Category: Tax Policy

Tax Technical Corrections Draft Bill Released by Outgoing House Ways and Means Chair; New Chair Plans Hearings on Tax Overhaul’s Impact

Posted on by Trey Jackson

Outgoing House Ways and Means Chairman Kevin Brady (R-TX) released a draft bill on Jan. 2  that includes tax technical corrections to previously enacted legislation, including the Tax Cuts and Jobs Act (TCJA) overhaul. 

Outgoing House Ways and Means Chairman Kevin Brady (R-TX) released a  draft bill  on Jan. 2  that includes tax technical corrections to previously enacted legislation, including the  Tax Cuts and Jobs Act (TCJA)  overhaul. 

  • Rep. Brady stated, “We are releasing this discussion draft of technical corrections with respect to the TCJA and other tax legislation to inform stakeholders and provide the American people an opportunity to submit feedback on the draft provisions.  I look forward to gaining valuable feedback from the public and working with my colleagues in the House and Senate on both sides of the aisle as we continue to provide clarity and certainty for job creators across the country seeking to invest in their workers and our communities.”  
  • The path forward for a technical corrections bill in the 116th Congress will be set by the new Ways and Means Chairman – Rep. Richard Neal (D-MA).
    • Clarification that the recovery period for qualified improvement property is 15 years, or 20 years under the alternative depreciation system (ADS);
    • Clarification that REIT dividends received indirectly by a mutual fund shareholder qualify for the 20% pass-through deduction;
    • Clarification that the Opportunity Zone tax deferral benefit only extends to capital gains – a position that was also incorporated in Treasury’s October proposed regulations.
    • Numerous other clarifications in the Brady draft relate to business interest (§ 163(j)), the pass-through deduction (§ 199A), and the limitation on active losses (§ 461(l).  

The path forward for a technical corrections bill in the 116th Congress will be set by the new Ways and Means Chairman – Rep. Richard Neal (D-MA) . 
  • There is strong bipartisan support for certain technical corrections, such as the 15-year recovery period for qualified improvement property, which could help spur action on a larger tax package.  
  • However, the current draft does not clarify that a business electing out of the new interest limitation is subject to a 30-year ADS recovery period for residential rental property placed in service before 2018.  The issue could be addressed in future versions of the legislation.  
  • Prospects for enactment of technical changes is uncertain, although Ways and Means Chairman Neal stated this week that hearings on tax legislation may be held in early 2019 on the TJCA’s impact and alternative proposals.  Neal also suggested that he will seek agreement with Ranking Member Brady on legislation addressing healthcare, infrastructure and retirement savings. (Wall Street Journal and Tax Notes, Jan. 4)

The Roundtable’s Tax Policy Advisory Committee (TPAC) will review these proposals, which will be a focus during TPAC’s Jan. 30 meeting, held in conjunction with The Roundtable’s State of the Industry Meeting in Washington, DC.  

 

Treasury Proposes Detailed Rules for New Restrictions on Deducting Business Interest

Posted on by Trey Jackson

On Tuesday, the Treasury Department released proposed regulations governing the new limitation on the deductibility of business interest expense, including the exception for real estate businesses. 

On Tuesday, the Treasury Department released proposed regulations governing the new limitation on the deductibility of business interest expense, including the exception for real estate businesses. 

  • Under the Tax Cuts and Jobs Act (TCJA), businesses generally can no longer deduct their interest expense to the extent it exceeds 30 percent of their annual earnings before interest, tax, depreciation and amortization (EBITDA).  Business interest deductibility was a key issue in Real Estate Roundtable President & CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before consideration of the tax bill.  (Roundtable Statement for the Record, Sept. 19, 2017)
  • DeBoer testified that the proposal could have severe unintended consequences.  Noting that the cost of debt is a necessary expense that must be accounted for when measuring income, he testified that our capital markets are the envy of the world and that responsible, appropriate leverage helps entrepreneurs and contributes to economic growth and job creation. (Roundtable Weekly, Sept. 29 and testimony video clips)
  • The final bill included a critical exception from the interest limit for an electing real property trade or business.  An electing real property trade or business is defined broadly to cover: any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. 
  • In February, the Roundtable submitted comments to Treasury with recommendations for how the real estate exception should work in the case of tiered business structures, and in the case of businesses that involve both real estate and non-real estate activities.  (Roundtable Weekly, Feb. 23, 2018)  

