Massachusetts Has a New Software Sales Tax

Posted on August 17, 2013 by Russ

Taxachusetts, er, Massachusetts has had for years a reputation of being a high tax state. Lately, Massachusetts has become a somewhat better locale (based on taxes). It’s not that Massachusetts has improved; rather, other nearby states have enacted or increased taxes. Just when you thought you could throw away the Taxachusetts label, out comes a new sales tax.

Last month, the Massachusetts legislature passed a new sales tax on computer software services. At 6.25%, it’s the highest sales tax rate on this in the country. The tax applies to all “computer software, including pre-written upgrades, which is not designed and developed by the author.” The law was effective July 31, 2013.

One website has published a piece about how confusing this new tax is. Consider:

This added levy is not only cumbersome, it’s super confusing. For example:

  • if you install software (Microsoft Office, Constant Contact, Drupal, etc.), it’s taxable
  • if your client clicks the mouse to install it, it’s not taxable
  • training your client to use this software is not taxable
  • but if you “customize” or configure the software in any way, it’s taxable
  • if you don’t actually make any changes, but just discuss them and plan them, it’s consulting and not taxable
  • if you create graphic design mockups, it’s not taxable
  • but as soon as you implement that design (i.e. program it), it becomes taxable if you’re using “prewritten” software “not developed” by you (such as WordPress)

At least, that’s how we think it works.

The Massachusetts high-tech community is up in arms over the new tax. As Christopher Anderson, president of the Massachusetts High Technology Council, said in an interview on WBZ-TV (as reported in the Boston Globe,

“When we impose a tax that no other state in the country imposes as broadly as this, it is going to have an impact on those small and midsize companies, initially, in terms of their ability to win and retain business or add or retain employees,” he said.

“In fact, a number of them are telling me they may have to shed employees just to maintain the business load they have,” Anderson added in the interview with WBZ’s Jon Keller.

Democratic state Senator Karen Spilka has filed a bill to repeal the measure. Meanwhile, Florida Governor Rick Scott has urged unhappy Massachusetts companies to consider moving to the Sunshine State. I am certain that if this tax remains law Massachusetts will see some companies move out-of-state. Taxes matter, and when a business in Massachusetts faces a confusing 6.25% tax while a business in neighboring New Hampshire doesn’t, a business owner might just move.

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Full Tilt Poker Remission Claims to Begin in Mid-September

Posted on August 17, 2013 by Russ

The Garden City Group (GCG) posted the following information on the Full Tilt Poker Claims Administration website yesterday:

Important Update About the Start of the Claims Process

Starting on September 16, 2013, GCG will email a Notice with instructions on how to submit a Petition for Remission online to all potentially eligible claimants identified by GCG utilizing data supplied by Full Tilt Poker (“FTP”). The deadline to submit a Petition for Remission is November 15, 2013. Instructions concerning the filing of Petitions will be included in the Notice and will be posted on this website. Please continue to check this website for updates. Please note that the registration process for email notification is no longer available…

If you do not receive an email notice and you believe you are eligible to participate in the remission process, you may file a claim online using the directions that will be provided on this website.

Once claims are filed, GCG will have to verify the claims (relatively simple in cases where the claimant agrees with the information sent by GCG but more complex where there are differences), total the amount of approved claims by all claimants, compare that to the total available for remission, and then pay the claims. However, the DOJ then must approve the amounts.

While in theory claims could be paid this year (after all, this is all electronic information, etc.), it’s far more likely that the review and payment process will take at least 90 days and probably longer. I’d expect payment in mid-2014 based on the announcement, and take later rather than sooner if I had to guess. We could get lucky and have a Christmas present of the Full Tilt funds…but it’s far more likely to be a 2014 Christmas present.

Posted in Gambling | Tagged | 1 Comment

Nite Moves Asks Supreme Court to Rule on Constitutionality of Taxing Pole Dances in New York

Posted on August 11, 2013 by Russ

When I think of “Night Moves” I think of a Bob Seger song. That’s not what this post is about. It seems that the upstate New York adult entertainment facility named Nite Moves isn’t happy with a New York state sales tax on pole dancers. The essential question: Is a tax on just certain kind of music or entertainment legal?

New York’s highest court, the Court of Appeals, held in a 4-3 decision that a sales tax on pole dancing is just fine. The owner of Nite Moves, Stephen Dick, has filed a writ of certiorari with the US Supreme Court asking the Court to overturn the tax. The question of whether pole dancing is a form of art or something that doesn’t promote culture (and so can be taxed) might be argued next Spring in Washington.

Speaking of Night Moves:

Posted in New York, Sales Tax | Tagged | 1 Comment

Once Again, Registration of a Tax Preparer Doesn’t Stop Him from Bad Behavior

Posted on August 11, 2013 by Russ

With tonight’s season premier of Breaking Bad, it feels apropos to note a tax “professional” who is accused of bad behavior. The US Department of Justice filed suit against Michael Turner of San Diego.

