San Antonio, Texas December 9, 2019 - BDO USA, LLP...Russell Clarkson, Managing Director, Technology & Business Transformation Services, BDO USA, LLP Drew Olson, Partner, Forensic

San Antonio, Texas

December 9, 2019

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Agenda

1:00 – 1:05 PM Welcome and Opening Remarks

Ann Peña, Tax Partner, BDO USA, LLP

1:05 –2:00 PM Accounting and Federal Tax Update

J.R. Vogel, Assurance Senior Manager, BDO USA, LLP

Eunice Santos, Audit Senior Manager, BDO USA, LLP

David Weeks, Tax Partner, BDO USA, LLP

Ari Berlin, Tax Managing Director, BDO USA, LLP

2:00 – 2:55 PM Digital Transformation

Russell Clarkson, Managing Director, Technology & Business Transformation Services, BDO USA, LLPDrew Olson, Partner, Forensic Investigation & Litigation Services, BDO USA, LLP

2:55 – 3:15 PM Break3:15 – 4:05 PM Fraud Prevention

Jesse Daves, Managing Director, Forensic Accounting & Investigations, BDO USA, LLP

Dawn Williford, Regional Practice Leader, Risk Advisory Services, BDO USA, LLP

4:05 – 4:55 PM Wayfair Update

Tom Smith, CPA, Tax Partner and Southwest Region SALT Leader, BDO USA, LLP

4:55 – 5:00 PM Thank You and Closing Remarks Penny Pepperling, Audit Partner, BDO USA, LLP

5:00 – 7:00 PM Networking Reception

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Welcome and Opening Remarks

Ann PeñaTax Partner, BDO USA, LLP

4

Financial Accounting Standard Boards Update

J.R. VogelAssurance Senior Manager, BDO USA, LLP

Eunice SantosAudit Senior Manager, BDO USA, LLP

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2019 Final ASUs Issued

ASU 2019- Title BDO Alert

01 Leases (Topic 842): Codification Improvements 2019-01 Alert

02Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials

N/A

03 Not-for-Profit Entities (Topic 958): Updating the Definition of Collections N/A

04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments 2019-04 Alert

05 Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief 2019-05 Alert

06Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities

2019-06 Alert

08Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements—Share-Based Consideration Payable to a Customer

2019-08 Alert

https://www.bdo.com/insights/assurance/fasb/fasb-issues-improvements-to-leases-standard-for-lehttps://www.bdo.com/insights/assurance/fasb/fasb-issues-targeted-improvements-to-financial-inshttps://www.bdo.com/insights/assurance/fasb/fasb-issues-transition-relief-for-credit-losses-sthttps://www.bdo.com/insights/assurance/fasb/fasb-simplifies-accounting-for-goodwill-certain-idhttps://www.bdo.com/insights/assurance/fasb/fasb-simplifies-accounting-for-goodwill-certain-id

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Clarifies certain aspects of new leases guidance• Allows non-manufacturer/dealer lessors to use cost, reflecting any volume or trade discounts, as

the fair value of the underlying asset

• Lessors that are depository/lending institutions will present all principal payments received under leases as investing cash flows. Other lessors will present all cash receipts from leases as operating cash flows.

• Provides an exception to the paragraph 250-10-50-3 interim disclosure requirements in the ASC 842 transition disclosure requirements (applies to lessees and lessors).

ASU 2019-01, Leases (Topic 842): Codification Improvements

Effective Dates Public Business Entities Other Entities

FYs beginning after 12/15/2019 FYs beginning after 12/15/2020

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Narrow improvements and clarifications to scope, recognition, measurement, presentation, and disclosure guidance issued in the following recent ASUs:

ASU 2019-04, Financial Instruments Codification Improvements

•Effective for FYs beginning after 12/15/19, including interim periods within those fiscal years

ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial

Liabilities

•Effective concurrent with ASU 2016-13 (or FYs beginning after 12/15/22 if already adopted 2016-13)

ASU 2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments

•Effective concurrent with ASU 2017-12 (or beginning of first annual period after issuance of 2019-04 if already adopted 2017-12)

ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

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Allows NFPs to elect private company accounting alternatives: Goodwill (ASC 350)

• Option to amortize goodwill on a straight line basis over a period of 10 years (or less if appropriate)

• If elected, entity must test goodwill when a triggering even occurs at either the entity level or reporting level.

Certain identifiable intangible assets in a business combination (ASC 805)• Option to subsume the following into goodwill:

- Customer-related intangible assets that are incapable of being sold or licensed independently from other assets acquired, and

- All non-compte agreements

• If elected, must also elect ASC 350 goodwill alternative

Effective immediately with same open-ended one-time election available to private companies

ASU 2019-06, Extending Private Company Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities

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2019 Select Proposals

Title Comment Deadline

Proposed ASU, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates

September 16, 2019BDO comment letter

BDO alert

Invitation to Comment, Identifiable Intangible Assets and Subsequent Accounting for Goodwill

October 7, 2019BDO comment letter

Proposed ASU, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting


Proposed ASU, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity


Proposed ASU, Debt (Topic 470): Simplifying the Classification of Debt in a Classified Balance Sheet (Current versus Noncurrent)


https://www.bdo.com/insights/assurance/comment-letters/bdo-comment-letter-financial-instruments%E2%80%94credit-lohttps://www.bdo.com/insights/assurance/fasb/fasb-affirms-decisions-to-defer-effective-dates-ofhttps://www.bdo.com/insights/assurance/comment-letters/bdo-comment-letter-identifiable-intangible-assetshttps://www.bdo.com/insights/assurance/comment-letters/bdo-comment-letter-reference-rate-reform-(topic-84https://www.bdo.com/insights/assurance/comment-letters/bdo-comment-letter-accounting-for-convertible-insthttps://www.bdo.com/insights/assurance/comment-letters/bdo-comment-letter-simplifying-the-classification

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PCC and EITF Update

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To discuss the following: Implementation of ASU 2016-02, Leases (Topic 842)

Implementation—revenue recognition

Effective dates for private companies

Distinguishing liabilities from equity (including convertible debt)

Simplifying the balance sheet classification of debt

Income tax simplification

Identifiable intangible assets and subsequent accounting for goodwill

PCC Issue No. 2018-01, “Practical Expedient to Measure Grant Date Fair Value of Equity-Classified Share-Based Awards”

EITF revenue recognition issue

Reference rate reform: facilitation of the effects of the interbank offered rate transition on financial reporting

Other PCC issuesNext meeting: December 16-17, 2019

Private Company Council (PCC) MET IN APRIL, JUNE AND SEPTEMBER OF 2019

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Issue 18-A: Recognition under Topic 805 for an Assumed Liability in a Revenue ContractStatus: Completed (subsumed on 7/31/19 into research project on Recognition and Measurement of Revenue Contracts with Customers under Topic 805) Discussed comment letters on proposed ASU and invitation to comment Recommended the FASB add a project on measuring assumed contract liabilities in a

revenue contract acquired in a business combination Postponed decision on recognition until measurement & related issues are addressed

Issue 19-A: Financial Instruments—Clarifying the Interactions between Topic 321 and Topic 323Status: Final Consensus Under the ASC 321 measurement alternative, consider observable transactions requiring

application or discontinuation of equity method Apply ASC 321 instead of ASC 323 to certain forward contracts and purchased options on

equity securities that are not derivatives and not deemed in-substance common stock

Emerging Issues Task Force (EITF)

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Issue 19-B: Revenue Recognition—Contract Modifications of Licenses of Intellectual PropertyStatus: Initial Deliberations Task force members discussed the issues; no tentative decisions reached Issues:

• Accounting for contract modifications in which another right is added to the existingrights, and the contract term is extended (i.e., whether to apply ASC 606 guidance onlicense renewals or guidance on modifications)

• Accounting for situations in which licensing rights are revoked, including options toconvert from software license to hosted (service) arrangement

Issue 19-C: Warrant Modifications: Issuers’ Accounting for Modifications of Equity ClassifiedFreestanding Call Options That Are Not within the Scope of Topic 718 or Topic 815Status: Added to EITF agenda on September 18, 2019. No deliberations yet.

