New California laws increase tax responsibilities of some companies
With the flurry of action at the end of the recent state legislative session, it is easy to overlook two laws that are having significant impacts on businesses statewide as well as the accountants they work with.
Assembly Bill 147 took effect in April and requires out-of-state and online retailers like eBay, Etsy or Amazon to collect sales taxes like local brick-and-mortar California businesses, in a bid to eliminate the advantage of out-of-state and online retailers.
AB 91 is more wide ranging in its impacts, which include limiting what income executives can claim as deductions and other changes that the state predicts will bring in roughly $1.6 billion in revenue in fiscal year 2019-2020.
Several of the provisions of AB 91, which took effect in July, harmonize state tax law with federal rules that resulted from the 2017 Tax Cuts and Jobs Act, according to Annette Nellen, a San Jose State university professor and director of the Master of Science in taxation program.
One example of this is allowing more “small businesses” to use the cash method of accounting as opposed to the accrual method.
“If I’m an accrual method retailer and I sell something but the customer doesn’t pay until next year I have to report it as income,” and pay taxes, Nellen said, noting if that same item is sold as cash the business doesn’t pay taxes until it is actually sold.
She said the small business definition includes companies with annual growth receipts in the prior financial period of $25 million or less.
This would likely make it easier for businesses to understand their own accounting records and ease the strain on their accountants, Nellen said.
“Overall, it's meant to be simpler, maybe more fair in computing your tax, as far as not paying tax until you’ve collected your money” she added.
The Tax Cuts and Jobs Act limited how much compensation executives can claim in their tax deductions, and AB 91 also falls in line with those changes, Nellen said. For example, if someone makes $5 million they can only deduct $1 million of that for state and federal taxes.
“It used to be if it was performance based they could deduct (the entire amount),” Nellen said.
But according to Ernest Howard, CPA, in Los Angeles, businesses “tend to be infinitely creative” and will likely find ways in conjunction with their tax professionals to pay that compensation through multiple entities and otherwise “disguise” it to avoid the change.
Still, the change could “to some degree deter some people from seeking certain high-end positions, rather than just sitting in their own world doing their own consulting,” Howard said.
Turning to AB 147, Nellen said companies would have to collect state and local “district” taxes if they have a physical presence in California or have more than $500,000 in annual sales.
Howard noted that calculating those taxes on sales would now become complex to the point where firms will need costly software to properly determine how much tax to add on.
Companies like Amazon now also have to collect tax on third-party sales that they facilitate on their platform, which was not the case before AB 147 came into effect in April.
According to Nellen, because different districts have their own taxes, it is not just the standard 7.25% state sales tax that gets added on.
“If a vendor, including one already located in California, has sales in California of more than $500,000 they have to collect the district tax every place they make a sale in California,” she said.
If a vendor shipped something to her in San Jose, they would now have to collect the 7.25% state sales tax as well as the extra 2% to reach the districts’ 9.25% tax, according to Nellen.
Staff Writer Chase DiFeliciantonio covers technology, banking, law, accounting, and the cannabis industry. Reach him at email@example.com or 707-521-4257.