All posts by Tyler Hamelwright

Arizona’s Out-of-State Seller Transaction Privilege Tax Now in Effect

Out-of-state sellers must now begin collecting transaction privilege tax (TPT) in the state of Arizona.

A remote seller that makes direct sales to Arizona customers and ships products into the state, but does not itself have a physical presence in Arizona will pay the tax to the Arizona Department of Revenue (ADOR).  A remote seller is required to pay TPT if in the current or previous calendar year annual gross proceeds or gross income derived from direct sales into Arizona is more than $200,000 in 2019, $150,000 in 2020, and $100,000 in 2021 and beyond.

The tax also requires a marketplace facilitator, which is any business facilitating the sale of goods by listing or advertising items on behalf of others, to collect and remit TPT if in the current or previous calendar year annual gross proceeds of sales or gross income through its platform exceeds $100,000 into Arizona.

For remote sellers and marketplace facilitators, the next key date will be November 1, 2019, when they will begin formally filing and paying their TPT for the October reporting period.

To assist businesses from other states comply with the remote seller tax, the Arizona Department of Revenue E-Commerce Compliance and Outreach (ECCO) team is in place to answer any questions about the legislation and the licensing and registering process. Additionally, ADOR specialists are providing guidance to Arizona-based retailers about other states with remote seller programs. The ECCO team can be reached Monday to Friday from 8 a.m. to 5 p.m. (MST) by phone 833-293-7253 (833-AZeSale) or by email azesale@azdor.gov.

The Department of Revenue also has a dedicated section on its website – www.azdor.gov/out-of-state-sellers – that has information on the legislation, TPT requirements, frequently asked questions, examples and other information.

On May 31, 2019, remote seller legislation was signed into law, which was the result of a 2018 ruling by the U.S. Supreme Court in South Dakota v. Wayfair. The decision allows states to require out-of-state businesses without a physical presence to collect and remit tax on sales from transactions in their state.

For more information on the Arizona Department of Revenue, visit https://www.azdor.gov.

Registration under New Remote Seller and Marketplace Facilitator Tax Laws Opens September 9

Out-of-state sellers and marketplace facilitators required to file and pay transaction privilege tax (TPT) in Arizona can now register with the Arizona Department of Revenue effective Monday, September 9.

Legislation signed into law on May 31, 2019, requires certain remote sellers and marketplace facilitators to file and pay TPT in the state starting October 1.

A 2018 ruling by the U.S. Supreme Court in the South Dakota v. Wayfair case allows states to require out-of-state businesses without a physical presence to collect and remit tax on sales from transactions in their state.

Out-of-state sellers can go to www.AZTaxes.gov to register for a license and file and pay TPT. As part of the application process a series of questions will assist businesses in determining whether they are subject to transaction privilege tax in Arizona and need to obtain a TPT license.

To further assist remote sellers and marketplace facilitators, the department has a dedicated section on its website – http://www.azdor.gov/out-of-state-sellers – that contains TPT requirements, frequently asked questions, examples, links and other information.

Additionally, the Department of Revenue’s E-Commerce Compliance and Outreach (ECCO) team is in place to assist remote sellers and marketplace facilitators with questions about the legislation and the licensing and registering process. Agency specialists are also providing support to Arizona-based businesses selling into other states with similar remote seller tax requirements. The ECCO unit can be reached Monday to Friday from 8 a.m. to 5 p.m. (MST) by phone: 833-293-7253 (833-AZeSale) or by email: azesale@azdor.gov.

Next Important Dates

October 1, 2019 – the new tax laws for remote sellers and marketplace facilitators take effect. Out-of-state sellers that meet the thresholds and other requirements will begin collecting TPT.

November 1, 2019 – remote sellers and marketplace facilitators will begin filing and paying TPT for the October period.

Remote Sellers

A remote seller makes direct sales to Arizona customers and ships products into Arizona, but does not itself have a physical presence in the state. Physical presence includes having a storefront, people or equipment in Arizona. A remote seller will be required to pay TPT if in the current or previous calendar year annual gross proceeds or gross income derived from direct sales into Arizona is more than $200,000 in 2019, $150,000 in 2020 and $100,000 in 2021, and beyond.

Marketplace Facilitators

A marketplace facilitator is any business facilitating the sale of goods by listing or advertising items on behalf of others, accepting payment on behalf of the seller and remitting payment to the seller. A marketplace facilitator will be required to collect and remit TPT if in the current or previous calendar year annual gross proceeds of sales or gross income through its platform exceeds $100,000 into Arizona.

So you received a letter from the IRS about your bitcoin. Here’s why, and what to do next

Shaun Hunley

The Internal Revenue Service has fired its loudest warning shots yet across the bows of bitcoin investors. In late July, the agency started sending letters to more than 10,000 cryptocurrency holders, warning that they may have violated federal tax laws.

This should not have come as a surprise to anyone, but it’s surely creating headaches for taxpayers and tax professionals who haven’t been sweating the details on cryptocurrency for the last few years. The good news is, it’s not too late to get up to speed. The bad news is, the days of getting a pass by claiming ignorance on the finer points of cryptocurrency tax compliance have come to an end.