    Business interest deductibility was a key issue in Real Estate Roundtable President & CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before consideration of the tax bill.  (Roundtable Statement for the Record, Sept. 19, 2017 and  video clips ). 
  • The proposed regulations are largely favorable.  Most importantly, the regulations clarify that partner-level borrowing qualifies for the real estate exception. Thus, at the election of the taxpayer, the real estate exception can extend to debt that is incurred by a partner to acquire an interest in a partnership that is engaged in a real property trade or business.  In addition, the regulations confirm the broad definition of a real property trade or business.  The regulations also clarify that capitalized interest, which commonly arises during the development of real estate, is not subject to the interest limit.
  • With respect to taxpayers engaged in both real estate and non-real estate activities, the proposed regulations generally would allocate and apportion debt based on the relative amount of the taxpayer’s adjusted basis in assets used in those activities.  However, taxpayers would directly trace and allocate qualified nonrecourse indebtedness to the asset securing the loan (with no apportionment).  This latter rule should result in the allocation of a larger share of debt to assets qualifying for the real estate exception.
  • Some concerns remain.  Notably, the attribution rule that allows partners to qualify for the real estate exception based on partnership-level activities does not extend broadly to all upper-tier borrowing for investment in lower-tier real estate businesses.  Thus, except in limited circumstances, debt incurred by a taxpayer to invest in a corporation (or REIT) that is engaged in a real property trade or business is not eligible for the real estate exception. 

The Roundtable’s Tax Policy Advisory Committee is continuing to review the 439-page regulatory package to understand its full implications for the financing of U.S. real estate.  Comments on the proposed regulations will be due 60 days after their publication in the Federal Register.

Virginia Plans to Advance Internet Sales Tax Legislation as Opponents Aim to Roll Back Supreme Court’s Wayfair Decision

Posted on by Trey Jackson

The Supreme Court’s recent South Dakota v. Wayfair decision allowing States to collect tax owed on remote internet sales purchases could generate an estimated $250 million in annual revenue for the state of Virginia, which is aiming to start its online sales tax program this summer. 

The Real Estate Roundtable and seven other national trade organizations wrote to congressional leaders on Sept. 17, 2018 opposing any legislation that reverses or limits the Supreme Court’s June 22 decision in South Dakota v. Wayfair, which allows States to collect tax owed on remote internet sales purchases.

  • Many states are seeking to expand their tax authority over online sales in the wake of the Supreme Court’s June 21 South Dakota v. Wayfair decision.  The 5-4 Wayfair ruling strongly suggests that South Dakota’s law requiring remote sellers to collect sales tax on more than $100,000 of in-state sales or 200 transactions complies with constitutional law.  
  • Virginia Finance Secretary Aubrey L. Layne Jr. recently told Bloomberg Tax that a state bill in next year’s Virginia legislative session would align with principles supported in the high court’s Wayfair decision.  Layne said details of the bill may be unveiled in December and added, “My guess is it probably won’t be effective until July.”  (BNA, Oct. 30) 
  • Despite the Wayfair ruling, a bipartisan quartet of House members led by Rep. Jim Sensenbrenner (R-WI) introduced legislation on Sept. 13 that would  prohibit states from requiring remote sellers with less than $10 million in national annual sales from collecting and remitting sales and use taxes – pending a compact approved by Congress.  In addition to Sensenbrenner’s Online Sales Simplicity and Small Business Relief Act of 2018 (H.R. 6824), other bills in Congress would go even further in reversing the Wayfair decision.   (Tax Notes, Nov. 7)
  • Opponents of the decision are asking Congress to include restrictions on States in an end-of-year bill.  (Bloomberg, Oct. 24).  However, legislation to roll back Wayfair is unlikely.  Any major legislation must be negotiated by leaders of both parties, who have limited time during a Lame Duck session.  Congressional negotiators are expected instead to focus on a handful of “must pass” bills. 
  • The Real Estate Roundtable and seven other national trade organizations wrote to congressional leaders on Sept. 17 opposing legislation that reverses or limits Wayfair.  (Wayfair Comment Letter, Sept. 17) 

