California Governor Brown Signs Internet Sales Tax Settlement

California Governor Brown Signs Internet Sales Tax Settlement

By Mark Muntean

On Friday, September 23, 2011, California Governor Jerry Brown signed into law a negotiated settlement Amazon.com Inc., which postpones a new California law requiring Amazon to collect sales tax on online Internet transactions in California.  Amazon, for its part, agreed to drop its initiative effort to repeal the online tax.    The settlement is expected to cost California $200 million. 

Amazon also agreed to begin collection of California sales taxes in September 2012, unless Congress acts to establish a national standard in connection with the applicability of sales taxes to Internet sales.   Amazon’s focus is not on Congress since legal experts believe California’s Internet sales tax law violated the U.S. Constitution.  

In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), a 1992 U.S. Supreme Court decision, the Supreme Court held that sales were not subject to incidence of sales tax unless the seller had “nexus” with the tax state.  Previously, Amazon fired its affiliates in California to avoid any nexus with California.  The Commerce Clause of the U.S. Constitution gives the federal government power to regulate interstate commerce and prohibits certain state actions, such as applying sales and use taxes that interfere with trade among the states.  In National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 US 753 (1967), it was held that a business whose only contacts with the taxing state are by mail or by common carrier lacks the "substantial nexus" required under the Dormant Commerce Clause.  The Commerce Clause is a frequent source of frustration for California as it reaches out to tax someone.

Thus, while the state cannot tax sales by businesses with no nexus with the state, Congress does have the power to regulate interstate sales.  However, it is difficult to see how the parties expect Congress to enact a federal standard for Internet sales taxes in a presidential election year.

Amazon also promised to hire 10,000 workers in California and spend $500 million on California distribution centers.  Several trade associations and retailers supported the bill since the new tax law results in a significant loss in sales to over 10,000 merchants, many of which were small businesses. 

Brentwood Couple Sentenced for State Income Tax Evasion and Concealing Property

Brentwood, California Couple Sentenced for State Income Tax
by Mark Muntean

A Brentwood, California man pleaded no contest to one felony count of California state income tax evasion and one felony count of concealing property with intent to evade the collection of tax.  His wife pleaded no contest to one misdemeanor count of state income tax evasion.

John Meza, 37, was sentenced to serve 120 days in county jail; pay us nearly $163,000 restitution representing the unpaid tax, interest, penalties, and cost of investigation; and serve three years formal probation. Jessica Meza, 40, was sentenced to serve two years probation; 200 community service hours; and is jointly and severally liable for the restitution with John Meza.

The couple immediately provided us a check for $50,000 towards the restitution.

According to court documents, the couple owned and operated seven sandwich shops and a newspaper distribution business in the Bay Area. They failed to file state income tax returns for the 2004 through 2007 tax years and failed to report more than $800,000 in taxable income. The California Franchise Tax Board (“FTB”) initiated the investigation after the couple failed to respond to numerous notices demanding they file their delinquent California personal income tax returns.

In addition, in 2006, the couple opened a bank account using false social security numbers and deposited checks into this account in order to evade or defeat collection of their personal income tax due.  This was a very big mistake.  Taxpayers that have not filed tax returns can come forward and working through an attorney can often resolve their issues with the FTB.  However, here the taxpayer took an extra step to hide money from the FTB.  Taxpayers should never ever under any circumstances take that extra step to hide money.  These are treated as badges of dishonesty and always end up badly. 

Contra Costa County Superior Court Judge William Kolin handed down the sentence in Department 18 of the Walnut Creek Superior Court. The case was prosecuted by Contra Costa County Deputy District Attorney Stacey Grassini.

The FTB criminal investigation program identifies and investigates cases of tax evasion and tax fraud to encourage compliance with California income tax laws and maintain the public trust.

Amazon cuts deal on California sales taxes

September 8, 2011

Reporting from Sacramento—

Amazon.com cut a tentative deal with legislative leaders Wednesday night that would allow it to postpone collecting sales taxes from Californians for another year.

The company in turn would drop its battle to overturn the state's new law that required it and many other out-of-state online retailers to collect the taxes.

Under the deal, Amazon would delay collecting taxes until September 2012, Assemblyman Charles Calderon (D-Whittier) said. The new law had mandated that Internet retailers start collecting state taxes in July if they had offices, workers or other connections in California.

Amazon had refused to collect the taxes and poured $5 million into collecting signatures for a ballot referendum challenging the law.

If Congress acts by next summer to settle the contentious issue of how online retailers should be taxed, that decision would override Amazon's deal with California.

"It's a safe harbor for up to a year," Calderon said of the agreement he helped strike. "If they can't get Congress to act by next July, then they will start to collect the tax in September 2012. If by chance they get Congress to act, then that would trump the state law."

There was no word from Gov. Jerry Brown about whether he would support the deal. Last week he rejected an olive branch from Amazon that included the offer of opening two distribution centers in the state in exchange for being allowed to start collecting the tax in 2014.

"I'm concerned about anything that would reduce revenues going forward because we're in a very uncertain economy," the governor said last week. "We need more revenues unless we're going to keep curbing schools, courts, corrections."

Brown's office did not return calls for comment Wednesday night.

Calderon said he had not heard from the governor. "He hasn't indicated one way or another," the legislator said. "Our hope and our guess is that he will support this. It will do away with litigation that has serious implications for the state."

The tax was a key part of the state's $86-billion budget that Brown signed in late June. It was forecast to bring in $200 million annually.

Big-box stores and other retailers had supported the new law, saying that online companies that didn't have to collect taxes had an unfair competitive advantage.

To prevent Amazon from challenging the law, legislators in the session's waning days hit upon a parliamentary trick. They tried to get two-thirds approval for a bill reinstating the tax as an "urgency" measure, which would be immune to a referendum.

On Tuesday, the measure fell five votes short of passing in the state Senate. Calderon said he was confident that with the deal in place, the measure would pass by the required margin. He credited Senate Minority Leader Bob Dutton (R-Rancho Cucamonga) with starting the talks that led to the deal.

IRS Publishes New Cost Basis Regulations

New rules would address three concerns of 2010 regulations

By Marlene Y. Satter

September 1, 2011

The IRS is preparing to issue three regulations to address concerns created by its issuance of regulations last October surrounding reporting the cost basis of stocks (TD 9504). 

In June, the IRS issued Notice 2011-56, which offers a favorable resolution to the issues, according to a commentary by Stevie D. Conlon, senior director & tax counsel, risk & compliance, securities tax solutions, for Wolters Kluwer Financial Services

The first matter concerned the ability of a customer to opt out of a broker’s default method of lot relief for determining cost basis on the sale of average basis eligible mutual fund and dividend reinvestment plan shares.

The final regulations had not provided for the customer to be able to undo the calculation of average basis of shares held and acquired prior to the opt-out, even if the customer had not sold any shares before opting out. However, the final regulations had included a way for customers to opt out of averaging if they had elected averaging and no shares had been sold.

It is now expected that customers will be able to opt out of averaging if it was the broker default choice, under appropriate conditions.

The second rule would clarify treatment of cash instead of fractional shares issued in dividend reinvestment plans. If a customer receives cash instead of fractional shares and that cash is not sufficient to reinvest 10% as is required for a dividend reinvestment plan, the plan would not be disqualified as a CDRP on that basis. The previous regulation had not been specific on that point.

The third would clarify that lot relief methods are applied on an account-by-account basis, since limitations imposed by both technology and systems and the lack of knowledge by a broker about a customer’s other holdings would make it impossible to apply otherwise.