Next meeting: tentatively March 12, 2020

Emerging Issues Task Force (EITF)

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SEC Final Rulemaking

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SEC Rulemaking – Focus Areas

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Capital Formation

Disclosure Effectiveness

Investor Protection

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Streamline and simplify disclosure requirements, discourage repetition and disclosure of immaterial information

Include changes to:

• MD&A• Confidential treatment requests• Cross-referencing• Property Disclosures• Risk Factors• XBRL and hyperlinks

Refer to BDO SEC Alert

SEC Rulemaking – FAST Act Modernization & Simplification of Regulation S-K (Final Rules)

https://www.bdo.com/insights/assurance/sec/sec-modernizes-and-simplifies-certain-disclosure-r

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Extends the “test-the-waters” accommodation currently only available to emerging growth companies to ALL issuers

Enables issuers to gauge market interest in possible offering with certain institutional investors prior to, or following, the filing of a registration statement

Final Rule is effective December 3, 2019

Refer to Press Release for more information

SEC Rulemaking – Solicitations of Interest Prior to a Registered Public Offering (Final Rules)

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https://www.sec.gov/news/press-release/2019-188

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SEC Proposed Rulemaking

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Proposed Amendments to:

Accelerated and Large Accelerated Filer Definition

Financial Disclosures About Acquired and Disposed Businesses

Regulation S-K Items 101, 103, and 105

Update Disclosure Requirements for Banking Registrants

SEC Rulemaking Proposals

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Proposal would change the definitions of an accelerated and large accelerated filer to exclude issuers that otherwise qualify as a smaller reporting company and have annual revenues of less than $100 million in their most recently completed fiscal year.

SEC Rulemaking – Proposed Amendments to Accelerated and Large Accelerated Filer Definitions

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These proposed changes would reduce the number of issuers

that qualify as accelerated filers and

are intended to reduce compliance costs for smaller

reporting companies

If adopted, certain low-revenue issuers

would not be subject to SOX 404(b) auditor

attestation requirements regarding ICFR

These low-revenue issuers would not need

to comply with the shorter SEC reporting

deadlines that apply to accelerated and large

accelerated filers

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PCAOB Update

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Project Current Stage TimingAuditing Accounting Estimates, Including Fair Value Measurements, and Amendments to PCAOB Auditing Standards

Final Standard issued on 12/20/2018 – approved by SEC on 7/1/2019

Effective for audits of fiscal years ending on or after December 15, 2020.

Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists

Final Standard issued on 12/20/2018 – approved by SEC on 7/1/2019

Effective for audits of fiscal years ending on or after December 15, 2020.

PCAOB Recently Completed Standard-Setting

Refer to: https://pcaobus.org/Standards/Pages/recently-completed-standard-setting-activities.aspx

https://pcaobus.org/Standards/Pages/recently-completed-standard-setting-activities.aspx

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Project Current StageQuality Control Standards, Including Assignment and Documentation of Firm Supervisory Responsibilities

Developing a concept release for public comment for the Board’s consideration in Q4 2019.

Supervision of Audits Involving Other Auditors

Analyzing comments to determine next steps.

Going Concern Monitoring effect on audits of the changes to the relevant accounting standards. Reminder: AS 2415, Consideration of an Entity's Ability to Continue as a Going Concern, and Staff Audit Practice Alert No. 13 continue to provide the applicable requirements and guidance.

PCAOB Current Projects – Standard Setting

Refer to: https://pcaobus.org/Standards/research-standard-setting-projects/Pages/default.aspx

https://pcaobus.org/Standards/research-standard-setting-projects/Pages/default.aspx

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PROJECT STATUS

Changes in the Use of Data and Technology in the Conduct of Audits

Researching whether impediments exist in PCAOB audit standards.

Auditor’s Role Regarding Other Information and Company Performance Measures, Including Non-GAAP Measures

Summarizing research findings and developing recommendations for next steps.

Auditor’s Consideration of Noncompliance with Laws and Regulations

Summarizing research findings and developing recommendations for next steps.

PCAOB Research Agenda

Refer to: https://pcaobus.org/Standards/research-standard-setting-projects/Pages/default.aspx

https://pcaobus.org/Standards/research-standard-setting-projects/Pages/default.aspx

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PCAOB: Critical Audit Matters

Audit Committees are reminded Critical Audit Matter (CAM) auditor reporting requirements are effective for large accelerated filers (LAFs) as of June 30, 2019 and for Other than LAFs as of December 15, 2020.

Frequent communication and education are critical to the successful implementation of this standard.

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Delivering Sustained Audit Quality

Source: BDO 2019 Audit Quality Report

https://www.bdo.com/insights/assurance/corporate-governance/2019-delivering-sustained-audit-quality/delivering-sustained-audit-quality

27 AUDIT QUALITY IS THE CORNERSTONE IN THE MARKETPLACE

“We believe that audit quality includes effective, efficient, technology-enabled and technically compliant audits that are highly

valued and relied upon by users of the financial statements and are performed by people doing

evaluative, insightful and impactful work.”

BDO Defines Audit Quality

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2019 YEAR-END PLANNING OPPORTUNITIES

David WeeksTax Partner, BDO USA, LLP

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Introduction

30 2019 Year-End Tax Planning Considerations

Introduction

As the end of the year approaches, now is a good time for taxpayers to think of planning moves that will help lower their tax bill for this year and possibly next year.

Year-end planning for 2019 continues to take place against the backdrop of new tax laws that make major changes to the rules for individuals and businesses. The new law is herein referred to as the “Tax Cuts and Jobs Act,” “TCJA,” or simply the “Act.”

For individuals, 2018 brought about lower income tax rates, a substantially increased standard deduction, substantially limited itemized deductions, no more personal exemptions, an increased child tax credit, an alternative minimum tax (AMT) that will capture far fewer taxpayers, and many more changes that we will hear about today.


Introduction – continued

For businesses, the corporate tax rate was reduced to a flat 21% rate, the corporate AMT was eliminated, and there are new limits on business interest deductions.

Most business taxpayers will now benefit from significantly liberalized expensing and bonus depreciation rules.

In addition, there is a 20% deduction for non-corporate taxpayers with qualified business income (QBI) from a flow-through entity (FTE). The QBI deduction reduces the highest effective tax rate for individuals with QBI from 37% to 29.6%.


Introduction – continued

Since the 2019 and 2020 rates will remain the same, the time-tested approach of deferring income and accelerating deductions to minimize taxes still works for many taxpayers, along with the tactic of “bunching” expenses into this year or into the next year, whichever is more beneficial to get around those remaining deduction restrictions that are based on a percentage of adjusted gross income.

In some instances, threshold amounts are adjusted for inflation from year-to-year, which should be taken into account when running projections.

We have compiled a list of tax saving moves and action steps that should be presented and applied based on unique taxpayer dynamics to help achieve meaningful tax savings with proper tax planning.

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Business Tax Law Changes



PROVISION 2019/2020 LAW

CorporateTax Rate

The top corporate tax rate has been permanently reduced from 35% to a flat tax rate of 21%. The prior corporate tax brackets have been reduced to a single flat rate, thereby converting the corporate progressive tax system into a flat tax system. Personal service corporations are now taxed at the same 21% tax rate as other C corporations.

Repeal ofAlternativeMinimum Tax

In the past, the corporate AMT was levied at a 20% rate, but it was repealed effective for tax years beginning after Dec. 31, 2017. Going forward, any prior AMT liabilities may offset the regular taxliability for any taxable year after 2017. In addition, the AMT credit is refundable for any taxable year beginning after 2017 and before 2022 in an amount equal to 50% (100% for taxable years beginning in 2021) of the excess credit for the taxable year.



Bonus Depreciation (FullExpensing)

Allows 100% expensing for the cost of qualified property acquired and placed in service after Sept. 27, 2017; gradually reduced for property placed in service after Dec. 31, 2022, andbefore Jan. 1, 2027, with no expensing available for property placed in service after Dec. 31,2026.

The new rules apply to most new and used property.




Section 179 Expensing Business taxpayers could elect to expense the cost of qualifying property, with an annual limit of $1 million.

The $1 million (increased to $1,020,000 in 2019 and $1,040,000 in 2020) limitation wasreduced by the amount by which the cost of such property placed in service during the taxable year exceeded $2.5 million ($2,550,000 in 2019 and $2,590,000 in 2020).




Limitation onBusiness InterestExpense Deduction

Limits the interest expense deduction for every business, regardless of its form, with average annual gross receipts over $26 million to the sum of:

i. Business interest income andii. 30% of the business’s “adjusted taxable income” (ATI). iii. Floor plan financing interest expense

ATI excludes:• Income and deduction items not related to a trade or business and business interest income. • Any net operating loss (NOL) deduction that could offset taxable income, and any deduction

allowed under new Section 199A for non-corporate taxpayers. • Deductions for depreciation, amortization and depletion, but only for taxable years

beginning on or after Jan. 1, 2022.




