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NEWS

NEWS

 

 

On January 1, 2016, New York City's Commuter Benefits Law took effect. Under the law, private employers with 20 or more full-time, non-union employees in New York City must offer covered employees the opportunity to enroll in commuter benefits programs to pay for their mass transit costs with pre-tax earnings.

What Is the Purpose of the Law?

The law's goal is to reduce transportation costs to employees, promote the use of mass transit, and lower payroll taxes for employers. Because federal income and social security (FICA) taxes are not imposed on such expenses, employees will be able to save on commuting expenses and employers will be able to reduce payroll costs.

What Are Commuter Benefits Programs?

A commuter benefits program is a plan whereby employers can offer their full-time employees the opportunity to use pre-tax income to cover certain IRS qualified transportation costs. Employees may use such pre-tax income to pay for various forms of transit, including the MTA subway and bus, Long Island Rail Road, Metro-North, Amtrak, New Jersey Transit and eligible ferry, water taxi, commuter bus and vanpool services. However, parking and bicycling expenses do not qualify. A list of mass transit providers, and qualified third-party providers that administer commuter benefits programs, are set forth in the Q&A below.

Alternatively, employers can provide (at their own expense) a transit pass or similar form of payment for mass transit transportation. However, if the employer-provided benefit is less than the maximum pre-tax transportation benefit that is allowed under IRS regulations (currently $130 for transit passes and commuter highway vehicles), then the employer must offer employees the opportunity to purchase pre-tax transportation fringe benefits in an amount equal to the difference.

What Employers Are Covered?

Only employers with 20 or more full-time employees are covered. An employer's total number of full-time employees is determined by calculating the average number of full-time employees for the most recent four-week period.

Employers with more than one location are covered by the law, so long as they have 20 or more full-time employees in New York City. Chain businesses (i.e., businesses that share a common owner or principal who owns a majority of each location and are engaged in the same business or operate under a franchise agreement) are also covered by the law. Full-time employees at all of the chain business' locations in New York City are counted to determine the total number of employees.

Temp agencies are covered by the law and are considered the employer of each full-time employee they place in another organization. Thus, temp agencies that place 20 or more full-time employees in New York City must offer those employees transportation benefits. To determine whether an employee qualifies as full-time, temp agency employers should add the total number of hours worked by each employee in the most recent four weeks at all placements.

The law's requirements may be waived for certain employers. To qualify for a waiver, an employer must present compelling evidence that providing transportation benefits would be impracticable and create severe financial hardship.

Which Employees Are Covered?

Only full-time, New York City employees are covered by the law. A full-time employee is any employee who works an average of 30 hours or more per week, any portion of which was in New York City, for a single employer. To determine whether an employee is full-time, employers should calculate the average number of hours worked in the most recent four weeks.

The law covers full-time employees who work in New York City, regardless of their place of residence. New York City includes the Bronx, Brooklyn, Manhattan, Queens and Staten Island.

Full-time employees whose job duties require them to work only occasionally in New York City are still covered by the law, so long as they work an average of 30 hours or more per week, any portion of which was in New York City and if their employer has 20 or more full-time employees.

The law does not cover New York City residents who work outside of the city. Thus, employers are not required to offer commuter benefits to their employees who live in New York City, but who work in New Jersey, Connecticut, Long Island, Westchester or some other location

What Are the Law's Recordkeeping and Administration Requirements?

Employers must give their full-time employees a written offer of the transportation benefits. Employers should maintain such records, and employee responses, for at least two years

Who Enforces the Law?

Initially, the Department of Consumer Affairs (DCA) will enforce the law although the proposed New York City Office of Labor Standards would be given enforcement responsibilities if such office is created by the City Council. While the law takes effect on January 1, 2016, employers will receive a six-month grace period - until July 1, 2016 - before the DCA can seek penalties. After July 1, 2016, employers will have 90 days to correct any violation of the law before penalties will be imposed.

What Are the Penalties for Noncompliance?

First violation penalties will range between $100 to $250, provided the employer fails to correct violations within 90 days. If a violation is not cured after the first fine, an additional fine of $250 will be issued for each additional 30-day period of noncompliance.

What Are the Employer Takeaways?

