June 2022 - RVG & Company

Recently, the New York State Department of Taxation and Finance (DTF) and the California Franchise Tax Board (FTB) issued guidance related to internet sales activities that are no longer protected by the income tax exemption under P.L. 86-272. On April 29, 2022, the New York State DTF issued “Final Draft Regulations” that place limitations on the tax income exemption provided to taxpayers. Prior to that, the California FTB issued a Technical Advice Memorandum (TAM) on February 14, 2022, that outlined similar limitations on P.L. 86-272 for e-commerce and online sellers of tangible personal property. New York and California are the first states to adopt the guidance issued by the Multistate Tax Commission (MTC). In August of 2021, the MTC published a “Statement of Information Concerning P.L. 86-272” that provides guidelines and examples of internet and e-commerce activities that are no longer protected by P.L. 86-272. New York and California’s adoption of the MTC’s measures represents a shift in the application of P.L. 86-272 for digital and online businesses.

Background on P.L. 86-272 and the Wayfair Decision

P.L. 86-272 is a 1959 federal law that prohibits a state from imposing a net income tax on an out-of-state business for income derived from business activities within the state if their activities are limited to “mere solicitation” of orders for the sale of tangible personal property and the orders are then approved and filled from outside the state. If the orders are accepted, they must be filled by shipment or delivery from outside the state.

Since the enactment of P.L. 86-272, sales of tangible personal property have evolved from primarily occurring in-person or over the phone – to taking place remotely through the internet. However, Congress has not updated P.L. 86-272 to reflect changes in technology and sales activities.

After the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., the MTC conducted hearings regarding P.L. 86-272 in the context of internet sales. The MTC’s guidance follows the Supreme Court’s acknowledgement that the internet transformed modern sales practices and that the application of state taxes required a similar transformation. In Wayfair, the Court held that remote internet-based sellers were responsible for collecting sales tax even though they were not physically present in the buyer’s state. Wayfair overturned prior Supreme Court cases that required the seller to have physical presence in the taxing state to be liable to collect sales taxes.

The Court stated that in the digital economy, the physical presence test was no longer sound – and did not align with the modern e-commerce economy. The MTC used Wayfair as an opportunity to revise the application of P.L.86-272. The MTC noted that e-commerce sellers may be engaging in activities through the internet that go beyond the solicitation and approval of an order for purposes of the P.L. 86-272 exemption.

P.L. 86-272 Activities That Remain Protected Under Revised New York and California Guidance

The guidance issued by New York and California follows the MTC’s Statement of Information. It should be noted that the MTC did not alter the P.L. 86-272 exemption for non-internet-based sales. Below is a list of internet / e-commerce activities that would still be protected under P.L. 86-272 in both New York and California:

Providing post-sale assistance to customers by posting a list of static frequently asked questions (FAQs) with answers on the company’s website.
Placing internet “cookies” onto the computers or other devices of the customers that gather information only used for purposes entirely ancillary to the solicitation of orders for tangible personal property.
Offering for sale only items of tangible personal property on the website, with the website allowing customers to search for items, read product descriptions, purchase items, and select delivery options.

Internet and E-Commerce Activities that Would Not be Protected by P.L. 86-272 Under New York and California Guidance.

The items listed below are the types of business activities and practices that will unwind the P.L. 86-272 exemption for online and e-commerce-based sales. This list is not exhaustive and may evolve as technology advances.

Providing post-sales assistance to customers by electronic chat or email those customers initiate by clicking on an icon on an internet website.
Soliciting for and receiving online applications for a business-branded credit card via the website from customers.
Enabling internet website viewers to apply for non-sales positions through submission of an electronic application and an upload of a cover letter and resume.
Placing internet “cookies” onto the computers or other electronic devices of customers to gather customer information that is used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale.
Remotely fixing or upgrading products previously purchased by customers by transmitting code or other electronic instructions to those products over the internet.
Offering and selling extended warranty plans via internet website to customers who purchased the business’s products.
Contracting with a marketplace facilitator that facilitates the sale of the business’s products on the facilitator’s online marketplace.
Contracting with customers to stream videos and music to electronic devices.

Conclusion

The effective date for the New York modification is uncertain because the DTF requested timely feedback on the Draft Regulations by June 30, 2022. Presumably, the rules will be effective after that date. The effective date for the California TAM is less certain. While the FTB issued the TAM on February 14, 2022, the TAM indicates that the basis for the new guidance is the Supreme Court’s decision in Wayfair. As a result, it is possible that the FTB could apply the new guidance under the TAM retroactively to tax year 2018, when Wayfair was decided.

Lastly, since New York and California are influential state tax jurisdictions, it is likely that other state will adopt the guidance issued by the MTC.

If you would like to discuss the potential impact that revisions to P.L. 86-272 may have on your business, please call RVG & Company at 954.233.1767.

