Nonprofit Report - July 2018
South Dakota v. Wayfair - Opening the Door for Imposition of State Sales' Tax on Interstate Sales
By: Kellie L. Newton
On June 21, 2018, the U.S. Supreme Court in South Dakota v. Wayfair, Inc., upheld a South Dakota statute requiring out-of-state sellers of goods to collect and remit sales tax if they have significant business in South Dakota, thus rejecting the long-standing physical presence requirement that prohibited many states from collecting sales taxes on goods sold to residents of their states. South Dakota v. Wayfair, Inc., 201 L. Ed. 2d 403 (2018). Forty-one states, two U.S. Territories and the District of Columbia asked the Supreme Court to uphold the South Dakota statute, which suggests that several other states may enact similar statutes in the future or move to enforce existing ones.
The decision overruled Quill Corp. v. N.D., 504 U.S. 298 (1992) and Nat’l Bellas Hess v. Dep’t of Revenue, 386 U.S. 753 (1967), which held that a state cannot require an out-of-state seller with no physical presence in the state to collect and remit sales tax on goods the seller ships to state residents.
Today, 41 states assess tax to sales within the state. Those states also have a use tax, which require sellers who didn’t pay sales tax to a retailer to pay use tax on the goods. Collecting and enforcing the use tax has been a challenge for states.
Justice Kennedy stated in the Wayfair opinion that Quill’s physical presence rule “becomes further removed from economic reality” each year and results in significant losses to states. 201 L. Ed. at 418. The opinion noted that previous rulings put both local businesses and many interstate businesses with physical presence in the state at a competitive disadvantage, creating tax shelters for internet businesses with limited physical presence. Id. at 420. The Government Accountability Office (GAO) estimates that between $8 and 13 billion dollars of sales tax is not collected in internet sales today. U.S. Government Accountability Office, SALES TAXES: States Could Gain Revenue from Expanded Authority, but Businesses Are Likely to Experience Compliance Costs, GAO-18-114 (2017).
The Wayfair case looked specifically at the South Dakota statute that protects small merchants who do not do a considerable amount of business in the state. Id. at 414. Specifically, the South Dakota statute only applies to sellers that deliver more than $100,000 of goods or services into South Dakota or engage in 200 or more separate transactions for the delivery of goods and services into the state on an annual basis. Id.; S. 106, 2016 Leg. Assembly, 91st Sess. (S. D. 2016) (S. B. 106). The statute was applied only retroactively and South Dakota is one of approximately 20 states that have adopted the Streamlined Sales and Use Tax Agreement, which standardizes taxes to reduce administrative and compliance costs and offers sellers free access to sales tax administration software. Id. at 427. States that introduce sales tax schemes that do not have similar protections may face legal challenge.
Sellers who might now be impacted by the South Dakota and other state statutes that require the collection of sales tax will have additional reporting requirements and costs to implement a system of collection.
Several bills were pending in Congress to address the internet sales tax issue at the time the Wayfair case was decided. Id. at 430 (Dissent). Two of those bills, Remote Transactions Parity Act and Marketplace Fairness Act address the steps states have to take to require collection and remittance of tax on interstate sales. Id. See also Marketplace Fairness Act of 2017, S. 976, 115th Cong., 1st Sess. (2017); Remote Transactions Parity Act of 2017, H. R. 2193, 115th Cong., 1st Sess. (2017). Time will tell whether Congress will seek to address inconsistent statutes that may be unleashed by Wayfair.
IRS Ignites Political Firestorm by Eliminating the Requirement for Most Nonprofit Organizations to Submit Confidential Donor Information to the IRS
By: Jeff Altman & Jim Kahl
On July 16, 2018, the IRS announced that it has eliminated the requirement for most nonprofit organizations to provide confidential donor information to the IRS on Schedule B to their annual IRS Form 990. Although limited in scope and with no impact on public transparency, the change has significant political ramifications and has ignited a firestorm of support and condemnation across the political spectrum. This includes a partisan Senate Finance Committee vote and delay in the Senate confirmation vote on the new IRS Commissioner.
Starting with tax years beginning in 2018, most nonprofit organizations will only need to report to the IRS the amounts given each year by their major donors ($5,000 or more). They will no longer need to report their donor names or addresses in the taxpayer confidential version of Form 990, Schedule B filed with the IRS. However, Section 501(c)(3) and 527 political organizations must still disclose their donor names and addresses to the IRS. Every nonprofit organization will still be responsible for collecting and maintaining major donor names and addresses in case it is ever needed or requested by the IRS. See Rev. Proc. 2018-38 for further legal background and details.
