So you want to be a fiscal sponsor. Now what?

Proposed House bill brings state income tax standards to the digital age

On June 3, 2019, the US House of Representatives introduced H.R. 3063, also known as the Business Activity Tax Simplification Act of 2019, which seeks to modernize tax laws for the sale of personal property, and clarify physical presence standards for state income tax nexus as it applies to services and intangible goods. But before we can catch up on today, we need to go back in time—great Scott!

Fly your DeLorean back 60 years (you’ve got one, right?) and you’ll arrive at the signing of Public Law 86-272: the Interstate Income Act of 1959. Established in response to the Supreme Court’s ruling on Northwestern States Portland Cement Co. v. Minnesota, P.L. 86-272 allows a business to enter a state, or send representatives, for the purposes of soliciting orders for the sale of tangible personal property without being subject to a net income tax.

But now, in 2019, personal property is increasingly intangible—eBooks, computer software, electronic data and research, digital music, movies, and games, and the list goes on. To catch up, H.R. 3063 seeks to expand on 86-272’s protection and adds “all other forms of property, services, and other transactions” to that exemption. It also redefines business activities of independent contractors to include transactions for all forms of property, as well as events and gathering of information.

Under the proposed bill, taxpayers meet the standards for physical presence in a taxing jurisdiction, if they:

1.  Are an individual physically located in or have employees located in a given state; 
2. Use the services of an agent to establish or maintain a market in a given state, provided such agent does not perform the same services in the same state for any other person or taxpayer during the taxable year; or
3. Lease or own tangible personal property or real property in a given state.

The proposed bill excludes a taxpayer from the above criteria who have presence in a state for less than 15 days, or whose presence is established in order to conduct “limited or transient business activity.”

In addition, H.R. 3063 also expands the definition of “net income tax” to include “other business activity taxes”. This would provide protection from tax in states such as Texas, Ohio and others that impose an alternate method of taxing the profits of businesses.

H.R. 3063, a measure that would only apply to state income and business activity tax, is in direct contrast to the recent overturn of Quill Corp. v. North Dakota, a sales and use tax standard. Quill required a physical presence but was overturned by the decision in South Dakota v. Wayfair, Inc. Since the Wayfair decision, dozens of states have passed legislation to impose their sales tax regime on out of state taxpayers without a physical presence in the state.

If enacted, the changes made via H.R. 3063 would apply to taxable periods beginning on or after January 1, 2020. For more information: https://www.congress.gov/bill/116th-congress/house-bill/3063/text?q=%7B%22search%22%3A%5B%22hr3063%22%5D%7D&r=1&s=2
 

Focus on the people: How higher ed institutions can successfully make an ERP system change

The enterprise resource planning (ERP) system is the heart of an institution’s business, maintaining all aspects of day-to-day operations, from student registration to staff payroll. Many institutions have used the same ERP systems for decades and face challenges to meet the changing demands of staff and students. As new ERP vendors enter the marketplace with new features and functionality, institutions are considering a change. Some things to consider:

1. Don’t just focus on the technology and make change management an afterthought. Transitioning to a new ERP system takes considerable effort, and has the potential to go horribly wrong if sponsorship, good planning, and communication channels are not in place. The new technology is the easy part of a transition—the primary challenge is often rooted in people’s natural resistance to change.  
2. Overcoming resistance to change requires a thoughtful and intentional approach that focuses on change at the individual level. Understanding this helps leadership focus their attention and energy to best raise awareness and desire for the change.
3. One effective tool that provides a good framework for successful change is the Prosci ADKAR^® model. This framework has five distinct phases that align with ERP change:

These phases provide an approach for developing activities for change management, preparing leadership to lead and sponsor change and supporting employees through the implementation of the change.

The three essential steps to leveraging this framework:

1. Perform a baseline assessment to establish an understanding of how ready the organization is for an ERP change
2. Provide sponsorship, training, and communication to drive employee adoption
3. Prepare and support activities to implement, celebrate, and sustain participation throughout the ERP transition

Following this approach with a change management framework such as the Prosci ADKAR^® model can help an organization prepare, guide, and adopt ERP change more easily and successfully. 

If you’re considering a change, but need to prepare your institution for a healthy ERP transition using change management, chart yourself on this ADKAR framework—what is your organization’s change readiness? Do you have appropriate buy-in? What problems will you face?

