Taxation & Representation, October 2, 2018

Taxation & Representation, October 2, 2018

Client Alert

Brownstein Client Alert, October 2, 2018

Note:

Since the House will be taking a break until the midterm elections, we thought we’d take a bit of a breather, too. The BHFS Tax Team won’t be publishing Taxation & Representation for the next couple of weeks, but be on the lookout for the next installment in early Nov. Of course, if there are significant developments in the interim, we will be sending out alerts. See you then!
 

IN THIS ISSUE

 

TAX TIDBIT

Yesterday,10 states began enforcement of online sales tax collection following the landmark Supreme Court decision in Wayfair v. South Dakota this June. With their inclusion, 19 states have laws or regulations in place dictating the terms of collection, while another 13 are in the process of implementing, litigating, or formalizing an online sales tax regime in the immediate future.

In August, the Tax Foundation released a report analyzing each state’s current online tax regime based on seven characteristics that the Supreme Court deemed necessary for the constitutional implementation of laws and regulations. These include:

  • Safe harbor: Exclude “those who transact only limited business” in the state. (South Dakota’s is $100,000 in sales or 200 transactions.)
  • No retroactive collection.
  • Single state-level administration of all sales taxes in the state.
  • Uniform definitions of products and services.
  • Simplified tax rate structure. (South Dakota requires the same tax base between state and local sales tax, has only three sales tax rates, and limited exemptions from the tax.)
  • Software: access to sales tax administration software provided by the state.
  • Immunity: sellers who use the software are not liable for errors derived from relying on it.

The states and their implementation status and scores are provided below:

 

SULLIVAN'S PICKS

  1. Tax Reform 2.0 Passes House. In case you hadn’t been paying attention, the House passed Tax Reform 2.0 last week right before they left to campaign for the midterms. Keep reading to find out what’s in the legislation!
     
  2. OIRA Administrator Rao on the Regulatory Process. Amidst OIRA’s new MOA with Treasury, Administrator Rao sat down to look back at the administration’s progress on regulations and discuss her role within the regulatory review process.
     
  3. Face the Facts. Last week, the House Ways & Means Subcommittee on Oversight heard from a number of witnesses about taxpayer authentication processes at the IRS. Learn what you need to know below.

 

 

THE DEEP DIVE

Legislative Lowdown

Tax Reform 2.0. Passes House. All three of the bills comprising “tax reform 2.0” passed the House last week, sending the legislation to the Senate for potential consideration between now and the end of the lame duck session after the midterms. On Thursday, both the Family Savings Act (H.R. 6757) and the American Innovation Act (H.R. 6756) passed the House with bipartisan votes of 240-177 and 260-156, respectively. H.R. 6757 enhances access to educational and retirement savings vehicles, while H.R. 6756 bolsters incentives for start-ups to write-off business costs. The Protecting Family and Small Business Tax Cuts Act (H.R. 6760) passed the House along a mainly partisan 220-191 vote on Friday. H.R. 6760 makes permanent the individual tax cut, simplification, and pass-through provisions of last year’s TCJA.  Majority Leader Mitch McConnell (R-KY) had previously indicated that a vote on the permanency provisions of H.R. 6760 would not be considered unless there’s clear 60 vote support; however, the provisions of the Family Savings Act parallel many of those within the Senate’s Retirement Enhancement and Savings Act, setting up the potential for bicameral support on that legislation in the lame duck session.

Paid the Bills (For Now). While House and Senate conferences were unsuccessful in reaching an agreement on H.R. 6147 - the Interior, Environment, Financial Services, and General Government Appropriations Act – last week, the government remains open with the successful agreement and signing of a continuing resolution (CR) through Dec. 7. The IRS will remain funded at its current FY 2018 levels through Dec. 7 with a CR within the Defense, Labor, HHS, Education minibus (H.R. 6157). While it’s unclear what state Congress and President Trump will be in after the midterms and closer to Dec. 7, the passage of the CR provides a rare sigh of relief for lawmakers who have speculated on the prospects of another government shutdown for months.

