tax policy updates · 2018-12-23 · south dakota v wayfair background south dakota: passed a law...

TAX POLICY UPDATES

South Dakota vs. Wayfair

Medical & Recreational Marihuana

South Dakota v WayfairBackground

► Sales tax is destination based i.e., sales tax on remote sales is generally due to the state where the

property is shipped.

► Sellers are only required to remit tax to states where they

have “nexus”.

South Dakota v WayfairBackground

► Quill v North Dakota and physical presence:

▪ A taxpayer only had nexus in a state (i.e., required to collect state

sales tax) if it had a non-de minimis “physical presence” in that state.

▪ Overruled by Wayfair.

► Direct Marketing Ass’n v Brohl

▪ In a concurring opinion, Justice Kennedy invited the states to

challenge Quill in light of changes to the economy largely brought

about by the internet.

South Dakota v WayfairBackground

► South Dakota:

▪ Passed a law requiring sellers to pay its sales tax if the seller had more

than $100,000 or 200 or more separate transactions into the state in

the previous calendar year, regardless of physical presence.

▪ SD sued Wayfair and other e-retailers to enforce this new law.

▪ SD courts held in favor of the taxpayers based on Quill.

▪ SD granted leave to appeal to the U.S. Supreme court.

U.S. Supreme Court’s holding:

▪ Nexus is “established when the taxpayer avails itself of the substantial

privilege of carrying on business in that jurisdiction.”

▪ Under this new test, the Court held that SD’s law is constitutional.

Three important factors for the Court:

▪ SD’s law did not apply to small sellers (under 100K/200 transactions)

▪ Law only applied prospectively, and

▪ SD had simplified its laws by being a member of Streamlined.

Wayfair outcomes:

▪ Physical presence still creates nexus.

▪ Mere economic activity may be enough to constitute nexus as well.

South Dakota v Wayfair

On August 1, 2018, Treasury issued RAB 2018-16 describing its

new nexus policy in light of the Wayfair decision:

▪ Physical presence still creates nexus (see RABs 1999-1 & 2015-22).

▪ Economic nexus:

o Beginning October 1, 2018, a seller establishes nexus in Michigan if,

in the last calendar year:

• sales into Michigan (both taxable & non-taxable) exceed $100,000,

or

• 200 or more separate sales transactions completed into Michigan (both

taxable & non-taxable).

o Penalties from October 1st through December 31st 2018 will be

waived for sellers with only economic nexus.

Michigan’s Response to Wayfair

Like South Dakota, Michigan is also a Streamlined member state, its

economic nexus policy is only prospective, and the policy only

applies to larger sellers.

Not all states are the same, must look at other states’ policies to

determine if a seller has nexus in a state.

After Wayfair

Michigan Medical Marihuana Act

(MMA) Allows private individuals (caregivers) to assist qualified

patients in obtaining marihuana for medicinal use.

Both the patient and caregiver must obtain licenses from the

Department of Licensing and Regulatory Affairs (LARA).

MMA does not impose a specific excise tax on marihuana.

Sales and use tax:

▪ Caregivers are not liable for sales tax for consideration received

in assisting a patient in obtaining marihuana.

▪ Patients are liable for use tax based on the purchase price paid

for marihuana.

Medical Marihuana Facilities

Licensing Act (MMFLA)

Allows for the licensing of retail marihuana establishments (i.e.,

provisioning centers) to sell marihuana to qualifying patients

(those licensed by LARA).

Imposes a 3% excise tax on all “gross retail receipts” of

licensed medical marihuana provisioning centers.

▪ ALL sales including non-marihuana sales e.g.: marihuana paraphernalia, clothing, food, or any other tangible

personal property or service.

▪ 3% tax is automatically repealed 90 days after the effective date

of legalization of recreational marihuana.

MMFLA (cont.)

6% Michigan sales tax is imposed on the final sales price of all

taxable sales by provisioning centers.

Sales tax is calculated after applying the 3% excise tax.