You now know that this framework can help your changes stick, and have an idea of where you might face resistance. We’re certified Prosci ADKAR^® practitioners and have experience guiding Higher Ed leaders like you through these steps. Get in touch—we’re happy to help and have the experience and training to back it up. Please contact the team with any questions you may have.

¹Prosci ADKAR^®from http://www.prosci.com

“The world is one big data problem,” says MIT scientist and visionary Andrew McAfee.

That’s a daunting (though hardly surprising) quote for many in data-rich sectors, including higher education. Yet blaming data is like blaming air for a malfunctioning wind turbine. Data is a valuable asset that can make your institution move.

To many of us, however, data remains a four-letter word. The real culprit behind the perceived data problem is our handling and perception of data and the role it can play in our success—that is, the relegating of data to a select, responsible few, who are usually separated into hardened silos. For example, a common assumption in higher education is that the IT team can handle it. Not so. Data needs to be viewed as an institutional asset, consumed by many and used by the institution for the strategic purposes of student success, scholarship, and more.

The first step in addressing your “big” data problem? Data governance.

What is data governance?

There are various definitions, but the one we use with our clients is “the ongoing and evolutionary process driven by leaders to establish principles, policies, business rules, and metrics for data sharing.”

Please note that the phrase “IT” does not appear anywhere in this definition.

Why is data governance necessary? For many reasons, including:

1. Data governance enables analytics. Without data governance, it’s difficult to gain value from analytics initiatives which will produce inconsistent results. A critical first step in any data analytics initiative is to make sure that definitions are widely accepted and standards have been established. This step allows decision makers to have confidence in the data being analyzed to describe, predict, and improve operations.
    
2. Data governance strengthens privacy, security, and compliance. Compliance requirements for both public and private institutions constantly evolve. The more data-reliant your world becomes, the more protected your data needs to be. If an organization does not implement security practices as part of its data governance framework, it becomes easier to fall out of compliance. 
    
3. Data governance supports agility. How many times have reports for basic information (part-time faculty or student FTEs per semester, for example) been requested, reviewed, and returned for further clarification or correction? And that’s just within your department! Now add multiple requests from the perspective of different departments, and you’re surely going through multiple iterations to create that report. That takes time and effort. By strengthening your data governance framework, you can streamline reporting processes by increasing the level of trust you have in the information you are seeking. Understanding the value of data governance is the easy part/ The real trick is implementing a sustainable data governance framework that recognizes that data is an institutional asset and not just a four-letter word.

Stay tuned for part two of this blog series: The how of data governance in higher education. In the meantime, reach out to me if you would like to discuss additional data governance benefits for your institution.

As a new year is upon us, many people think about “out with the old and in with the new”. For those of us who think about technology, and in particular, blockchain technology, the new year brings with it the realization that blockchain is here to stay (at least in some form). Therefore, higher education leaders need to familiarize themselves with some of the technology’s possible uses, even if they don’t need to grasp the day-to-day operational requirements. Here’s a high-level perspective of blockchain to help you answer some basic questions.

Are blockchain and bitcoin interchangeable terms?

No they aren’t. Bitcoin is an electronic currency that uses blockchain technology, (first developed circa 2008 to record bitcoin transactions). Since 2008, many companies and organizations utilize blockchain technology for a multitude of purposes.

What is a blockchain?

In its simplest terms, a blockchain is a decentralized, digital list (“chain”) of timestamped records (“blocks”) that are connected, secured by cryptography, and updated by participant consensus.

What is cryptography?

Cryptography refers to converting unencrypted information into encrypted information—and vice versa—to both protect data and authenticate users.

What are the pros of using blockchain?

Because blockchain technology is inherently decentralized, you can reduce the need for “middleman” entities (e.g., financial institutions or student clearinghouses). This, in turn, can lower transactional costs and other expenses, and cybersecurity risks—as hackers often like to target large, info-rich, centralized databases.

Decentralization removes central points of failure. In addition, blockchain transactions are generally more secure than other types of transactions, irreversible, and verifiable by the participants. These transaction qualities help prevent fraud, malware attacks, and other risks and issues prevalent today.

What are the cons of using blockchain technology?

