More Details Emerge as States Apply Sales and Use Tax Policies for Remote Sellers of Products
In 2018, the Supreme Court addressed the problem of use tax collection by ruling in South Dakota v. Wayfair that a state could require any remote seller who has an economic connection with it to collect and remit its use tax for sales to purchasers within that state. In doing so, the Supreme Court struck down its physical presence requirement that had been in effect since its 1967 decision in National Bellas Hess (reaffirmed in its 1992 Quill decision), upon which remote sellers had relied to avoid collecting use tax on sales to customers in states in many instances.
An important question that is lurking in the background is the impact on the incentive and overall marketplace now that the Supreme Court has modernized its state sales and use tax jurisprudence and eliminated the outmoded and illogical physical presence requirement. Remote sellers now find themselves treated the same way as brick and mortar retailers when it comes to collecting sales and use taxes.
Even more complex than for many online sellers of goods is the nature of the incentive and promotional merchandise industry. Consider that a manufacturer or supplier may sell products to a third party (distributor) with a client or buyer in a different state that are then drop shipped to multiple locations in multiple states to a clients’ customers or employees. Where does the collection of use tax begin and end?
At least 38 states so far have imposed an obligation on remote sellers, and it seems likely that the other seven states that impose sales and use taxes will do so soon. The starting date for collecting and remitting use taxes varies by state.
For example, California did not require remote sellers to collect and remit its sales and use tax until April 1, 2019. Moreover, the collection and payment obligation applies only if total retail sales to California residents exceed $500,000 annually. Illinois required remote sellers to collect and remit its sales and use tax on October 1, 2018. Illinois has the same de minimis thresholds as South Dakota, i.e., it applies to those with retail sales of at least $100,000 or with at least 200 transactions annually with Illinois residents. Although New York’s law requiring collection and payment went into effect on the date of the Supreme Court’s decision in Wayfair, June 21, 2018, New York does not appear to have enforced its law until 2019. New York’s de minimis thresholds are retail sales of at least $300,000 and with at least 100 transactions annually with New York residents.
Suffice it to say, remote sellers should be collecting and remitting sales/use taxes now, even if some states will not require it until October 1, 2019. (Texas is one such state, and its de minimis threshold is the same as California’s, annual retail sales to Texas residents over $500,000.)
For the complete text of the Summer Washington Update prepared exclusively for the IFI by George Delta, Esq., the IFI’s Legal Counsel, visit here.
A Brief Primer on Tariffs and Trade
Ever since the administration of President Trump began imposing tariffs on foreign goods, the president has often asserted that when the United States places a tariff on a foreign import, that other country directly pays the bill. Like many of his other assertions, this one is also incorrect, but that does not prevent the president from repeating it. For example, on November 29, 2018, Trump tweeted, “Billions of Dollars are pouring into the coffers of the U.S.A. because of the Tariffs being charged to China, and there is a long way to go.”
When trying to understand how tariffs work, perhaps the first question that would arise is who is responsible for paying them? Logically, it might seem that either the foreign government or a company that sells the foreign goods in the United States would be liable for tariffs. When the U.S. government imposes a tariff on foreign goods, however, neither the foreign government nor the company selling the goods in the U.S. is technically responsible for the paying the tariff.
Tariffs are usually paid by companies that import goods here. Most American importers do not handle the paperwork on imported products themselves. They retain the services of entities commonly known as an importer of record. These companies navigate the process of importing goods into the United States, a complicated process as evidenced by a 211-page publication from the U.S. Customs and Border Protection (CBP) titled Importing into the United States A Guide for Commercial Importers (last revised in 2006.) The importer of record has experience in dealing with CBP and its system for inspecting imports and levying any duties on them. (Broadly speaking, “duties” are a tax or fee placed on an import. Tariffs are a form of duty.) Thus, when imported goods first enter the U.S. in a port of entry, the importer of record receives the initial bill for the tariff.
This is where the question of who ultimately bears the cost of tariffs becomes a bit more complex. An importer of record is little more than a middleman that provides a service, and its business model would not survive the cost of paying tariffs. Service providers nearly always pass on costs to their customers. Therefore, a company that contracts with an importer to bring goods into the United States will almost always see the costs of that contract rise after a tariff has been imposed on goods it imports. For example, as a result of the tariffs, the importer of record might wind up paying between 10 and 25 percent more to bring in the exact same product it imported before the tariffs. Those costs are passed on to the company that intends to sell the goods in the United States, which means the selling company faces a choice regarding those additional costs.
