District of Columbia
Property sales resulting in unincorporated business termination may become taxable.
The District of Columbia enacted the Budget Support Act of 2020 (BSA) (L. 2020, Act 23-404) on October 1, 2020, which amended the definition of “taxable income” to include gain from the sale of any assets or other disposition of any assets, including real property, tangible assets, and intangible assets in the District, even when such a sale would result in the termination of an unincorporated business. This amendment became effective January 1, 2021.
In response to the enacted BSA, the D.C. Office of Tax and Revenue (OTR) has released a proposed amendment to their franchise tax rule under Regulation 117 requiring that unincorporated businesses subject any gains from property dispositions resulting in the termination of their business to franchise tax.
Any unincorporated business that believes it is exempt from the tax is required to request a ruling from the District CFO thereon if—
- the trade or business renders personal services; and
- the trade or business is not specifically exempted by the act or unincorporated business tax statutes.
Such a ruling request must be in writing and include the following information:
- The taxpayers’ name, address, and Federal Employer Identification Number (FEIN)
- The facts and circumstances concerning the specific tax matters for which they are requesting guidance;
- The statutory or judicial authority upon which they are relying;
- The relief requested; and
- A “penalties of perjury” statement signed and dated by the taxpayers.
Any public comments on the proposed regulation amendment are to be received by November 14, 2021, when the OTR will take final rulemaking action in finalizing the amendment.
This proposed regulation should be communicated to all D.C. Unincorporated Business Tax clients that have undergone or anticipate having a property disposition prior to the end of the 2021 calendar year for year-end tax planning purposes. Needless to say, CPAs need to be aware of this proposed regulation in order to properly advise taxpayers.
Businesses required to report new hires of independent contractors.
Florida businesses will now be required to submit new hire information for independent contractors to the Florida Department of Revenue. This requirement went into effect as of October 1, 2021. Existing law previously required the reporting of employee new hires, and this new law expands the reporting to independent contractors.
Under the law, employers, and now “service recipients,” are required to do the following:
- Report new hires of employees and independent contractors to the State Directory of New Hires, Florida Child Support Services Program;
- Reflect payments in an amount of $600 or more per calendar year for services rendered in the course of a trade or business;
- The report must include the name, address, and Social Security number (or other identifying number), and dates of services of the independent contractor along with the name, address, and federal employer identification number of the service recipient;
- File the report within 20 days after the earlier of either the date of the first payment or the date on which the contract was entered into.
A limited exemption exists from this new reporting requirement for employees and independent contractors working for, or under contract with, a federal or state agency in the intelligence or counterintelligence space, where reporting this information would endanger the safety of the worker or compromise an ongoing investigation. The report may be submitted by mail, fax, or through an online reporting tool.
As CPAs are aware, the issue of proper worker classification is an increasing area of concern among both state and federal tax and labor enforcement authorities. Florida businesses hiring independent contractors should first survey their use of independent contractors to determine whether they will meet the $600 reporting threshold to comply with the new law. Second, businesses should evaluate their workforce to ensure proper worker classification status in order to mitigate potential audit risk as well as to bolster documentation that supports worker classification determinations.
Expansion of sales and use tax to digital products. Effective March 14, 2021, the newly enacted Maryland House Bill (HB) 932 has expanded the application of sales and use tax to digital codes and products. Taxability includes certain digital codes and products when the customer tax address is located within the state. The application includes out-of-state vendors selling to in-state customers under certain circumstances; some exemptions to this expanded taxability are available.
Sales and use taxability under the HB 932 are expanded to include the sale of digital codes and products made to a “customer tax address” within the state. The application expands various digital products, including education, entertainment, information sources, photography and video, and software. The application applies to out-of-state vendors selling to customers within the state of Maryland and will create nexus only if gross revenue from the sale of digital product exceeds $100,000 or if there are 200 or more separate transactions that involve digital products within the state.
“Digital code” is defined as a code that may be obtained by any means, including in tangible form, such as a card, or through e-mail. This code must provide the buyer with a right to obtain one or more digital products. This definition does not include a gift certificate or gift card with a monetary value that may be redeemable for an item other than a specified digital product.
“Digital products” are defined as products that are obtained electronically by the buyer or delivered by means other than tangible storage media through the use of technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities. This definition includes prerecorded or live music delivered digitally, newspapers, magazines or other publications, books/e-books, digital download or stream of motion pictures, music, live events, digitized sounds used to alert users of communications (e.g., ringtones), subscription or license to access content online, or subscription or license to use a software application. Digital products also include prerecorded or live music, performances, audio books or speeches, access to or use of video or online games, online classes or instructions, or access to chat rooms, discussions, or weblogs, among many others.
The state’s expansion of sales and use tax also includes Software as a Service (SaaS), as noted above under digital products, because it includes a subscription or license to use a software application. The law revised the list of taxable services to state “fabrication, printing, or production of tangible personal property or a digital product” [emphasis added]. A taxable service is subject to sales tax, regardless of how the service is delivered.
Sales tax on digital products, including SaaS, will not apply on customized software or sales made to the federal government or exempt organizations. Other items excluded from sales tax under HB 932 include the resale of a digital product, property intended for use in another state, and research and development.
The “customer tax address” includes the following considerations, which should be applied in the following order:
- The business location of the vendor when the digital product is received by the buyer at such location;
- The location of the primary use of the product;
- The location where the digital product is received by the buyer, or by a donee of the buyer that is identified by the buyer, if known to the vendor and maintained in the ordinary course of the buyer’s business;
- The location indicated by an address for the buyer that is available from the business records of the vendor that are maintained in the ordinary course of business;
- The location indicated by an address for the buyer obtained during the consummation of the sale, including the address of the buyer’s payment instrument; or
- If none of the above is present, then the U.S. location of the vendor’s headquarters, the location where the vendor has the greatest number of employees, or the location where the vendor makes the digital products available for electronic transfer.