Prescription drug and food exemptions do not apply to

marihuana.

NOTE: illegal sales of marihuana/marihuana are subject to

sales tax.

See RAB 2018-2 for more information.

Recreational Marihuana

Ballot Proposal

Would legalize the sale, use and possession of certain amounts of

marihuana to adults 21 and older for recreational purposes.

▪ 3% provisioning center tax repealed 90 days after it takes effect.

▪ If passed, sales could begin as early as mid-to-end 2019.

Imposes 10% tax on the sales price of retail sales of marihuana by

licensed retailers. only marihuana, not other property or services.

Subject to sales tax.

Sales tax base includes the 10% marihuana tax.

May not be sold in a single transaction with any non-marihuana

property or service.

TAX POLICY UPDATES

Tax Cuts and Jobs Act (TCJA)

TCJA Overview

Enacted into law December 22, 2017:

▪ Affects tax years after 12/31/17 through 12/31/2025.

▪ Repatriation of foreign income provision effective tax years

before 12/31/17.

Substantial changes to federal tax system:

▪ Individual and corporate tax reform including rate cuts and

base broadening.

▪ International tax provisions – moves U.S. tax system from

worldwide to territorial system.

Individuals & Corporations

Tax rate cuts:

▪ 37% = top individual rate + most bracket rates reduced.

▪ 21% = flat corporate rate (decreased from 35%)

Tax base broadening:

▪ Personal exemption repealed.

▪ State and Local Tax (SALT) deduction limited to $10K.

International Taxation

Before TCJA (Worldwide)

▪ U.S. shareholders of foreign corporations not taxed on

earnings until repatriated as dividends.

except Subpart F – passive income of U.S. owned controlled foreign

corporations (CFCs).

▪ Credit for foreign taxes paid up to the amount of U.S. tax due.

Now = TCJA (Territorial)

▪ Foreign sourced income is taxed even if distributed as

dividends. Dividends, however, receive a deduction.

o IRC 965 Repatriation Provisions

o Global Intangible Low-Taxed Income (GILTI)

o Foreign Derived Intangible Income (FDII)

How does TCJA impact Michigan?

Individual Income Tax (IIT)

Because MI relies on Adjusted Gross Income (AGI), TCJA

adjustments to AGI may increase or decrease tax base.

Corporate Income Tax (CIT)

Generally, TCJA broadens Federal Taxable Income (FTI) base.

Because CIT is based on FTI, TCJA may increase tax base,

without adjustments:

▪ Deductions and addbacks.

▪ Dividends received deduction regarding foreign entities,

including Subpart F income.

IRC §§951-964; MCL 206.623(2)(d)

Important TCJA Provisions

IRC 163(j)Interest expense deduction

Expanded to apply to most business interest expense.(Limited to interest expense involving related parties previously.)

Limits deductible net business interest expense to:

▪ the sum of business interest income and

▪ 30% of adjusted taxable income.

Disallowed amounts may be carried forward as business interest paid in the following tax year.

Small business exception: these changes do not apply to

taxpayers with less than $25 million in annual gross receipts.

IRS currently developing proposed regulations. see Notice 2018-28

IRC 168(k) Bonus depreciation

Allows for 100% immediate expensing of equipment through

2022 with a 20% reduction per year; phase out begins 2023.

MI impact: NoneMI tax base decoupled.

IRC 172Net Operating Losses (NOLs)

Amends only NOLs arising after December 31, 2017:

▪ NOL may only offset up to 80% of pre-NOL taxable income.

▪ No carrybacks; indefinite carryforward.

o Exception: Farm NOLs retain 2 year carryback.

NOLs existing before December 31, 2017 remain subject to

pre-TCJA provisions.

IRC 179Expensing depreciable assets

Full and immediate expensing of certain depreciable

assets (qualified machinery, equipment, etc.):

▪ Increases allowance from $500K to $1M.