While many large New York City employers already offer such pretax transit benefits, the new law will require many smaller employers to put a qualified transportation benefit program in place. Thus, employers with employees in New York City must now determine whether they will be subject to the new law, and if so, the impact on their operations. Employers should therefore consider changes to the administration of their benefits programs, proper communications to employees regarding such plans and any payroll changes necessary to comply with the new law in 2016.

 
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IRS audits of businesses have dropped in 2016 to just 0.49% of all business tax returns, the lowest level since 2004. IRS audits of large corporations have also dropped. The IRS audited 6,458 large corporations, which are entities with assets exceeding $10 million. Four years ago, the IRS audited over 10,000.

Tax audits of individual by the IRS declined for the fifth straight year in 2016. The IRS audited just 0.7% of tax returns, which represents 1 in every 143 individual tax returns, down from 1 in 90 back in 2000. In 2016, the IRS audited 5.83% of high-income households, which is defined as returns with income over $1 million, down from 9.55% in 2015, which represents the lowest audit rate for that income group since 2008.

The above drop in audit rates are a result of budgets cuts at the IRS, which has lost 30% of its enforcement staffing since 2010. Expect Republicans to continue cutting the agency’s budget as part of broader spending cuts and the continued lowering of IRS audit rates.

The rules for the collection of New York State sales tax as it relates to computer software are quite complex.  In this article we look to explain how sales tax applies to sales of computer software and related services.

Prewritten computer software is taxable as tangible personal property, whether it is sold as part of a package or as a separate component, regardless of how the software is conveyed to the purchaser. Therefore, prewritten computer software is taxable whether sold:

  • on a disk or other physical medium;
  • by electronic transmission; or
  • by remote access.

Prewritten computer software includes any computer software that is not designed and developed to the specifications of a particular purchaser. This includes software created by combining two or more prewritten programs or portions of prewritten programs.

Custom software is not subject to tax provided it is designed and developed to the specifications of a particular purchaser. If the custom software is sold or otherwise transferred to someone other than the person for whom it was originally designed and developed, it becomes subject to tax.

Prewritten software that is modified or enhanced to the specifications of a particular purchaser is subject to tax. However, if the charge for the custom modification or enhancement is reasonable and separately stated on the invoice, then the charge for the modification or enhancement is not subject to tax.

Computer software services

Many services related to computer software are exempt. Examples of these services include:

  • training
  • consulting
  • instruction
  • troubleshooting
  • installing
  • programming
  • systems analysis
  • repairing
  • maintaining
  • servicing

However, when these otherwise exempt services are provided in conjunction with the sale of prewritten software, the charge for the service is exempt from tax only when the charge for the service is reasonable and separately stated on the invoice or billing statement given to the customer.

Sales of software upgrades

Generally, the sale of a revision or upgrade of prewritten software is subject to tax as the sale of prewritten software. If, however, the software upgrade is designed and developed to the specifications of a particular purchaser, its sale to that specific purchaser is exempt as a sale of custom software.

Remotely accessed software

A sale of computer software includes any transfer of title or possession or both, including a license to use.

When a purchaser remotely accesses software over the Internet, the seller has transferred possession of the software because the purchaser gains constructive possession of the software and the right to use or control the software.

Accordingly, the sale to a purchaser in New York of a license to remotely access software is subject to state and local sales tax. The situs of the sale for purposes of determining the proper local tax rate and jurisdiction is the location from which the purchaser uses or directs the use of the software, not the location of the code embodying the software. Therefore, if a purchaser has employees who use the software located both in and outside of New York State, the seller of the software should collect tax based on the portion of the receipt attributable to the users located in New York.

Software maintenance agreements

Separately stated and reasonable charges for maintaining, servicing, or repairing software are exempt from sales tax. However, if a software maintenance agreement provides for the sale of both taxable elements (such as upgrades to prewritten software) and nontaxable elements, the charge for the entire maintenance agreement is subject to tax unless the charges for the nontaxable elements are:

  • reasonable and separately stated in the maintenance agreement, and
  • billed separately on the invoice or other document of sale given to the purchaser.