Each blockchain transaction requires signature verification and processing, which can be resource-intensive. Furthermore, blockchain technology currently faces strong opposition from certain financial institutions for a variety of reasons. Finally, although blockchains offer a secure platform, they are not impervious to cyberattacks. Blockchain does not guarantee a hacker-proof environment.

How can blockchain benefit higher education institutions?

Blockchain technology can provide higher education institutions with a more secure way of making and recording financial transactions. You can use blockchains to verify and transfer academic credits and certifications, protect student personal identifiable information (PII) while simultaneously allowing students to access and transport their PII, decentralize academic content, and customize learning experiences. At its core, blockchain provides a fresh alternative to traditional methods of identity verification, an ongoing challenge for higher education administration.

As blockchain becomes less of a buzzword and begins to expand beyond the realm of digital currency, colleges and universities need to consider it for common challenges such as identity management, application processing, and student credentialing. If you’d like to discuss the potential benefits blockchain technology provides, please contact me.

A common pitfall for inbound sellers is applying the same concepts used to adopt “no tax” positions made for federal income tax purposes to determinations concerning sales and use tax compliance. Although similar conceptually, separate analyses are required for each determination.

For federal income tax purposes, inbound sellers that are selling goods to customers in the U.S. and do not have a fixed place of business or dependent agent in the U.S. have, traditionally, been able to rely on their country’s income tax treaty with the U.S. for “no tax” positions. Provided that the non-U.S. entity did not have a “permanent establishment” in the U.S., it was shielded from federal income tax and would have a limited federal income tax compliance obligation.

States, however, are generally not bound by comprehensive income tax treaties made with the U.S. Thus, non-U.S. entities can find themselves unwittingly subject to state and local sales and use tax compliance obligations even though they are protected from a federal income tax perspective. With recent changes in U.S. tax law, the burden of complying with sales and use tax filing and collection requirements has increased significantly.

Does your company have a process in place to deal with these new state and local tax compliance obligations?

What has changed? Wayfair—it’s got what a state needs

As a result of the Supreme Court’s ruling in South Dakota v. Wayfair, Inc., non-U.S. entities that have sales to customers in the U.S. may have unexpected sales and use tax filing obligations on a go-forward basis. Historically, non-U.S. entities did not have a sales and use tax compliance obligation when they did not have a physical presence in states where the sales occurred.

In Wayfair, the U.S. Supreme Court ruled that a state is no longer bound by the physical presence standard in order for it to impose its sales and use tax regime on entities making sales within the state. The prior physical presence standard was set forth in precedent established by the Supreme Court and was used to determine if an entity had sufficient connection with a state (i.e., nexus) to necessitate a tax filing and collection requirement.

Before the Wayfair ruling, an entity had to have a physical presence (generally either through employees or property located in a state) in order to be deemed to have nexus with the state. The Wayfair ruling overturned this precedent, eliminating the physical presence requirement. Now, a state can deem an entity to have nexus with the state merely for exceeding a certain level of sales or transactions with in-state customers. This is a concept referred to as “economic nexus.”

The Court in Wayfair determined that the state law in South Dakota providing a threshold of $100,000 in sales or more than 200 sale transactions occurring within the state is sufficient for economic nexus to exist with the state. This is good news for hard-pressed states and municipalities in search of more revenue. Since this ruling, there has been a flurry of new state legislation across the country. Like South Dakota, states are actively passing tax laws with similar bright-line tests to determine when entities have economic nexus and, therefore, a sales and use tax collection and filing requirement.

How this impacts non-U.S. entities

This can be a trap for non-U.S. entities making sales to customers in the U.S. Historically, non-U.S. entities lacking a U.S. physical presence generally only needed to navigate federal income tax rules.

Inbound sellers without a physical presence in the U.S. may have very limited experience with state and local tax compliance obligations. When considering all of the state and local tax jurisdictions that exist in the U.S. (according to the Tax Foundation there are more than 10,000 sales tax jurisdictions), the number of sales and use tax filing obligations can be significant. Depending on the level of sales activity within the U.S., a non-U.S. entity can quickly become inundated with the time and cost of sales and use tax compliance.

Next steps

Going forward, non-U.S. entities selling to customers in the U.S. should be aware of those states that have economic nexus thresholds and adopt procedures so they are prepared for their sales and use tax compliance obligations in real time. These tax compliance obligations will generally require an entity to register to do business in the state, collect sales tax from customers, and file regular tax returns, usually monthly or quarterly.

