Tax act pushback and high court state sales tax ruling

NONPROFIT NEWS

As the dust has started to settle from the ridiculously hurried lawmaking process that resulted in the massive Tax Cuts and Jobs Act, and as nonprofits are finding themselves needing to comply with its hastily drafted provisions, we're starting to see pushback on the IRS and Treasury regarding the lack of further guidance on the new requirements. In June, several comments were submitted requesting delayed implementation specifically with respect to the act's new provisions regarding the unrelated business income tax. The U.S. Supreme Court also issued an opinion last month overturning the longstanding physical nexus rule for the state imposition of sales tax on online retailer transactions. While not specific to the nonprofit sector, the decision could certainly have significant implications for nonprofits that engage in e-commerce.

Delayed Implementation of Tax Act Provisions Requested

As I've previously covered in this column, the Tax Cuts and Jobs Act that was hastily passed by the House and Senate and signed into law by President Donald Trump at the end of 2017 included a number of provisions likely to have significant impact on nonprofits and the sector more broadly, either directly or indirectly. In addition to the hurried passage of the Act, many of its provisions took effect on Jan. 1 of this year, leaving no time for Treasury and the IRS to develop regulations, or any other guidance, regarding implementation of the new rules.

In February, the 2017-2018 IRS Priority Guidance Plan was amended to add additional projects in light of the new tax law. Nonetheless, many organizations have found themselves struggling to comply with the new requirements and rules imposed by the act absent further guidance, including with respect to several new rules relating the unrelated business income tax, or UBIT. In June, the Exempt Organizations Committee of the American Bar Association's Section of Taxation submitted comments requesting that implementation of the new Code Section 512(a)(6) be delayed. The National Council of Nonprofits similarly sought delayed implementation of the new Code Section 512(a)(7), as well as the 512(a)(6), provisions.

An unrelated trade or business generally includes any trade or business (meaning an activity carried on for the production of income from the selling of goods or performance of services), that is regularly carried on (meaning with a frequency and continuity with which for-profits generally engage in similar activities), and is not substantially related to furthering the exempt purposes of the organization, although there are number of applicable modifications, exclusions, and exceptions. The new Code Section 512(a)(6) eliminates the ability of any organization with more than one unrelated trade or business to offset income from one unrelated business activity with losses from another for purposes of determining its net unrelated business taxable income. Instead, it requires organizations to compute unrelated business taxable income "separately with respect to each trade or business." This new rule has frequently been referred to as the UBIT silo rule.

However, there is not yet any guidance as to the applicable definition of "each trade or business" to direct organizations in applying the new rule. For example, if a subject exempt organization operates two restaurants in separate locations that constitute unrelated trade or business activity, are those considered to be a single unrelated trade or business or two separate ones for purposes of the new rule? As the ABA Committee comments note, "in the absence of regulations, exempt organizations do not have sufficient information to know how to track their income and expenses in order to comply with the law." The comments request that the new rule not be implemented until regulations are issued and urge, at a minimum, that organizations acting in good faith that fail to pay appropriate estimated taxes during the interim period not be penalized. The comments further request that certain unrelated business taxable income not derived from an organization's actual carrying on of a trade or business, including that arising from passive investments not controlled by the organization and that included only by virtue of a particular statutory rule or exception, be excluded from the purview of Section 512(a)(6).

The National Council of Nonprofits similarly submitted comments noting the difficulties many organizations are having in seeking to comply with new Code Sections 512(a)(6) and 512(a)(7). Section 512(a)(7) increases the unrelated business taxable income of a subject exempt organization by certain amounts paid or incurred by the organization to provide qualified transportation fringe benefits or on-premises athletic facilities to its employees. The comments note that "quarterly tax payments are already past due for many nonprofits, but no one - not accountants, lawyers, or nonprofits - can say with certainty what is and is not covered by the new tax because Treasury and the IRS have not provided necessary guidance." In the comments, the Council requested that implementation of these two new sections be delayed, retroactively to the beginning of 2018, until one year after final rules are promulgated and that any late filing penalties imposed in the meantime be abated.

Supreme Court State Sales Tax Decision

While not specifically directed to the nonprofit sector, the Supreme Court's 5-4 decision in South Dakota v. Wayfair Inc., 2018 DJDAR 5927, in June will certainly impact certain nonprofits around the country. In its decision, the Supreme Court upheld the legality of South Dakota's recently enacted law requiring certain remote sellers to collect a state sales tax if they had 200 or more separate transactions or more than $100,000 in gross revenue from sales in the state in the previous or current calendar year, regardless of whether they had a physical presence there.

Prior to the Wayfair decision, the applicable standard provided that states could only require merchants to collect sales tax from transactions when the merchants had a physical presence in the respective state, which permitted many online retailers to avoid collecting many state sales taxes, even in the states where their customers resided. Under the new standard, states may now presumably choose to implement laws requiring the collection of sales tax by online retailers without a physical presence in such states, although it's currently unclear whether thresholds other than those included in the South Dakota law will be sufficient to pass constitutional muster. For nonprofits that sell merchandise online, the potential new exposure to state sales tax collection requirements could have a significant financial impact, and add new complexity to such sales.