I recently spent time with two friends, who happen to be financial advisors, where we discussed the proposed tax reform legislation and what it means for estate planning now and in the future. A link to the podcast is here. Enjoy listening! #estateplanning #legacyplanning #taxplanning #taxreform
(h/t to my colleague, David A. Lawrence, Esq. who recently attended the Annual Virginia Tax Roundtable and provided the summary below.)
It’s time, once again, to share some of the tidbits that I gleaned from the Annual Virginia Tax Roundtable. Each year, a small group of Virginia tax lawyers convenes to meet with the Virginia Tax Commissioner, his staff, and the Attorney General’s staff to talk about what the Tax Department is thinking, the challenges that they are facing, and ideas for improved tax administration in Virginia.
In addition to responding to changes ushered in by the 2017 Tax Act, Virginia taxpayers and tax preparers should take note of several new and existing factors that could complicate your tax filing efforts.
Identity Theft & Refund Fraud Continues at High Levels
The rise in fraudulent refund filings remains a big issue for the Tax Department, and the additional scrutiny required to identify those cases continue to slow processing of Virginia tax returns. The good news: the Department believes it is catching more of these fraudulent filings before checks are issued; it denied more than $32 million in fraudulent 2017 refunds just through October 21, 2018 of this year.
More Retirements & Staffing Challenges
The State is continued to be challenged by the retirements of long experienced tax examiners, and they are trying to hire new examiners as quickly as possible. Particularly hard hit has been compliance field audit personnel in Northern Virginia and Tidewater.
Speaking of audits, the Tax Department engaged an outside consultant to help it be more proactive in its compliance and audit activities. It is considering expanding reviews of Schedule A deductions and Schedule C deductions. Further, the agency has lots of federal return data, as well as data from other federal programs. Now, according to the Commissioner, the state just needs a better, more efficient way to use that data for compliance and audits. Note that fewer appeals are coming to the Tax Department, and the Tax Department particularly hates dealing with tax appeals from local jurisdictions.
2017 Tax Act – A Great Revenue Windfall for Virginia
The changes made by the federal 2017 Tax Legislation are projected to give a windfall of additional tax revenue to Virginia from individual filers. The General Assembly loves the extra revenue, as long as it is not blamed for raising taxes. There may be some proposals this year in the General Assembly to increase Virginia’s standard deduction, increase the personal exemption, and/or permit Virginia itemizing for an individual even if that individual took the federal standard deduction. There have not been many inquiries from the Legislature to the Tax Commissioner on the business side of the 2017 Tax Act. It is expected that some type of federal conformity, with exceptions, will be in place by mid-February 2019 effective for 2018 and onward.
One of the biggest windfalls for the State is the fact that if more individuals use the federal standard deduction, they are currently required to use the Virginia standard deduction, which is very low. Furthermore, for those who do itemize, the repeal and limitation of those itemizable deductions also produces more revenue for Virginia. Finally, the limitations on loss deductions, net interest deductions, and NOL deductions produce additional revenue for Virginia. On the other hand, Virginia loses revenue with the increased Section 179 Expensing and the fact that more “small” businesses will be able to use the cash method of accounting.
Registering with the SCC Triggers Virginia Tax Filings for Businesses
The Department confirmed that if a non-Virginia corporation or entity registers with the Virginia SCC as a foreign entity, it automatically must start filing Virginia income tax returns, even if it has no income.
The Department keeps pumping out lots of rulings on Virginia residents versus non-residents for taxation purposes. They are all fact specific, and make it difficult for former residents to be treated as non-Virginia tax residents when they continue to maintain ties to Virginia after they have left the state (particularly if they try to leave the State just prior to the year in which a large sale transaction occurs).
A Brave New World in Collecting Sales Tax from Out of State Businesses – the Wayfair Decision
The U.S. Supreme Court’s decision in Wayfair this past year effectively overturned the requirement for “physical presence” in order for a state to subject nonresident businesses to collect sales taxes for other states.
As a result of the Court’s decision, if a business had a physical presence in a state, then that state may still require that business to collect and pay sales tax on sales made into that state. Additionally, states that have statutes similar to the one at issue in Wayfair, where an out-of-state business has numerous sales into a state (either in raw numbers of transactions or in the amount of dollars), then that state may now require those out-of-state sellers to collect and pay sales tax on sales made into that state.
Virginia has not acted yet to implement the Wayfair decision, but most other states have acted with various thresholds. This revenue raiser will likely be added to this coming General Assembly’s legislative calendar. As an example of taxable nexus, the Wayfair situation subjected a company to collect and pay sales taxes to a state where the company had either at least $100k in sales or at least 200 transactions in that State.
This will have a big impact on internet sellers, software sellers, and other “free shipping” product sales. A future question raised by the Wayfair case is whether states will try to use it to expand that ruling into the income tax and local tax area. The Supreme Court used old “income tax” nexus cases as part of its logic in support of the Wayfair decision. So expect more to come.
#taxplanning #businessplanning #taxreform @bgnthebgn