▪ Changes phase-out threshold from $2M to $2.5M, adjusted for

inflation starting 2019.

MI Impact: Decreases CIT tax base

IRC 199Domestic production activities deduction

Repealed.

MI impact: NoneMI tax base decoupled.

IRC 199A20% deduction for pass-through income

Authorizes a 20% deduction for qualified business income

received from certain pass-through entities.

Basics:

▪ Only applicable for non-corporate taxpayers.

▪ Limitations based on:

o type of trade or business.

o taxable income.

o W-2 wages paid.

▪ Taken after AGI computed on IRS draft Form 1040.

o IRS working on proposed regulations.

IRC 243Dividends received deduction

► When ownership is:

▪ less than 20%: deduction = 50%deduction reduced from 70%

▪ between 20% and 79%: deduction = 65%deduction reduced from 80%

▪ 80% or greater: deduction = 100%deduction unchanged.

MI Impact: Increases CIT tax base

IRC 461Excess business losses

Limits deduction of net business losses for non-corporate

taxpayers to 250k / 500k annually.

▪ Will impact computation of AGI for individuals.

▪ Losses in excess of threshold are carried forward to the following

year as an NOL and subject to the post-TCJA NOL rules.

▪ IRS is still developing forms and instructions.

IRC 965International Provision: Repatriation/Transition Tax

► Deemed repatriated and taxed at 15.5% (liquid assets) and 8% (illiquid assets) if foreign derived earnings and profits are accumulated and untaxed post-1986 for a non-CFC shareholder with ≥10%.

► Generally imposed for the 2017 tax year, but federal election to pay the tax over an 8 year period.

► Transition Tax Statement

▪ Filed separately, reporting IRC 965 income.

▪ Income included in AGI on Form 1040 for individuals.

▪ Income not reported in FTI on Form 1120 for corporations.

► MI Impact: None on CIT baseThis income is included in FTI and deducted under foreign dividends received deduction.[MCL 206.623(2)(d)]

► Certain foreign subsidiaries’ inbound dividends will generally not

be subject to US federal tax as a result of the dividends received

deduction.

► GILTI intended to discourage base erosion by moving or

keeping valuable mobile intangibles and related income

outside U.S. tax. Income deemed repatriated annually.

► U.S. shareholder of CFC must include GILTI in gross income

(similar to Subpart F income – deemed repatriated at year end);

a deduction equal to 50% of GILTI is available on federal return.

MI Impact:GILTI included in FTI may be deducted from CIT base as dividend from

a foreign entity.

Global Intangible Low-Taxed Income

(GILTI)

New deduction to encourage US companies to export

services and products related to intangible income that is

owned in the US:

▪ 37.5% 12/31/17 through 1/1/26

▪ 21.875% thereafter

MI Impact: None on CIT tax base Net FDII may be deducted under the foreign dividends received

deduction. [MCL 206.623(2)(d)]

Foreign Derived Intangible Income

(FDII)

Federal Tax Reform 2.0?

Primary purpose: make permanent many of the changes in the TCJA, including:

▪ change to corporate tax rate.

▪ 199A deduction for qualified pass-through income.

May also introduce other minor changes.

Michigan’s Response to TCJA

2018 PA 38 & 39:

▪ Preserved Michigan’s personal income exemption:

o 2018: increased to $4,050.

o $4,900 by 2021.

▪ Updated IRC references for corporate and individual taxpayers.

Related legislation pending:

▪ SB 1097: decoupling from business interest limitation provisions

under IRC 163(j) for CIT taxpayers.

Check Treasury’s website routinely for newsletters, notices, and

other updates.

TAX TECHNICAL

UPDATESIndividual Income Tax (IIT)

2018 IIT Updates

Tax rate 4.25%

Personal exemption amount $4,050

Special exemption $2,700

Qualified disabled veteran deduction $400

2018 PA 38

Subtraction for taxpayers who:

▪ were born after 1945.

▪ have retired as of January 1, 2013.

