Berdon Blogs

SALT TALK: May the Source Be with You – NY Nonresident Subject to Tax on Litigation Settlement

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Jan 3, 2017 1:00:00 PM

Having already surpassed $600 million at the box office, it’s no surprise that the New York State Tax Appeals Tribunal is looking to Rogue One and the Star Wars franchise for guidance. Case-in-point, the Tribunal’s recent decision[1] confirming a New York nonresident individual’s source income will always be with them. The unpleasant experience of one couple plainly points to the absolute necessity of planning for the state tax consequences when settling a lawsuit. 

Meet the Murphys.

As nonresidents of New York, these husband and wife taxpayers were subject to tax on only their New York source income. Mr. Murphy was a member in an LLC that conducted a portion of its business in New York and, accordingly, had New York source income during its years of operation. Mr. Murphy assigned his LLC interest to Mrs. Murphy during 1999. Various issues arose with the LLC and Mrs. Murphy started legal action against the LLC.

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SALT TALK:  Year-End Planning Tips – Sales Tax and Revisiting Responsible Person Liability

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Dec 19, 2016 11:00:00 AM

I’m not a big fan of donuts, but this time of year they just seem to proliferate around the office.  So while eating a glazed chocolate donut and reading the state tax dailies, I couldn’t help but notice that the United States District Court for the Northern District of Illinois dismissed a class action suit against Dunkin’ Donuts.  I was really enjoying my donut, so I couldn’t imagine why anyone would want to bring a consumer fraud suit with the potential to ruin one of the nation’s leading guilty pleasures.  Wouldn’t you know the suit had absolutely nothing to do with the quality of the donuts, but to the sales tax collected on certain coffee purchases as compared to what was charged on food for on-premises consumption.

Since we all have year-end issues on our minds, of course my thoughts turn to sales tax and how can we help our clients rest a little easier while enjoying the holidays.  In the very first SALT TALK, we issued the following advice:

We generally tell our clients that if you are going to take an aggressive position on sales tax collection, consider that you are paying someone else’s tax (the purchaser) plus interest and penalties.  Not only that, but sales tax obligations are virtually impossible to walk away from as personal liability generally attaches to “responsible parties.” So think long and hard in deciding whether or not collecting and remitting sales tax is really giving you a competitive advantage.

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SALT TALK:  NYC Department of Finance Cautions Us with Unusual Year-End Gift

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Dec 12, 2016 7:00:00 AM

In a rarely released Update on Audit Issues[1] (“UAI”), the New York City Department of Finance cautions those who are not a “registered securities or commodities broker or dealer” may not rely on the customer-based sourcing rules for sourcing receipts. This update comes even though two prior Department issued Finance Letter Rulings (“FLR”s) permitted unregistered partnerships to apply customer-based sourcing.  The Department cautions that FLRs are issued to the Ruling applicant and are not precedential authority that can be applied to other taxpayers. 

Under the current law, registered broker-dealers are permitted to source receipts from brokerage commissions, margin interest, certain underwriting revenues, advisory services, certain interest income, and several other categories of income based on the location of the customer.  Those who aren’t registered are subject to a different set of sourcing rules which generally requires apportionment of receipts according to where the services were performed.  So a New York based registered broker-dealer could source a management fee charged to a California client out-of-state, which an unregistered business performing a similar type activity would need to apportion the receipt to New York.

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SALT TALK:  Year End Planning Tips – When a Tax is NOT a Tax

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Dec 5, 2016 11:00:00 AM

It’s understandable.  Even Chief Justice Roberts was confused back in 2012 when he had to decide whether the new health care mandate was a tax or not, so he decided it was both.  What does this have to do with year-end tax planning?  Nothing, other than a recently decided Ohio Supreme Court decision[1] holding that Ohio’s Commercial Activity Tax (“CAT”) can be imposed on a company whose only “contact” with Ohio is $500,000 or more in annual sales to customers in Ohio.

While there are many complex Constitutional issues raised by this decision, a more basic premise struck a chord.  The premise: why should we care if we are protected by Public Law 86-272?  P.L. 86-272 was a gift from the federal government which states that no state or political subdivision can impose a net income tax on income derived in a state if the only activity by the seller is the mere solicitation of sales.  Anything beyond (and we could blog for over a year on what goes beyond) “mere solicitation” and all bets are off.

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SALT TALK:  Year End Planning Tips – Taxing Reasons Not To Visit Your Relatives for the Holidays

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Nov 28, 2016 12:43:21 PM

The drive is too far and the traffic is horrendous.  Did you see those outrageous airfares?  I have a major deadline at work.  Didn’t we come to you last year; this year I have to go to the in-laws?  While all members of the Berdon SALT team are anxiously looking forward to traveling both to spend the upcoming holidays with our respective families, we know that some of our clients may not be as enthusiastic.  Our holiday gift to our readers is two-fold: firstly an excuse (at least a new one) not to attend that family function, and secondly, potential tax savings for using our excuse.

The excuse:  I can’t spend another day in (fill in the appropriate tax jurisdiction) because I will be taxed as a resident and owe an additional (please fill in the appropriate dollar amount) in personal income tax.