At first, confusion about how to deal with the tax side of virtual currency was understandable. At the end of 2013, right when the cryptocurrency hype cycle was starting and bitcoin was valued at roughly $650, major banks, tech companies and accounting firms were convening industry summits to figure out whether cryptocurrency would be taxed as a capital asset, like a stock or a commodity, and thus subject to capital gains rates, or as a fiat currency, such as dollars, euros and yen, for which gains are generally taxed as ordinary income.

By March of 2014, though, the IRS had issued clear guidance on virtual currencies, explaining that it will tax the digital assets as property, not currency. What followed was a five-year drumbeat of announcements and actions that made it clear the IRS was getting serious about crypto. In November of 2016, the agency filed a John Doe summons to the bitcoin trading platform Coinbase, asking for names and other information of everyone who is trading bitcoin. Then, in the summer of 2018, as the price of bitcoin had climbed above the $8,000 mark, the IRS’s Large Business & International Division launched a compliance campaign into how investors who own bitcoin are filing their taxes.

It should have been clear by then that what was once the Wild West was now being carefully monitored. Still, the IRS warning letters issued last month caught many recipients off guard. The reason, of course, is that many people — even tax professionals — still don’t really understand the details of how cryptocurrency is being taxed.

Sure, the IRS categorizes cryptocurrency as property, but keeping track of the tax basis for that piece of property is not as straightforward as many other assets. For one, the price is wildly volatile. This July, the price of bitcoin topped $12,000, which is more than three times its value in December of 2018. In order to accurately calculate gain or loss, anyone selling their bitcoin needs to keep track of its value the day they received it and the day they sold it, and also factor in different tax brackets and other variables that can impact the total amount owed to the IRS. For those who are transacting with bitcoin frequently, those calculations can become exponentially complicated.

Fortunately, the IRS’ steady ramp-up in enforcement acknowledges this complexity, and even those cryptocurrency holders who have received letters still have time to get their houses in order. To help them get started, the following is a general primer on how virtual currency taxes will affect the three primary types of cryptocurrency holders.

Cryptocurrency miners

Many cryptocurrency miners are under the mistaken impression that they are only subject to tax on the amount it costs them to mine the bitcoin. However, according to the IRS, when a bitcoin is mined, the miner is supposed to keep track of what the asset was valued at on that day, and subsequently treat that value as income.

Miners that are engaged in a trade or business are subject to ordinary income, plus self-employment tax. The value of the coin becomes the tax basis, and if you trade or use that bitcoin later, then you have to include in income the value of what you get, minus that tax basis. That requires onerous record-keeping, which many bitcoin miners are not currently set up to do, but is vital to staying compliant with the IRS.

Vendors accepting bitcoin as payment

In May, AT&T announced it would begin accepting bitcoin, which could well be a harbinger of the future of e-commerce. But not all businesses are created equal. A huge corporation like AT&T has armies of accountants and accounting firms to keep track of these transactions. Most, if not all, small businesses don’t have that luxury.

Take, for instance, a small retailer or a consultant that may begin accepting bitcoin. When that small business receives the cryptocurrency, that value is included in the business’s income. But at that moment in time, they now need to track their tax basis in the bitcoin they receive.

For example, if a company sells something for $5,000 in bitcoin, but then uses the bitcoin to buy something else a year later when the price has climbed to $10,000, they now have a reportable gain of $5,000. It’s easy to see how confusing this can get for businesses that don’t have the resources to employ a full-time accounting team to track the daily value of their digital assets.

Investors

While there are many different types of cryptocurrency investors, the principle for them all is roughly the same: Investors have to track when they acquire and how they use the bitcoin.

If an investor is in the business of selling bitcoin, it will be taxed differently than if an investor is engaged in casual tinkering in the cryptocurrency market. The gain recognized by bitcoin sellers will be taxed at ordinary income rates (with a top rate of 37 percent). However, those not in the trade or business of selling bitcoins will benefit from lower capital gains rates (with a top rate of 20 percent).

Employers could also start using bitcoin to pay employees. If they do that, it will add another layer of complexity because the bitcoin would need to be reported on W-2 wages, income tax withholding, employment taxes, etc.

Be prepared

Whether you’ve already received one of these letters from the IRS or you do in the future, it’s undoubtedly unsettling. Frankly, it seems threatening. Rest assured, though, that it is just part of the forced education process the IRS is introducing to the cryptocurrency marketplace. The IRS is essentially putting cryptocurrency holders on notice: We know you have this, and you’re probably treating it improperly on your taxes. That’s why it’s so vital that practitioners help their clients get their ducks in a row. Tax professionals need to change their practice to make sure they are asking and tracking all relevant data. Otherwise, eventually those IRS warning letters will become audits.

Treasury and IRS unveil new Form W-4 for 2020

The Treasury Department and the Internal Revenue Service released a redesigned Form W-4on Friday for tax year 2020, making a number of changes to earlier draft versions of the form after hearing complaints from tax professionals.