The business coalition letter explains that for more than a decade, industry groups “have undertaken significant efforts to establish economic parity between online and brick-and-mortar sellers that would better reflect the changing dynamics of today’s omnichannel marketplace. For Congress to insert themselves post-ruling only creates additional uncertainty and further complicates the implementation process, while undermining the level playing field created by the Wayfair decision.”  (Roundtable Weekly, Sept. 21) 

The eight organizations conclude the letter by offering to work with Congress on any problems that may arise from state implementation of remote internet sales tax collection allowed by Wayfair.  (Roundtable Weekly, June 22)

 

Guidance on Business Interest Deduction Limit May Address Real Estate Investment Issues

Posted on by Trey Jackson

The Treasury Department and Internal Revenue Service are close to issuing draft regulations on the new business interest expense limitation, enacted in last year’s tax overhaul.  Regulations related to the Tax Cuts and Jobs Act can be designated for an expedited, 10-day review by the White House Office of Management and Budget before publication and public release, though the timetable can be extended if needed.

A Feb. 21, 2018 Roundtable letterurged Treasury to clarify that interest (other than investment interest) on debt that is allocable to an owner of an entity engaged in a real property trade or business is exempt from the new business interest limitation rule – if that trade or business has elected out of the rule.

  • The Tax Cuts and Jobs Act capped the amount of interest that a business with revenue over $25 million can deduct annually – to no more than 30 percent of earnings before interest, taxes, depreciation, and amortization.  The provision also includes an important exception for an “electing real property trade or business.” 
  • This exception reflects policymakers’ understanding that limits on the deduction for interest expense could have enormous negative consequences for property values, real estate markets, and economic growth.  (Reference: Real Estate Forum, Jan/Feb 2018,  Decoding The New Tax Bill) 
  • The Real Estate Roundtable on Feb. 21, 2018 wrote to Treasury Secretary Steven Mnuchin and offered a number of recommendations to resolve ambiguities in how the new limitation will apply.  The Roundtable requested clarifications to ensure the exception operates as intended for common real estate ownership arrangements – focusing on the scope and application of the exception for an electing real property trade or business. 
  • The letter urged Treasury to clarify that interest (other than investment interest) on debt that is allocable to an owner of an entity engaged in a real property trade or business is indeed exempt from the new business interest limitation rule – if that trade or business has elected out of the rule.  As relevant examples, the letter describes four common scenarios where the financing of a real property trade or business occurs through a tiered structure. Clarifying the rules for real estate in the context of tiered arrangements will help avoid potential disruptions.  (Roundtable comment letter, Feb. 21, 2018)
  • In April, Treasury and the IRS released Notice 2018-28 to provide interim guidance on the new limit until the proposed regulations are issued. For real estate investors, however, the Notice leaves unanswered some of the key issues related to the financing of real estate.  (IRS, April 2 and Roundtable Weekly, April 6)   
  • On Oct. 25, OMB’s Office of Information and Regulatory Affairs (OIRA) acknowledged receipt of the proposed section 163(j) rules from Treasury.  After OIRA completes its review, the proposed guidance will be issued.  A second set of regulations, focused specifically on pass-through entities, is expected in December.

The Roundtable’s Tax Policy Advisory Committee will continue to seek appropriate clarifications as Treasury moves forward with regulatory projects related to implementation of the Tax Cuts and Jobs Act.

Congressional Lame Duck Session Could Consider Condominium Tax Accounting and Other Real Estate Tax Policy Issues

Posted on by Trey Jackson

Following the Nov. 6 mid-term elections, a “Lame Duck” session of Congress is expected to consider various tax policies of importance to commercial real estate.   

Several tax issues of importance to real estate may be in play during the November “Lame Duck” congressional session, including  condo tax accounting rules; technical corrections; the cost recovery period for qualified improvement property (QIP);and tax extenders.