▪ receive pension benefits from SSA exempt employment

with a governmental agency.

Subtraction of pension benefits or standard deduction

up to:

▪ Single: $35,000

▪ Joint: $55,000

▪ Both spouses qualify: $70,000

2018 IIT Updates – Pension

Maximum credit: $1,500up from $1,200

Rent percentage for credit calculation: 23% up from 20%

Total household resources (THR) limit: $60,000 up from $50,000

THR phase-out begins at: $51,000up from $41,000

THR percentage for credit computation: 3.2% down from 3.5% no change to THR percentage less than $6,000

2018 IIT Updates –Homestead Property Tax Credit

TCJA only impacts NOLs created after 2017.

Carryback for farming NOLS only (2 years).2018 tax year limited to 80% of taxable income.

Carryforward indefinitely until fully exhausted.

TCJA and MI IITNet Operating Loss (NOL)

New Form: MI-461 – Michigan Excess Business Loss

▪ For taxpayers who exceed the federal business loss limitation:

o Single: $250k ○ Joint: $500k

▪ Allocates allowed and disallowed federal business loss

between Michigan and non-Michigan sources.

▪ Computes Michigan excess business loss which becomes

Michigan NOL carryforward.

▪ Follow instructions carefully! Federal and Michigan differences

result in reporting issues for MI-1040H, MI-1040D, MI-4797,

Schedule NR.

2018 IIT Updates – Forms

MI-1041: Michigan Fiduciary Income Tax Return

▪ Eligible for e-file.

▪ Two new forms:

o MI-1041-V: e-file payment voucher

o MI-8453FE: Estate or Trust Declaration for e-file

MI-1045: Application for Michigan Net Operating Loss Refund

▪ Reformatted; calculation begins with Adjusted Gross Income (AGI).

▪ Exploring e-file option.

▪ Carryover worksheet available online in early 2019.

2018 IIT Updates – Forms

Amending MI-1040

▪ Include Schedule AMD

▪ Provide reason for amending and supporting documentation.

▪ Line 31: Use appropriate +/- for refund or tax paid with original filing.

Paper filers:

▪ Follow the form’s attachment order.

▪ Place all supporting documents at the end.

Provide all business activity locations

▪ See the Business, Rental, Royalty Activity Worksheet

IIT Helpful Hints

New IIT

Revenue Administrative Bulletins

(RABs)

Describes the income tax treatment of rental income or loss

for individuals.

Addresses whether rental income is characterized as business

or non-business income.

RAB 2017-16Treatment of Rental Income as Business or Non-business Income

Replaces RAB 1988-22.

Discusses the treatment of Individual Retirement Arrangements (IRAs) under the Michigan Income Tax Act.

RAB 2017-21Individual Retirement Arrangements

Replaces RAB 1988-30.

Discusses the tax treatment of contributions to and distributions from an annuity plan created under Internal Revenue Code

(IRC) 403(b)

RAB 2017-25Tax Treatment of Retirement Income from IRC 403(b) Plans

Replaces RAB 2001-5.

Discusses the elimination of oil and gas income and expenses as it relates to Part 1 of the Michigan Income Tax Act.

RAB 2018-8Eliminating the Income and Expenses of Producing Oil & Gas

1. michigan.gov/taxes

2. Click Reports and Legal

3. Select Revenue Administrative Bulletins

or Internal Policy Directives

Finding RABS and IPDs

Alternative Dispute Resolution

(ADR)

2017 Public Act 215 provides for this new, non-judicial

dispute resolution process.

► Previously, Treasury was unable to compromise taxes

before litigation.

► PA 215 grants Treasury the authority to compromise taxes

administered under the Revenue Act through this

process.

Alternative Dispute Resolution

Which taxes are covered?

