California Crypto Currency Laws

The California Digital Financial Assets Law requires a digital financial asset transaction kiosk operator (“kiosk operator”) to comply with certain requirements that go into effect on January 1, 2024, January 1, 2025, and July 1, 2025.

Effective January 1, 2024

Effective January 1, 2024, the Digital Financial Assets Law requires a kiosk operator to: (1) provide a list of its kiosk locations to the Department of Financial Protection and Innovation (Department), (2) comply with daily transaction limits, and (3) provide receipts to customers with specified information for any transaction made at the operator’s kiosks.

Kiosk Locations

Effective January 1, 2024, the Digital Financial Assets Law requires a kiosk operator to provide the Department with a list of all locations of kiosks that the operator owns, operates, or manages in this state. The law also requires a kiosk operator to submit updates to the Department within 30 days of any changes to kiosk locations. Fin. Code, § 3906.

  • Who must report a list of kiosk locations?

    Anyone who owns, operates, or manages a digital financial asset transaction kiosk in this state must report kiosk locations to the Department. A digital financial asset transaction kiosk (“kiosk”) is defined as an electronic information processing device that is capable of accepting or dispensing cash in exchange for a digital financial asset.

  • When must a kiosk operator submit its list of kiosk location(s)?

    The law requiring a kiosk operator to report its kiosk locations to the Department becomes operative on January 1, 2024. The Department requests kiosk operators submit a list of kiosks to the Department no later than March 15, 2024.

  • How does a kiosk operator submit its kiosk locations to the Department?

    A kiosk operator can submit its kiosk location information to the Department by completing this Excel template with all kiosk locations and submitting it via the Department’s upload site.

    The Excel file must contain the following horizontal fields, in the order specified below, for each location:

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California Digital Assets Law
Licensing

Beginning July 1, 2025, companies must be licensed by the DFPI or have applied for a license with the DFPI to operate in California. The DFAL prohibits an entity from engaging in digital financial asset business activity unless the entity holds a license from the DFPI. Digital financial business activity includes activities such as exchanging, storing, or transferring a digital financial asset, such as a crypto asset. The new law promotes consumer and investor protection by creating a robust regulatory framework, including supervision and enforcement authority, for certain crypto activities.

Prospective Licensees

If you are a prospective DFAL licensee, or have a question about how the law affects your business, join our email list to receive future updates or email crypto@dfpi.ca.gov.

Kiosks

The Digital Financial Assets Law requires a digital financial asset transaction kiosk operator (“kiosk operator”) to comply with certain requirements in California.

Beginning January 1, 2024, a kiosk operator must provide the Department a list of all kiosk locations that an operator owns, operates, or manages in the state. An operator is defined as a person who owns, operates, or manages a digital financial asset transaction kiosk located in this state. Additionally, by January 1, 2024, an operator (1) may not dispense or accept more than $1,000 in a day to or from a customer via kiosks and (2) must provide a customer with a receipt with specified information for any transaction made at the operator’s kiosk.

Beginning January 1, 2025, kiosk operators must provide pre-transaction disclosures to customers and are prohibited from collecting from customers in any single transaction the greater of $5 or 15% of the U.S. dollar equivalent of digital financial assets involved in the transaction.

By July 1, 2025, operators must comply with the licensing requirements stated in the law. Learn more on the kiosk operators webpage.

How Is Software As-A Service(SaaS)Treated Under State Tax Laws?

A very important and often misunderstood area in the sales tax arena is the taxability of cloud computing, cloud-based services, etc., collectively often referred to as Software-as-a-Service (or SaaS). The moniker alone is enough to start the state tax conversation down an interesting path.

The Basics

When we work with clients to determine how something should be taxed, we start with a few basic questions and then work from there.

Has nexus has been created?
This includes looking at both the physical presence as well as an economic presence. Following the U.S. Supreme Court’s June 2018 ruling in South Dakota v. Wayfair, many states enacted economic nexus statutes which require sellers to collect and remit sales tax in those states based on sales or transactional thresholds. In this process we also look at when nexus was created based on physical presence or economic nexus.