Corporate NetOperating Losses(NOLs)

Under the TCJA, NOL deductions are limited to 80% of taxable income for tax years beginning after Dec. 31, 2017. New law also eliminates carryback of NOLs and allows unused NOLs to be carried forward indefinitely.

Pre-TCJA NOLs had a carryback period of 2 years and a carryforward period of 20 years.

NOLs generated before 2018 will not be subject to the 80% of taxable income limitation.




Section 199ADeduction

The new law provides individuals, estates and trusts with a deduction of up to 20% of their qualified business income (QBI), regardless of whether it is attributable to income earned through an S corporation, partnership, sole proprietorship, or disregarded entity.

Eligible taxpayers may also be entitled to a deduction of up to 20% of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

For taxpayers whose taxable income does not exceed $160,700 (or $321,400 for married filing jointly or $160,725 for married filing separately), the deduction is equal to the lesser of 20% of QBI or taxable income.

For taxpayers whose taxable income is at least $210,700 (or $421,400 for married filing jointly and $210,725 for married filing separately), two additional provisions apply:

(1) A limitation based on W-2 wages may reducethe deduction percentage below 20% (50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property held by the business);

(2) No deduction may be claimed for income fromspecified service businesses.



Provision 2019/2020 LawExcessBusiness LossLimitation

For tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, “excess business loss” of a taxpayer other than a C corporation is disallowed. Under this rule, excess business losses are not allowed for the tax year but are instead carried forward and treated as part of the taxpayer’s NOL carryforward in subsequent tax years.

An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to trades and businesses over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The threshold amount for a tax year is $510,000 for married individuals filing jointly and $255,000 for other individuals, with both amounts indexed for inflation. These thresholds increase to $259,000 and $518,000, respectively, for 2020.

For a partnership or S corporation, the new rule applies at the partner or shareholder level. In terms of ordering, these rules only apply only after the basis limitation rules under Secs. 1366(d) or 704(d) and the at-risk basis rules under Section 465 are applied for active owners and after the PAL rules under Section 469 are applied for passive owners.




S-to-C corporationConversions

The TCJA makes two modifications for a C corporation that (a) was an S corporation on Dec. 21, 2017, and revokes its S corporation election after Dec. 21, 2017, but before Dec. 22, 2019, and (b) has the same owners of stock in identical proportions on the date of revocation and on Dec. 22, 2017. If an S corporation and its shareholders determine that it is advantageous to revoke the S election, two new provisions cushion the impact of the revocation:

1. After the expiration of the post-termination transition period (at least one year after revocation), a distribution of money by the corporation is allocated between the accumulated adjustments account (AAA) and the accumulated earnings and profits (AE&P) of the corporation in the same ratio as the amount of the AAA bears to the amount of theAE&P as of the effective date of the revocation election.

2. If a terminated S corporation using the cash method is required under Section 448 to adopt the accrual method, the resulting Section 481(a) adjustment is taken into account ratably over 6 taxable years beginning with the year of change.

These provisions incentivize S-to-C conversions so taxpayers can benefit from the 21% corporate tax rate and the accompanying deferral provided to shareholders until distributions are made. A more comprehensive discussion of the choice of entity decision is provided in a later section.



PROVISION 2019/2020 LAWEntertainment Expenses

Under pre-TCJA law, no deduction was allowed for ordinary and necessary expenses for an activity of a type generally considered to be entertainment, amusement, or recreation, or for a facility used in connection with such an activity, unless the taxpayer established that the expense was directly related to or associated with the active conduct of the taxpayer’s trade or business or income-producing activity.

The TCJA repeals the rule that allowed a deduction for entertainment, amusement, or recreation expenses that were directly related to or associated with the active conduct of the taxpayer’s trade or business.

A deduction for any food or beverage expense, even in connection with entertainment, continues to be limited to 50% of the otherwise deductible amount.




Advance Payments

In general, for a cash basis taxpayer, an amount is included in income when actually or constructively received.

For an accrual basis taxpayer, however, an amount is included in income when all the events have occurred that fix the right to receive that income and the amount of that income can be determined with reasonable accuracy, unless an exception permits deferral or exclusion. Accrual taxpayers with an applicable financial statement are also subject to a general rule that precludes the deferral of income recognition beyond book recognition.

Exceptions often allow tax deferral to mirror financial accounting deferral (e.g., income is recognized as the goods are provided or the services are performed) to a limited extent. See Rev. Proc. 2004-34.




Advance Payments

The TCJA codifies the deferral method of accounting for advance payments for goods, services and other listed items under Rev. Proc. 2004-34 by providing that a taxpayer who computes taxable income under the accrual method of accounting and receives any advance payment (defined below) during the tax year, must:

(a) Include the advance payment in gross income for that year, or(b) If the taxpayer elects, the taxpayer may:

(i) Include the portion of the advance payment required to be included under Section 451(b) in its gross income in the taxable year of receipt, and

(ii) Include the remaining portion of the advance payment in gross income in the tax year following the tax year in which the payment is received. (Section 451(c)(1)(B))




Like-Kind Exchanges

Under Section 1031, a taxpayer doesn’t recognize gain or loss on an exchange of like-kindproperties if both the relinquished property and the replacement property are held for productive use in a trade or business of for investment purposes. Under pre-TCJA law, property eligible to be exchanged in a tax-free like-kind exchange included real property and personal property, including intangible personal property such as patents and other intellectual property.

Section 1031 is now limited to exchanges of real property that is not considered inventory or held primarily for sale.

Note: In light of the increased and expanded expensing provisions under Section 179 and bonus depreciation, the elimination of the like-kind exchange provisions’ applicability to tangible personal property should be less impactful.


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Choice of Entity Considerations


Choice of Entity DecisionTop Marginal Rates – Before Tax Reform

Corporation Pass-Through (Active) Pass-Through (Passive)

Federal Income Tax (Entity) 35% 0% 0%

Federal Income Tax (Owner) 0% 39.6% 39.6%

NII/SE Tax 0% 3.8% 3.8%

Federal Tax on Earnings 35% 43.4% 43.4%

Federal Income Tax – Distr.* 13.0% 0% 0%

Net Investment Income Tax* 2.5% 0% 0%

Total Federal Tax Rate 50.5% 43.4% 43.4%

Section 199A Deduction Benefit (0%) (0.0%) (0.0%)


* Effective rate based on distribution of net after-tax cash taxed at 20% income tax rate and 3.8% NII tax rate.


Choice of Entity DecisionTop Marginal Rates – Following Tax Reform

Corporation Pass-Through (Active) Pass-Through (Passive)

Federal Income Tax (Entity) 21% 0% 0%

Federal Income Tax (Owner) 0% 37% 37%

NII/SE Tax 0% 3.8% 3.8%

Federal Tax on Earnings 21% 40.8% 40.8%

Federal Income Tax – Distr.* 15.8% 0% 0%

Net Investment Income Tax* 3.0% 0% 0%


Section 199A Deduction Benefit (0%) (7.4%) (7.4%)


* Effective rate based on distribution of net after-tax cash taxed at 20% income tax rate and 3.8% NII tax rate.


Choice of Entity Decision:Important Considerations

Current distribution vs. reinvestment of after-tax cash

Expected rate of return on reinvestment after-tax cash

Potential exit event and timing considerations

Impact of tax reform on taxable income calculations

International tax considerations

Availability of Section 199A deduction

• See BDO Section 199A Playbook

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Partnership Planning Considerations


Draft Disclosure RequirementsOverview

New partnership disclosures will be required by partnerships for 2019 income tax returns

Tax basis capital reported by partner

Beginning and ending of year partner share of Section 704(c) built-in gain/loss

Partner share of Section 751 ordinary income or loss, as applicable

Additional liability reporting

Section 743(b) reporting

Guaranteed payment for services versus use of capital disclosure

Disregarded entity disclosure detail


Draft Disclosure Requirements:Tax Basis Capital

Item L on Schedule K-1, Partner’s Capital Account Analysis must now be prepared solely on the tax basis

Previously, partnerships could report partner capital on Schedule K-1 on a GAAP, tax, Section 704(b) book, or “other” basis

Beginning in 2018, partnerships were required to report negative tax basis capital accounts

The IRS continues to attempt to identify situations where “outside” tax basis is significant relative to a partner’s tax liability, e.g., deductibility of losses and debt-financed distributions


Draft Disclosure RequirementsDisregarded Entity Disclosures

Schedule K-1, Line H2 asks if the partnership interest is owned through a disregarded entity, and if it is, to identify the name and taxpayer ID number of the disregarded entity

Previously, partnerships did not have to disclose the name or TIN of the disregarded entity, just the name and TIN of the beneficial owner

This disclosure may relate to liability allocations to a disregarded entity under the anti-abuse rules contained in Prop. Regs. Sec. 1.752-2 as well as identifying the ultimate taxpayer that will include the income, gain, loss, deduction and credit from Schedule K-1


Draft Disclosure RequirementsWhat does this mean in practical terms?

