IRS Announces More Refund Delays

Early in tax-filing season, the IRS warned that taxpayers who had filed prior to January 26 might see delays of a week beyond the projected date shown in the online “Where’s My Refund” tool. Since February 15th the “Where’s My Refund” tool has displayed a message indicating further delays.

Some taxpayers who have filed electronically are getting a message that there is no information regarding their return from the “Where’s My Refund” tool. The IRS is aware of the situation and expects it to be resolved in a few days, at which time taxpayers will be able to get an expected refund date when they visit “Where’s My Refund”.

The IRS is asking taxpayers not to repeatedly call the agency to inquire about their refunds even if they are getting mixed signals from the “Where’s My Refund” tool.

Update on Repair and Maintenance Rules

For many years determining whether an expenditure was a tax-deductible repair expense or must be treated as a capital improvement has been an area of controversy. Taxpayers generally want to get the benefit of an immediate deduction which is only available if the expenditure qualifies as a repair.

This issue has been addressed by many court decisions with varying results. In 2008 the Treasury released proposed regulations to try to bring some clarity to the issue. This was the government’s response to two taxpayer-friendly court decisions. The basic premise of the proposed regulations is that the unit of property being repaired or replaced must be identified. Once the unit of property is identified, the next step is to determine if the expenditure meets a series of tests. If the expenditure meets one of these tests, the expenditure should be capitalized. A unit of property is improved if the expenditure:

1. Results in a betterment to the property, by increasing capacity, productivity, efficiency, strength or quality;
2. Results in a material addition to the property, such as physical enlargement, expansion or extension;
3. Replaces a major component or substantial structural part of a unit of property;
4. Adapts the property to a new or different use;
5. Extends the useful life of the unit of property, such as rebuilding the property to a like-new condition after the end of its useful life; or
6. Ameliorates a material condition that existed prior to the acquisition of the property by the taxpayer.

Identifying the unit of property is very important. For items of personal property, the unit of property is determined based on the functional interdependence of the component parts. For real property, the 2008 proposed regulations considered a building to be a unit of property. This interpretation made it possible to treat the replacement of a roof as a deductible repair under certain conditions. The reason it was possible to expense a roof replacement was that it was not considered a major component or substantial part of the unit of property (the building).

In December, 2011 the Treasury issued new temporary regulations which replace the 2008 proposed regulations. These regulations are effective for taxable years beginning on or after January 1, 2012. Although the tests for betterment, restoration and adaptation are still in the regulations, the rules on buildings have been changed. Under the new rules, building systems are considered separate from the building structure. Building systems include the following: HVAC, plumbing, electrical, elevators, escalators, fire protection, security systems and other items to be determined by regulations at a later time.  

The new regulations provide several examples dealing with roof repairs and replacements. They conclude that a replacement of a complete roof or a substantial part of the roof must be capitalized as a restoration of the unit of property. One example concludes that the replacement of a roof membrane but not the decking or insulation can be deducted as a repair because the roof membrane is not considered a major component.

The question of whether an item qualifies as a deductible repair is a fact-intensive question and involves complex rules. It is advisable to discuss major repairs with your tax advisor to determine the tax consequences.

Pennsylvania Clarifies Sales Tax Nexus for Remote Sellers

In December, 2011 the Pennsylvania Department of Revenue issued Sales and Use Tax Bulletin 2011-01 to clarify the sales tax obligations of remote sellers. For this purpose, a remote seller is someone outside PA. The power of a State to require a business to collect sales tax has been an area of confusion and controversy for decades. Generally, a State cannot tax interstate commerce unless the out-of-state seller has sufficient contact with the state to give the state jurisdiction to tax the transaction. This contact is called “nexus”.

In the case of National Bellas Hess, the U.S. Supreme Court ruled that an out-of-state seller did not have nexus in a state if the only communication between the buyers and sellers was by mail or common carrier. The Supreme Court addressed this question again in the Quill Corp. v. North Dakota case. In that case the court ruled that a physical presence was required in a state before a requirement to collect sales tax could be imposed on the seller.  In Scripto, Inc. v. Carson, the Supreme Court stated that when determining whether a business has tax nexus with a state, which in part is dependent upon the physical presence within the state of representatives of that business, it does not matter whether the representatives are regular employees of the company, or are independent contractors hired by the company.