The Treasury said it doesn’t expect to make further changes to the redesign beyond some minor updates for inflation adjustments.

“Our dedicated staff at the Treasury and IRS worked tirelessly over the past year to produce a Form W-4 that is more accurate, transparent and simplifies the tax withholding experience for hardworking Americans,” said Treasury Secretary Steven T. Mnuchin in a statement. “We are proud that the Tax Cuts and Jobs Act lowered taxes for most Americans and are enthusiastic that the improved W-4 will help taxpayers better determine the correct withholding amount for their personal financial situation to more readily reap the benefits of historic tax reform.”

Form W-4 for 2020 draft

The redesigned Form W-4 employs a building block approach to replace complex worksheets with more straightforward questions that make it simpler for employees to figure a more accurate withholding. While it uses the same underlying information as the old design, the new form uses a more personalized, step-by-step approach to better accommodate individual taxpayer needs.

Employees who have submitted a Form W-4 in any year before 2020 are not required to submit a new form merely because of the redesign. Employers will continue to compute withholding based on the information from the employee’s most recently submitted Form W-4.

The Treasury and the IRS are releasing the nearly finalized improved Form W-4 now, to give employers and payroll processors extra time to learn about the new form and update their systems for next year. As usual, the IRS also plans to release withholding tables with routine adjustments for inflation in November.

Several accounting and tax professional groups had complained that earlier draft versions of the form required taxpayers to reveal too much information to their employers about outside sources of income for employees and their spouses. The Treasury and the IRS redesigned the W-4 withholding form in the wake of the Tax Cuts and Jobs Act, which eliminated the traditional exemptions for dependents and the taxpayers themselves along with a host of deductions. Many taxpayers discovered this year as a result of the changes that they unexpectedly ended up owing taxes because they didn’t have enough money withheld from their paychecks last year. The IRS urged taxpayers to do a “paycheck checkup” last year using an online withholding calculator, but the process was complicated and relatively few taxpayers did it. Earlier this week, the IRS unveiled an improved Tax Withholding Estimator tool to aid in the process (see IRS offers new tax withholding estimate tool).

The IRS is once again urging taxpayers to do another paycheck withholdings checkup this year to ensure they have the correct amount withheld for their personal tax profile.

IRS sends letters to 10,000+ cryptocurrency users urging them to pay taxes

The Internal Revenue Service has started sending letters to over 10,000 taxpayers who own virtual currencies, such as Bitcoin and Ethereum, advising them to pay back taxes on any income they failed to report.

The IRS announced on Friday that it began sending the educational letters to taxpayers last week. More than 10,000 taxpayers are expected to receive the letters by the end of August. The IRS obtained the names of the taxpayers through various ongoing compliance efforts. For example, the IRS filed a John Doe summons with Coinbase, one of the largest Bitcoin and Ethereum exchanges in the U.S., in 2016, to obtain the names of all its users, although it later limited the probe to those who engaged in transactions of $20,000 or more (see IRS scales back Coinbase investigation).

There are three different types of letter being sent to taxpayers, but all three versions aim to help taxpayers understand their tax and filing obligations and how to correct previous errors. The letters also tell taxpayers where they can find relevant information on the IRS website, including which forms and schedules to use and where to send them.

“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” said IRS commissioner Chuck Rettig in a statement. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

Last year, the IRS announced a Virtual Currency Compliance campaign to deal with tax noncompliance related to virtual currency by doing more outreach and examinations of taxpayers. The IRS intends to stay actively engaged in addressing noncompliance related to crypto transactions through various efforts, ranging from taxpayer education to audits to criminal investigations. Virtual currency is also an ongoing focus area for the IRS Criminal Investigation unit.

Accountants and tax practitioners can help any cryptocurrency-using clients who have been contacted by the IRS. “The IRS and additional government authorities continue to focus on cryptocurrency transactions, and the tax reporting by investors engaged in such transactions,” said Tim Speiss, partner-in-charge of the Personal Wealth Advisors Group at EisnerAmper in New York. “Tax professionals have also been striving to assist investors with the proper federal and state tax reporting rules. The proper tax reporting of these transactions can be very complex. Therefore, assisting investors and taxpayers so they are in compliance with reporting rules is critical in assisting them to avoid potential penalties and interest attributable to non-reporting.”

Back in 2014, the IRS issued Notice 2014-21, which said that virtual currency is property for federal tax purposes and offered guidance on how general federal tax principles apply to virtual currency transactions. Compliance efforts follow these general tax principles, but the IRS has also been looking to update the guidance, as the cryptocurrency market has grown dramatically in recent years. The IRS plans to continue to consider and solicit feedback from both taxpayers and tax practitioners on its education efforts and future guidance.

The IRS said it anticipates issuing additional legal guidance in this area in the near future. In the meantime, taxpayers who don’t properly report the income tax consequences of digital currency transactions could be liable for tax, penalties and interest, and in some cases, may even be subject to criminal prosecution.

More information on virtual currencies can be found on IRS.gov.