Cadillac Coup De-Cember? House Republican lawmakers last week indicated that legislation to delay the “Cadillac tax” will be taken up during the lame duck session following the midterms. On Tuesday, House Ways and Means Committee chairman Kevin Brady told reporters that a truncated legislative schedule and forthcoming “tax reform 2.0” votes had pushed back consideration for the Save American Workers Act (H.R. 3798). The bill would roll back several provisions of the Affordable Care Act (ACA) that include reclassifications of full-time worker definitions, amnesty for businesses in violation of the individual mandate from 2015 to 2018, and a delay on the “Cadillac tax” until 2023. The latter has been a contentious sticking point for proponents and critics of the ACA, with the 40 percent excise tax on select health insurance plans having been delayed since its introduction.

A Change is Gonna Come (at the IRS). On Thursday, House and Senate staffers met to discuss H.R.5444, a bill that improves a number of IRS functions and further protects taxpayers. Rep. Lynn Jenkins (R-KS), who chairs the House Ways and Means Committee’s Oversight Subcommittee, said last week that she sees light at the end of the tunnel and is hopeful a deal will be reached shortly. The bill, passed by the House in April, would establish an appeals office in the tax collection agency and strengthen programs to combat and help victims of identity theft and scams. In the Senate, S.3246 and S.3278 are similar to their House counterpart. These bills include language passed in the House that encourages IRS officials to make recommendations to Congress regarding improvements to the agency down the road. The agency revamp, which has been underway for the past couple of years, would make the most significant changes to the IRS since 1998. There is the potential that the combined legislation could advance after the midterm elections.


RegWatch

OIRA Administrator Naomi Rao on the Regulatory Process. Last week, Bloomberg Government held a conversation with Office of Information and Regulatory Affairs (OIRA) Administrator Neomi Rao to discuss the Office of Management and Budget’s new Memorandum of Agreement (MOA) with Treasury. Under the MOA, Treasury and OIRA have made a number of arrangements to afford OIRA the opportunity to review tax regulations released by Treasury, while simultaneously expediting review for certain regulations related to the Tax Cuts and Jobs Act. Thus far, OIRA has reviewed six proposed rules.

Administrator Rao explained that OIRA seeks to ensure agency regulations are legal and in alignment with President Trump’s policy priorities. Her objective is to reduce the regulatory burden and duplication across federal agencies. Administrator Rao said her initial approach is to determine whether or not there is a need for regulation in a particular area; if not, she prefers to let the market create a solution, rather than the government.

Going forward, Administrator Rao wants to increase the transparency of the review process with the goal of making it clearer to the American people what regulations are in the pipeline or need to be addressed. She expects next year to be more deregulatory than this year, as the pace of reform accelerates.

Opportunity Zones Regs Imminent. On Sept. 12, OIRA received proposed regulations from Treasury on “Capital Gains Invested In Opportunity Zones,” hinting the proposed regulations may soon be released. The TCJA’s opportunity zones are intended to incentivize investment in economically distressed regions of the country by providing tax benefits to investors. Last week, Treasury Secretary Steven Mnuchin announced that he expects more guidance to be released within the next couple of weeks. Although the MOA states that OIRA and Treasury have ten days to review regulations regarding TCJA, the timeframe can be extended if both agree more time is necessary. In a meeting with Treasury Secretary Steven Mnuchin, mayors from around the country asked that the anticipated regulations not conflict with current incentives to bolster investment.


1111 Constitution Avenue

Face the Facts. On Wednesday, September 26, the House Ways and Means Subcommittee on Oversight held a hearing entitled “IRS Taxpayer Authentication: Strengthening Security While Ensuring Access.”

The purpose of the hearing examined how the Internal Revenue Service (IRS) verifies taxpayer identities through online applications and platforms, in addition to exploring vulnerabilities in the current IRS vetting process. The hearing predominantly focused on issues related to the IRS’s ongoing implementation process, public-private correspondence, and international cooperation. See our full write up of the hearing here.

One of the more interesting takeaways from the hearing was that the IRS is actively looking into technologies like facial recognition to combat identity theft. IRS Chief Information Officer Gina Garza noted that although the technology is promising and being explored and tested internationally, there is no “silver bullet” or a one-size-fits-all approach to taxpayer authentication and identity security. Both Garza and Chief Privacy Officer Edward Gillen added that while the agency is actively piloting unique technologies, engagement with state governments, federal contractors, and private sector stakeholders at the IRS Security Summit should continue to yield positive results as the IRS fights to stay ahead of cybercriminals.