For the complete text of the Spring Washington Update prepared exclusively for the IFI by George Delta, Esq., the IFI’s Legal Counsel, visit here.
OSHA Sends Clarifying Memo on Safety Incentive Programs
The Occupational Safety and Health Administration on October 11, 2018, issued a surprising and important memo to their regional directors clarifying its position on safety incentive programs and post-incident drug testing.
The memo, unlike some past commentary by the agency in the form of several memos issued in 2016, seems to finally acknowledge that properly implemented safety incentive programs can be beneficial. The Incentive Federation has reported extensively on this topic since the late 1990s, and the Federation’s letter in 2016 to OSHA from IFI Legal Counsel George Delta can be viewed here.
In part, OSHA’s memo states, “Incentive programs can be an important tool to promote workplace safety and health. One type of incentive program rewards workers for reporting near-misses or hazards and encourages involvement in a safety and health management system. Positive action taken under this type of program is always permissible under § 1904.35(b)(1)(iv).”
The memo continues, “Another type of incentive program is rate-based and focuses on reducing the number of reported injuries and illnesses. This type of program typically rewards employees with a prize or bonus at the end of an injury-free month or evaluates managers based on their work unit’s lack of injuries. Rate-based incentive programs are also permissible under § 1904.35(b)(1)(iv) as long as they are not implemented in a manner that discourages reporting. Thus, if an employer takes a negative action against an employee under a rate-based incentive program, such as withholding a prize or bonus because of a reported injury, OSHA would not cite the employer under § 1904.35(b)(1)(iv) as long as the employer has implemented adequate precautions to ensure that employees feel free to report an injury or illness.”
Some industry experts, who have worked with safety incentive programs for years, have weighed in on how they believe the latest OSHA directive should be observed.
Brian Galonek, president of industry company All Star Incentive Marketing and a Director on the IFI Board of Directors stated in his recent blog that, “It would make sense that adding an incentive to something far more important, like working safely on the job, would not only work but would also laudable. Despite that logic, over the years OSHA has taken a negative stance towards safety incentive programs that inarguably has had the result of preventing many such programs from being deployed. As a result, there are countless accidents and injuries that could have been prevented if workers had been better engaged and properly motivated to work safer.”
The bottom line is properly built safety incentive programs are created with the best intentions, do work, and benefit everyone involved.
In this memo OSHA makes clear that properly built safety incentive programs are legitimate attempts to promote a safer workplace. I believe the following quote from this clarification is the clearest statement by OSHA yet showing that they understand that these programs are deployed with the best intentions and great results.
“The Department believes that many employers who implement safety incentive programs do so to promote workplace safety and health. In addition, evidence that the employer consistently enforces legitimate work rules (whether or not an injury or illness is reported) would demonstrate that the employer is serious about creating a culture of safety.”
Brian’s blog from late last week can be viewed here.
“It appears to me that this statement is a retrenching by OSHA, recognizing the weakness and indefensibility of their current rule,” said Sean Roark, Executive Vice President of IncentPros, Inc. and a Director on the IFI Board of Directors. “The memo strengthens George Delta’s original analysis that the position as presented a few years ago will probably not stand up to a rigorous court challenge.”
Both Galonek and Roark have followed the evolving developments with OSHA’s view of safety incentive programs for many years.
Supreme Court Rules on Out-of-State Collection of Use and Sales Taxes
The U.S. Supreme Court held in South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018) on June 21, 2018 in a 5-4 decision that states have authority to collect sales tax on goods and services delivered from remote sellers that don’t have a physical presence in their states.
In overturning previous and long-standing Court decisions requiring the physical presence of a seller in the state where goods are delivered, the Court determined that physical presence is no longer required before a state can require an out-of-state seller to collect its sales or use tax. George Delta, IFI’s general counsel, stated, “For what it may be worth, even the four dissenters agreed that the two earlier cases were wrongly decided. Their preferred solution would have been to let Congress fix the problem.”
An important question that is lurking in the background is the impact on the incentive and overall marketplace now that the Supreme Court has modernized its state sales and use tax jurisprudence and eliminated the outmoded and illogical physical presence requirement. Henceforth, remote sellers would find themselves treated the same way as brick and mortar retailers when it comes to collecting sales and use taxes. The effects of the holding in Wayfair on various remote sellers are not as clear or obvious.
