Transportation companies should carefully consider sales and use tax nexus issues. Crossing state lines for a job may be a way to boost the bottom line, but doing so may also mean dealing with complex tax laws. States are adopting far-reaching rules and interpretations on the issue of nexus and it is important to understand your responsibilities.
WHAT IS NEXUS?
Nexus is known as, “the level of contact that must exist between a taxpayer and a state before the state has the authority under the U.S. Constitution to assess a tax.”
Many states are increasing the number of audits, thereby allowing states to collect more revenue without enacting new taxes or increasing tax rates. These state audits are unexpected and taxpayers are shocked to learn they are not in compliance and may face substantial tax and penalties as a result.
State income tax nexus may be attained through one of three primary actions:
A physical presence
An economic presence
Through the ownership of a pass-through entity satisfying either the physical or economic presence standards
Physical nexus is created if a company maintains a temporary or permanent presence of people (employees, agents or representatives) or property (inventory, offices or warehouses) within a state. A permanent presence is deemed to be that which is substantial and long-term. Whereas, temporary presence may be created through visiting customers or prospects, or even minor attendance at trade show events.
Economic Nexus, also known as a “factor presence test,” may establish nexus with a taxing state, even though the business entity has no physical presence, but only makes sales to customers in the state. Under this test, there is no need to have any physical connection with the state. Under the factor presence standard, states will be deemed to establish nexus if the level of activity exceeds a certain threshold. Not all states have adopted the economic nexus approach, however, the number of states participating is growing. California, Ohio and Washington are the more active states applying the economic nexus standard.
For the states requiring a physical presence, many business entities may be protected from potential state income tax assessments under a long-standing Federal law. Public Law 86-272 prevents states from taxing out-of-state corporations on income derived from business activities within the state if their activities are limited to “mere solicitation of orders” and the orders are approved and filled from outside the state.
Does this apply to my transportation company?
Generally, having employees or owning or leasing property in a state creates nexus. Other activities qualifying you for nexus include:
Maintaining a local bank account
Accepting orders for your transportation services
Using a local phone number
A nexus study was done by Sabrix, Inc. and the results showed that 95 percent of the companies surveyed underestimated their nexus issues. The most common items companies overlooked were:
Independent contractors – agents acting on behalf of the company may create nexus
Services – performing services in other states may create nexus
Trade shows – spending a single day at a trade show in another state may create nexus
There are many complexities with today’s cross-border business climate requiring careful consideration because of unforeseen nexus issues. Smith Schafer can help you navigate the laws to ensure your state income tax obligations are correctly calculated and reported. Transportation has been a key practice area of ours since 1971. Our Transportation Group, comprised of numerous professionals, is committed to serving over 110 Minnesota transportation entities.
Hiring people from targeted categories and employing them for at least 120 hours may qualify your transportation company for the Work Opportunity Tax Credit (WOTC). Finding good drivers is a constant challenge for transportation companies. This program is designed to increase employment opportunities for individuals who typically experience certain barriers to employment. The WOTC program was renewed for five years, retroactively from January 1, 2015 to December 31, 2019.
Any first-time hire may qualify your transportation company for this credit. The new hire must fall into one of the following target groups listed below:
with a service-connected disability who have been unemployed for at least six months in the past year.
with a service-connected disability and hired within one year of their discharge/release date.
who have been employed for at least six months.
receiving Supplemental Nutrition Assistance Program (SNAP) benefits.
who have been unemployed for at least four weeks, but less than six months.
Food Stamp Recipient
Designated Community Residents
Vocational Rehabilitation Referral
Supplemental Security Income Recipients
Depending on which target group the individual belongs to, the maximum credit per new hire may range from $1,200 to $9,600.
WOTC Program Details
Your HR professional will need to complete a screening of a potential employee and instruct them to complete the WOTC survey using one of the following methods:
Call Center Survey
If it is determined they qualify for the WOTC, the employee must complete IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit) on or before their start date. This form MUST be postmarked within 28 days of the start date and sent to the state Department of Labor for Certification. This form is used to make a written request to the state workforce agency to certify an individual as a member of a targeted group.
The credit is equal to a percentage of the eligible employee’s wage and must work at least 120 hours to receive credit. The average credit per qualified employee is $1,200 to $1,500, with the number of qualified employees dependent on the job type, location and wages. Most transportation companies may see anywhere from 10-30 percent of their new hires qualify.
Requirements to be Eligible for WOTC
The credit is limited to the amount of the business income tax liability. When your transportation company applies the credit against your income tax liability, the normal carry-back and carry-forward rules apply. Any unused credits may be carried back one year and carried forward for 20 years.
Reporting the credit requires a wage add back adjustment in the amount of the current year credit generated and may affect calculations of other federal and possibly state tax credits, such as Federal Empowerment Zone Employment Credit (reduces allowable qualified wages limitation – maximum credit goes from $3,000 to $1,800) and the Federal Indian Employment Credit (not allowed in 1st year if WOTC claimed).
Why should your transportation company participate?