Only disputed matters involving the following taxes may be settled through the Alternative Dispute Resolution process:

▪ Single Business Tax

▪ Michigan Business Tax

▪ Motor Carrier Fuel Tax (IFTA)

▪ Motor Fuel Tax

▪ Use Tax

▪ Corporate Income Tax

▪ Equalization Tax

▪ Individual Income Tax

▪ Sales Tax

▪ Severance Tax

When may a tax matter be settled?

► Only after a valid (timely) request for informal

conference has been made.

► But no later than 21 days after the informal conference

was held.

► Collectability/inability to pay tax is not a basis for

settlements.

How is a

settlement offer

made?

Complete and mail Form 5573, Michigan Alternative Dispute Resolution Settlement Offer to:

Michigan Department of Treasury –

Executive Office

Alternative Dispute Resolution

P.O. Box 30716

Lansing, Michigan 48909

(Form available at: www.michigan.gov/taxes)

A valid settlement offer must:

▪ Be the offering party’s best, good-faith offer.

▪ Identify the issues and amounts in dispute.

▪ Include the factual and legal bases supporting the offer.

▪ Identify the issues to be settled and the amount of the

proposed settlement.

▪ Be signed by the taxpayer, not by a third-party

representative.

▪ Include any supporting documentation.

Failure to meet the required criteria will result in the settlement

offer being returned to the taxpayer for additional information

and resubmission.

What happens next?

► If a valid settlement offer is made, the informal conference request is placed in abeyance pending resolution of the

settlement offer.

► Treasury may accept, reject, or counter a taxpayer’s initial

offer.

▪ Multiple exchanges may occur until either a settlement is

reached or negotiations stall.

▪ Responses must be in writing (a taxpayer’s response may be

signed by an authorized representative).

▪ A rejection or counter-offer by the Department will include the

factual and legal bases for the rejection or counter-offer.

What is the outcome?

► Acceptance

▪ Execute settlement agreement.

▪ Account adjustment including issuance of assessment

or refund (depending on settlement).

► Rejection without counter-offer

▪ Removal from abeyance.

▪ Proceed to informal conference or withdraw.

1. michigan.gov/taxes

2. Click Collections, Audits & Appeals

3. Select Hearings and Appeals

4. Click Alternate Dispute Resolution

For more ADR information...

Tax Practitioner Resources1. michigan.gov/taxes

2. Click Tax Professionals

3. Select Tax Practitioner Web Service

Practitioner Web Services (Not for Public Use)

▪ Submit general and account specific questions regarding

Treasury individual or business tax.

Practitioner Hotline: 517-373-0616 (Not for Public Use)

▪ General questions regarding tax preparation only.

▪ Please leave a detailed voice message.

Tax Practitioner Resources

Form 151 – Authorized Representative Declaration Power of Attorney (POA)

1. michigan.gov/taxes

2. Click Power of Attorney Form 151 under Popular Forms

3. Select Authorized Representative Declaration Video

E-mail questions option is discontinued but can check refund,

access tax information and ask a tax question:

1. michigan.gov/taxes

2. Click Individual Income Tax

3. Select Check Your Refund Status

4. Select a self-service option

► The following information is required:

▪ Social Security Number

▪ Tax Year

▪ Filing Status

▪ AGI or THR

Taxpayer Resources

Contact Treasury

Individual Income Tax …..………………………….…….... 517-636-4486

Business Taxes ……………………….....…….…….….…….. 517-636-6925e.g.: Sales, Use, Withholding, Corporate Income Tax, Michigan Business Tax

Motor Fuel Tax …..………………………………………....…517-636-4600

Motor Carrier Tax ..………………………………………...... 517-636-4580

Tobacco and Cigarette Taxes ………………....………… 517-636-4630

Office of Collections..……………………………………..... 517-636-5265

Detroit City Taxes ..………………………………….……….. 517-636-5829

► Need More Guidance?

▪ Tax Text Manual

▪ Taxpayer Assistance Manual

SUW UPDATES

Sales, Use and Withholding Taxes

How often do I need to file? Same filing frequency for all Sales, Use and Withholding (SUW) registered

taxes.