  • As part of a potential year-end omnibus spending bill to fund the government, tax policies that may be addressed include condo tax accounting rules; technical corrections; the cost recovery period for qualified improvement property (QIP); and tax extenders.  (Roundtable Weekly, Oct. 12) 
  • Current condo tax accounting rules require multifamily developers of buildings with five or more residential units to recognize income and pay tax on their expected profit as construction is ongoing — well before pre-sale transactions are closed and full payment is due from the buyer.  This mismatch of cash flow and tax liability prevents income tax deferment until a condo building is finished.   Home builders of single-family homes, townhouses and row houses are not subject to this accounting rule restriction. 
  • A House bill introduced last summer by Reps. Carlos Curbelo (R-FL) and Joe Crowley (D-NY) aimed to correct this disparity.  Although the Fair Accounting for Condominium Construction Act (H.R. 3659) stalled in 2017, it could serve as a template for inclusion in year-end tax legislation.  The Real Estate Roundtable supports lawmakers’ efforts to pass H.R. 3659. 
  • Other congressional efforts to ensure that development accounting rules treat condos like other residential construction included a 2016 letter from 10 members of the Senate Finance Committee urging regulatory corrections to former Treasury Secretary Jack Lew. 
  • Roundtable President and CEO Jeffrey DeBoer on April 7, 2017 sent a letter to Treasury Secretary Steven Mnuchin   outlining eight regulatory actions the Treasury Department could take to stimulate new real estate investment, job creation, and economic growth.  Among the recommendations addressed in the letter are tax accounting for new condominium construction; the Foreign Investment in Real Property Tax Act, tax treatment of private real estate funds and partnership tax rules. 

Last week, an article on the condo tax accounting issue in The Real Deal included a quote from Roundtable Senior Vice President & Counsel Ryan McCormick, who commented on the outlook for correcting the current rules.  “Legislation may be the most likely route, in light of all the work ongoing at Treasury with tax reform,” McCormick said.

Roundtable Comment Letter Urges Treasury to Simplify, Streamline New Pass-Through Deduction Regulations

Posted on by Trey Jackson

The Real Estate Roundtable on Monday submitted detailed recommendations to the Treasury Department on simplifying and streamlining  the new 20 percent tax deduction for pass-through businesses. (Roundtable letter, Oct. 1)

The   Real Estate Roundtable on Monday submitted detailed recommendations to the Treasury Department on simplifying and streamlining  the new 20 percent tax deduction for pass-through businesses. (Roundtable letter, Oct. 1)

  • Passed as part of last year’s tax overhaul, the deduction can reduce the top tax rate on qualifying pass-through income, including rental income, to 29.6 percent.  Once it is fully implemented, section 199A will be a powerful incentive for capital investment and job growth.
  • The comment letter from Roundtable President and CEO Jeffrey DeBoer suggests four major simplifications that would provide greater certainty, lessen the need for wasteful restructuring, and reduce taxpayer-government controversies.   

 Trade or business definition  
The final regulations should clarify that rental income from real property held for the production of rents will be considered a trade or business for purposes of section 199A;

Aggregation  
The final regulations should allow taxpayers to treat all qualifying real estate rental activities, whether held directly or through a pass-through entity, as if held in a single “trade or business” for purposes of section 199A;

Non-recognition transactions 
When assets with associated unadjusted basis immediately after acquisition (UBIA) are transferred in a non-recognition transaction (such as a like-kind exchange or the contribution or distribution of assets involving a partnership or S corporation), the general rule should be that the UBIA of an asset (and its duration) carries over; and

Separating trades and businesses 
The final regulations should provide rules to help taxpayers ascertain when multiple activities (including multiple activities conducted in a single entity) constitute discrete trades or businesses.

  • With a few exceptions, last year’s Tax Cuts and Jobs Act limited the pass-through deduction to businesses with employees or capital-intensive businesses that invest in long-lived (i.e., depreciable) assets, including real estate.  This so-called wage/capital limitation applies to partnerships, S corporations, and sole proprietorships, but does not apply to ordinary REIT dividends and income from publicly traded partnerships.
  • During the tax reform debate, The Roundtable’s Tax Policy Advisory Committee (TPAC) formed a task force to review the regulations, analyze their impact on real estate investment and jobs, and craft specific recommendations for policymakers. 
  • The pass-through deduction (section 199A) was a key element of Roundtable President and CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before lawmakers released the first version of the proposal in the fall of 2017.   (Roundtable Weekly, Sept. 22, 2017)

TPAC will continue to offer insight to Treasury officials and congressional tax-writing committees before final regulations are expected by the end of the year.

