas Comptroller proposed amendments to this rule to address reporting requirements for distributors of certain off-highway vehicles that were added as a result of SB 586, 87th Leg., R.S. (2021).  Prior to SB 586, Tex. Tax Code § 151.482 (Reports by Manufacturers and Distributors) only required manufacturers of such vehicles to file reports with the Comptroller.  See HB 1543, 86th Leg., R.S. (2019).

Notable Additions to the State Automated Research System

General

Fraudulent Transfers

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Texas Tax Roundup – Interesting Tax Court Cases And Rulings

Texas Taxes

[In this very special “throwback” edition of the Texas Tax Round Up, newly reemerged from out the Super-Saragossa Sea of the Internet, we travel back to a much simpler time—February 2022.]

Howdy y’all!  Has it been a month already?  We’ve got another action-packed month of Comptroller-related news.  Here we go!

Court Cases

Courts of Appeals

Hegar v. Black, Mann, and Graham, L.L.P., No. 03-20-00391-CV (Tex. App.—Austin Feb. 25, 2022)

  • The Texas Third Court of Appeals held that a taxpayer may self-assess and pay tax under protest for subsequent periods after the filing of a protest suit and include those periods in the suit by amending the petition— in other words, there’s no requirement that the Comptroller actually assess tax for those periods. Thus, the Court of Appeals upheld that the District Court’s denial of the Comptroller’s plea to the jurisdiction for those subsequent periods.
  • On the merits, however, the Court of Appeals held that the taxpayer—a law firm that specialized in preparing loan packages for lending institutions—purchased taxable data processing (instead of nontaxable legal or paralegal) services from vendors when the vendors created an interface between each lenders’ loan origination systems and the vendors’ document generation systems that produced the loan package, which the law firm then reviewed to ensure the legal requirements were met.

Proposed Rules

Franchise Tax

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FinCEN Provides Reminder About BSA Reporting Requirements

FinCEN Provides Reminder About BSA Reporting Requirements

FinCEN And Bank Secrecy Act Reporting

On March 7, 2022, the Financial Crime Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury alerted financial institutions “to be vigilant against efforts to evade the expansive sanctions and other U.S.-imposed restrictions implemented in connection with the Russian Federation’s further invasion of Ukraine.”[1]  Such restrictions include sanctions actions taken by the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) involving certain Russian and Belorussian persons.

The alert reminds financial institutions of potential red flags for identifying sanctions evasion activity and of financial institutions’ reporting obligations under the Bank Secrecy Act (“BSA”), including those relating to convertible virtual currencies (“CVCs”).

What’s A “Financial Institution”?

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Foreign Gifts | When Do You Have To Report Them?

Foreign Gifts | When Do You Have To Report Them?

Foreign Gifts And IRS Reporting

U.S. persons who receive gifts or bequests from foreign persons beware—these gifts or bequests may need to be reported to the Internal Revenue Service (“IRS”).  The consequences for failing to do so can be costly.

What Are The General Requirements To Report Foreign Gifts?

For purposes of federal income tax, gross income generally does not include the value of property acquired by gift, bequest, devise, or inheritance.[1]  However, a U.S. person who receives foreign gifts that exceed certain threshold amounts during the taxable year must report the gifts on a Form 3520.[2]

Who’s A U.S. Person?

A “U.S. person” includes 1) a U.S. citizen or resident, 2) a domestic partnership 3) a partnership; 4) an estate other than a foreign estate; and 5) a trust if a U.S. court can exercise primary supervision over the trusts administration and U.S. persons have authority to control all substantial decisions of the trust.[3]  A “foreign estate” is an estate whose income is foreign source and not effectively connected to the conduct of a U.S. trade or business.[4]

What’s A Foreign Gift?

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Tax Court In Brief: Determination of Costs Of Goods Sold

Determination of Costs Of Goods Sold

Tax Court in Brief: Lord v. Comm’r—Marijuana and COGS

Lord v. Comm’r, T.C. Memo. 2022-14 | March 1, 2022 | Kerrigan, J. | Dkt. No. 19224-18

Short Summary:  In 2012, Mr. Lord owned interests in a limited liability company and an S corporation, both of which were formed in the State of Colorado and both of which were licensed by that state to cultivate, process, and distribute medical marijuana.  The businesses did not have audited financial statements for 2012 and were not otherwise required to maintain books and records or financial reports in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).  The businesses calculated the depreciation included in their cost of goods sold (“COGS”) for the year by using the accelerated cost recovery method in section 168(a), and they claimed bonus depreciation under section 168(k).  The businesses used methods under section 168(a) and (k) that did not conform with GAAP.

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Federal Income Tax Characterization of Transactions Involving Computer Programs

Federal Income Tax Characterization of Transactions Involving Computer Programs

The sale of a computer program—it seems simple.  But, as illustrated by the Treasury Regulations’ computer program characterization rules, the issue of just what a sale of computer program is can become confusing fast.

