2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

State and Local Tax (“SALT”) Year-End Tax Updates

Residency Taxpayers moving to another state during the pandemic should also consider the impact of state residency rules. A relocated individual working and living in a new state could still be considered a resident taxpayer of their original state and simultaneously meet statutory residency rules in their new state. Generally, in order to change residency status, taxpayers must change their domicile. Taxpayers looking to pursue a domicile change should be aware that a number of factors are taken into account in the determination. . A temporary relocation during the pandemic is not likely to change a taxpayer’s domicile unless significant changes are made. However, the relocation during the pandemic may trigger statutory residency, where some states will treat taxpayers who exceed 183 days and have a place of abode as a resident for tax purposes. It is possible that a taxpayer could be treated as a resident of two states; one based upon domicile and the other based upon statutory residency. In most cases, the resident credit will protect the taxpayer from double taxation, but depending on the states, double taxation can apply to types of intangible income. Each taxpayer’s circumstances should be individually reviewed and commented on by a tax professional, as the details around domicile and residency are important in order to draw a conclusion. SALES TAX NEXUS CONSIDERATIONS AND INCREASED SCRUTINY It has been two years since the United States Supreme Court ruled in the Wayfair case pertaining to sales tax economic nexus, and the implications are still unrolling for affected taxpayers. Taxpayers who have not addressed sales tax economic nexus should make sure that they speak to their tax advisors in order to understand their exposure. Taxpayers who addressed the implications of the decision in prior years should make sure that any state changes over the last two years do not require modifications to that initial analysis. State taxes are always changing, and any analysis should be updated frequently in order to confirm that changes in law do not alter the conclusions.

On June 21, 2018, in South Dakota v. Wayfair, Inc., the United States Supreme Court, in a 5-4 decision, ruled in favor of South Dakota and its economic nexus provisions for sales tax collection. In so doing, the Court overturned its prior decision in Quill (Quill Corp. v. North Dakota). Quill required that a retailer have a physical presence in a state, in order to be required to collect sales tax for sales into that state. The South Dakota statute requires remote retailers with annual in-state sales exceeding $100,000 or 200 separate transactions to collect and remit sales tax. In the two years since the Wayfair decision, almost every state has enacted sales tax economic nexus laws. While the most common thresholds mirror those of South Dakota, many states have unique thresholds for sales and transactions for nexus creation. The only two states with a sales tax that have yet to pass an economic nexus rule are Florida and Missouri. As expected, as a result of the Wayfair decision, many taxpayers have been required to register, collect and remit sales tax in a large number of additional states. Not as obvious, the ability to correctly collect the tax has been a large hurdle for taxpayers. The additional cost of research into the taxability of products and services and investment in software enabling taxpayers to correctly invoice their customers is a by-product of the decision that was not widely anticipated by interstate retailers. The ruling also brought many historical sales tax exposures to the front of taxpayers’ minds. It is important to understand that the Wayfair decision didn’t negate prior nexus-creating activity in earlier years, so a taxpayer that registers to collect sales tax in compliance with the Wayfair rules, but had prior nexus due to prior physical presence that had gone unaddressed, will still have exposure for those prior years. The only way to properly address previous year sales tax exposure is to file all delinquent returns or enter into a voluntary disclosure agreement with the state.