Accurate tracking of partnership activities, i.e., Section 704(b) and tax basis capital accounts, is key

If partner Section 704(b) and tax basis capital accounts have been accurately tracked, gathering the required data should not be overly burdensome

A lack of capital accounts will require additional services in order to meet these disclosure requirements

Be wary of shortcuts! We need to be able to support all amounts disclosed on the tax return

It will be important to evaluate prior recourse vs. nonrecourse liability determinations and allocations under Section 752


General Disclaimer:

These materials do not constitute tax or legal advice, and cannot be relied upon for purposes of avoiding penalties under the Internal Revenue Code. These materials may omit discussion of exceptions, qualification, definitions, effective dates, jurisdictional differences, and other relevant authorities and considerations. In no event should a reader rely on these materials in planning a specific transaction. BDO will not be responsible for any error, omission, or inaccuracy in these materials.

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Estate, Gift, and Generation-Skipping Tax Planning

Ari BerlinTax Managing Director, BDO USA, LLP

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Federal Estate, Gift, and GST Taxes

The American Taxpayer Relief Act of 2012 (ATRA) permanently provided for a maximum federal estate tax rate of 40% with an annually inflation-adjusted$5,000,000 exclusion amount.

The TCJA temporarily doubled the annually inflation adjusted exclusion from $5,000,000 to $10,000,000 before adjustment for inflation.

The applicable exclusion amount, as adjusted for inflation, is $11,400,000 for gifts made and estates of decedents dying in 2019.

The applicable exclusion amount for a married couple is $22,800,000.

Since the annual exclusion has increased substantially over the last few years, it is a good time to consider more taxable gifts and planning ideas.

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Estate Tax Law ChangesPROVISION 2019 LAW 2020 LAW

Estate & GiftTax Exemption

For estates of decedents and gifts made after Dec. 31, 2017, and before Jan. 1, 2026, the base estate and gift tax exemption amount is doubled from $5 million to $10 million.

The $10 million amount is indexed for inflation and is approximately $11.4 million for 2019 ($22.8 million per married couple).

The increase in exemption amount also applies to generation-skipping transfer taxes.

The annual gift tax exclusion amount is $15,000.

For estates of decedents and gifts made after Dec. 31, 2017, and before Jan. 1, 2026, the base estate and gift tax exemption amount is doubled from $5 million to $10 million.

The $10 million amount is indexed for inflation and is expected to be approximately $11,580,000 for2020 ($23.16 million per married couple).

The increase in exemption amount also applies to generation-skipping transfer taxes.

The annual gift tax exclusion amount is $15,000.

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$600,000

$2,600,000

$4,600,000

$6,600,000

$8,600,000

$10,600,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

ESTATE EXCLUSION

60

0%

10%

20%

30%

40%

50%

60%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

TOP ESTATE TAX RATE

61

Portability

ATRA made “portability” between spouses permanent.

Portability allows the estate of a decedent who is survived by a spouse to make a portability election to permit the surviving spouse to apply the decedent’s unused exclusion to the surviving spouse’s own transfers during life and at death.

The portability election must be made on a timely filed estate tax return. This is the case even if the size of the estate is under the threshold required for filing a federal return. When advising an executor as to the need to file a federal estate tax return, always consider the need for a portability election.

Rev. Proc. 2017-34 provides relief for late estate tax portability elections. In cases where an estate tax return was filed, a late portability election can generally be made for up to two years following the date of death.

62

Strategies for Year-End 2019

Making annual exclusion gifts is one of the easiest ways to maximize wealth transfers to future generations.

In 2019, every individual can give up to $15,000 (and married couples can give $30,000) to any grandchild without triggering a generation-skipping transfer (GST) tax.

- Examples of common uses of the annual exclusion include outright gifts at holiday time, contributions to Section 529 plans, or payment of insurance premiums of policies held in an irrevocable life insurance trust (ILIT).

- Note that Section 529 plans can be “front-loaded” with up to five years’ worth of annual exclusion gifts ($75,000 per person, or $150,000 per couple).

If you don’t use your annual exclusion in a particular year, you lose it; it is not cumulative.

63

Strategies for Year-End 2019 – continued

Making taxable gifts now removes any future income and growth on that asset from your federal estate tax base. However, you also transfer your basis, so your beneficiaries will not get the benefit of the basis step-up that would occur on death if you held the asset.

In general, while the long-term capital gains rate is sufficiently below the estate tax rate of 40%, giving away assets may still be beneficial if a taxpayer is below the lifetime exemption amount.

64

IRS Issues Final Regulations on 11/22/2019

The Treasury Department and the Internal Revenue Service issued final regulations confirming that individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.

No “clawback”

USE IT OR LOSE IT

65

2020 Presidential Candidates – Tax Proposals

66

Tax Reform 2.0

PROVISION PROPOSED

Individual Tax Rates

Make the Tax Reform tax rates “permanent”

Tax Deductions

Make the Tax Reform changes for the following items “permanent”• $10,000 limitation on real estate taxes/income tax/sales tax• $750,000 limitation on mortgage acquisition indebtedness• Elimination of all 2% miscellaneous itemized deductions

67

Biden

PROVISION PROPOSEDIndividual Income Tax

• Go back to pre-tax reform tax rates (top rate of 39.6%)• Long term capital gains would be taxed as ordinary income when

income exceeds $1,000,000

Estate Tax Eliminate the step-up basis to heirs

68

Sanders


• 4% income based premium tax on households earning more than $29,000• 4 new tax brackets with top tax rate of 52% on income above

$10,000,000• Long term capital gains would be taxed as ordinary income when

income exceeds $250,000Estate Tax • Go back to 2009 estate exclusion level of $3,500,000

• Increase top tax rate to 77%

69

Warren


• Go back to pre-tax reform tax rates (top rate of 39.6%)• Long term capital gains would be taxed as ordinary income for top 1% of

households• 14.8% investment tax on individuals over $250,000 and married over

$400,000Estate Tax • Go back to 2009 estate exclusion level of $3,500,000

• Increase top tax rate to 65%

70

Questions?

71

Digital Transformation

Russell ClarksonManaging Director, Technology & Business Transformation Services, BDO USA, LLP

Drew OlsonPartner, Forensic Investigation & Litigation Services, BDO USA, LLP

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

Digital Forces at Play:Disruption & Foresight

GET TO KNOW BDO’S DIGITAL TRANSFORMATION SERVICES

73

73

Master Game of Chess

Drew vs. Russell

74

DIGITALWORLD

HUMANWORLD

Digitization is a catalyst to business transformation. Core company

challenges must be addressed to be on the right side of disruption.

Today’s marketplace faces unprecedented pressures, both external and internal. Our world is dominated by digital and cognitive disruption.

74

7575

“We aren’t keeping up with the speed of change.”

“My systems are not keeping up.”

“We are drowning in data.”

“I don’t know who my customers are.”

“New business models are challenging us.”

“I’m exposed to fraud, breach, and theft.”

“I am too costly to compete.”

“My industry and business are under attack.”

There has never been a more difficult time to be in business.

76

76

TECHNOLOGY FORCESexplosion of data, cloud & flexible service delivery,

pervasive interconnectivity

MARKET FORCESregulatory shifts, security risks, globalization, changing customer

expectations, automation

COMPETITIVE FORCESmobility and social, focus on

cost, skill shortages, new entrants, sharing economy

Market pressures at play.

MID-MARKETBUSINESS

7777

What is the solution to digital disruption?

Developing a digital transformation strategy is the #1 priority for c-suite

executives.

71% of companies have seen increases in revenue from digital initiatives.

79% of executives anticipate increases in profitability over the next 3 years due to digital transformation initiatives.

79%of companies plan to increase spending on digital transformation over the next year.

67%of companies say reducing operational inefficiency is one of their top 3 business goals in the next 12-18 months.

7878

Digital 3+1 Approach

Digital Transformation is all about reimagining your business and operations in today’s digital economy, securing your future starting today.We set you on your pathway toward Digital Transformation with our Digital 3+1 approach:

DIGITAL BUSINESS. Guiding clients through their digital transformation to create new value, market differentiation, and revenue in the digital economy.