It is important to emphasize that this policy change only eliminates the information that must be provided to the IRS in what is currently the taxpayer confidential version of IRS Form 990, Schedule B. It does not reduce public transparency in any way. Currently, names and addresses already are redacted in the public inspection version of Schedule B and are strictly protected from public disclosure by statute. The new policy does not change the information that is currently required to be made publicly available both by the IRS and nonprofit organizations– which is just the donated amounts (even though some organizations voluntarily chose to disclose more).
For several years, the IRS has been considering eliminating Schedule B for administrative reasons. This past spring, a broad coalition urged that Schedule B be eliminated both to protect constitutional freedoms and to help prevent further targeting of nonprofit organizations and their donors on the basis of ideology both by the IRS and state officials. Recently, the formal Advisory Committee to the IRS recommended eliminating Schedule B to encourage e-filing. While the IRS does not appear ready to go that far yet, the announced changes more closely align the IRS filing rules with the statutory public disclosure requirement that applies to Section 501(c)(3) and 527 organizations. The IRS is reversing its prior administrative actions, which expanded this requirement to include other nonprofit organizations.
The Stated Rationale
In announcing the reasons for this change in its Press Release -- the Treasury Department stated that the new policy will:
- “No longer require certain tax-exempt organization to file personally-identifiable information about their donors” and “relieves” most nonprofit organizations of an “unnecessary reporting requirement” to “send the IRS information that it doesn’t need to effectively enforce our tax laws.” This change “will in no way limit transparency” – since the publicly available information will stay the same as before.
- “Better protect taxpayers by reducing the risk of inadvertent disclosure or misuse of confidential information.” This was cited as “an especially important safeguard for organizations engaged in free speech and free association protected by the First Amendment.” It will also “reinforce the reforms already implemented by the IRS in the wake of the political targeting scandal and enhance public trust in the [IRS].”
- “Save both private and government resources” required to create redacted versions of Schedule B for public inspection.
The rationale stated by the Treasury Department in its Press Release and the IRS in Rev. Proc. 2018-38 is supported by organizations that fear that their donors are at risk for public harassment and boycotts that could result from inadvertent disclosure of their identities (as has occurred sometimes in the past). If the IRS has no regulatory or administrative use for this information, why should disclosure be required? They argue that disclosing even the amounts of donations chills free speech and free association by indicating the size and number of donors. The change also helps reduce the possibility of future targeting of organizations and their donors by the IRS and state officials. They believe that the reform does not go far enough and that Schedule B should be eliminated entirely in order to provide the greatest constitutional protections.
The strong response by those who decry “dark money” and favor robust disclosure is that the past rule did not go far enough. They argue that donor names should be made publicly available. Because Citizens United has opened the floodgate of political intervention by nonprofit organizations and the Supreme Court also has endorsed public disclosure when it involves campaign finance, the IRS should be more aggressive in obtaining donor information and policing nonprofit activities. They also would like donor information to be made available to public watch dog organizations to help with the effort.
The reply is that the IRS is a tax collection agency and hasn’t been statutorily authorized to regulate free speech and association activities. Moreover, when it entered into this area in the past, there was political targeting and other auditing abuses of both organizations and individual donors whose names were disclosed to the IRS in Schedule B.
The counter-reply is who is better situated than the IRS to police nonprofit political activities. Also that the IRS needs this information to guard against private benefits. They add that the IRS should be tasked with monitoring foreign contributions.
The suggested answer is that the IRS could add checklist questions to the Form 990, if appropriate, to address these issues and require responses in a more discrete and protective manor (instead of requiring the names and addresses of all donors to be filed with the IRS).
One final point to consider is how states like California and New York that currently require the filing of unredacted copies of Schedule B in support of charitable solicitation registrations will react. Beginning in 2018, will they accept Schedule B without donor names or will they implement their own new donor disclosure forms? Will this help resolve or further fuel years-long litigation against California and New York over donor disclosure?
Notwithstanding the limited scope of the new policy, the controversy grows -- with points and counter points, articles, editorials, letters, hearings and lobbying heating up on all sides. The new IRS rule is reigniting and fueling far broader controversies over money and politics.
Where and when will it all end? Not soon, so stay tuned!