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GOVERNMENT AFFAIRS TOP ISSUES

 

ADDRESSING ONLINE SALES Tax

With the Supreme Court decision in South Dakota v. Wayfair, Congress needs to create national standards so businesses aren’t faced with the logistical nightmare of trying to comply with differing requirements in the 12,000 taxing jurisdictions nationwide. The Remote Transactions Parity Act and Marketplace Fairness Act create a nationwide clearing house system to simplify the sales tax collection process and protects businesses from unnecessary audits.

WHY IS IT GOOD FOR OUR INDUSTRY?
With the Supreme Court decision in South Dakota v. Wayfair, Congress needs to create national standards so businesses aren’t faced with the logistical nightmare of trying to comply with differing requirements in the 12,000 taxing jurisdictions nationwide. This is particularly important since 31 states already have some law requiring sales tax to be collected without a physical presence, and the Supreme Court decision did not clearly identify which aspects of those state laws could be considered an undue burden on interstate commerce. The Remote Transactions Parity Act and Marketplace Fairness Act create a nationwide clearing house system to simplify the sales tax collection process and protects businesses from unnecessary audits.

MORE DETAIL
NAED spent years trying to protect members from online sellers who received up to a 10% price advantage from misleading claims relating to purchases being tax free. In order to help address this, NAED joined an amicus brief in South Dakota v. Wayfair, where the Supreme Court agreed to support leveling the playing field with respect to e-commerce by allowing states to require retailers to collect sales taxes, even if the retailer doesn’t have a physical presence in the state. Now the nexus rule will focus on “whether the tax applies to an activity with a substantial nexus with the taxing state”. The opinion of the Court discusses how the economic and virtual contacts of this case are clearly sufficient to form such a nexus. Without more guidance, it isn’t clear which state laws are enforceable, but the opinion of the court strongly suggested that South Dakota’s law will pass constitutional muster. This is due to a number of factors including that: (i) the law applies only to sellers that deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services into the state on an annual bases; (ii) it ensures that there is no obligation to remit the sales tax retroactively; (iii) South Dakota is a state that has adopted the Streamlines Sales and Use Tax Agreement; and (iv) the law provides sellers access to sales tax administration software paid for by the state, and sellers who choose to use such software are immune from audit liability.

 

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TAX REFORM

As Congress considers phase two of tax reform, NAED supports changes that promote permanency, and tax rate parity for businesses who pass through profits to the owners’ individual tax returns.

WHAT DOES IT MEAN FOR OUR INDUSTRY?
While the 2017 tax reform was beneficial to our members, cuts to the C-corp tax rates will not help more than 60% of our member companies that function as pass-through entities. For that reason tax reform 2.0 needs to create parity between the rates for corporations. In addition, NAED supports permanency for almost all of the individual income tax breaks that are set to expire after 2025. Making the tax reforms permanent will aid middle class families, and spur economic activity.

 

MORE DETAIL
In 2017, NAED had three priorities in tax reform: 

1. Lower rates on all businesses – as addressed above, the lower rates on all businesses will benefit our members. However, we continue to call for true rate parity between C and S Corporations.

2. Protect LIFO – the last round of tax reform did not address LIF0; and that is unambiguously good for much of our membership.

3. Repeal the death tax – the latest tax reform did double the exemption from the death tax. However, as with the discounted S Corp rates, the higher exemption sunsets at the end of 2025.


MORE RESOURCES

20% Business Tax Deduction Webinar (original broadcast: October 2018)
Brian Reardon, President of the S-Corp Association and Ryan Ellis, Policy Advisor with the Family Business Coalition, explain everything you need to know about the 20% deduction for qualifying pass-through businesses. 

 

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ELIMINATE DEATH TAX

The estate tax disproportionately impacts small and family-owned businesses and the threat of the looming tax prevents investment in business. Removing the costs associated with preparation for the tax and the substantial burden of the tax itself will create nearly 160,000 jobs, add $119 billion to GDP and boost workers’ income by $79 billion.

SUPPORT THE FULL REPEAL OF THE ESTATE TAX

WHY IS THE ESTATE TAX BAD FOR OUR INDUSTRY?
The death tax imposes burdensome compliance costs and forces many NAED businesses to divert productive capital into large life insurance policies and expensive estate planning. 

The National Association of Manufacturers found that one-third of small business owners will have to sell or liquidate part of their companies to pay estate taxes.

The estate tax disproportionately impacts small and family-owned businesses and the threat of the looming tax prevents investment in business. Removing the costs associated with preparation for the tax and the substantial burden of the tax itself will create nearly 160,000 jobs, add $119 billion to GDP and boost workers’ income by $79 billion.

MORE DETAIL
The estate tax is levied on the assets of an estate before it is passed on to heirs. The 2017 tax overhaul temporarily doubles the exemption amount for estate, gift and generation-skipping taxes from the $5 million base, to a $10 million base through 2025 (with the base indexed for inflation). Couples can take advantage of another federal estate law provision called portability to double that exemption with proper planning.