DIGITAL PROCESS. Reinventing operational processes by optimizing end-to-end performance and improving efficiency.

DIGITAL BACKBONE. Advising clients on their digital foundation by addressing or removing the IT complexities, risks, and barriers to innovation, to meet business and evolving market demands.

DIGITAL ADOPTION. Our +1, is at the heart of our approach: a fully integrated change management program that informs and enables the business’ strategic direction, while streamlining user adoption for employees, suppliers, and customers.

7979

We help clients disrupt, innovate, and transform by: assessing your digital readiness, developing digital strategy, prioritizing digital opportunities, and implementing digital solutions.

THE RESULTS? An increase in revenue, profitability and security.

8080

1Launching a digital reinvention that impacts multiple aspects of your business models.

2Reinventing customer engagement along multiple touch points of a newly designed digital and social customer lifecycle.

3Reimagining the core process that drives the business, applying cognitive capabilities, deep analytics and insights across business lines and silos.

4Innovating and migrating application suites and broader technology architectures that enable your business, leveraging the flexibility and agility of the cloud.

Enterprises need to become agile, digitally consumable, and fully integrated to compete in the marketplace.

BDO LEADS CLIENTS IN IDENTIFYING C-SUITE IMPERATIVES, INCLUDING:

BDO applies today’s most relevant industry solutions, methods, and expertise throughout your Digital Transformational journey to drive innovation, completeness, and competitive positioning for your future.

8181

Externalexperiences

Employee experiences

Products,Platforms,Networks

Operations

Internal External

People, Knowledge

Process, Things

• 360° customer mgmt• Interactive marketing• Data-driven services

delivery• Customer rewards / value

adds• Integration w. operations

• Health monitoring / empowerment

• Staff Compliance Enablement

• Employee Engagement• Training/Certification

• Supply chain mgmt• Product lifecycle mgmt• Predictive maintenance• Revenue cycle mgmt• Data-driven pricing• Back office ops mgmt• Claims processing

• Health information exchange• Social listening / analytics• Customer/Vendor experience

mgmt• Regulatory compliance

reporting

Here’s a rough breakdown of any company:

8282

300 C-Suite Executives(including CEO, COO, CFO, CMO, CIO)

Middle Market Focus($250M to $3B)

Targeted Industries(Financial Institutions, Healthcare, Natural Resources & Retail)

Building Tomorrow’s Business

BDO 2019 DT Survey

8383

Executive Summary

Top 5 Findings

1. Developing a digital transformation strategy is middle market executives’ #1 digital priority.

8484

Executive Summary

Top 5 Findings

2. Digital transformation goes beyond IT.

8585

Executive Summary

Top 5 Findings

3. Improving customer experience and operational efficiency top mid-market organizations’ short- and long-term goals.

8686

Executive Summary

Top 5 Findings

4. Digital transformation delivers.

8787

Executive Summary

Top 5 Findings

5. Top digital challenges include cyber concerns, measurement, and talent.

8888

• Improvements on food supply chain• Less waste improves margins• Response time on disaster recovery reduces waste, enhances

public confidence, improves margins

• Competitive advantage• Improvement of employee morale – rise to the challenge• Increase in pride of company• Reduction of insurance claims and overall insurance spend• Increased good information is increased knowledge and the

benefits of knowing what you don’t know

Business Continuity and Digital Transformation

8989

What is your industry?

How is technology changing the game?

What are you going to do to adapt and adopt?

- Shipping and Logistics

- Retail

- Accounting and Finance

- Government contracts

- Hospitality

- Healthcare

- Manufacturing

- Oil and Gas

- How to seek the competitive advantage?

The Digital Challenge

9090

Reflection Develop your Digital Foresight Launch your Digital Imperatives

Consider BDO to guide your journey!

Malcolm “Chip” CohronManaging Director, National Digital Transformation Services770.330.8095 (cell)[email protected]

Russell ClarksonManaging [email protected]

Drew OlsonPartner, Forensic Investigation & Litigation [email protected]

Kirstie TiernanPartner, Advanced [email protected]

9191

Resources

https://www.bdo.com/insights/business-financial-advisory/the-middle-market-goes-back-to-the-future%E2%80%9D-the-dhttps://www.bdo.com/insights/business-financial-advisory/the-ten-step-guide-to-digital-transformationhttps://www.bdo.com/thought-leadership/digital-transformation-survey

92

Questions?

93

Fraud Prevention & Detection: Do You Have a Clue?

Jesse DavesManaging Director, Forensic Accounting & Investigations, BDO USA, LLP

Dawn WillifordRegional Practice Leader, Risk Advisory Services, BDO USA, LLP

94

The cost of fraud

Building the “perfect” perp

Learning from the lessons of others

DISCUSSION THEMES

95

Occupational frauds are those schemes in which a person defrauds his or her employer.

OCCUPATIONAL FRAUD DEFINED

96

RATIONALIZATION

“The company owes me.” “It’s only a loan; I’ll pay it back.” “It’s for a good cause.” “No one will notice.”

COMMON ELEMENTS OF FRAUD

MOTIVE/PRESSURE

Financial pressures Unrealistic expectations Addiction Greed

OPPORTUNITY Lack or circumvention of internal

controls Turnover at key positions Related party transactions Significant use of estimates

Source: Donald R. Cressey, Other People's Money (Montclair: Patterson Smith, 1973)

97

5% of annual revenue lost to fraud

Median loss of $130,000 per scheme

Median duration of 16 months

THE COST OF FRAUD

Source: ACFE’s 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2018 by the Association of Certified Fraud Examiners, Inc.

98

83.5%

35.4%

9.6%

0% 20% 40% 60% 80% 100%

Asset Misappropriation

Corruption

Financial Statement Fraud

Occupational Frauds by Category - Frequency

2014

HOW FRAUD IS COMMITTED

89.0%

85.4%

38.0%

36.8%

10.0%

9.0%

Source: ACFE’s 2016 and 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2016 and 2018 by the Association of Certified Fraud Examiners, Inc.

99

$114,000

$250,000

$800,000

$125,000

$200,000

$975,000

$130,000

$200,000

$1,000,000

$0 $2,000,000

Asset Misappropriation

Corruption

Financial Statement Fraud

Occupational Frauds by Category - Median Loss

201420162018

HOW FRAUD IS COMMITTED


100

COMMITTING MORE THAN ONE SCHEME


Asset misappropriation only 57%

Asset misappropriation and corruption 23%

Corruption only 9%

Corruption, asset misappropriation, and financial statement fraud 4%

Asset misappropriation and financial statement fraud 3%

Financial statement fraud only 1%

Corruption and financial statement fraud 1%

Asset misappropriation

Corruption

Financial statement fraud

Sheet1

Asset misappropriation only 57%

Asset misappropriation and corruption23%

Corruption only9%

Corruption, asset misappropriation, and financial statement fraud4%

Asset misappropriation and financial statement fraud3%

Financial statement fraud only1%

Corruption and financial statement fraud1%

101

0%10%20%30%40%50%

Initial Detection of Occupational Frauds

2014

DETECTION OF FRAUD SCHEMES


102

Median Loss Based on Presence of Anti-Fraud Controls

Control Percent of CasesControl in

PlaceControl Not

in PlacePercent

Reduction

Code of Conduct 80% $110,000 $250,000 56%

Proactive Data Monitoring/Analysis 37% $80,000 $165,000 52%

Surprise Audits 37% $75,000 $152,000 51%

External Audit of ICOFR 67% $100,000 $200,000 50%

Management Review 66% $100,000 $200,000 50%

Hotline 63% $100,000 $200,000 50%

Anti-Fraud Policy 54% $100,000 $190,000 47%

Internal Audit Department 73% $108,000 $200,000 46%

Management Certification of Financial Statements 72% $109,000 $192,000 43%

Fraud Training for Employees 53% $100,000 $169,000 41%

Formal Fraud Risk Assessments 41% $100,000 $162,000 38%

ANTI-FRAUD CONTROLS AT THE VICTIM ORGANIZATION


103

Prepare a comprehensive fraud risk assessment

Perform proactive data analytics Educate management, employees, vendors

and customers Remember: Trust is NOT an internal control

ANTI-FRAUD TIPS

104

Number of Perpetrators – Frequency and Median Loss

NUMBER OF PERPETRATORS

$74,000

$150,000

$339,000 52%

19%

30%

0%

10%

20%

30%

40%

50%

60%

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

One Two Three or More

PERC

ENT

OF

CASE

S

MED

IAN

LO

SS


105

Male66.8%

Female33.2%

2014

Male69.0%

Female31.0%

2016

GENDER

Male69.0%

Female31.0%

2018

Gender Of Perpetrator - Frequency


106

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

60

Age of Perpetrator - Frequency

201420162018

AGE

Source: ACFE’s 2014, 2016 and 2018 Report To The Nations On Occupational Fraud and AbuseCopyright 2014, 2016 and 2018 by the Association of Certified Fraud Examiners, Inc.