The Computer Program Characterization Regulations

Treasury Regulation § 1.861-18 provides rules for characterizing primarily cross-border transactions involving computer programs.[1]  For these purposes, a “computer program” means “a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result.”[2]  The term also includes certain items incidental to the operation of a computer program.[3]

In characterizing a transaction involving a computer program, neither general principles of copyright law nor the parties’ characterization of the transaction are determinative.[4]  For instance, it doesn’t matter if the parties label a transaction a license or payments as royalties if factors present in the transaction warrant a different treatment.[5]  The means by which the computer program is transferred also is irrelevant.[6]

Ultimately, there are six possible results from the application of the computer program characterization rules: 1) the sale or exchange of copyright in a computer program, 2) the license of a copyright in a computer program (generating royalties income), 3) the sale or exchange of a copy of a computer program, 4) the lease of a copy of a computer program, 5) the provision of services for the development/modification of a computer program; or 6) the provision of know-how relating to computer programming techniques.[7]

To get to these results, the regulations first require that we distinguish between the transfer of the copyright in a computer program versus the transfer of a copy of a computer program.[8]

A transaction is the transfer of a copyright right if the purchaser acquires any one of the following rights:

  • the right to make copies of the computer program for purposes of public distribution;
  • the right to prepare derivative computer programs based on the copyrighted computer program;
  • the right to make a public performance of the computer program;
  • the right to publicly display the computer program.[9]

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OECD Issues Model Rules On Nexus and Sourcing

OECD Issues Model Rules On Nexus and Sourcing

On February 4, 2022, the Organization for Economic Cooperation and Development (“OECD”) issued  model rules for nexus and revenue sourcing under Pillar One of the international tax agreement (the so-called “two-pillar solution”) signed last year by 137 countries, including the United States. As explained previously, Pillar One would allocate taxing rights over 25% of the residual profit of the most profitable MNEs to the countries where goods or services are used or consumed. The OECD anticipates that countries that are parties to the two-pillar solution will enact laws substantially similar to the model rules, while taking into account various requirements peculiar to their constitutional and legal systems.

The model rules would require that each transaction be categorized according to its “ordinary or predominant character,” based on the transaction’s substance rather than its legal form. The categories anticipated by the model rules include revenues from the sale of:

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What Can The State Of Texas Do To Collect State Taxes?

What Can The State Of Texas Do To Collect State Taxes?

So, the Texas Comptroller of Public Accounts (“Comptroller”) says you owe state tax.  If the deficiency determination hasn’t yet become final, you still may be able to challenge the underlying tax liability (for more on that, read this post).  But say you don’t do that (or say the say the Comptroller has made a jeopardy determination and can begin collection action immediately)?  What happens then?

At that point, the Comptroller, acting independently or with the Attorney General of the State of Texas (“Attorney General”), may try to collect the taxes claimed to be due.  Here are some of the tools they have at their disposal.[1]

State Tax Liens

One item in the Comptroller’s arsenal is the state tax lien.  Automatically arising when a taxpayer owes tax, penalties, or interest to the state, a state tax lien attaches to all of the taxpayer’s property that is subject to execution.[2]  But, it only becomes effective against a bona fide purchaser once a notice of state tax lien is filed with the county clerk in the appropriate county.[3]

A notice of state tax lien must include the name of the taxpayer, the type of tax owed, each period for which the tax is claimed, the tax due for each period (excluding penalties, interest, and other costs), and any other relevant information.[4]  The Texas Tax Code provides that a single notice of state tax lien “is sufficient to cover all taxes administered by the Comptroller, including penalty and interest computed by reference to the amount of tax, that may have accrued before or after the filing of the notice.”[5]  Meaning that the notice may cover taxes that the notice doesn’t even mention.

State tax liens remain in effect until the taxpayer fully pays the taxes, interests, penalties, and fees that the taxpayer owes the state.[6]  Nevertheless, the Comptroller and Attorney General may agree to a partial release of a state tax lien on specific real or personal property if the taxpayer pays the Comptroller the “reasonable cash market value” of the property (such “reasonable cash market value” being determined as prescribed by the Comptroller).[7]

In order to challenge the validity of a state tax lien, a taxpayer (or any other person) must file suit in Travis County district court within 10 years of the date when the lien is filed.[8]  However, this limitations period won’t apply only if a taxpayer provides “substantive evidence” that the Comptroller “considers satisfactory” that rebuts the presumption that the taxpayer received proper notice of the taxpayer’s tax liability (so probably almost never).[9]  As result of a suit challenging the validity of a state tax, the lien will either be 1) perpetuated and foreclosed or 2) nullified.[10]

Levies

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ReDISCovering A Tax Classic: The Domestic International Sales Corporation

ReDISCovering A Tax Classic: The Domestic International Sales Corporation

Created by Congress in 1971 as a tax incentive for domestic exporters of U.S.-made goods, the domestic international sales corporation (DISC) remains a viable tool for small-to-medium sized exporters to reduce their federal income tax liability.[1]

A DISC typically is just “a shell corporation with no employees, the only purpose of which is to act as an accounting vehicle for the earnings of its affiliated or parent corporation.”[2]  Special transfer pricing rules allow DISCs to “skim[] the export profits of the parent corporation by taking ‘commissions’ on the parent’s export sales.”[3]

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Texas Comptroller Says You Owe Tax – Now What?

Texas Comptroller Says You Owe Tax—Now What?

It’s a letter that no one looks forward to—a notice of determination (also sometimes called a “Notification of Audit Results,” “Notification of Exam Results,” or “Notice of Tax/Fee Due”) from the Texas Comptroller of Public Accounts (the “Comptroller”) saying that you or your business owe tax. How do you respond?

There are options.

Who’s the Comptroller?

The Comptroller is the official in Texas who is responsible for collecting most state (and some local) taxes.[1] These taxes include:

  • state and local sales and use tax;[2]
  • franchise tax;[3]
  • motor vehicle sales, use, and rental tax;[4]
  • motor fuels tax;[5]
  • oil and gas severance taxes;[6]
  • insurance taxes;[7]
  • public utilities gross receipts tax;[8]
  • mixed beverage gross receipts tax and mixed beverage sales tax;[9]
  • cigarette, cigar, and tobacco taxes;[10]
  • state hotel occupancy tax;[11] and
  • oil well servicing tax.[12]

What’s a Notice of Determination?

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