 

Ways and Means Passes “Tax Reform 2.0” Legislation; House GOP Leaders Plan September Floor Vote

Posted on by Trey Jackson

The House Ways and Means Committee yesterday passed “Tax Reform 2.0” legislation along party lines (21-15) that would make permanent individual and pass-through business tax cuts set to expire at the end of 2025.  House leaders plan a full chamber vote by the end of this month to highlight the GOP’s signature economic policy achievement before the November mid-term elections. (House Ways and Means Committee Mark-up Resourcesand Reuters, Sept. 13)

House Ways and Means Chairman Kevin Brady (R-TX) during the “Tax Reform 2.0” mark-up on Sept. 13.

  • The proposed legislation consists of three bills that would make permanent the individual and pass-through business provisions of the Tax Cuts and Jobs Act (P.L. 115-97); boost employer and individual retirement plans; and allow startup businesses to write off more of their costs.  (Ways and Means summary of Protecting Family and Small Business Tax Cuts Act of 2018 – H.R. 6760)
  • House Ways and Means Chairman Kevin Brady (R-TX) commented on the 2.0 package in an interview with CNBC’s Squawkbox, “We expect to have it ready for a floor vote in September. Locking in the permanence, we think, is fair and it’s pro-growth, creating another million and a half new jobs in the long run.”
  • Despite statements by Brady and House Speaker Paul Ryan (R-WI) about a full House vote this month, attracting support from GOP incumbents in high-tax states may be difficult due to a permanent extension of the new cap on federal deductions for state and local tax deductions (SALT).  The tax reform package is also unlikely to pass the Senate without support from Democrats, although the three House bills may be considered separately.
  • The nonpartisan, congressional Joint Committee on Taxation released a report on Sept. 12 estimates that the House’s second round of tax cuts could cost more than $657 billion over a decade. The costs of making the tax cuts permanent alone would cost about $631 billion, according to the report.

The House will be out of session until Sept. 25, which gives Congress four days to pass government funding by Oct. 1 to avoid a shutdown.  Yesterday, House Appropriations Chairman Rodney Frelinghuysen (R-NJ) announced at a meeting of House and Senate conferees that a deal has been reached on a continuing resolution to keep all of the government funded through at least Dec. 7. 

 

FIRPTA Repeal Bill Introduced; “Tax Reform 2.0” Mark-Up Next Week

Posted on by Trey Jackson

As House Republican leaders this week promoted a second round of tax cuts before the mid-term elections, Reps. Kenny Marchant (R-TX) and Joe Crowley (D-NY) introduced legislation yesterday to repeal the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). 

A recent report by the Rosen Consulting Group (RCG) estimated that FIRPTA repeal would generate an initial increase of between $65 billion and $125 billion in international investment in U.S. commercial real estate. 

  • FIRPTA subjects foreign investment in U.S. real property to a much higher tax burden than foreign investment in any other class of assets. As a result, overseas investors are often discouraged from investing in U.S. real estate.  FIRPTA effectively deters billions of dollars of capital that would strengthen U.S. infrastructure, expand the tax base and create much-needed domestic jobs.
  • The Marchant-Crowley Invest in America Act would build on FIRPTA reforms Congress passed in the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) by repealing FIRPTA altogether.  
  • The PATH Act exempted foreign pension funds from FIRPTA and increased the share of a publicly traded US REIT that a foreign investor can hold without triggering FIRPTA.  The PATH Act changes injected billions of dollars in foreign investment into the U.S. real estate market, and contributed to a spike in capital investment in many parts of the country.  (Roundtable Weekly – Oct 13, 2017)
  • A recent report by the Rosen Consulting Group (RCG) estimated that FIRPTA repeal would generate an initial increase of between $65 billion and $125 billion in international investment in U.S. commercial real estate. The report determined that repealing FIRPTA would generate between $26 and $49 billion in total economic activity — a boost of 10 to 30 basis points to U.S. GDP.  This new level of activity would lead to the creation of 147,000 to 284,000 jobs throughout the economy and increase taxpayers’ income by $8 billion to $16 billion.  RCG’s report concluded that repealing FIRPTA would not have a meaningful impact on the federal budget, as FIRPTA accounted for less than 0.002% of federal tax receipts from 2009 to 2013. (Unlocking Foreign Investment in U.S. Commercial Real Estate, July 2017)
  • FIRPTA reform is a long-standing goal of The Roundtable.  The economic benefits of a comprehensive FIRPTA repeal was a focus of testimony by Real Estate Roundtable President and CEO Jeffrey DeBoer before the U.S. Senate Finance Committee on Sept. 19, 2017.  (Roundtable Weekly) 