Is the product taxable?
Once nexus is established, the sale of tangible personal property by a retailer to a customer in a given state is generally taxable. We start there, and then review the transaction to see if there are any exemptions that would cause the sale of the property to not be taxable.

Certain services are taxable. How does the state treat services?
We also look to whether, after nexus has been established, the taxpayer is selling any taxable services in the state. Many services are straightforward and are clearly either taxable or not. However, services such as data processing and information services are some of the interesting “catch-all” services now considered taxable by some states.

The Complications
Arizona Transaction Privilege Tax Exemption For Forklifts Used By Manufacturers

The Arizona Transaction Privilege Tax exemption for forklifts used by manufacturers has been clarified and expanded as a result of a recent ruling received by the sales tax consultants at Agile Consulting Group. Transaction Privilege Tax or TPT is to Arizona what Sales and Use Tax is to most other U.S. states. Transaction Privilege Tax is levied on sales of most goods and some services in the state of Arizona. However, there is an exemption in place for the manufacturing industry.

In a prior post, Agile has discussed the Arizona sales tax exemption for manufacturing. The exemption is outlined in Ariz. Rev. Stat. Ann. §42-5061(B)(1) and includes a number of different categories of purchases commonly made by manufacturers. One area where the Statutes and the Arizona Department of Revenue’s guidance has been lacking relates to forklifts, which are arguably one the most universally used types of machinery and equipment across all types of manufacturing operations regardless of the product being produced. In fact, no prior rulings or guidance have been provided regarding how the Arizona Department of Revenue suggests that the manufacturing exemption applies to forklift purchases, leases, repairs, as well as the fuel used to power these units.

Agile requested clarification of the Arizona Transaction Privilege Tax exemption for forklifts used by manufacturers in a ruling submitted to the Arizona Department of Revenue in June 2023. Additionally, our sales tax consultants argued for favorable tax treatment of these forklifts across twelve different scenarios for forklifts in use at a plant for one of our longstanding Arizona manufacturing clients. In the response Agile received from the Arizona Department of Revenue’s Taxpayer Services Section representative, we received encouraging news for all Arizona manufacturers that use forklifts within their manufacturing process.

The key takeaways from the ruling Agile received about the Arizona Transaction Privilege Tax exemption for forklifts used by manufacturers are:

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Judiciary’s Interpretation And Enforcement Of FDCPA In Asset Repatriation Case | The Schwarzbaum Compliance Dispute

The United States District Court, Southern District of Florida, presided over by Magistrate Judge Bruce E. Reinhart, encountered a complex legal issue involving Isac Schwarzbaum (“Mr. Schwarzbaum”), who was ordered to repatriate assets to satisfy a significant judgment against him.

The core of the dispute lay in the Repatriation Order (ECF No. 176), directing Schwarzbaum to transfer overseas assets into a U.S. bank account. Schwarzbaum appealed this order (ECF No. 177) and contested the necessity of compliance, citing the absence of a notice under Section 3202 of the FDCPA (ECF No. 191). The case, hinging on the interpretation of a repatriation order and its compliance with the Federal Debt Collection Practices Act (“FDCPA”), raised substantial questions about the enforcement of court orders and the compliance prerequisites.

This article presents a summarized analysis of the decisive legal proceedings regarding the enforcement of a Repatriation Order by the U.S. District Court, Southern District of Florida, and the ensuing discussion regarding adherence to the Federal Debt Collection Practices Act (FDCPA).

On March 29, 2023, the U.S. District Court issued a Repatriation Order against Mr. Schwarzbaum for the repatriation of over $17 million in judgment debts plus post-judgment interest to satisfy the Outstanding Debt of the judgment, ECF No. 176 (“the Repatriation Order”). The order, which demanded compliance by April 28, 2023, was met with an appeal from Schwarzbaum, and a request for a stay was subsequently denied by Judge Bloom on June 8, 2023, thereby enforcing the order. See ECF No. 186.