Below are benefits of participating in the WOTC Program:
Reduce your operating cost.
Increase revenue by reducing certain expenses.
Provide a financial benefit by reducing federal, state, and local tax liability.
Further allow HR and Tax Departments to become revenue generating areas.
Benefits received may be used to offset effect of cutbacks and/or allow funding for other special projects.
Participation in incentive programs may play a significant role in a company’s expansion plans.
The transportation industry faces a unique set of challenges in today’s marketplace. Some of the specific challenges driving the industry today include:
Concerns over the health and well-being of drivers
Aging drivers and staffing shortages
Employees not saving enough to meet their financial retirement needs
One way the transportation industry can turn these challenges into opportunities, is by offering a well-designed retirement plan savings program for drivers and all company employees. Retirement plan design is complex, requiring help from trusted professionals who understand the complexities, challenges, rewards and opportunities associated with effective retirement planning. Below are retirement plan design tips regarding each transportation industry trend.
1. Concerns over the Health & Well-being of Drivers
Drivers often face health issues, such as increased risk of motor vehicle and on-the-job accidents, exposure to loud noises and dangerous chemical emissions and sleep deprivation. Some retirement plan design tips to address these concerns include:
Ensure the disability provisions within the plan document offer a generous definition of what constitutes a “disability” in an effort to protect drivers who may become disabled.
Design the plan to allow for hardship distributions to cover such items as medical bills.
Allow disability wage payouts to be included in the definition of plan compensation.
2. Aging Drivers & Staffing Shortages
Staff shortages in the transportation industry are expected to worsen in coming years. The industry has already seen a shift in the average age of drivers, and the upward trend in driver ages is expected to continue to rise. Employer-sponsored retirement plans have become an important tool for attracting and retaining high-quality employees. Below are several retirement plan design opportunities encouraging young employees to join the workforce, while still supporting more experienced employees.
Offer plan provisions which allow generous, discretionary employer matching and profit sharing contributions in prosperous company years.
Adopt safe harbor plan provisions which guarantee generous, fully-vested employer contributions to employees while also allowing older, long-term employees to contribute larger amounts to the plan.
Provide catch-up contribution arrangements within the retirement program for employees age 50 and older to make additional plan contributions and offer employer matching contributions on catch-up contributions.
3. Employees Not Saving enough to meet their Financial Needs in Retirement
There is a growing concern among transportation company owners, who have a fiduciary responsibility to the companies’ retirement program, that employees are not saving enough for a comfortable, fulfilling retirement. A solid retirement plan program may include some of the following solutions to counteract this growing concern.
Establish an Automatic Contribution Arrangement (ACA) within the retirement plan, along with a provision for automatically increasing the contribution percentage each year to encourage more employees to invest and to continuously grow their investment commitment.
Develop an informative, educational program for all staff to ensure they have the best information available, which will allow them to feel more comfortable making investment decisions on their own behalf and will aid in increasing enrollment.
Educate employees, and specifically those who may otherwise avoid investing in the company’s retirement plan due to lack of investment understanding, through utilizing online access to educational webinars, administrative guides and easy-access websites. This will assist over-the-road drivers and all staff to access their retirement plan information from anywhere.
Do you know what is tax deductible in relation to meals and entertainment expenses?
Many of our transportation company clients like to entertain. Whether it is taking a business client to lunch or throwing a company picnic for employees, you may be entitled to deduct the entire cost of the activity.
The General Rule. Meals and entertainment expenses are only 50 percent deductible on your tax return.
Example:Bill takes several clients to a restaurant where he pays $20 for a separate dining room, $200 for food and beverages and $30 for a tip. All of the costs relating to the business meal, including the charge for the separate dining room, must be reduced by 50 percent. Thus, Bill’s deduction is $125 for the meal (50 percent x $250 charges for meal, tip and room).
Many transportation companies fail to realize there are numerous exceptions to the 50 percent rule and these exceptions may be particularly beneficial. Below are some exceptions:
100 percent Deductible Expenses
If meals or entertainment are provided for the benefit of your employees, you may write off 100 percent of the cost as a business expense. Common examples include:
Meal and entertainment expense for a company picnic or holiday party.
Free coffee or bottled water provided to employees at the place of business.
Free food or beverages provided to the public for promotional purposes.
Meals provided at the place of business to more than half of the employees for the benefit of the employer.
80 percent Deductible Expenses
If your company employs interstate truck operators or bus drivers, who are under Department of Transportation regulations, you may deduct 80 percent of their expenses for meals while traveling away from home.
Reminder: ALL deductions MUST BE business related and the IRS requires you to provide written proof of an expense. You must be able to establish the amount spent, business purpose and business relationship of the individuals involved.
Can I prorate sales tax on parts and repairs to my motor coach operating both in and outside of the state? Would you clarify the sales tax on the transfer of vehicles between related parties? These are a couple questions we hear regularly from our transportation clients.
Our transportation industry expert, Kim Mahanna, will address a few questions that have come from our clients in this webinar.