“In 2015, Congress passed the most significant reforms of FIRPTA since its passage in 1980.  Congress should build on the recent success by repealing FIRPTA outright as part of tax reform. Unleashed by FIRPTA’s repeal, capital from abroad would create jobs by financing new real estate developments, as well as the upgrading and rehabilitation of existing buildings. Architects, engineers, construction firms, subcontractors, and others would be put to work building and improving commercial buildings and infrastructure,” DeBoer testified.  (Roundtable Statement for the Record, Senate Finance Committee Sept 2017) 

Tax Reform 2.0

GOP leaders aiming to pass another round of tax reforms through the House before the November mid-term elections are planning next week to introduce “Tax Reform 2.0” legislation. The bill would make the individual tax cuts contained in President Donald Trump’s December tax overhaul permanent, while expanding taxpayer savings opportunities. 

House Ways and Means Committee Chairman Kevin Brady (R-TX) commented, “… next week we will introduce legislation to make permanent the small business and individual tax cuts that are driving these positive economic numbers. This investment into our workers will produce over a million and a half new jobs, continue to boost wages, and increase America’s competitiveness for years to come.”  (Accounting Today, Sept. 7). 
  • Today, House Ways and Means Committee Chairman Kevin Brady (R-TX) commented on the 2.0 legislation expected to be marked up by his committee next week while reacting to the U.S. Bureau of Labor Statistics’ August jobs report showing a gain of 201,000 jobs.
  • “August was another solid month of job growth, marking over 1.6 million jobs created this year and the highest level of wage gains since 2009. And we know we can do even better to continue creating greater financial security for our workers and Main Street businesses. That’s why next week we will introduce legislation to make permanent the small business and individual tax cuts that are driving these positive economic numbers. This investment into our workers will produce over a million and a half new jobs, continue to boost wages, and increase America’s competitiveness for years to come,” Brady said.  (Accounting Today, Sept. 7)
  • In July, Brady released a two-page framework for “Tax Reform 2.0” that would make individual and small business tax cuts.  Although last December’s Tax Cuts and Jobs Act made corporate tax cuts permanent, most provisions for individuals and pass-through businesses are set to expire at the end of 2025.  Yesterday, Ways and Means Committee Republicans released an updated outline of the Tax Cuts 2.0 package.
  • Bloomberg reported this week that House Majority Whip Steve Scalise stated, “We’re not resting on our laurels. We’re seeing this great economic growth, and so we’re starting to put together tax cuts 2.0.”  (Los Angeles Times, Sept. 5)

The central feature of the reform proposal — a permanent extension of tax cuts for individuals — is unlikely to pass the Senate, where it would need Democratic support (The Hill, July 24).  Additionally,  the introduction of a Tax Reform 2.0 bill may delay legislation addressing tax technical corrections until after the November elections. (Roundtable Weekly, July 20)

 

Ways & Means Launches Hearings on Impact of Tax Reforms; Top Treasury Official Outlines Timeline for Implementation Guidance

Posted on by Trey Jackson

The House Ways and Means Committee this week held the first in a series of hearings on how the Tax Cuts and Jobs Act (TCJA) is affecting job creation and the economy five months after its enactment.

House Ways and Means Chairman Kevin Brady (R-TX) in his  opening statement offered a list of favorable economic statistics and projections that he said are attributable to the new law

Treasury Assistant Secretary Sketches Timetable for Regulations Implementing Tax Reform 
Certain provisions of the TCJA of interest to commercial real estate could be addressed in upcoming IRS guidance or in a congressional technical corrections bill.

  • Acting IRS Commissioner David Kautter on May 12 said that Treasury and the IRS hope to complete proposed regulations on section 199A passthrough deduction by mid- to late-July. (Tax Notes, May 15, “Kautter Talks Timelines for TCJA Guidance Projects” and Roundtable Weekly, May 4).
  • Kautter added that the target date for a notice of proposed rulemaking on section 163(j) business interest deduction limitation is late summer or early fall. (Roundtable Weekly, April 6).)
  • Natalie Tucker, legislation tax accountant at the Joint Committee on Taxation, recently  said that the cost-recovery period for qualified improvement property rises to the level of consideration for a “technical correction.”  While Congress was formulating the TCJA, a new category—qualified improvement property—wasn’t assigned a cost-recovery period, and fell to the 39-year period by default, rather than the intended 15-year period.  That was not the intent of Congress and therefore qualifies for inclusion in a technical corrections bill, according to Tucker.  (Bloomberg Law, May 11, “Agreement Reached on Three ‘True’ Technical Corrections”)

Along with TCJA rulemaking and implementation, the legislation’s impact on CRE will be a focus of discussion at The Roundtable’s Annual Business Meeting and Policy Advisory Committee Meetings on June 14-15 in Washington, DC.