Will companies that drop ship merchandise to end users on behalf of an incentive house be responsible for reporting and collecting taxes? What if the merchandise is shipped to award recipients in several different states, each with different sales or use tax laws? Will a performance improvement company or their clients be held liable since the clients are eventually paying for the merchandise? Will promotional products distributors, suppliers, end buyers or end users have to collect and remit sales and use tax to the states, and if so, which states?
For his most recent interpretation and background on this issue read George Delta’s July 2018 Washington Update prepared exclusively for the Incentive Federation.
Circuit Court Overturns Department of Labor Fiduciary Rule
On March 15, 2018, a panel of the Fifth Circuit Court of Appeals struck down the fiduciary rule in a 2-1 decision. See Chamber of Commerce of the United States of America v. Dep’t of Labor, No. 17-10238 (5th Cir. Mar. 15, 2018). The decision is sweeping in that it rejected the rule that redefined fiduciary investment advice, as well as the new prohibited transaction exemptions, and the modifications to old exemptions adopted along with the rule.
As reported in past months on this website and in other communications by the Incentive Federation the fiduciary rule, issued by the Department of Labor in 2016 and originally scheduled to be implemented by January 2018, had significant implications for companies offering incentive travel and awards programs to the financial marketplace. As we reported in 2017, unless the current administration changed the course of the rule, the new “fiduciary” rule may well make incentive programs a thing of the past for those selling financial products to the public.
George Delta, Esq., the Federation’s legal counsel, has provided an update on the status of the fiduciary rule given the District court’s recent action. Interesting, another Circuit court, in an unrelated case, has upheld the fiduciary rule, perhaps setting up an appeal to the Supreme Court. Read Delta’s April 2018 Washington Update and his earlier description of the impact of the fiduciary rule in 2017.
Employee Achievement Awards Exclusion Survives in Tax Cuts and Jobs Act
The 2017 Tax Cuts and Jobs Act passed both the U.S. Senate and the U.S. House of Representatives, albeit with two votes by the House due to some procedural matters, and was signed buy the President before Christmas.
The incentive, recognition and corporate gifting industry is a fortunate recipient of the support of several elected officials who listened to and agreed with industry leaders that the tax exclusion afforded Section 274(j), Employee Achievement Awards of the IRS Code, should remain law and not be repealed as was contemplated by the House of Representatives just a few months ago. Additionally, clarifying language defining tangible property for purposes of instructing what constitutes a tax deductible award was inserted into the bill by the Senate. The language is summarized as follows:
“The Senate amendment adds a definition of “tangible personal property” that may be considered a deductible employee achievement award. It provides that tangible personal property shall not include cash, cash equivalents, gift cards, gift coupons or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. No inference is intended that this is a change from present law and guidance.”
The Incentive Federation worked hard this year to monitor the tax reform actions of Congress and to keep the IFI members and other companies in the industry informed. We lobbied, encouraged members to write letters and make calls to elected officials, and contacted Senators and Representatives directly. However, the Federation cannot take all the credit for saving 274(j) from repeal, as it was largely the efforts of IFI member companies and industry leaders that achieved the success.
In particular, the Federation wishes to give a special thank you and acknowledgment to O.C. Tanner, a Utah-based recognition and performance improvement company. O.C. Tanner has been in a unique position to educate and persuade some key elected officials, and in particular Senator Orin Hatch (UT), who chairs the Senate Finance Committee. Senator Hatch was a strong and influential proponent of the provisions within 274(j), and he became a proponent largely due to O.C. Tanner’s relationship with the Senator over many years.
On behalf of the IFI Board of Directors the Federation also wishes to thank all individuals who responded to our call for contacting elected officials by writing letters and making calls. The success we’ve had keeping a valuable and important tax exclusion for our industry’s companies and their business clients was clearly a joint effort. Thank you all.
Wellness Program Regulations Sent Back to the EEOC for Re-consideration
As reported by the WorldatWork in a recent news release the U.S. District Court for the District of Columbia sent back controversial wellness regulations to the Equal Employment Opportunity Commission (EEOC) during the last week of August for further consideration.
As reported by WorldatWork the regulations were finalized by the EEOC last summer and gave employers guidance on how employer-sponsored wellness programs can administer incentives and remain compliant under Title I of the Americans with Disabilities Act (ADA) and Title II of the Genetic Nondiscrimination Act (GINA).
The court’s decision is a result of a case brought against the regulations by AARP. In the lawsuit, AARP argued the final rules went against the original intent of the ADA and GINA by allowing employers to provide certain monetary incentives of up to 30% of the cost of coverage while still meeting the definition of being voluntary under the two laws.
