Talking Tax round-up: Tax reform rulemaking, state conformity to tax reform, impact of Wayfair case

21 August, 2018

John Livingstone
Industrial Products Tax Leader, PwC US

I recently hosted our latest video broadcast of ‘Talking Tax,’ which delved into the latest on tax reform — from rulemaking to state conformity — and then analyzed the impact of the Wayfair decision. Below are some highlights from our discussion and summaries of recent developments.

Status of tax reform rulemaking

Scott McCandless, a principal in our Tax Policy Services practice, and Mark Prater, a managing director in out Tax Policy Services practice, joined us on our first panel to share their insights regarding the timing of regulatory guidance around tax reform. The Office of Management and Budget’s (OMB’s) Office of Information and Regulatory Affairs (OIRA) has indicated that it expects that (1) guidance relating to the global intangible low-taxed income (GILTI) provisions will be released in September, (2) guidance relating to recent modifications of Sections 951(b) and 958(b) will be released in November, and (3) guidance relating to Section 163(j) will be released in December.

When we asked our webcast attendees what tax reform guidance they are most interested in receiving, they said guidance relating to GILTI (30%), the Section 965 transaction tax (21%), Section 199A (20%), and foreign derived intangible income (10%).

OMB/OIRA review of tax regulations

Bill Wilkins, a managing director in our National Tax Services practice, joined Scott and Mark on the panel to discuss the new Treasury Department-OMB agreement granting OMB greater review of tax rules. Under the agreement, OIRA will review tax regulations if they (1) could create a serious inconsistency or otherwise interfere with an action planned by another agency, (2) raise novel legal or policy issues, or (3) have an annual non-revenue effect on the economy of $100 million or more. The new agreement replaces a 1983 Memorandum of Agreement between Treasury and OMB on tax regulatory actions.

The new agreement generally provides 45 days for OIRA to review regulations after Treasury submits the information. However, regulations related to tax reform may be designated for expedited release, which provides OIRA with a review period of 10 business days.

IRS and Treasury release proposed Section 965 regulations

The IRS and Treasury on August 1 released proposed regulations under Section 965, which was amended by tax reform legislation to impose a one-time toll tax on the undistributed, previously untaxed post-1986 foreign earnings and profits of certain US-owned corporations as part of the transition to a new hybrid territorial tax regime. The toll tax is imposed at a rate of 15.5% on cash or cash equivalents and 8% on illiquid assets.

The following are highlights of the Section 965 proposed regulations: (1) Section 965(a): detailed information on the inclusion amount and calculation, (2) Section 965(c): a participation deduction applicable to income inclusions to achieve lower effective tax rates, (3) Section 965(g): application of a reduced foreign tax credit, and (4) Section 965(h): taxpayer election to pay the transition tax in installments over eight years. The government requests comments within 60 days on the proposed rules for computing the toll tax.

Please refer to the PwC Insight for more information.

Treasury releases proposed regulations and notice under Section 199A

Treasury on August 8 released proposed regulations under Sections 199A and 643. In addition, the IRS released Notice 2019-64, which contains a proposed Section 199A revenue procedure. The tax reform legislation added new Section 199A, which allows a taxpayer other than a corporation to deduct 20% of its ‘combined qualified business income’ from partnerships, S corporations, and sole proprietorships. The deduction is available in tax years 2018 through 2025.

The preamble to the proposed regulations indicates that guidance is being provided for computational, definitional, and anti-avoidance purposes. The proposed computational and definitional rules under Section 199A have a prospective effective date and are proposed to be effective for tax years ending after the date final regulations are published in the Federal Register. The regulators state that taxpayers may rely on the proposed regulations until the final regulations are effective. In addition, the Section 199A anti-abuse rules in the regulations are proposed to apply to tax years ending after December 22, 2017. Finally, the anti-avoidance guidance in proposed Reg. sec. 1.643-1, intended generally to prevent abuse through the use of trusts, is proposed to be effective for tax years ending after the date of publication of the proposed regulations in the Federal Register.

The proposed revenue procedure in Notice 2018-64 provides guidance on methods for calculating W-2 wages for purposes of Section 199A. The revenue procedure is proposed to apply to tax years ending after December 31, 2017; the notice containing the proposed revenue procedure is effective on the date that it is published in the Internal Revenue Bulletin. Until the proposed revenue procedure is finalized, the notice states that taxpayers may use the methods in the proposed revenue procedure.

Please refer to the PwC Insight for more information.

Treasury releases proposed bonus depreciation regulations

Treasury on August 3 released proposed regulations implementing the expanded depreciation provisions under Section 168(k) enacted as part of the tax reform legislation. The regulations, published in the Federal Register on August 8, address issues such as the definition of qualified property, when used property is eligible for bonus depreciation, when property is acquired and placed in service, rules applicable to self-constructed property, how to compute the depreciation, and the time and manner for making elections. The regulations also deal with certain issues affecting partnerships and consolidated groups of corporations.