JCT Gets Dynamic. Last week, the Joint Committee on Taxation (JCT) released new analysis of one of the bills included in Tax Reform 2.0, concluding that an extension of the individual provisions would lead to increased economic growth in the initial years following enactment of the legislation. The nonpartisan agency released a dynamic analysis of the Protecting Family and Small Business Tax Cuts Act of 2018 (H.R.6760) noting that provisions included in the bill would add $93 billion to the economy over the next decade, while the deficit would increase interest payments on the debt by about $7 billion. Under this dynamic analysis, the cost of the bill is $545 billion, down from the initial $631 billion under the static estimate. Over the long-term, however, JCT explained the benefits would begin to disappear as the increased debt would lead to an interest rate hike, negatively impacting the overall economy.


Regulation Station & Regulations On-Deck
Regulation Latest Action Regulation Link Comment Countdown Brownstein Commentary
Debt Equity Documentation Sept. 24 REG-130244-17 82 Days  
Dividend Equivalency 871(m) Sept. 20 Notice 2018-72 No Comment Period Washington Update
GILTI I Sept. 13 REG-104390-18 60 Days After Federal Register Publication  
SALT Aug. 23 REG-112176-18 9 Days Washington Update
Executive Compensation Aug. 21 Notice 2018-68 38 Days Washington Update
Passthrough
Businesses
Aug. 8 REG-107892-18
Notice 2018-64
Deadline Passed Oct. 1 Washington Update
Full Expensing Aug. 3 REG-104397-18 5 Days  
Education Savings July 30 Notice 2018-58 No Comment Period Washington Update
Higher Education Excise Tax June 8 Notice 2018-55 Deadline Passed Sept. 6  
Carried Interest March 1 Notice 2018-18 N/A  
Health Savings Accounts March 5 Rev. Proc. 2018-18
Rev. Proc. 2018-27
N/A  
Opportunity Zones Feb. 8 Notice 2018-48
Rev. Proc. 2018-16
No Comment Period  

 

 

 AT A GLANCE

  • On Monday, Oct. 1, Charles Rettig was sworn in as the 49th Commissioner of the IRS. He already has a full plate with cybersecurity threats and challenges from Sen. Ron Wyden (D-OR) over the Johnson Amendment.

  • The New Jersey governor’s office last week introduced regulations that would provide state and local tax (SALT) workarounds for state taxpayers in the form of charitable funds and tax credits. Under the rule, taxpayers would be able to invest in specific public works charities – including schools, public safety, and infrastructure – and subsequently receive one-for-one tax credits that can be allocated up to 90 percent of their property taxes.

  • If Democrats take the House, the House Ways and Means Committee Chairman, Rep. Richard Neal (D-MA), could choose to have the Joint Committee on Taxation and Ways and Means staff review President Trump’s tax returns.

 

 

BROWNSTEIN BOOKSHELF

  • Confused by the modified safe harbor explanations of eligible rollover distributions? Not to worry—here’s everything you need to know.
     
  • The SEC has signaled it may change its regulatory approach to proxy advisory firms. BHFS gives you the lowdown in a recent article.
     
  • It seems like the cryptocurrency market is constantly changing, requiring regulators to adapt accordingly. Learn more about specific requirements in Colorado here.

 

 

DID YOU KNOW?

Three House Democrats broke ranks last Friday to vote in favor of the Protecting Family and Small Business Tax Cuts Act (H.R. 6760), or the portion of Tax Reform 2.0 that would make permanent the individual tax cut, simplification, and pass-through provisions of last year’s TCJA. The three members – Reps. Conor Lamb (D-PA), Kyrsten Sinema (D-AZ), and Jacky Rosen (D-NV) – all share the following characteristics:

  • incumbents running as first-time candidates for new seats
  • currently in races rated “toss-up” or “Lean Democratic” by the Cook Politico Report
  • in battleground states decided in 2016 by less than 3.5 percentage points