The death tax imposes burdensome compliance costs and forces many NAED businesses to divert productive capital into large life insurance policies and expensive estate planning.

The National Association of Manufacturers found that one-third of small business owners will have to sell or liquidate part of their companies to pay estate taxes.

While the estate tax may be devastating to family businesses, it is a drop in the bucket of the federal budget – typically amounting to around 1% of annual federal revenues. If policy makers need revenue, there are better places to look.

The death tax contributes such a small portion of federal revenues that there is a good argument that not collecting the death tax would lead to higher economic growth and thereby increase federal revenue from other taxes. Former undersecretary of the Treasury Steve Entin found, by using a “dynamic” economic analysis, that repealing the death tax would increase tax revenues by nearly $89 billion over 10 years. 

 

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REINS ACT

WHY IS IT GOOD FOR OUR INDUSTRY?
The Federal Code of Regulations contains more than 180,000 pages – making it very difficult and costly for business to manage regulatory compliance. This bill makes sure the most impactful regulations receive appropriate review.

Major rules will be subject to a stand-alone, up or down vote by Congress.

Major rules are those that have an annual economic impact of $100 million or more.

MORE DETAIL
The REINS Act would require Congress to take an up or down, stand-alone vote, and for the President to sign-off on all new major rules before they can be enforced on the American people, job-creating small businesses, or state and local governments.

Major rules are those that have an annual economic impact of $100 million or more. In 2016 almost 130 major rules were published.

A study by the Competitive Enterprise Institute found that annual regulatory compliance costs in the United States hit $1.9 trillion in 2017. Not all regulations are bad; many provide important public safeguards. However, when a proposed regulation could have an impact in the hundreds of millions or even billions of dollars on our economy, it should be subject to the review by the elected representatives of the people. The REINS Act is about improving the regulatory process.

The REINS Act would prevent Administrations from either party from bypassing Congress to implement a political agenda through regulation. NAED encourages Congress to support the REINS Act as a means of restoring badly-needed oversight on the pace of regulation in the U.S.

 

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INNOCENT SELLERS FAIRNESS ACT

WHY IS IT GOOD FOR OUR INDUSTRY?
Innocent Sellers protects distributors from being included in unfounded lawsuits in which the distributor has no role in the manufacture or modification of the product.

Preserve victims’ access to courts while holding sellers harmless when they have not acted negligently in the design, manufacture, sale, or installation of a legal product.

MORE DETAIL
A Harris poll of small business owners and managers found that 61% increased the cost of products and services due to the threat of lawsuits, and 73% said their businesses suffered from the time associated with litigation.

It is estimated that in 2011 small businesses would lose $152 billion to tort costs. Of this $35.6 billion was paid out of pocket as opposed to insurance.

The bill will protect distributors who follow the rules from being part of lawsuits that should not affect them. This bill will provide uniformity for distributors who work in multiple states compared to current state-by-state laws. The bill maintains liability for distributors who are negligent in the sale of their products.

The bill does not preempt state law. It will only apply to federal litigation.

 

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LIFO

WHY IS REPEAL BAD FOR OUR INDUSTRY?
We estimate half of NAED member companies use LIFO inventory valuation. The marginal increase in their tax liabilities will damage growth prospects.

Distributors would be forced to pay a tax on unrecognized “phantom profits” caused by swings in commodity prices.

A “drop in the bucket” in increased federal revenue is an existential threat to family businesses who have counted on LIFO for decades.

MORE DETAIL
Revenue raised by repealing LIFO would only be a tiny fraction of the federal budget: some estimates call for an additional $112 billion in revenue over the next decade, but this amounts to a drop in the bucket of the projected $43.5 trillion in projected federal revenues over the same period. And once the LIFO reserves are no longer available to tax, the revenue to the treasury would be diminished further, and Congress will be coming back to business for a way to make up for the lost revenue, making this essentially a short-term revenue raiser with no other justifications for repeal. LIFO repeal will do more harm than good.

If repealed, companies using LIFO would be forced to report their reserves as income, resulting in a massive incremental tax liability. Additionally, repealing LIFO would mean potentially higher future tax bills and would make it harder for companies to manage inflation.

NAED is a member of the LIFO Coalition – a coalition of almost 100 trade associations, business groups and corporations. The LIFO Coalition encourages documenting the following information to present to policy makers on the impact of LIFO repeal:

The percentage increase in your tax liability if LIFO were repealed
The relationship between your LIFO tax liability and net worth and/or working capital, etc.

And where applicable please note the impact repeal would have on jobs (will you have to reduce your workforce or not hire new workers?), capital investments (will you delay or cancel planned investments?), employee benefits (would you have to reduce costs by changing health care benefits or payments to 401(k) plans, etc.?)

 

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