Exempt sales for production or research and development

Prewritten computer software used or consumed directly and predominantly in the production of tangible personal property for sale, or directly and predominantly in research and development, is exempt from tax. The purchaser must provide the seller with a properly completed Form ST-121, New York State and Local Sales and Use Tax Exempt Use Certificate. See Tax Bulletins Exempt Use Certificate (TB-ST-235) and Research and Development (TB-ST-773).

Exempt sales to corporations and partnerships

Custom software is exempt from tax when resold or transferred directly or indirectly by the purchaser of the software to either:

  • a corporation that is a member of an affiliated group of corporations that includes the original purchaser of the custom software; or
  • a partnership in which the original purchaser of the custom software and other members of the affiliated group have at least a 50% interest in capital or profits.

However, the exemption does not apply if the sale or transfer of the custom software is part of a plan having as its principal purpose the avoidance or evasion of tax, or if the sale is prewritten software that is available to be sold to customers in the ordinary course of business.

 

As more companies in the manufacturing industry are becoming involved in foreign transactions, particularly exporting, they need to be aware that they can reduce their U. S. tax liability using an Interest-Charge Domestic International Sales Corporation, more commonly known as an IC-DISC.  The IC-DISC is a federal tax export incentive entity structuring available for U. S. companies that export goods and services to foreign countries.  An IC-DISC creates the opportunity to tax a portion of export related to profits at lower tax rates, and to potentially defer export related income to future years. 

The IC-DISC allows certain U. S. exporters to reduce their overall tax liability through a commission mechanism.  The exporter manufacturing company pays a tax deductible commission, based on qualified export sales, to a newly created corporation that makes an IRS election to be an IC-DISC.  By design, IC-DISCs are exempt from federal tax, and therefore do not pay tax on the commission received.  The IC-DISC then distributes the commission income to the shareholder as a qualified dividend subject to tax at reduced capital gains tax rates.

The IC-DISC entity can be created by the shareholders of the exporter manufacturing company as a brother-sister configuration, typically used when the exporter manufacturing company is a regular corporation for tax purposes.  Or, the IC-DISC can be established by the exporter manufacturing company as a parent-subsidiary configuration when the parent exporter manufacturing company is a pass-through type tax entity.

In either case, the benefit received from utilizing an IC-DISC structuring is dependent on the tax structuring and the effective tax rates of the taxpayers involved in the commission transactions.  The IC-DISC is not required to distribute its accumulated earnings, allowing for the dividend income to be deferred into future years. 

Export sales must meet the following requirements in order to qualify for the IC-DISC benefit:

  1.  Export property must be manufactured in the U. S.
  2.  Export property must be sold for direct use outside the U. S.
  3.  Less than 50 percent of the export property’s sale price must be attributable to imported

In addition to export sales of manufactured property, the following transactions may also qualify for IC-DISC treatment:

  1.  Leasing U. S. manufactured property for use outside of the U. S.
  2.  Export sales of property that is extracted, produced, or grown in the U. S., including crops and 
  3.  Engineering and architectural services provided for construction projects located outside the U. S.

 

 

The Research and Development Tax Credit Program, or RTCP, was introduced into the Internal Revenue Code to encourage businesses to invest in significant research and development efforts with the high expectation that such an advantageous tax incentive program would help stimulate economic growth and investment throughout the United States and prevent further jobs from being outsourced to other countries.

In December 2015 the Protecting Americans from Tax Hikes Act of 2015, or PATH Act, made the RTCP a permanent tax incentive within the Code and considerably restructured the program to allow eligible “small businesses” (i.e., $50 million or less in gross receipts) to claim the RTC against the Alternative Minimum Tax for tax years beginning on January 1, 2016.

Businesses with average annual gross receipts of less than $50 million for the three taxable year period preceding the current taxable year are now eligible to offset both their regular income tax and their AMT with RTCs. Before the enactment of the PATH Act, businesses in AMT positions were unable to utilize their RTCs to offset their tax liability. Regardless, it is important to point out that RTCs can generally be either carried back 2 years or carried forward up to 20 years before the RTCs could expire unutilized

In addition, PATH allows eligible “start-up companies”, which is defined in this section of the Code as companies with less than $5 million in gross receipts in the current taxable year and that have no gross receipts for any taxable year prior to the five taxable year period ending with the current taxable year, to claim up to $250,000 of the RTC against the company’s federal payroll tax for tax years beginning on January 1, 2016.