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If Your Company Is Based In NY And You Work Remotely In California You Are Double Taxed

As we were reading an article written by Noah Peterson at The Tax Foundation it caught our attention. We believe it will catch your attention, too! It is titled “How Are Remote And Hybrid Workers Taxed?” Here is what Noah Peterson writes:

Working from home is great. The tax complications? Not so much.

Last year, 13 percent of full-time employees in the U.S. worked from home and 28 percent worked a hybrid model. Many of them worked in a different state than the one in which their employer was located. That’s millions of Americans who will face complicated income tax situations this filing season—some even getting taxed twice.

Where Is Income Taxed?

Generally, income can be taxed where you live and where you work. If those are the same state—as is typically the case with remote and in-person workers—then that’s where you’ll get taxed (with one exception; more on that below). But if you live and work in two different states—say, you live in New Jersey and commute into New York—then you could get taxed in both.

Thankfully, every state with an income tax offers a credit for taxes paid to another state. The catch: it won’t exceed the amount you pay on that income in your home state. So, your income wouldn’t be double taxed, but if the second state has higher income tax rates, you would be paying more than if you worked exclusively from your own state.

When Would I Be Double Taxed?

Five states tax people where their employer’s office is located, even if they work remotely and never set foot in the state. This is called the “convenience of the employer” rule, and ConnecticutDelawareNebraska, New York, and Pennsylvania have it, though they differ on the details.

If your employer is based in one of these states, but you’re working elsewhere for your convenience (not because your employer requires it), then you might pay income taxes both in the state where you live and work and in the state where your employer is based, without an offsetting credit.

For example, say your company is based in New York but you work remotely in California. Because you live and work in California, the state expects you to pay taxes on the income you earn there. But because New York has a convenience rule, it also expects you to pay taxes on the income you earn through your New York-based company. You’d pay income taxes to both states.

What If I Commute across State Lines?

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DISSOLUTION OF A NEW YORK COMPANY
Background

Domestic corporations (corporations created under the laws of New York State) must pay income franchise and other taxes to New York State. The corporation pays the income franchise tax in exchange for the privilege of exercising its corporate franchise, doing business, employing capital, owning or leasing property, maintaining an office, or deriving receipts from activity in the state.

A domestic corporation that is in existence must continue to file New York State returns and pay any taxes or fees due regardless of whether it does any business, employs any capital, owns or leases any property, maintains any office, derives any receipts from any activity in this state or engages in any activity, within or without New York State, until it is formally dissolved. The process of voluntary dissolution brings the existence of the corporation to an end, and eliminates the corporation’s obligation to file returns and pay taxes and fees to New York State in the future. The dissolution process involves both the Tax Department and the New York Department of State.

A domestic corporation that voluntarily dissolves does not end its obligation to file returns and pay taxes and fees if it continues to conduct business, even if the business is carried on entirely outside New York State.

There are different procedures for the voluntary dissolution of New York State not-for-profit corporations and the surrender of authority by foreign business corporations.

Procedure For Voluntary Dissolution

Voluntary dissolution is generally a two-step process:

  • Obtaining written consent from the Tax Department1 (which will check to see if the corporation owes back taxes and if it has filed all its returns)2; and
  • Filing paperwork with the New York Department of State, including a Certificate of Dissolution.

1Written consent from the NYS Tax Department is not required for Limited Liability Companies.

If the corporation has done business in and incurred tax liability to the City of New York, it  must request written consent to dissolve from the New York City Commissioner of Finance. Additional information is available on New York City Department of Finance’s website.

How To Get Consent From The Tax Department

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Taxpayers Leaving New York

According to an article in the Heritage Foundation written by EJ Antoni, this exodus is a direct response to New York’s obscenely high taxes.

Compared with other states, New Yorkers:

  • Pay the highest total tax burden and highest share of personal income (14%) in taxes.
  • Endure the second-worst overall business tax climate.
  • Face the highest individual income tax rate and income tax collections per capita.
  • Pay the second-highest state and local corporate income tax collections per capita.
  • Have the fourth-highest property taxes and local sales tax rate (on average),
  • Pay the highest cigarette taxes and ninth-highest gasoline taxes.
  • Pay the sixth-highest capital-stock tax rate.
  • Are tied for third-highest estate tax rate.