Because SUW taxes are reported on a combined form.

Based on the tax with highest threshold.

Determined by Treasury.

▪ Unable to change, even if you want to file more often.

▪ Reviewed yearly for update – notified in writing if changed.

Monthly Quarterly Annually

Per Registration

Application: > $1,000/month $63 - $999/month < $62/ month

Additional

Requirements: ▪ Seasonal ▪ Fuel retailers/suppliers

▪ Monthly/Quarterly filers required to reconcile annually.

Required Return(s): Form 5080 Form 5080 Form 5081

Due Date: 20th of the following month.

20th of the month following the quarter.

February 28th of year following tax year reported.

View your required tax returns in MTO

You must pay no later than your return due date to avoid

penalty, interest and losing sales and use tax discounts.

You may pay as often as you like.

▪ Allocate your payments to the tax period on the tax return.

▪ Pay any remainder due with your timely return filing.

Electronic vs. mailed payments.

▪ Mail: statutory provision for due date postmark.

▪ EFT: earliest payment = next business day (before 8pm EST).

How often do I need to pay?

Payment without a tax return

A Note About Use Tax…

▪ Use Tax on Sales & Rentals

o Taxable Services – i.e.: telecommunications, accommodations, rentals/leases, industrial laundries.

o Registerable and discountable.

▪ Use Tax on Purchases

o Due when subject to sales tax but not charged –i.e.: out-state purchases and removal from resale

inventory.

o No registration, available on every tax return, not

discountable.

A Note About Withholding…

► 2018 PA 118 revises due dates and methods of filling

withholding statements and tax returns with Treasury.

► Wage statements (e.g., W-2, W-2G, 1099-R, 1099-MISC)

due to Treasury January 31st beginning the 2018 tax year

(first due date per the Act = 1/31/2019).

► Employers with ≤ 250 employees must file an annual return electronically, still due February 28th.

► Beginning January 2019, employers using MTO will be able

to upload wage statements prior to filling an annual return.

SUW Actions: W-2 Upload

MTO, the road to recovery

Last Release: January 16, 2018

MTO Benefits

▪ Free and secure.

▪ Personalized user profiles providing independent

access to web services.

▪ Intuitive navigation.

▪ Customizable access to business accounts via

Tax Services.

▪ Payment flexibility including SUW Audit payments.

Michigan Treasury Online

Live Demonstration

Michigan Treasury Online

Taxpayer Advocate

Serve as a resource of last resort to those who

have exhausted all attempts to remedy their

situation through Treasury’s normal channels.

Provide a fresh review of your issue.

Identify and communicate general policy and

operational issues that affect multiple taxpayers.

Will always listen and try to clarify your issue.

Provide educational outreach to tax

professionals, the Michigan Legislature, and

others.

Administer, operate, and maintain Treasury’s Tax Practitioner Hotline & Web Service inquiries.

Taxpayer

Advocate

CONTINUOUS IMPROVEMENT ~ CULTURE OF SERVICE ~ EMPLOYEE ENGAGEMENT

What We Can Do:

Change the timeframe for processing returns,

correspondence or refunds.

Serve as a substitute for Treasury’s formal

appeals process.

Offer legal guidance.

Assist with tax preparation, but we may be

able to answer specific tax questions.

Change filing deadlines or payment due

dates.

Taxpayer

Advocate

CONTINUOUS IMPROVEMENT ~ CULTURE OF SERVICE ~ EMPLOYEE ENGAGEMENT

What We Cannot Do:

Contact Us

Advocate Phone #:

517.636.4752

Email: TaxpayerAdvocate@Michigan.gov

Tax Professionals Hotline #:

517/373.0616

Please provide: your name, business name, account number, tax type, tax year and the

nature of the issue.

Taxpayer

Advocate

CONTINUOUS IMPROVEMENT ~ CULTURE OF SERVICE ~ EMPLOYEE ENGAGEMENT

Q&A with Treasury

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