107

$0 $100,000 $200,000 $300,000 $400,000

Postgraduate Degree

University Degree

Some University

High School Graduate or Less

Education Level of Perpetrator - Median Loss

201420162018

EDUCATION LEVEL


108

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Employee

Manager

Owner/Executive

Other

Position of Perpetrator - Frequency

201420162018

POSITION


109

0%2%4%6%8%

10%12%14%16%18%

Department of Perpetrator - Frequency

2014

2016

2018

DEPARTMENT


110

0% 10% 20% 30% 40% 50%

Less than 1 year

1 - 5 years

6 - 10 years

More than 10 years

Tenure of Perpetrator - Frequency

201420162018

TENURE


111

89%6% 4%

1%

Criminal Background of Perpetrator – Fraud Related

Never charged or convictedCharged but not convictedHad prior convictionsOther

CRIMINAL BACKGROUND


112

Number of Perpetrators: One Gender: Male Age: 36-45 Education Level: Degree Position: Employee (staff) Department: Accounting Tenure: 1-5 Years Criminal Background: Clean

BUILDING THE “PERFECT” PERP

113

Top 10 Behavioral Red Flags of Perpetrators

1. Living beyond means2. Financial difficulties3. Unusually close association with

vendor/customer4. No behavioral red flags5. Control issues, unwillingness to share

duties6. Divorce/family problems7. “Wheeler-dealer” attitude8. Irritability, suspiciousness or

defensiveness9. Addiction problems10.Complained about inadequate pay

RED FLAGS


114

Questions?

115

Wayfair Update

Tom SmithTax Partner and Southwest Region SALT Leader,BDO USA, LLP

116

• Overview of the Wayfair decision• State sales/use tax economic nexus laws and regulations• What should businesses do?• ASC 450 considerations • Case studies• Wayfair and state corporate income tax consequences• ASC 740 considerations

Agenda

117

Overview of the Wayfair decision

118

As a result of the Wayfair decision, a physical presence is no longer required for substantial nexus under the Commerce Clause.

Wayfair Decision

• On June 21, 2018, the U.S. Supreme Court issued its decision in South Dakota v. Wayfair.

• In a 5-4 decision, the Court ruled in favor of South Dakota and overruled Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Revenue of Ill.

• The Court concluded that “the physical presence rule of Quill is unsound and incorrect.”

• Remanded to the South Dakota Supreme Court to evaluate if the provision meets the other tests for constitutionality (parties rumored to be negotiating a settlement.)

119

The Court’s holding in Wayfair presents a host of new constitutional questions, including:

• Is the South Dakota economic threshold the minimum?

• If not, what standard will determine the minimal economic threshold for substantial nexus?

• Could a physical, “non-economic” presence not constitute substantial nexus?

Wayfair – the Threshold

• To replace the physical presence rule of Quill and National Bellas Hess, the Court held that substantial nexus is established -- “When the taxpayer [or collector] ‘avails itself of the

substantial privilege of carrying on business’ in” a state.

• Wayfair’s economic and virtual contacts with South Dakota, as measured by more than $100,000 of sales or 200 separate sales transactions satisfied Wayfair’ssubstantial nexus definition.

120

Most states are enforcing their sales/use tax economic nexus statutes prospectively. Some may attempt retroactive enforcement.

Court also noted favorably South Dakota’s membership in SSUTA (uniform sales/use tax definitions, single state/local rate, uniform state/local tax base, etc.)

Wayfair – Open Issue - Retroactivity

• The Wayfair decision created numerous open questions for multistate retailers that have relied upon the physical presence standard in determining whether to collect and remit sales taxes.

• Retailers should monitor State publications to determine whether potential liability States are purporting to apply Wayfair on a retroactive basis.

• If currently under audit, the taxpayer should aggressively resist any attempts to apply economic nexus on a retroactive basis.

• The South Dakota statute at issue in Wayfair could only be enforced prospectively.

121

State Enacted Economic Nexus Laws and Regulations

122

States with Sales/Use Tax Economic Nexus Statutes(AS OF 9/9/2019)www.bdo.com/wayfair

CA

OR

WA

NVUT

AZNM

CO

MT

WY

ID

ND

SD

KS

NE

OK

LATX

MO

AR

IA

MN

WI

IL IN

TN

KY

ALMS

FL

GA

MI

SC

NC

WVVA

PA

OH

NY

ME

NH

DE

RI

NJ

DC

HI

AK

Enacted statute/rule/admin

Enforcement suspended

Proposed in 2019

Statute/Rule not enacted to date

*DE, MT, NH, OR have no sales/use tax**Nome, AK imposes economic nexus

VT

MD

CT

MA

123

MA, OH, OK, PA, RI, and WY enforcement originally presented retroactivity concerns. At this point, it appears that every state has decided to only enforce economic nexus post Wayfair.

Other states with statutes effective prior to the Wayfair date of decision have changed their “enforcement dates.”

States with Enacted Economic Nexus Statutes

Effective Date/Enforcement Date Prior to June 21, 2018

• Massachusetts – $500,000 sales AND 100 transactions (effective 10/1/2017)

- Eff. 10/1/2019, MA statutorily enacted a threshold of $100,000

• Ohio – $500,000 sales plus “cookies” (effective 1/1/2018)

- Eff. 8/1/19, OH amended its rule to follow the $100,000 or 200 transactions

• Oklahoma – $10,000 sales (effective 4/10/2018)

- Effective 11/1/2019, Oklahoma’s threshold increases to $100,000

• Pennsylvania – $10,000 sales (effective 4/1/2018)*

- Effective 4/1/2019 for sales of digital products

- PA issued Bulletin 2019-01 increasing threshold to $100,000 (eff. 7/1/2019)

• Rhode Island – $100,000 sales or 200 transactions (effective/enforcement date 8/17/2017)

124

NY originally had an economic nexus threshold on its books since 1989, but it had never been enforced. On Jan. 15, 2019, NY issued a special notice indicating that NY intended to enforce it’s rule “effective immediately,” which was codified on June 24, 2019 in SB 6615.

States with Enacted Economic Nexus Statutes Effective Date/Enforcement Date On/Near June 21, 2018

• Hawaii – $100,000 sales or 200 transactions (effective 7/1/2018)

• Maine – $100,000 sales or 200 transactions (enforcement date: 7/1/2018)

• Vermont – $100,000 sales or 200 transactions (effective 7/1/2018)

• New York - $500,000 sales AND 100 transactions (effective 6/21/2018)

Effective Date/Enforcement Date September 1, 2018

• Mississippi – $250,000 sales (enforcement date: 9/1/2018)

125

MI has enacted no statute or regulation; rather, issued RAB 2018-16 (also includes 2017 sales for initial determination).

*Effective 1/1/2019, ND no longer has the “or 200 transactions” test as part of its threshold. Beginning on 1/1/2019, the test is simply $100,000.

**Effective 3/14/2019, WA no longer has the “or 200 transactions” test as part of its threshold. Beginning 3/14/2019, the test is simply $100,000.

States with Enacted Economic Nexus Statutes Effective Date/Enforcement Date October 1, 2018

• Alabama – $250,000 sales (enforcement date: 10/1/2018)

• Illinois – $100,000 sales or 200 transactions (effective 10/1/2018)

• Indiana – $100,000 sales or 200 transactions (enforcement date: 10/1/2018)

• Kentucky – $100,000 sales or 200 transactions (10/1/2018)

• Maryland- $100,000 sales or 200 transactions (10/1/2018)

• Michigan - $100,000 sales or 200 transactions (10/1/2018)

• Minnesota – 10 or more sales totaling $100,000 or 100 transactions (enforcement date: 10/1/2018)

• Nevada - $100,000 sales or 200 transactions (eff. 10/1/2018)

• North Dakota* – $100,000 or 200 transactions (eff. 10/1/2018)

• Washington** – $100,000 sales or 200 transactions (eff. 10/1/2018)

• Wisconsin – $100,000 sales or 200 transactions (enforcement date 10/1/2018)

126

*When calculating whether you exceed California’s threshold, its statute requires you to aggregate the sales of all related persons.