And what do New Yorkers get for all these taxes? Roads smooth as glass? The best airports in the world? Trains running on time? Bulletproof electric grid and water infrastructure? Ample police to maintain safety and order? Not even close states the commentary written by the author Etoni.

Instead, New York City residents face some of the highest crime rates in the world, thanks to soft-on-crime policies from liberal politicians. And people everywhere across the state are threatened by a looming municipal debt crisis. Notwithstanding its sky’s-the-limit tax policies, New York has accumulated the highest state and local debt per capita in the nation.

And the future is not bright. When people flee the state, they take their jobs and money with them. That hamstrings future revenue collection for a state that has never learned to spend within its means. But the days of being rescued by tycoons like J.P. Morgan are long gone. Absent a federal bailout, both New York state and New York City are on a collision course with first grade mathematics—and bankruptcy.

An Introduction To Tax Forms For Gig Economy Workers

The gig economy has transformed the contours of the modern workforce, bringing forth a unique combination of flexibility, autonomy, and diversified income streams. Whether you’re driving for a ride-sharing platform, developing eye-catching graphics as a freelance designer, or mastering home repairs as a handyman, you’re participating in an ever-evolving, vibrant economy. But with the freedom of gig work comes an often overlooked aspect: understanding and managing your tax obligations. In this blog, I’ll cover some of the essential tax issues and IRS forms with which every gig worker should be familiar.

As a participant in the gig economy, you’re an independent contractor in the eyes of the IRS. Essentially, you’re a solo entrepreneur, which ushers in a unique set of tax rules and obligations. Central to these obligations is the Form 1099 series (Form 1099-NEC, Form 1099-K, Form 1099-MISC). We’ll look at each of these to get a better understanding of your gig worker responsibilities, but the key is that you must report your income to the IRS and to state and local tax agencies. As a gig economy worker, you should be familiar with what constitutes “income” and what you need to include on your annual tax return regardless of whether you receive one of the forms.

Income

Income is the starting point for determining taxes due. In general, income is all the money and other things of value that you receive, but the technical definition is broad. For practical purposes, income can include payments you receive from wages and employee benefitsself-employment or side jobs (freelance or independent contractor work), goods or services you sell online, renting personal property, partnerships or other business entities, investments, or other benefits paid to you. Income isn’t just money – it can also be the value of goods or services you receive. (Think of a bartering transaction where someone pays you in an exchange by giving you an item or providing valuable work for you.) You can even have income for tax purposes for payments made to someone else on your behalf. Income is generally taxable when the payment is available to you, even if you don’t immediately take possession of it; for example, you usually can’t delay income simply by waiting to pick up a check or deposit it into your account.

When you perform gig work, you should carefully store and organize your receipts and other records of your costs. Tax law allows you to deduct certain business expenses, which can reduce the amount of tax you will ultimately need to pay on your income. While tax law requires third parties in certain situations to report payments to taxpayers, such as through the Form 1099 series, those forms generally only show your income, not your expenses. It’s your responsibility to keep track of your deductible costs so that you can correctly calculate the tax you owe. Even if you don’t receive a form reporting income paid to you during the tax year, you should report the income on your tax return.

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Six Taxable Items That May Surprise You

If something of value changes hands, you can bet the IRS considers a way to tax it. Here are six taxable items that might surprise you:

