Fall 2013 Business Tax Group Update - Virginia Retail Sales and Use Tax: Transitional Rules Can Benefit Hampton Roads Businesses

Virginia Retail Sales and Use Tax: Transitional Rules Can Benefit Hampton Roads Businesses

By now, most everyone in Virginia has felt the effects of the 0.3% increase in Virginia Retail Sales and Use Tax. The effects on Hampton Roads taxpayers, however, do not end there. The Virginia General Assembly imposed a Regional Sales and Use Tax in Hampton Roads (and in Northern Virginia), raising the tax by an additional 0.7%. Thus, effective July 1, 2013, the total rate of tax in Hampton Roads went from 5.0% (state and local) to 6.0%.

Transitional rules do, however, provide for three exceptions to the statewide and regional increases. While the first two are fairly straightforward, the third is slightly more complicated and will require action by the taxpayer.

1. Property delivered before July 1, 2013, is not subject to the increases, even if paid for on or after July 1, 2013.

2. Property paid for in full before July 1, 2013, is not subject to the increase, even if delivered on or after July 1, 2013.

3. If before April 3, 2013, a taxpayer enters into one or more certain contractsbona fide real estate construction contracts, contracts for the sale of tangible personal property, or leases of tangible personal propertybut payment and delivery occur on or after July 1, 2013, the purchaser or lessee (not the seller or lessor) may request a refund of the statewide and regional increases from the Virginia Department of Taxation (not from the seller or lessor) if the property is delivered on or before September 30, 2013. The refund request must be in writing, but no particular form is required.

Preferred Built-in-Gains Tax Rules for S Corporations Set to Expire at Year-End

Under current Federal tax law, S corporations with assets subject to the built-in gains "BIG" tax benefit from a shortened recognition period. Specifically, S corporations that were S corporations beginning on or before January 1, 2008, may be able to dispose of BIG assets (or liquidate) on or before December 31, 2013 without triggering BIG tax. Also, the benefits of the shortened-recognition period may be leveraged if the BIG assets are sold on the installment method.

Our Business Tax Group gladly assists S corporations in determining whether disposition of BIG assets (or liquidation) in 2013 will provide value to the S corporation and its shareholders. We will help our clients navigate all related issues (e.g., carryover-basis asset acquisitions, taxable income limitations, NUBIG limitations, calendar-year vs. fiscal-year accounting) and execute all transactions needed to accomplish any disposition (or liquidation).

U.S. Supreme Court to Decide Whether Severance Payments Should be Excluded from FICA Withholding

The Supreme Court has agreed to review the Court of Appeals for the Sixth Circuits decision in US v. Quality Stores, which held that severance payments do not constitute wages for purposes of FICA tax. This should resolve a split between the Sixth and Federal Circuit Court on the issue. In 2008 the Circuit Court of Appeals for the Federal Circuit held such payments constituted wages subject to FICA unless they met narrow exclusions set out in IRS administrative pronouncements. The controversy revolves around whether supplemental unemployment benefits or SUB payments constitute wages for purposes of income tax withholding and FICA. SUB payments are defined by the Internal Revenue Code to include amounts which are paid to an employee, pursuant to a plan to which the employer is a party, because of an employees involuntary separation from employment (whether or not such separation is temporary), resulting directly from a reduction in force, the discontinuance of a plant or operation or other similar conditions%u2026. The IRS has generally considered severance pay to be wages under FICA, requiring withholding from employees and matching payments from employers. Certain exclusions from FICA exist for severance plans which meet the requirements of various IRS administrative pronouncements, including that the payments have a tie to amounts payable under state unemployment compensation benefits, but these did not cover many severance payments made to employees. The court in Quality Stores disagreed with the Federal Circuit and the IRS finding that the definition of SUB payments under the relevant Internal Revenue Code sections classified such payments as non-wages which, while subject to income tax withholding, were not subject to FICA tax, thus covering more types of severance payments.

Economic conditions during the past few years have resulted in a significant number of layoffs and reductions in force, many coming with severance payments to involuntarily separated employees. To the extent FICA was withheld on such severance payments and the Supreme Court ultimately follows the Sixth Circuit in finding that such payments were not subject to FICA, companies making such payments may be entitled to a refund of such Tax. Employers making such payments should consider filing administrative refund claims for any eligible years to preserve their position pending resolution of the case. The Business Tax Group can assist you in evaluating your prior payments and potential options regarding your claims.

3.8% Surtax on Excess Net Investment Income in Effect

As we highlighted in our Webinar last November 2012, the new 3.8% Medicare surtax on excess net investment income went into effect on January 1, 2013. This surtax may apply to those individuals whose adjusted gross income is in excess of certain thresholds:

  • married couples filing jointly with incomes over $250,000,
  • married individuals filing separately with income in excess of $125,000,
  • trusts and estates with taxable income in excess of $11,950, and
  • $200,000 for all other filers.

The surtax is generally levied on the lesser of (a) total income in excess of the above thresholds or (b) net investment income. Net investment income consists of:

  • interest,
  • dividends,
  • annuities,
  • royalties,
  • rents,
  • passive activity income, and
  • net capital gains.

There is still time to address ways to limit the reach of the new surtax. For example, using installment sales to spread income over several years, prepayment of expenses and other income reduction strategies, increasing retirement plan contributions, or converting income producing investments to investments that focus on growth.

Please contact members of the Business Tax Group to go over your particular tax situation and how we can help you respond to this new tax for 2013.

2013 Year-End Tax Planning Webinar

On Thursday, November 21, 2013, at 12:00 p.m. (EST) Kaufman & Canoles will host a 2013 Year-End Tax Planning Webinar, which will recap the 7 new taxes that went into effect on January 1, 2013, and review the new Obamacare provisions that go into effect on January 1, 2014. To register or for more information click here or contact Erin Holland at erholland@kaufcan.com.


The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2017.

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