Today the amount of sales being transacted by electronic commerce has grown exponentially and states are concerned that they are not receiving the tax revenue that they should. The Commonwealth of Pennsylvania is concerned about this revenue loss and issued guidance to help sellers determine if they should be collecting PA sales tax. To meet the physical presence test established by the Supreme Court, PA requires vendors that are maintaining a place of business within the Commonwealth to collect sales tax on each retail sale. What exactly does it mean to maintain a place of business? The PA law tries to explain what this means. Excerpts of the law are shown below.

 The law defines maintaining a place of business in this Commonwealth” as:

(1)     Having, maintaining or using within this Commonwealth, either directly or through a subsidiary, representative or an agent, an office, distribution house, sales house, warehouse, service enterprise or other place of business; or any agent of general or restricted authority, or representative,…

(2)     Engaging in any activity as a business within this Commonwealth by any person, either directly or through a subsidiary, representative or an agent, in connection with the lease, sale or delivery of tangible personal property…….

(3)     Regularly or substantially soliciting orders within this Commonwealth in connection with the lease, sale or delivery of tangible personal property…………by means of catalogues or other advertising, whether the orders are accepted within or without this Commonwealth

(3.1)  Entering this Commonwealth by any person to provide assembly, service or repair of tangible personal property, either directly or through a subsidiary, representative or an agent.

(3.2)  Delivering tangible personal property to locations within this Commonwealth if the delivery includes the unpacking, positioning, placing or assembling of the tangible personal property.

The Bulletin issued provides examples of activities that they believe establish nexus for sales tax purposes. The examples include the following areas:

(1)     Storing property in the state,

(2)     Having a contractual relationship with an entity or individual physically located in Pennsylvania whose website has a link that encourages purchasers to place orders with the remote sellers,

(3)     Using affiliates, agents and/or independent contractors located in PA to provide repair, delivery or other service relating to tangible personal property sold by the remote seller to PA customers’

(4)     Regularly soliciting orders from PA customers via the website of an entity or individual physically located in PA, such as via click-through technology,

(5)     Accepting orders that are shipped to PA customers from a PA facility which is operated by a remote seller’s affiliate, agent or independent contractor,

(6)     Having affiliates, agents and/or independent contractors provide services in PA (including, but not limited to storage, delivery, marketing or soliciting sales) that benefit, support and/or compliment the remote seller’s business activity,

(7)     Having employees regularly travel to PA for any purpose related to the seller’s business activity.

Pennsylvania established a deadline of February 1, 2012 for businesses to comply with these rules and become licensed to collect sales tax. This deadline has now been extended to September 1, 2012 to enable companies to have more time to make necessary changes to their accounting systems.

Pennsylvania realizes that many sales take place with out-of-state sellers that have no nexus with PA and therefore, do not collect sales tax. In those situations, the buyer is required to remit the sales tax directly to PA in the form of use tax. Many businesses are familiar with filing use tax returns but individuals rarely remit use tax. To encourage individuals to remit use tax, the 2011 individual income tax return includes a line to add use tax.

If you are a business that sells to customers in Pennsylvania you should review your activities and determine if you should become licensed in Pennsylvania.

Congress Targets IRA Assets

Generally IRA funds must begin to be distributed when the account holder attains age 70 1/2.  The funds are usually distributed over the life expectancy of the account owner and a hypothetical beneficiary who is 10 years younger than the participant. The life expectancy is reflected in the Uniform Lifetime Table issued by the Treasury. If the account owner dies and leaves the benefits to a spouse or other individual beneficiary, the benefits can be paid-out over the individual beneficiary’s life expectancy. However, if the beneficiary of the account is the participant’s estate, rather than an individual, the assets must be distributed within five years.

For many years planners have deferred income taxes on IRA benefits by “stretching” the pay-out period over the life of a young beneficiary and avoiding the five-year payout period required for estates. The government has noticed the large amount of taxes being deferred on these funds and thay are looking for ways to accelerate the taxes.

On February 7, 2012, Senator Max Baucus Announced the Modified Chairman’s Mark of The Highway Investment, Job Creation and Economic Growth Act of 2012. One of the revenue raisers in this proposal targets the IRA distribution rules. The proposal would require the retirement savings accounts to be treated, for tax purposes, as distributed within five years of the death of the account holder, unless the beneficiary is the account holder’s age, a child with special needs or older than 70.

It is unlikely that this proposal will become law but it is worth mentioning and we will follow its progression through Congress. With the size of the federal deficit, the potential tax dollars being deferred by IRA and other retirement accounts will almost certainly be an area of interest to the tax-writing committees in Congress.