Supreme Court Appears Divided During Oral Arguments on Expanding States’ Authority to Collect Taxes on E-Commerce Purchases; Decision Expected by June

Posted on by Trey Jackson

The U.S. Supreme Court on Tuesday heard oral arguments on a long-awaited case (South Dakota v. Wayfair, Inc., No. 17-494 ) that addresses the constitutionality of states’ authority to collect sales and use taxes on Internet consumer purchases from retailers who do not have a physical presence in a state.

The U.S. Supreme Court heard  oral arguments  on a long-awaited case (South Dakota v. Wayfair, Inc., No. 17-494  ) that addresses the constitutionality of states’ authority to collect sales and use taxes on Internet consumer purchases from retailers who do not have a physical presence in a state. 

The Wayfair case challenges two pre-Internet Supreme Court decisions from 1991 and 1967 (Quill Corp. v. North Dakota, 504 U.S. 298, and National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753, respectively).  This pair of decades-old opinions exempts many internet merchants from collecting billions of dollars in sales taxes.  The U.S. Government Accountability Office (GAO) estimates that state and local governments could have collected an estimated 8 to 13 billion dollars in 2017 if states were given authority to require sales tax collection from all remote sellers. (GAO report, Dec. 18, 2017).  

During this week’s oral argument on Wayfair, the nine justices offered divided views.  For example, Justice Elena Kagan commented, “Congress is capable of crafting compromises and trying to figure out how to balance the wide range of interests involved here.”  Justice Sonia Sotomayor added, “Is there anything we can do to give Congress a signal it should act more affirmatively in this area?” (CQ, April 17) 

Three justices – Neil Gorsuch, Clarence Thomas and Anthony Kennedy – have expressed a willingness in past writings to rethink the Court’s case law in this area.  On Tuesday, Justice Ruth Bader Ginsburg suggested now is the time for the Quill ruling to be corrected. Ginsburg asked, “If time and changing conditions have rendered it obsolete, why should the court which created the doctrine say, ‘Well, we’ll let Congress fix up what turns out to be our obsolete precedent?'” (Reuters and Wall Street Journal, April 17 / AP, April 18)

Justice Stephen Breyer also noted, “When I read your briefs, I thought absolutely right. And then I read through the other briefs, and I thought absolutely right. And you cannot both be absolutely right.” (Bloomberg Law, April 17) 

During the Supreme Court’s  oral argument on Wayfair , the nine justices offered divided views. See  transcript .

Throughout decades of congressional efforts, legislation to level the tax playing field between Internet-based retailers and “brick and mortar” stores has never passed both chambers. More recently, President Trump has signaled his support for legislation authorizing states to impose sales tax collection requirements on online purchases. (Roundtable Weekly, Feb. 23) 

The Roundtable joined The International Council of Shopping Centers, Investment Program Association, Nareit®, the National Association of REALTORS® , the National Multifamily Housing Council, NAIOP, the American Farm Bureau Federation and the South Dakota Farm Bureau Federation in filing an amicus curiae brief on March 5, urging the Justices to overrule the antiquated, pre-internet, “physical presence” test that imposes collection of sales and use taxes on traditional “brick-and-mortar” retailers – while exempting on-line retailers from those same obligations.  The March brief re-iterated many points set forth by a real estate coalition in an initial amicus brief filed last November. (Roundtable Weekly,   March 9, 2018  and Nov. 3. 2017) 

On Wednesday, a USA Today editorial supported the real estate industry’s viewpoint, while also including an opposing view.  (USA Today, Tax Online Shopping Like All Others, April 17) 

The Supreme Court is expected to render a decision in Wayfair by the end of June. (Wall Street Journal, April 17 and Roundtable Weekly, Jan. 12)