Washington Snapshot: Treasury Solicits Input on UBIT Guidance, SALT Workaround Regulations Coming Soon
In This Week's Edition of Snapshot…
- Senate Finance Committee Considers Treasury Nominee
- Treasury Solicits Input on UBIT Guidance with Notice 2018-67, Releases Priority Guidance Update
- SALT Regulations Update
- Primary Elections Held Recently in 13 States
- In the States: States Weigh Wayfair Decision
Yesterday, the Senate Finance Committee held a hearing to consider the nominations of Michael Faulkender to be assistant Treasury secretary for economic policy and Elizabeth Darling to be HHS commissioner on children, youth, and families.
Chairman Orrin Hatch (R-UT) assured the nominees that the Committee will try to move as quickly as possible in considering their nominations. Meanwhile, Ranking Member Ron Wyden (D-OR) expressed his expectation that, if confirmed, each nominee would conduct their work with integrity and in a manner that will “give Congress and the public reason to believe [that] Treasury’s economic analysis is trustworthy.”
On Tuesday, the Treasury Department released Notice 2018-67, which requests comments on the recently enacted requirement that charities must compute unrelated business income separately for the purposes of unrelated business income tax (UBIT). According to Steptoe & Johnson LLP, “The notice outlines general concepts for identifying separate trades or businesses for purposes of section 512(a)(6) [of the Tax Cuts and Jobs Act, P.L. No. 115-97] and provides that an exempt organization may rely on any reasonable, good-faith interpretation, taking into account all the facts and circumstances, when determining whether the organization has more than one unrelated trade or business.”
The Council has asked Treasury to delay the implementation of both this provision and that of section 512(a)(7)—which would impose UBIT on nonprofit employee fringe benefits. These provisions have been in place and effective since Jan. 1, 2018. However, key questions remain unanswered with respect to both new provisions, which prevent charities from understanding whether they are liable for UBIT on certain fringe benefits provided to their employees, as well as how to calculate unrelated business income overall. The Council will be submitting comments in response to Treasury’s request and will share those with Council members when available. Comments are due to Treasury by Dec. 3, 2018.
The update indicates that many of the projects remain unfinished—including issuing guidance on section 512(a)(6) UBIT changes on unrelated business income discussed above, as well as guidance on section 512(a)(7) changes around taxing nonprofits on employee fringe benefits—were not included as a priority in this update. Treasury had hoped to release this guidance in June.
Other outstanding guidance projects resulting from the 2017 tax code overhaul include the excise tax for nonprofit executive compensation and estate and gift taxes.
The Treasury Department is expected to release its guidance on proposed workarounds for the newly enacted cap on the state and local tax (SALT) deduction. According to the Wall Street Journal, “The Trump administration is finishing what’s expected to be a crackdown on state laws circumventing the new $10,000 federal cap on individual deductions for state and local taxes. The rules are likely to halt a strategy embraced in New York, New Jersey and Connecticut, high-tax states where high-income residents are getting pinched by the cap.”
The $10k cap was established by last year’s tax code overhaul, and high-tax states have been considering and enacting laws that would let taxpayers claim a credit against state taxes if they donate money to a state-backed charity. While high-tax states are bracing for the likelihood that Treasury’s rules will disallow these workarounds, other states who have long had similar programs in place could also be affected. The Journal article notes, “For instance, Arizona, Alabama, Georgia and South Carolina let taxpayers get a 100% state tax credit for donations to charities supporting private schools. That is more generous than the New York, New Jersey and Connecticut proposals and those programs have important political backing from Republicans and the conservative school-choice movement.”
In the weeks ahead, we will include updates from the midterm election trail. This is intended to provide nonpartisan, matter-of-fact election news about the primary races that will play a key role in the outcome of the November elections.
Since our last edition of Washington Snapshot, there have been primary elections in 13 states, including: Tennessee, Kansas, Michigan, Missouri, Washington, Hawaii, Connecticut, Minnesota, South Dakota (runoff), Vermont, Wisconsin, Alaska, and Wyoming—and there have been many notable outcomes.
Although none of these primaries involved what Axios has identified as the “five most competitive House races in the midterms,” they did result in a lot of potential “firsts.” In Michigan, Rashida Tlaib won her primary for former Congressman John Conyers’ seat, and is set to become the first Palestinian-American woman in Congress. Voters in Connecticut’s 5th district elected former National Teacher of the Year Jahana Hayes as the Democratic nominee—which, if she wins in the general election in November, would make her the first black woman to represent Connecticut in Congress. In Minnesota, Ilhan Omar won her primary for Rep. Keith Ellison’s seat (he is leaving Congress to run for Attorney General in Minnesota), becoming the first Somali-American woman set to be elected to Congress. In Wisconsin, Leah Vukmir won her primary for Senate—putting her in the running to become Wisconsin’s first ever female Republican senator.
Arizona and Florida (as well as Oklahoma with a runoff race) will hold their primary elections next week—rounding-out the collection of primaries for the month of August.
Exclusive from our colleagues at the National Council of Nonprofits.
The U.S. Supreme Court’s recent decision in South Dakota v. Wayfair, Inc. overturns precedent and makes clear that states have the power to impose taxes on entities beyond their borders. The decision allows states to collect sales taxes for online purchases of goods and services from sellers without a physical presence in the state. The case arose from a 2016 South Dakota law permitting state and local taxation on internet sales for vendors that made at least 200 transactions with or $100,000 in sales to residents. The State argued that an economic presence rather than a physical presence test should be recognized as legally sufficient.
Twenty-one states have statutes similar to South Dakota’s in place to tax out-of-state sales and are looking to quickly implement the their laws through registration and remittance requirements beginning as soon as September 1. Other states are reportedly re-evaluating their laws to tap into the estimated $13 billion to $26 billion in new tax revenues that could result from adopting Wayfair-approved laws. Legislators in Kansas and Louisiana introduced bills this year specifically citing Wayfair in anticipation of the ruling. The Kansas legislation failed, but the new Louisiana law broadened the definition of “dealers” to persons who met the same criteria as the South Dakota thresholds. Interestingly, the New Hampshire Governor called a special session to protect resident businesses from outside taxing authorities, but no bill was passed. Some states and sellers may look to Congress to set federal uniformity standards to avoid confusion across the country; however, states may choose to take action because Congress may not respond favorably or quickly to the ruling.
The Wayfair decision could have significant implications for foundations and charitable nonprofits, as purchasers and sellers online. Nonprofit organizations could also lose out in upcoming state tax reform legislation as states seek to adjust their laws to take full advantage of their newly recognized powers. States currently are not consistent in whether some or all nonprofits are exempt from sales taxes as purchasers and as sellers. As a result, the immediate impact of the Wayfair decision is confusion about when, where, and how nonprofits should be paying and/or charging sales taxes. Legislatures that open up their sales tax laws for reforms can – whether intentionally or inadvertently – impose taxes on previously exempt nonprofits, as was the case earlier this year in Kentucky. It will be incumbent upon nonprofits to make sure their elected officials understand why their organizations are exempt from taxes. If state law currently requires charitable organizations to pay sales taxes, then the Wayfair decision may present an opportunity for nonprofits to bring the state in line with the majority of states that exempt nonprofits from paying or charging sales taxes.