**Following a trend towards states removing the transactions threshold, effective 7/1/2019, IA’s threshold only requires $100,000 sales, but the 200 transactions test has been eliminated.

***KS issued guidance indicating that remote sellers are subject to tax. However, KS does not specify a threshold. The AG indicated the rule was invalid.

States with Enacted Economic Nexus Statutes Effective Date/Enforcement Date On/After November 1, 2018

• Arizona - $200,000 sales in 2019; $150,000 in 2020; and $100,000 2021 and after (eff. 10/1/2019)

• Arkansas – $100,000 sales or 200 transactions (eff. 7/1/2019)

• California* - $500,000 sales (eff. 4/1/2019)

• Colorado– $100,000 sales (effective 6/1/2019)

• Connecticut – $250,000 sales AND 200 transactions (eff. 12/1/2018)

- Eff. 7/1/2019, $100,000 sales

• DC - $100,000 sales or 200 transactions (eff. 1/1/2019)

• Georgia – $250,000 sales or 200 transactions (effective 1/1/2019)

- Effective 1/1/2020, $100,000 or 200 transactions

• Idaho - $100,000 sales (eff. 6/1/2019)

• Iowa** – $100,000 sales or 200 transactions (effective 1/1/2019)

• Kansas*** - No amount of sales stated (effective 10/1/2019)

• Louisiana – $100,000 sales or 200 transactions (enforcement date: 1/1/2019)

127

*When calculating whether you exceed Virginia’s threshold, its statute requires you to aggregate the sales of all commonly controlled persons, as defined under IRC Sec. 1563(a).

States with Enacted Economic Nexus Statutes Effective Date/Enforcement Date On/After November 1, 2018

• Nebraska - $100,000 sales or 200 transactions (effective 4/1/2019)

• New Jersey – $100,000 sales or 200 transactions (effective 11/1/2018)

• New Mexico– $100,000 sales (effective 7/1/2019)

• North Carolina - $100,000 sales or 200 transactions (enforce:11/1/2018)

• South Carolina - $100,000 sales (eff. 11/1/2018)

• South Dakota - $100,000 sales or 200 transactions (eff. 11/1/2018)

• Tennessee - $500,000 sales (eff. 10/1/2019)

• Texas - $500,000 (eff. 10/1/2019)

• Utah – $100,000 sales or 200 transactions (effective 1/1/2019)

• Virginia* - $100,000 sales or 200 transactions (eff. 7/1/2019)

• West Virginia - $100,000 sales or 200 transactions (eff. 1/1/2019)

• Wyoming – $100,000 sales or 200 transactions (effective 7/1/2017, but enforcement was stayed until 2/1/2019)

128

*To date, the following two states have not enacted an economic nexus threshold:

Florida and Missouri

**Alaska does not have a state sales tax; however, local jurisdictions can impose sales tax. Nome, AK is the first local jurisdiction to pass an ordinance imposing economic nexus on remote sellers with over $100,000 in sales or 100 separate transactions.

States with Proposed Economic Nexus Statutes

Jurisdictions with Proposed Rules

• Kansas – $100,000 sales (vetoed by Governor)- However, KS administratively (Notice 19-04) will begin

requiring remote sellers to register, charge, and collect sales tax.

- Interestingly, the KS Dep’t of Revenue does not specify a number of sales

- Rather, KS is using the long-arm provision of its statute to impose nexus on remote sellers (K.S.A. 7-3702(h)(1)(F).

129

In Direct Marketing Ass’n v. Brohl (2015), the U.S. Supreme Court ruled that Colorado’s use tax notice and reporting statute was constitutional.

*States are trending towards removing notice/reporting options if they statutorily require remote sellers or marketplace facilitators to register and collect.

Use Tax Notice and Reporting

• Colorado began enforcing 7/1/2017 (1/1/2018 for online marketplaces)

• Option in lieu of economic nexus sales/use tax collection:- Alabama - Georgia (repealed eff. 4/28/2019) - Iowa (marketplace facilitators) - Louisiana - Oklahoma (repealed eff. 11/1/2019)- Pennsylvania - Rhode Island - Vermont - Washington (repealed eff. 7/1/2019)

130

In Wayfair, the U.S. Supreme Court identified use tax notice, “click-through nexus,” and “cookie nexus” as examples for the failure of the physical presence rule “likely” to create “technical and arbitrary disputes.”

Other “Physical Presence” Expansion Techniques Prior to Wayfair, states have also enacted statutes to

impose sales/use tax collection responsibilities based on: • Affiliate nexus – remote sellers with affiliated ownership

with an entity that has an in-state physical presence.

• Click-through nexus – remote seller enters into an agreement with a resident of a state in which the resident directly or indirectly refers potential customers to the retailer for a commission or other consideration.

• “Cookie” nexus – remote seller is treated as having physical presence with a state based on the “presence” of “cookies” on customers’ or prospective customers’ computers.

131

Marketplace Facilitators

132

As of November 2019, roughly 37 states have adopted marketplace facilitators rules• For the most part, the thresholds are identical to each State’s remote seller economic nexus

thresholds

Marketplace• Typically defined as a physical or electronic place, platform, forum, store, website, catalog, or other

sales software application where TPP is offered for sale

Marketplace Facilitator (a/k/a Marketplace Providers)• Typically defined as the entity that owns and operates the marketplace, and directly or indirectly

processes transactions on behalf of marketplace sellers

• Facilitators are required to charge/collect/remit sales tax on taxable transactions made through its marketplace

• Considered the “retailer” under some states marketplace schemes

Marketplace Sellers• Typically defined as a seller, other than the marketplace facilitator/provider that sells through the

marketplace

• Be aware: If a marketplace seller has nexus in a state, and it makes any taxable sales that are not through a marketplace, then it would be required to collect/remit sales tax on those transactions

Marketplace Facilitator Rules

133

States with Marketplace Facilitator Rules(AS OF 11/27/2019)

CA

OR

WA

NVUT

AZNM

CO

MT

WY

ID

ND

SD

KS

NE

OK

LATX

MO

AR

IA

MN

WI

IL IN

TN

KY

ALMS

FL

GA

MI

SC

NC

WVVA

PA

OH

NY

ME

NH

DE

RI

NJ

DC

HI

AK

Enacted statute/rule/admin

Statute/Rule not enacted to date

AK, DE, MT, NH, OR have no states sales/use tax

**Nome, AK imposes economic nexus

VT

MD

CT

MA

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• The following state sales/use tax laws require an entity that is NOT the retailer in a transaction to administer sales/use tax pursuant to a Marketplace Facilitator Law:

Marketplace Facilitator Laws – Effective Now

State Date

1 Washington 1/1/18

2 Pennsylvania 4/1/18

3 Oklahoma 7/1/18

4 Minnesota 10/1/18

5 New Jersey 11/1/18

6 Connecticut 12/1/18

7 Alabama 1/1/19

8 Iowa 1/1/19

9 South Dakota 3/1/19

10 D.C. Wash. 4/1/19

11 Nebraska 4/1/19

12 South Carolina 4/26/19

13 Idaho 6/1/19

14 New York 6/1/19

15 Vermont 6/7/19

16 Arkansas 7/1/19

17 Indiana 7/1/19

18 Kentucky 7/1/19

State Date

19 New Mexico 7/1/19

20 Rhode Island 7/1/19

21 Virginia 7/1/19

22 West Virginia 7/1/19

23 Wyoming 7/1/19

24 Ohio 8/1/19

25 Arizona 9/30/19

26 California 10/1/19

27 Colorado 10/1/19

28 Maine 10/1/19

29 Maryland 10/1/19

30 Nevada 10/1/19

31 North Dakota 10/1/19

32 Texas 10/1/19

33 Utah 10/1/19

34 Wisconsin 10/1/19

35 Hawaii 1/1/20

36 Illinois 1/1/20

37 North Carolina 2/1/20

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Example States

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Definitions - Connecticut

“Marketplace facilitator" means any person who:1) Facilitated retail sales of at least $100,000 during the prior twelve-month

period by marketplace sellers by providing a forum that lists or advertises TPP subject to sales and use taxes or taxable services;

2) Directly or indirectly through agreements or arrangements with third parties, collects receipts from the customer and remits payments to the marketplace sellers; and

3) Receives compensation or other consideration for its services.

Marketplace Facilitator – Connecticut(Non-Streamlined Member)

137

Definitions - Connecticut

“Marketplace seller" means any person who has an arrangement with a marketplace facilitator regarding retail sales of such person, regardless of whether or not such seller already has, or is required to have, a Connecticut Sale and Use Tax Permit from DRS.