The District Court sided with AARP and determined that the EEOC relied on an “unreasonable interpretation of the statutes.”
The decision states, “while EEOC has discretion to choose the correct incentive level, the fact that it does not appear to have considered any relevant factors in determining what incentive level best approximates ‘voluntariness’ suggests that the agency’s decision may very well be different on remand.”
To minimize the disruptive consequences to this decision, the court ruled that the current rules will remain in effect until the EEOC has reconsidered the rules under the direction of the court’s decision. The timing for when the EEOC will review and release revised wellness regulations remains uncertain. The EEOC is currently waiting for the Senate to confirm President Trump’s nominee, Janet Dhillion, to chair the agency.
“The controversy over these regulations continues,” said Melissa Sharp Murdock, principle content strategist in WorldatWork’s Washington, D.C., office. “For now, employers and rewards professionals can continue to rely upon the 2016 regulations with regard to their incentive plans connected to employer-sponsored wellness programs. However, this may change once the agency reconsiders the regulations.”
Legislation also was introduced in this Congress aimed at eliminating the confusion over wellness plans incentives and bringing uniformity to the regulation of these programs. The bill, H.R. 1313, Preserving Employee Wellness Programs Act, sponsored by Rep. Virginia Foxx (R-N.C.), was approved by the House Education and Workforce Committee on March 8. A floor vote has not been scheduled.
Federal and California Labor Laws That May Affect Awards Programs
George Delta, IFI’s legal counsel, has provided an update and overview of certain Federal and state labor laws that potentially affect how companies reward employees with various types of incentive programs, particularly when points are accrued by employees for satisfactory and exemplary work.
Tax reporting and compliance issues are familiar to incentive companies and their clients who use reward and recognition programs. Although tax issues are important for all reward and recognition programs, compliance with federal and state labor laws is often overlooked, even though sometimes it can be just as important for the overall success of a reward and recognition program. Often, the parties using the program are not aware of labor law issues, and, occasionally, they may turn a blind eye to them.
One such important issue that is often unrecognized arises when awards are paid solely in merchandise, gift cards (physical or virtual), reloadable prepaid bank cash or debit cards, travel, event tickets, and other non-cash awards. The awards are based on points that employees earn and which are redeemable for the various non-cash items. In such cases a question arises whether the reward and recognition program would violate the Fair Labor Standards Act (the “FLSA”) unless the employer also offers a cash option in lieu of the other awards under the program. If the program is used to reward employees in California, the same issue would arise under California labor law
An example of a non-cash reward and recognition program that could violate the FLSA and/or California labor laws is when a client of an incentive company gives the employees in its retail operations, fulfillment centers, call centers, and corporate offices “points” for achieving certain targets or other metrics. The “points” could be discretionary or earned automatically when such targets are reached. The program does not incorporate a system where each employee can opt for the cash value of an award instead of merchandise, gift cards, cash or debit cards, travel or other awards when redeeming the points earned.
Delta’s full analysis of the affect labor laws may have on rewards and recognition programs may be viewed here.
“Fiduciary Rule” Revisited by Administration and Congress – Impact on Incentive Travel Programs Unclear
The Department of Labor’s (DOL) “Fiduciary Rule” issued in 2016, and scheduled to be fully implemented by January 2018, is under further scrutiny and legislative challenges. The first stages of the regulation became effective June 9, 2017, even though the Administration has ordered the DOL to review the rule and recommend revisions. IFI’s analysis of the rule suggests that there are significant implications for companies offering incentive travel and awards programs to the financial marketplace.
Until there is greater clarity with respect to the new fiduciary rule, some financial institutions may be leery of using incentive or award programs to motivate and/or compensate their employees, while others are restructuring their programs to place a greater emphasis on general recognition and education, for example, instead of providing sales-based incentives.
While not readily apparent in the wording of the new fiduciary rule, which is an amendment to the Employee Retirement Income Security Act, part of the rule does suggest that incentive trips and other forms of rewards or incentives may no longer be acceptable if they present conflicts of interest. See Senator Elizabeth Warren’s October 2015 report, “Villas, Castles and Vacations: How Perks and Giveaways Create Conflicts of Interest in the Annuity Industry,” that was an impetus for the new rule. Note that incentive travel was not the only form of sales incentive targeted.
