Global Tax Insights
State Tax Outlook for 2019June 13, 2019
The Tax Cuts and Jobs Act (TCJA) and the Wayfair ruling certainly made a mark on the state tax climate this past year. Learn more about what state tax trends will impact businesses and individuals in 2019 and beyond.
2018 was an eventful year, marked by many important tax developments. Between the momentous tax overhaul to the Supreme Court decision in Wayfair, the state and local tax scene certainly went through its share of changes. Below we cover some of the top state tax developments in 2018 and how they will shape the landscape for 2019 and beyond.
6 important developments
- The impact of Wayfair- Did you read our blogs, Supreme Court Rules that States can Collect Sales Tax on Online Purchases and U.S. Supreme Court Ruling in South Dakota v. Wayfair, Inc. – Key Takeaways for all Sellers? You’ll want to check them out. Essentially, the U.S. Supreme Court ruled in June 2018 that states can impose sales tax collection on out of state retailers, even those without nexus, or physical presence in the state. South Dakota’s law imposes a tax on retailers with 200 transactions or annual in-state sales exceeding $100,000. Several states have adopted sales tax changes similar to South Dakota following the Wayfair ruling, including Colorado, Hawaii, and Illinois. It’s expected that more states will follow suit in 2019.
- The Tax Cuts and Jobs Act (TCJA)- There are a number of provisions that will impact state taxes this year and beyond, due to the massive tax overhaul signed in December 2017. The effects of these changes on state taxes will differ depending on the state’s economic, fiscal and demographic characteristics. Changes include:
- IRC Section 965, the Repatriation tax- The TCJA revised Section 965 to require U.S. shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States.
- Interest deduction limitation- Check out our blog, TCJA Introduces New Limit on Business Interest Deductions . Starting in 2018, the deduction for business interest will generally be limited to 30% of the taxpayer’s adjusted taxable income (ATI) for the tax year.
- Section 179 expensing threshold- For tax years beginning after 2017, the TCJA increased the maximum Section 179 expense deduction from $500,000 to $1 million.
- Section 199A pass through deduction- Check out our blog, What are the Final Regulations for 20% Pass-through Deductions? The new deduction introduced by the TCJA allows business owners to take a deduction for up to 20% of their qualified business income (QBI) from schedule C businesses, certain rental businesses and business income from partnerships and S corporations.
- Sales tax on cloud based sales- 17 states imposed a sales tax on Software as a Service (SaaS) in 2018, and 26 states imposed a sales tax on digital goods and products. It’s likely that this trend will continue into 2019 and beyond, with more states taxing internet and cloud based sales.
- Move towards market based sourcing- For non-tangible personal property sales, many states have changed their method of sourcing receipts, replacing the traditional cost-of-performance method with market based sourcing. Market based sourcing is sourcing sales of goods or services to the state where the customer receives the benefit.
- Municipal level taxes targeted toward special initiatives- Several municipalities attempted to raise revenue for special initiatives in 2018, addressing issues like homelessness and obesity. San Francisco, for example, enacted an increase in the business tax rates on gross receipts. This will be directed to fund homeless services. State tax experts predict more activity in this area during 2019.
- Cap on state and local tax (SALT) deduction- The SALT deduction allows taxpayers of high tax states to deduct local tax payments on their federal tax returns. The TCJA instituted a cap on the SALT deduction (previously there was no cap). Starting in 2018, the maximum SALT deduction available is $10,000.
Questions on the state tax outlook for 2019 and beyond? Contact any member of our State and Local Tax Services Team.
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