Mr. Turner is alleged to have,

…failed to sign or affix a Preparer Tax Identification Number (PTIN) to many of the returns that he has prepared. In addition and according to the government, Turner takes bogus deductions on his customers’ returns in order to claim larger refunds for his customers. His customers then recommend Turner as a tax preparer to their friends, which helps Turner to expand his customer base and further increase his own profits. Specifically, the government alleges that Turner claims inflated or fabricated deductions on the Schedule A of his customers’ Form 1040 tax returns, claiming that his customers have large non-cash charitable contributions and unreimbursed employee expenses. The complaint also alleges that when Turner’s customers are audited, Turner has provided false documents to those customers in an attempt to assist them in substantiating charitable contributions and employee expenses that they did not incur. According to the complaint, however, Turner has instructed his customers not to identify him as their tax return preparer in communications with the Internal Revenue Service (IRS).

That’s a multitude of bad behavior if proven. Of course, Mr. Turner doesn’t have a license, right? Well, no. California requires all paid tax preparers to have a license. Preparers who are unenrolled (not EAs, CPAs, or attorneys) must obtain a license from the California Tax Education Council (CTEC). And Mr. Turner has a license from CTEC.

This shows two points: First, that having a license cannot stop bad behavior. And second, the government has methods today of stopping tax preparers who are breaking bad. As the DOJ noted in their press release, “In the past decade the Justice Department Tax Division has obtained injunctions against hundreds of tax preparers.” I suspect this point just might make it into the arguments in the Loving appeal.

Posted in IRS, Tax Preparation | Tagged , , | 1 Comment

Ledyard 3, Mashantucket Pequots 0

Posted on August 11, 2013 by Russ

Back in mid-July the 2nd Circuit Court of Appeals ruled on an interesting case regarding tribal sovereignty at Indian casinos. The case pitted the country’s largest casino, Foxwoods, against the town of Ledyard and the State of Connecticut. The issue: Could Ledyard and Connecticut levy a personal property tax on non-tribal vendors who lease slot machines to Foxwoods? The original court decision held that various laws prevented Ledyard and Connecticut from imposing the tax on tribal vendors. However, the 2nd Circuit unanimously reversed the decision.

The main issue is whether or not the federal laws, such as the Indian Gaming Regulatory Act (IGRA) prohibits the tax. The court held that the interests of the state and town outweigh the federal interest.

The tax, imposed on non-Indian vendors, is likely to have a minimal effect on the Tribe’s economic development. While IGRA seeks to limit criminal activity at the casinos, nothing in Connecticut’s tax makes it likely that Michael Corleone will arrive to take over the Tribe’s operations.

Or, as the court put it,

The Town and State have more at stake than the Tribe. The economic effect of the tax on the Tribe is negligible; its economic value to the Town is not. The Tribe’s sovereign interest in being able to exercise sole taxing authority over possession of property is insufficient to outweigh the State’s interest in the uniform application of its generally-applicable tax, particularly where, as here, there is room for both State and Tribal taxation of the same activity.

Ledyard has begun to again receive tax payments. The other question is will the Pequots appeal to the Supreme Court or ask for an En Banc appeal to the entire 2nd Circuit? We’ll know the answer to that question soon.

Hat Tip: Victor Rocha

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IRS Postpones August 30th Furlough Day

Posted on August 11, 2013 by Russ

The IRS will be open for business on Friday, August 30th (the Friday before the Labor Day weekend). The IRS postponed the scheduled furlough day, noting:

“We have made substantial progress in cutting costs. … Our progress is such that we have decided to postpone the furlough day scheduled for Aug. 30. We still have more work to do on the budget and cost-savings, so we will reevaluate in early September and make a final determination as to whether we will need another furlough day in September,” said Danny Werfel, IRS Acting Commissioner, in a message to IRS employees.

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IRS Delays Disclosure Authorization Retirement for Three Weeks

Posted on August 9, 2013 by Russ

Good news for tax professionals. When I went to IRS e-services this morning, I was greeted by this message:

DA and EAR Retirement delayed by three weeks

The planned retirement of Disclosure Authorization and Electronic Account Resolution on August 11, 2013 has been delayed until September 2 while IRS completes the transition to our new web portal. DA and EAR users have an additional three weeks to use both electronic products. Once the portal transition work is complete, DA and EAR would then be retired as previously planned and will be unavailable for use.

So we have another three weeks, until September 2nd, when tax professionals can save the IRS money and time by entering Forms 2848 and 8821 ourselves in e-services.

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Rhode Island Is Now a Bad State for Gamblers

Posted on August 8, 2013 by Russ

Rhode Island Seal

Little Rhody, Rhode Island, changed its tax structure for 2012. Rhode Island eliminated itemized deductions (but did increase the standard deduction). Thus, an amateur gambler with $50,000 of gambling winnings and $30,000 of gambling losses will owe tax on his wins and will not get the benefit of his gambling losses.