In early June a round of legislation was introduced to replace the DOL’s fiduciary standard for employer-sponsored retirement savings plans with a new one agreed to by Congress. The Affordable Retirement Advice for Savers Act (H.R. 2823) would repeal the DOL rule and establish a statutory definition of “investment advice” that would, among other things, set standards for providing information about investment options for employer-sponsored defined contribution savings plans, IRAs and HSAs.
In the Senate the Affordable Retirement Advice Protection Act (S.1321) is similar to the House bill in that it would establish a new paradigm for investment advice for DC plans, but it does not expressly repeal the DOL rule nor create a fiduciary duty for IRAs and HSAs. Additionally, the House has passed legislation – the Financial CHOICE Act (H.R. 10, Sec. 841) – that includes a provision to assign the responsibility for defining the guardrails for investment and other advice applicable to employer-sponsored retirement savings plans, including 401(k) plans and other defined contribution plans, to the Securities and Exchange Commission rather than the DOL. Nothing that IFI has seen in the proposed legislation suggests that Congress aims to address the contention that sales incentives present a conflict of interest for financial services providers.
For the time being, how any of the proposed changes might affect or give relief to the incentive travel industry remains unclear. For IFI’s Legal Counsel George Delta’s full explanation of the new rule’s impact, click here. The IFI will continue to monitor the proposed legislation and determine if there is any opportunity to positively influence the impact on incentive travel programs sponsored by financial companies.
How the Fiduciary Rule Affects Incentive Travel and Awards Programs for the Financial Marketplace
In his bi-monthly legal update, George Delta, IFI’s Legal Counsel, explains The Department of Labor’s new rule, issued in 2016 and scheduled to be implemented by January 2018, that has significant implications for companies offering incentive travel and awards programs to the financial marketplace. Unless the current administration changes the course of the rule, the new “fiduciary” rule may make incentive programs a thing of the past for those selling financial products to the public.
Until there is greater clarity with respect to the new fiduciary rule, some financial institutions may be leery of using incentive or award programs to motivate and/or compensate their employees, while others are restructuring their programs to place a greater emphasis on general recognition and education, for example, instead of providing sales-based incentives. Although financial institutions may be overreacting, that is understandable in the context of prior practices when conflicts were rife, as fund companies competed to encourage brokers and advisors to put people in their funds, regardless of the clients’ best interest. Mutual fund companies also compensated intermediaries with trips to exclusive destinations and other lavish prizes. For a full explanation of the new rule’s impact, click here.
The IRS Issues Legal Advice Regarding Customer Loyalty and Rewards Programs
George Delta, IFI’s Legal Counsel, has provided his bi-monthly Legal Update for IFI members. The topic covered relates to customer loyalty and rewards programs, so if you sell, offer or manage those types of programs, George’s update offers some valuable information for you, your customers and especially the accounting professionals you rely on.
The Associate Chief Counsel of the IRS has recently issued Legal Advice setting forth its position that an accrual method taxpayer cannot account for the costs of redeeming points in its “hybrid coupon” customer rewards program under the Treasury rules that apply to “premium” coupons. This legal advice memorandum is important to companies that operate loyalty programs, because if their programs can meet the definition of a “premium” coupon, they would be allowed to deduct their reasonable estimated redemption costs from gross receipts with respect to sales with which they issue points. (The regulations in question are old, and they refer to trading stamps or premium coupons instead of their current equivalent, points).
In effect, if you can get the points issued under your loyalty program to meet the definitional requirements of “premium coupons,” you can estimate and currently deduct your redemption costs. Otherwise, you can only deduct the cost of points as customers redeem them. Deduction upon redemption is the normal rule, so the IRS wants to limit the scope of what constitutes a “premium coupon.”
For a more complete explanation of the IRS advice on rewards programs, click here.
Federation Response to OSHA Safety and Health Program Management Guidelines
The Occupational Safety and Health Administration (“OSHA”) has issued a revised draft of OSHA Safety and Health Program Management Guidelines. OSHA invited public comment to their proposed revisions and the Incentive Federation and some Federation members have written to OSHA to express opposition to OSHA’s criticism of safety incentive programs. The Draft Guidelines state in a note that, “Incentive programs for workers or managers that tie performance evaluations, compensation, or rewards to low injury and illness rates can discourage injury and illness reporting. Point systems that penalize workers for reporting injuries, illnesses, or other safety or health concerns have the same effect, as can mandatory drug testing after reporting injuries. Effective safety and health programs recognize positive safety and health activities, such as reporting hazardous conditions or suggesting safer work procedures.” To see the Incentive Federation’s response click here.