Tax Attic for 11/29/2018

The topic of sales tax came up in a News Report I saw over the Thanksgiving Holiday weekend.  To most of us, sales tax is not a glamorous topic.  However, it is a tax that makes a major contribution to the funding of our schools; to Michigan’s general fund; and to the revenue sharing fund of municipalities such as Rockford.  In other words, it is an important tax.  This summer, specifically June 21, 2018, the United States Supreme Court made it a more important tax.  In South Dakota vs. Wayfair, the Court ruled that “physical presence”, as defined in several decisions over the past 50 years, was being incorrectly defined.  Specifically in two prior cases, Quill and National Bella Hess, the Court had ruled that states had no power to collect sales tax from sellers in which the seller did not have a physical presence.  “Physical presence” meant just what we all think it means:  a brick and mortar presence.  Wayfair  will now allow states to collect sales tax from sellers even if the seller has no physical or brick and mortar presence within the state.  The seller now has to have what is called “nexus” with the state in order to be forced to collect and remit sales tax to the state.  A nexus standard was not defined in Wayfair but the Court did rule in South Dakota’s favor so many states, including Michigan, have passed laws similar, if not exact, to South Dakota’s.  They aren’t copy-cat laws but why mess with a winner?  South Dakota’s law states that a seller without a physical presence is one having sales of less than $100,000 or having less than 200 separate sales transactions.  Since the seller has no physical presence using this new definition, it will not be required to collect and pay South Dakota sales tax.  By default, the Court ruled this definition of a minor presence is okay with them.  Michigan passed a law with exactly these two qualifiers.  The Court also agreed with South Dakota’s provision stating that the law would not be applied retroactively.  Michigan’s law also has this provision.  Basically, for most sellers, Michigan’s law will go into effect on January 1, 2019. So, what are the dollars and cents of sales tax to be collected by the Michigan Treasury Department?  The best guess is the revenue collected in 2019 will be $203 million and will increase to $248 million by 2021. As I stated earlier, this money must be divided as all sales tax would be: schools, general, and municipalities.  Out-going Governor Snyder would like this bucket of new found money to be allocated to the bucket of money going to be used exclusively for fixing the roads but that change will take legislative action.  In-coming Governor-elect Gretchen Whitmer might be hoping the out-going legislature will take lame-duck action and pass a law to that effect.  However, politics being what it politics is, a Republican-controlled legislature probably would not want to do something as perceived as helping an in-coming Democrat governor who has promised to “Fix the damn roads.”  We will all stay-tuned to see how this one turns out.

Let’s say a few words about the 2018 rules for itemizing deductions on the Schedule A.  The world has turned upside-down in the Schedule A arena.  The standard deduction amounts were basically doubled from 2017 to 2018 by the Tax Cuts and Job Act passed in December, 2017.  The 2017 amount for single taxpayers  was $6,350 and was increased to $12,000 in 2018.  Married filing joint taxpayers in 2017 were allowed $12,700.  This amount was increased to $24,000.  Head of household taxpayers were allowed $9,350 in 2017.  This amount went up to $18,000 for 2018.  Single and head of household filers age 65 or older or blind are still allowed an additional standard deduction amount of $1,550.  Married filing joint, qualifying widow, and married filing separate taxpayers age 65 or blind will receive an additional amount of $1,250.  It is projected that these new and higher standard deduction amounts will decrease the number of taxpayers itemizing deductions on their 2018 tax returns by 20 million.  That is a significant number of taxpayers who will not have to keep track of their itemized deductions.  20 million taxpayers will not have to keep track of their medical expenses, their property tax, their mortgage interest, their charitable contributions, nor their miscellaneous employee expenses.  Only if the taxpayer’s deductible amounts exceed the $12,000, $18,000 or the $24,000 standard deduction amounts will it be necessary to keep track of the previously deductible amounts for federal tax return purposes because those 20 million taxpayers will be filing a short tax return.  I realize this will be quite a change for many of those taxpayers but, in this case, shorter may very well be better.  This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.

He owns Action Tax Service on Northland Dr in Rockford.

Contact Jerry at www.actiontaxservice.com