The IRS publishes Informational Releases regarding scams that are directed at taxpayers and tax professionals. Many of these scams attempt to impersonate the IRS. To raise awareness of fraud, this article will cover some of the characteristics and deceptions used by these scammers. Below is a brief description of the various deceptions used by criminals.

These schemes are targeted at taxpayers to either obtain money or sensitive personal information by impersonating the IRS. The scammers send, emails, text messages, or phone calls that seek personal information by deceiving the taxpayer that there is an outstanding tax liability that must be paid immediately to prevent immediate arrest, criminal prosecution, the garnishment of wages, and the seizure of personal property or business assets.

A Similar deception is the “tax refund” scam, where the fraudster falsely informs the taxpayer that they have an outstanding refund from the IRS and it can only be paid by providing personal and financial information to the caller, text message, or website. Like the tax liability scam, the perpetrator seeks to obtain sensitive information that will be used to establish fraudulent credit cards, bank accounts, or government payments, such as Social Security or Medicare.

To avoid being the victim of an IRS impersonation scam it should be known that the IRS will never initiate a payment or refund request by telephone, email, or text message. The IRS will always send a formal notice by mail. Also, the IRS does not:

Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card, or wire transfer. Generally, the IRS will first mail you a bill if you owe any taxes.
Threaten to bring in local police or other law enforcement to have you arrested for not paying.
Demand payment without giving you the opportunity to question or appeal the amount at issue.
Ask for payment by gift card, credit, or debit card numbers over the phone.

Phishing Emails Directed at Students

This phishing email targets university and college students that have email addresses ending in “.edu”. The scammer claims that the individual has a pending refund with the IRS and to obtain the refund they must provide personal information to a website contained in an email link. The phishing website will request: the Name, Social Security Number, Date of Birth, Address, Driver’s License Number, and Current Address. In addition, the scammer may request personal information of the student’s parents, which the student might unwittingly supply.

Phishing Email Directed at Tax Professionals

The IRS notes that more than 90% of all data thefts start with a phishing email. Tax professionals are being targeted with a tactic called spear phishing. The spear-phishing email poses as a trusted source that “baits” the recipient into opening an embedded link or an attachment. The email may request the tax professional to update tax software or cloud storage, however, the link or attachment is a website controlled by the thief. The malicious link may infect the firm’s computers and networks that seek client data or bank accounts related to the firm. Additionally, tax firms may receive emails from prospective clients to review spreadsheets or links to data to solicit services, however, these emails contain viruses, ransomware, or other software designed to damage the firm’s computer system.

Fake Charities

The IRS advises taxpayers to be watchful for scammers who set up fake charitable organizations to take advantage of taxpayers’ generosity. The scammers take advantage of tragedies and disasters, such as the COVID-19 pandemic. Often these scams are done over the phone and pressure the taxpayer to make a donation – and stress its tax deductibility. A legitimate charity will take donations at any time, without pressure. Also, many of these phony charities ask for payment by gift cards or wire transfer, which is not traceable. It is safest to pay by credit card or check — and only after having done some research on the charity. Donations made to unqualified charities are not tax-deductible. To check the status of a charity, use the IRS Tax Exempt Organization Search Tool, located on the IRS website to verify a charity.

Offer In Compromise (OIC) Mills

Taxpayers should beware of promoters claiming their services are needed to settle their tax debt with the IRS and that their tax debt can be settled for “pennies on the dollar” or that there is a limited window of time to resolve tax debts through the OIC program. These OIC Mills distort the fact that many taxpayers can accomplish it on their own or through a trusted CPA firm. These Mills advertise on TV or radio and claim that they can obtain significantly discounted settlements with the IRS. Often, these Mills require the taxpayer to pay for the service in advance – when in fact – the taxpayer does not qualify for the OIC program. Taxpayers can go to IRS.gov and review the Offer in Compromise Pre-Qualifier Tool to see if they qualify for an OIC. It should also be known that under the First Time Penalty Abatement policy, taxpayers can go directly to the IRS for relief from a potential penalty.

Immigrant / Senior Fraud

IRS impersonators are known to target groups with limited English proficiency as well as senior citizens that have limited access to information or are isolated from friends and family. These scams are often threatening in nature. the IRS impersonation scam remains a common ploy. This is where a taxpayer receives a telephone call threatening jail time, deportation, or revocation of a driver’s license from someone claiming to be with the IRS. Taxpayers who are recent immigrants often are the most vulnerable and should ignore these threats and not engage the scammers. Also, seniors are threatened to have Social Security, Medicare, or Medicaid payments seized if payment is not immediately made. As noted above, contact made by the IRS is through the mail – not the phone. Also, taxpayers that are more comfortable in a language other than English can file Schedule LEP to select a preferred language to communicate in with the IRS.

If you would like to discuss the potential impact of any of these scams on you or your business, please call RVG & Company at 954.233.1767.

Month: June 2022

New York and California Issue Guidance on the Application of Public Law 86-272 Income Tax Exemption