Here is the list of bad states for gamblers with the reasons why:

Connecticut [1]
Hawaii [2]
Illinois [1]
Indiana [1]
Kansas [8]
Massachusetts [1]
Michigan [1]
Minnesota [3]
Mississippi [4]
New York [5]
Ohio [1] [6]
Rhode Island [1]
Washington [7]
West Virginia [1]
Wisconsin [1]

NOTES:

1. CT, IL, IN, MA, MI, OH, RI, WV, and WI do not allow gambling losses as an itemized deduction. These states’ income taxes are written so that taxpayers pay based (generally) on their federal Adjusted Gross Income (AGI). AGI includes gambling winnings but does not include gambling losses. Thus, a taxpayer who has (say) $100,000 of gambling winnings and $100,000 of gambling losses will owe state income tax on the phantom gambling winnings. (Michigan does exempt the first $300 of gambling winnings from state income tax.)

2. Hawaii has an excise tax (the General Excise and Use Tax) that’s thought of as a sales tax. It is, but it is also a tax on various professions. A professional gambler is subject to this 4% tax (an amateur gambler is not).

3. Minnesota’s state Alternative Minimum Tax (AMT) negatively impacts amateur gamblers. Because of the design of the Minnesota AMT, amateur gamblers with significant losses effectively cannot deduct those losses.

4. Mississippi only allows Mississippi gambling losses as an itemized deduction.

5. New York has a limitation on itemized deductions. If your AGI is over $500,000, you lose 50% of your itemized deductions (including gambling losses). You begin to lose itemized deductions at an AGI of $100,000.

6. Ohio currently does not allow gambling losses as an itemized deduction. Because of the rescinding of the law allowing gambling losses as a deduction, Ohioans cannot deduct gambling losses on their state, city, or school district returns.

7. Washington state has no state income tax. However, the state does have a Business & Occupations Tax (B&O Tax). The B&O Tax has not been applied toward professional gamblers, but my reading of the law says that it could be at any time.

8. Beginning in 2014 (2014 tax returns filed in 2015), Kansas will not allow gambling losses as an itemized deduction. See #1 above as to how this will impact amateur gamblers in the Sunflower State.

My thanks to Paul Dion, CPA, for pointing this out. My one Rhode Island client moved elsewhere before 2012 so I haven’t prepared a Rhode Island return this year.

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IRS Scandal Continues to Percolate

Posted on August 8, 2013 by Russ

Some news this week on the IRS Scandal:

Darrell Issa has expanded the probe of the IRS scandal to the Federal Elections Commission. As CNN’s Jake Tapper stated, “If you thought the IRS targeting–scandal, controversy, whatever you want to call it–was forgotten, think again.”

But there’s more: According to the Washington Examiner:

In a remarkable admission that is likely to rock the Internal Revenue Service again, testimony released Thursday by House Ways and Means Committee Chairman Dave Camp reveals that an agent involved in reviewing tax exempt applications from conservative groups told a committee investigator that the agency is still targeting Tea Party groups, three months after the IRS scandal erupted

If the transcript shown in the Examiner post is correct, there’s likely to be a huge blow-up on this scandal when Congress reconvenes.

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While I Was Out…

Posted on August 8, 2013 by Russ

Ten days off in a row should have been enough…but it wasn’t. In any case, here are some of the posts that the tax blogosphere had that might be of interest:

Jason Dinesen asked, “What’s the upside of preparer regulation for Enrolled Agents?” While at the National Association of Enrolled Agents annual meeting, I asked that question, too. The NAEA officials all swore it was a wonderful thing. The only thing I can deduce is that the RTRP program should lead to more Enrolled Agents. That said, I remain opposed to the RTRP program.

National Public Radio (NPR) noted that statistics show that the IRS targeting was worse for conservative groups than liberal groups. Republicans asked Democrats to bring just one liberal or progressive group to hearings that was impacted. To date, none have been found.

Jason Dinesen’s client who went through a nearly 28-month identity theft nightmare with the IRS finally received her tax refund.

The IRS released a draft of Form 8960. What’s that? It’s the new ObamaCare 3.8% Investment Tax. It does appear that the IRS smartly didn’t link the form to Other Income (as I previously noted, gambling income is not subject to this tax). As Paul Neiffer reported, there are only 33 lines to calculate this tax. As I tell my friends, I have lifetime employment…for all the wrong reasons.

Joe Kristan has a report on an interesting court decision: Can suing be your trade or business? The court held that it could be.

Meanwhile, the Tax Court held that a business owner whose business made a whopping $877 must take a salary of nearly $31,000! Joe Kristan has more on what is a very raw deal for the taxpayer. I do agree with Joe’s conclusion: “When advancing and withdrawing funds from an S corporation, be sure to generate the appropriate prissy paperwork.” If you have a loan, make it look like a loan: Charge interest and record it! It’s possible that with good paperwork the owner wouldn’t have received such a ridiculous result.

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