  • Surprise #1: Hidden treasure. In 1964, a married couple discovered $4,467 in a used piano they purchased seven years prior for $15. After reporting this hidden treasure on their 1964 tax return, the couple filed an amended return that removed the $4,467 from their gross income and requested a refund. The couple filed a lawsuit against the IRS when the refund claim was denied. The Tax Court ruled that the hidden treasure should be reported as gross income on the couple’s 1964 tax return, the year when the hidden treasure was found.Tip: The IRS considers many things like hidden treasure to be taxable, even though they are not explicitly identified in the tax code.
  • Surprise #2: Some scholarships and financial aid. Scholarships and financial aid are top priorities for parents of college-bound children, but be careful — if part of the award your child receives goes toward anything except tuition, it might be taxable. This could include room, board, books, or aid received in exchange for work (e.g., tutoring or research).Tip: When receiving an award, review the details to determine if any part of it is taxable. Don’t forget to review state rules as well. While most scholarships and aid are tax-free, no one needs a tax surprise.
  • Surprise 3: Gambling winnings. Hooray! You hit the trifecta for the Kentucky Derby. But guess what? Technically, all gambling winnings are taxable, including casino games, lottery tickets and sports betting. Thankfully, the IRS allows you to deduct your gambling losses (to the extent of winnings) as an itemized deduction, so keep good records.Tip: Know the winning threshold for when a casino or other payer must issue you a Form W-2G. But beware, the gambling facility and state requirements may lower the limit.
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CALIFORNIA TAX CREDITS

According to a recent article attributed to Nerd Wallet, tax credits available to an individual taxpayer include:

California State Tax Credits

Tax credits are a type of benefit that decreases your taxes owed by the credit amount. Some credits may also be refundable, meaning if the credit amount exceeds how much you owe in taxes, you might be able to get the overage back in the form of a refund.

Here is an overview of a few popular tax credits available in California for the 2023 tax year (taxes filed in 2024).

California Earned Income Tax Credit (CalEITC)

The CalEITC is a tax benefit that mirrors the federal earned income tax credit. Californians with earned income and federal AGI of up to $30,950 in 2023 may be eligible for a tax credit of up to $3, The exact credit amount depends on your filing status and the number of qualifying children. (People without kids also qualify.)

California Young Child Tax Credit (YCTC)

The refundable young child tax credit is another state-level tax credit modeled after the federal version of the child tax credit. People who qualify for the California earned income tax credit mentioned above and who also had a child younger than 6 by the end of the 2023 tax year are generally eligible for the YCTC. The maximum credit for 2023 is $1,117. The credit begins to phase out for those with an earned income of $25,775 and above and is not available for anyone making above $30,931.

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Important Effective Date Item In Preamble To Digital Asset Broker Reporting Prop. Regs
The proposed regulations on broker reporting of digital assets released August 29, 2023 (REG-122793-19) included more than guidance under IRC section 6045. They also included related proposed regulations under section 1001 on amount realized and section 1012 on basis. I think that generally, the 1001 and 1012 proposed regulations are fairly straightforward and tie to the general rules at these provisions.
One clarification they offer is that in a transaction where a taxpayer exchanges, for example, X coin for Y coin and pays a transaction fee, 50% of the transaction fee is treated as a reduction to the amount realized for the disposition of X coin and 50% is added to the basis of the Y coin acquired.
Unlike the virtual currency FAQs #39 – #41, Prop. Reg. 1.1012-1(j) provides that in applying the specific identification method to know which digital asset was disposed of (when the taxpayer has more than one unit or code representing their digital assets), the taxpayer must apply specific identification on a wallet by wallet or exchange by exchange system. In contrast, the FAQs allow (or at least do not disallow) use of a universal tracking approach where the taxpayer transferring, for example, 2 Xcoin out of wallet 1 to buy goods, could specifically identify to say they used the basis of 2 Xcoin in T’s wallet 2. This would not be allowed under the proposed regulations. The long list of questions in the proposed regulations include though, whether there are alternatives to this approach (questions 44 & 45 at page 59616 in the Fed. Register).
Prop. Reg. 1.1001-7(c) and 1.1012-1(j)(6) provide that these proposed regulations are effective on the January 1 following when final regulations are published. However, page 59616 in the Fed. Register states that the 1001/1012 proposed regulations are reliance regulations. That is, per the preamble, taxpayers “may rely on these proposed regulations under sections 1001 and 1012 for dispositions in taxable years ending on or after August 29, 2023, provided the taxpayer consistently follows the proposed regulations under sections 1001 and 1012 in their entirety and in a consistent manner for all taxable years through the applicability date of the final regulations.”

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