“Forum" means is a physical or electronic place, including, but not limited to, a store, a booth, an Internet website, a catalog, or a dedicated sales software application, where TPP or taxable services are offered for sale.

Marketplace Facilitator – Connecticut(Non-Streamlined Member)

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Specifics - Connecticut (Office of the Commissioner Guidance OCG-8)

Who is required to register with Connecticut?• Marketplace facilitators must register and file Form REG-1.• Marketplace sellers must register if they exceed CT’s economic nexus

standards, even if all of the marketplace seller’s sales are through a marketplace facilitator.o If 100% of sales are through a marketplace facilitator, check the box on Form REG-

1 and register for annual filing requirements.

Marketplace Facilitator – Connecticut

139


Who is responsible for the tax?• Marketplace sellers are required to collect sales tax, unless:

o Seller can show that such sale was properly facilitated by facilitator; and

o Any failure of facilitator to collect the proper amount of tax for sale was not the result of seller providing incorrect information

• Generally, marketplace facilitators will be responsible for any audit deficiency for sales facilitated through its forum, and the marketplace facilitator will have all rights and remedies afforded to retails to contest any such assessments.


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What documentation/exemption certificates are required?• To not be required to collect sales tax, a marketplace seller must either (1) have a

contract that explicitly provides the facilitator will collect and remit sales tax on all taxable sales, or (2) a properly completed Form DRS-055 – Certificate of Collection.

Who needs to file returns (report sales)?• Marketplace sellers that are registered are still required to report sales made through

marketplace facilitatorso All sales should be reported as gross receipts, and sales made through marketplace facilitators

should be deducted on the same line as a sale for resale

o The marketplace seller can also request to be an annual filer.

• Marketplace facilitators will file sales tax returns and report all sales made through its forum.


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Definitions - South Dakota (2018 S.B. 2)

“Marketplace provider" means any person who facilitates a sale for a marketplace seller by:1) Offering for sale by the marketplace seller, by any means, tangible

personal property, products transferred electronically, or services for delivery into this state; and

2) Directly, or indirectly through any agreement or arrangement with third parties collecting payment from a purchaser and transmitting the payment to the marketplace seller, regardless of whether the person receives compensation or other consideration in exchange for facilitating the sale or providing any other service.

Marketplace Facilitator – South Dakota(Streamlined Member)

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Definitions - South Dakota (2018 S.B. 2)

“Marketplace seller" means a retailer that sells or offers for sale tangible personal property, products transferred electronically, or services for delivery into this state, through a marketplace that is owned, operated, or controlled by a marketplace provider.

“Marketplace" is any means by which any marketplace seller sells or offers for sale tangible personal property, products transferred electronically, or services for delivery into this state, regardless of whether the marketplace seller has a physical presence in this state.

Marketplace Facilitator – South Dakota

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Specifics - South Dakota (Marketplace Bulletin – February 2019) Marketplace Seller making a sale through a marketplace provider that is subject

to tax will consider the sale as a sale for resale. Marketplace Provider is required to collect and remit sales tax on all TPP,

products transferred electronically, or services delivered into the state, that the marketplace provider makes or facilitates for a marketplace seller• Liability relief – a marketplace provider that fails to collect/remit sales tax may be

relieved of liability if the failure was due to incorrect/insufficient information provided by the marketplace seller. The relief may not exceed 5% of the total sales tax due on all sales into this state that are facilitated by a marketplace provider for marketplace sellers in a calendar year.

o Liability relief does not apply to any sales where the marketplace provider is affiliated with the marketplace seller.


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Specifics - South Dakota (Marketplace Bulletin – February 2019)

Who needs a sales tax license?• If a marketplace provider exceeds economic nexus thresholds, then it is required to

become licensed.

• If a marketplace seller exceeds economic nexus thresholds, then it may be required to get licensed.

Who is responsible for the tax?• If the marketplace provider exceeds economic nexus thresholds, then it is required to

charge/remit sales tax on all sales made through its marketplace.

• If a marketplace is remitting the sales tax, then the marketplace seller is not responsible for sales tax made through that marketplace.


145

Specifics - South Dakota (Marketplace Bulletin – February 2019)

What documentation/exemption certificates need to be provided?• Marketplace providers are NOT required to provide a resale certificate to marketplace

sellers.

• In place of a resale certificate to marketplace sellers, the marketplace providers must provide notice to marketplace sellers that SD sales tax is being reported and remitted on all marketplace sales.o The notice must include the date the marketplace began complying with SD law. The notice

should be conspicuously posted on the marketplace website and provided directly to each marketplace seller.

Are there any local sales tax issues?• No. In South Dakota, state and local municipal taxes are reported and paid on the

same return.


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Definitions - California (Assembly Bill No. 147; CA Sec. 6041)

“Marketplace Facilitator" means a person who contracts with marketplace sellers to facilitate for consideration, regardless of whether deducted as fees from the transaction, the sale of the marketplace seller’s products through a marketplace operated by the person or a related person and who does both of the following:

1. Directly or indirectly, though one or more related persons, engages in any of the following: (A) transmitting or otherwise communicating the offer or acceptance between the buyer and seller. (B) Owning or operating the infrastructure, electronic or physical, or technology that brings buyers and sellers together. (C) Providing a virtual currency that buyers are allowed or required to use to purchase products from the seller. (D) Software development or research and development activities related to any of the activities described in paragraph (2), if such activities are directly related to a marketplace operated by the person or a related person.

2. Directly or indirectly, through one or more related persons, engages in any of the following activities with respect to the marketplace seller’s products: (A) payment processing services. (B) fulfillment or storage services. (C) Listing products for sale. (D) Setting prices. (E) Branding sales as those of the marketplace facilitator. (F) order taking. (G) Providing customer service or accepting with returns or exchanges.

Marketplace Facilitator – California(Non-Streamlined Member)

147

Definitions - California (Assembly Bill No. 147; CA Sec. 6041)

“Marketplace Seller" means a person who has an agreement with a marketplace facilitator and makes retail sales of TPP through a marketplace owned, operated, or controlled by a marketplace facilitator, even if that person would not have been required to hold a seller’s permit or permits, or required to collect the tax imposed pursuant to Chapter 3 (commencing with Section 6201), had the sale not been made through that marketplace.

“Marketplace" means a physical or electronic place, including, but not limited to, a store, booth, internet website, catalog, television or radio broadcast, or a dedicated sales software application, where a marketplace seller sells or offers for sale TPP for delivery in this state regardless of whether the TPP, marketplace seller, or marketplace has a physical presence in this state.

Marketplace Facilitator – California

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Specifics - California (Bulletin/FAQs)

Who needs a sales tax license?• Marketplace facilitator is considered the seller and the retailer for each sale

facilitated through its marketplace for purposes of determining whether the marketplace facilitator is required to register.

• A marketplace seller must register for retail sales made on its own behalf and not facilitated through a registered marketplace facilitator. But, if the seller exclusively sells through the marketplace, then it is not required to register.

Who is responsible for the tax?• If the marketplace provider exceeds economic nexus thresholds, then it is required to

charge/remit sales tax on all sales made through its marketplace.

• If a marketplace is remitting the sales tax, then the marketplace seller is not responsible for sales tax made through that marketplace.


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Specifics - California (Bulletin/FAQs) What documentation/exemption certificates are needed?

• Marketplace facilitator is considered the retailer and seller for each sale facilitated through its marketplace.

• Marketplace seller is no longer considered the retailer of sales facilitated through a marketplace.o Be aware, if a marketplace seller exceeds CA’s economic nexus thresholds, and it make any sales

outside of a marketplace, then the marketplace seller is responsible for collecting and reporting those sales on its own sales tax return.

• As such, it is “recommended” that the marketplace facilitator provide documentation to the marketplace seller that indicates the marketplace facilitator is registered with the CDTFA and will be paying sales tax and collecting use tax on sales through the marketplace.o Marketplace seller should obtain the marketplace facilitators seller’s permit or account number.


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Definitions - New York (Senate Bill No. S06615)

“Marketplace provider" means a person who, pursuant to an agreement with a marketplace seller, facilitates sales of TPP by such marketplace seller or sellers. A person “facilitates a sale of TPP” if they meet both of the following conditions:

1. The person provides the forum in which the sale takes place or the offer of sale is accepted, including a shop, store, or booth, an internet website, catalog, or similar forum; and

2. Such person or

Documents

San Antonio, Texas December 9, 2019 - BDO USA, LLP...Russell Clarkson, Managing Director, Technology & Business Transformation Services, BDO USA, LLP Drew Olson, Partner, Forensic