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SALT TALK:  NJ Attempt to Sack the Carried Interest Leaves Downfield Options Wide Open

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Nov 21, 2016 11:00:00 AM

They've got the Giants and the Jets and now they want credit for sacking the carried interest?  Both the President-elect and his opponent set their sights on its elimination, yet some states, most recently New Jersey, still see the need to pursue the quarterback and miss the long ball?

Just a few months ago, New Jersey Assemblyman Troy Singleton sponsored Assembly Bill No. 3868, which would penalize carried interests with an additional 19 percent surtax. But wait, it's not just New Jersey lawmakers that forgot they’re playing on the Fed’s field. Back in March of 2016, New York had a similarly reckless play in motion.

Regardless of your view on taxing carried interests, you've got to remember the state's play no role here and income earned from carried interests receive no preferential treatment at the state level.  Fortunately, the New York proposal tripped over its own feet and the New Jersey one is likely to do the same.  The most amusing part of these proposals was the fact that they don't become effective until all three of the tri-states pass a similar law. 

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SALT TALK:  Fed Cuts May Lead to State Hikes

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Nov 14, 2016 12:50:00 PM

Anybody stay up late Tuesday night?  I know I did, but not for the reason that comes immediately to mind.  While most of my fellow citizens were eagerly anticipating election results, the tax professionals at Berdon were busy thinking through the impact that the election could have on our clients’ taxes. 

While any proposed framework set forth by President-Elect Trump still has a long way to go before materializing into law, a wide swath of federal tax cuts seems to be heading our way.  Proposals include a drop of the top individual tax rate from 39.6% to 33%. As part of the proposed repeal of the Affordable Care Act, the 3.8% tax on investment income would be eliminated.  Surprisingly, the proposals to eliminate the AMT as well as preferential capital gain rate treatment for carried interests still remain in place. Corporate tax rates would decrease from 35% to 15% and the corporate AMT would also be eliminated. Repatriation of offshore corporate profits would be “encouraged” with a one-time tax rate of 10%. Estate tax repeal is still on the table as well.

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SALT TALK:  Who Wants to RAP[P] About NYC Taxes?

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Nov 7, 2016 11:00:00 AM

The New York City Department of Finance held its 2016 Tax Representatives and Practitioners Program (“TAXRAPP”) this past Wednesday.  Based on the filled-to-capacity banquet room at the New York Athletic Club, it seems that a lot of us wanted to “rap” about taxes.

Being too young to have participated in any meaningful “rap sessions” and too old to have grown up with rap music, I always wondered what the creator of the TAXRAPP acronym had in mind.  Nonetheless, while a lot of useful information was exchanged, none of us were sitting barefoot on the floor or riffing poetically to a techno inspired beat. Instead, what we were treated to were the insights of the key policymakers for the New York City Department of Finance as well as the New York State Department of Taxation and Finance. 

I have attended many a TAXRAPP over the years and this was perhaps the most informative ever.  I attribute this in part to the major overhaul of the New York State and New York City corporate tax structure over the past two years.  Many practitioners attended to find out the latest changes to the rules and the impact on their clients.  While useful, those attending only to find out the rule changes are really missing the point.

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SALT TALK:  NJ Estate Tax Repealed, Inheritance Tax Still Creates Major Roadblock, Gas Tourists No Longer Welcome

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Oct 31, 2016 12:50:00 PM

While it has been a long and sordid journey, the traffic cones have been lifted and the barriers cleared. Not being an estate and gift tax expert, that was certainly my first impression when I read that New Jersey lawmakers finally agreed to phase out the estate tax, raise the gas tax by 23 cents a gallon, gradually lower the sales tax rate, and provide an exemption for retirees.

First, the good news: For decedents dying on or after January 1, 2017, the NJ Estate Tax exclusion increases from $675,000 to $2,000,000. For decedents dying on or after January 1, 2018, the tax is completely eliminated. Here is the catch though: New Jersey still has in place and currently has no plans to eliminate the Inheritance Tax[1]. Leave money to the right relatives and (on or after 1/1/18) no tax applies. Leave money to friends or the wrong relatives and your estate may be in for a big surprise.

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SALT TALK:  Fantasy Football for the Supreme Court?

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Oct 24, 2016 11:00:00 AM

One could argue that the United States Supreme Court (“SCOTUS”) never showed enthusiasm towards addressing state tax issues, and with the current roster being one Justice short, the situation has not changed. Accordingly, to move things along and remain completely bipartisan in the process, I propose that every federal Circuit Court justice will be required to participate in a fantasy football pool. Each week’s winner will get to be SALT Justice of the Week (“SJW”), a high honor indeed!  

The SJW will be required to review at least one state tax related petition for certiorari during his or her one week tenure and persuade the remaining Justices to grant the petition. Hopefully, the SJW will choose Direct Marketing Association v. Brohl

As discussed in my February 29, 2016 blog, “No One Likes a Tattletale”, Colorado enacted and the U.S. Court of Appeals for the Tenth Circuit upheld that requiring merchants to tattle on their customers is constitutional.  Specifically, the law requires retailers not collecting Colorado sales tax to do three things if sales to Colorado customers exceed $100,000:  they must tell Colorado purchasers that they owe use tax; they must provide an annual summary to the customer; and they must annually report the purchaser information to the Colorado Department of Revenue.

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