One of the most substantial changes made by the 2017 tax legislation allows taxpayers to expense 100% of the cost of certain qualified property acquired after September 27, 2017, and placed in service through December 31, 2022. Previously, taxpayers generally could claim only 50% bonus depreciation for qualified property placed in service through the end of 2017, with phase-downs to 40% and 30% for qualified property placed in service in 2018 and 2019, respectively.

The regulations are proposed to apply to qualified property placed in service, and specified plants planted or grafted, during or after a tax year that includes the date of publication of final regulations in the Federal Register. Taxpayers may rely on the proposed regulations with respect to qualified property acquired and placed in service, and specified plants planted or grafted, after September 27, 2017, for tax years ending on or after September 28, 2017.

Please refer to the PwC Insight for more information.

Priorities relating to tax reform

When we asked our webcast attendees about their company’s highest priority relating to tax reform, they said assessing its impact to their effective tax rate and related planning (55%), working with the business to enhance supply chain opportunities in response to reform (11%), moving ahead with cash repatriation activities (8%), and engaging in various regulatory and lobbying initiatives to mitigate potential detrimental impacts (6%).

State conformity to tax reform

Rob Ozmun, a partner in our State Tax Services practice, joined us on our second panel to discuss recent state and local tax developments.

Since the enactment of tax reform, industrial products companies have been struggling to understand the federal income tax consequences of the various tax reform provisions. Just like uncertainties around the application of the new rules at the federal level, there are uncertainties about how to apply the rules at the state level. How and at what point in time a state adopts the tax reform provisions is significant for taxpayers.

States have several options for conforming to the federal tax reform provisions. Some states may conform (in part) to the federal provisions, while others may not. To date, states have responded to tax reform in a variety of ways. Some have done nothing; some have issued administrative guidance; some have enacted a legislative response; and some have issued administrative guidance and enacted a legislative response.

The state tax compliance burden likely will be heavy, especially with many large, multinational companies doing business in all 50 states. To stay ahead, industrial products companies need to understand the underlying federal tax reform provisions, undertake modeling exercises, monitor ongoing state legislative activity, and stay close to resulting operational changes.

When we asked our webcast attendees how they assess how the states have reacted to the potential impact of tax reform on their companies, they said that it is too early to say (46%), states are seeing it as an opportunity to raise revenue (26%), and it is fairly balanced (9%).

Impact of Wayfair decision

The US Supreme Court recently held in South Dakota v. Wayfair that physical presence is not required for the imposition of sales and use tax, overturning its prior decision in Quill Corp. v. North Dakota regarding state taxation of out-of-state sellers. The Court ruled that its Quill decision (1) creates market distortions, (2) puts businesses with physical presence at a disadvantage, and (3) imposes the sort of arbitrary, formalistic distinction that modern Commerce Clause precedents disavow. The Court concluded that the doctrine of stare decisis no longer can support the prohibition of a valid exercise of the state’s sovereign power to require tax collection by remote sellers.

The Court considered four factors in justifying its departure from stare decisis: (1) the internet revolution and its impact on commerce has made the erroneous ruling in Quill even more egregious, (2) the revenue shortfall experienced by South Dakota is due to the Court’s prohibition of a valid exercise of the state’s power to tax, (3) physical presence is not as clear and easy to apply as Quill implies, and (4) the unfair burden on taxpayers in the state that buy from vendors with nexus v. taxpayers in the same state that buy from vendors like Wayfair.

Specifically addressing South Dakota’s law, the Court noted that nexus was sufficient based on the economic and virtual contacts Wayfair had with the state. The Court noted that South Dakota’s tax system includes several features intended to prevent undue burdens on interstate commerce, including no obligation to retroactively remit the sales tax.

The Wayfair decision likely will increase the number of states and local jurisdictions in which industrial products companies are required to collect and remit sales and use tax with varying rates. Sellers with no in-state physical presence will need to manage this impact. Businesses will need to determine what goods and services are taxable in the new filing jurisdictions and implement appropriate procedures to manage the increased number of filings. Manufacturers that provide services should consider a state-by-state and facts and circumstances analysis to determine the potential impact on each taxpayer.

Industrial products companies not only have to consider where they have additional filings, but also the potential ASC 450 impacts. Additional compliance burdens also could require updating systems to address the impact of the decision on a go-forward basis. The ruling also may impact businesses involved in M&A transactions with prior sales tax exposures. Additionally, although Wayfair primarily focused on sales tax, there may be broader state tax nexus implications related to other taxes, such as income taxes.

When we asked our webcast attendees about the impact of the Wayfair decision on their companies, they said that it was too early to say (30%), has very little impact (27%), will result in additional compliance costs, but likely very little sales tax impact (14%), and has them concerned about the potential impact to the income tax frameworks across the country (10%).