It is important to note when an entity has an obligation to collect sales tax, it will be liable for any sales tax due to a state, regardless of whether the sales tax is actually collected from the customer. It is imperative to stay abreast of these complex legislative changes in order to be compliant.

At BerryDunn, our tax professionals work with a number of non-U.S. companies that face international, state, and local tax issues. If you would like to discuss your particular circumstances, contact one of the experienced professionals in our state and local tax (“SALT”) practice.

It’s that time of year. Kids have gone back to school, the leaves are changing color, the air is getting crisp and… year-end tax planning strategies are front of mind! It’s time to revisit or start tax planning for the coming year-end, and year-end purchase of capital equipment and the associated depreciation expense are often an integral part of that planning.

The Tax Cuts and Jobs Act (TCJA) expanded two prevailing types of accelerated expensing of capital improvements: bonus depreciation and section 179 depreciation. They each have different applications and require planning to determine which is most advantageous for each business situation.

100% expensing of selected capital improvements—bonus depreciation

Originating in 2001, bonus depreciation rules allowed for immediate expensing at varying percentages in addition to the “regular” accelerated depreciation expensed over the useful life of a capital improvement. The TCJA allows for 100% expensing of certain capital improvements during 2018. Starting in 2023, the percentage drops to 80% and continues to decrease after 2023. In addition to the increased percentage, used property now qualifies for bonus depreciation. Most new and used construction equipment, office and warehouse equipment, fixtures, and vehicles qualify for 100% bonus depreciation along with certain other longer lived capital improvement assets. Now is the time to take advantage of immediate write-offs on crucial business assets. 

TCJA did not change the no dollar limitations or thresholds, so there isn’t a dollar limitation or threshold on taking bonus depreciation. Additionally, you can use bonus depreciation to create taxable losses. Bonus depreciation is automatic, and a taxpayer may elect out of the bonus depreciation rules.

However, a taxpayer can’t pick and choose bonus depreciation on an asset-by-asset basis because the election out is made by useful life. Another potential drawback is that many states do not allow bonus depreciation. This will generally result in higher state taxable income in the early years that reverses in subsequent years.

Section 179 expensing

Similar to bonus depreciation, section 179 depreciation allows for immediate expensing of certain capital improvements. The TCJA doubled the allowable section 179 deduction from $500,000 to $1,000,000. The overall capital improvement limits also increased from $2,000,000 to $2,500,000. These higher thresholds allow for even higher tax deductions for business that tend to put a lot of money in a given year on capital improvements.

In addition to these limits, section 179 cannot create a loss. Because of these constraints, section 179 is not as flexible as bonus depreciation but can be very useful if the timing purchases are planned to maximize the deduction. Many states allow section 179 expense, which may be an advantage over bonus depreciation.

Both section 179 and bonus depreciation are crucial tools for all businesses. They can reduce taxable income and defer tax expense by accelerating depreciation deductions. Please contact your tax advisor to determine if your business qualifies for bonus depreciation or section 179 and how to maximize each deduction for 2018.

Section 179 and bonus depreciation: where to go from here

Both section 179 and bonus depreciation are crucial tools for all businesses. They can reduce taxable income and defer tax expense by accelerating depreciation deductions. Please contact your tax advisor to determine if your business qualifies for bonus depreciation or section 179 and how to maximize each deduction for 2018.

IRS Notice 2018-67 Hits the Charts
Last week, in addition to The Eagles Greatest Hits (1971-1975) album becoming the highest selling album of all time, overtaking Michael Jackson’s Thriller, the IRS issued Notice 2018-67—its first formal guidance on Internal Revenue Code Section 512(a)(6), one of two major code sections added by the Tax Cuts and Jobs Act of 2017 that directly impacts tax-exempt organizations. Will it too, be a big hit? It remains to be seen.

Section 512(a)(6) specifically deals with the reporting requirements for not-for-profit organizations carrying on multiple unrelated business income (UBI) activities. Here, we will summarize the notice and help you to gain an understanding of the IRS’s thoughts and anticipated approaches to implementing §512(a)(6).

While there have been some (not so quiet) grumblings from the not-for-profit sector about guidance on Code Section 512(a)(7) (aka the parking lot tax), unfortunately we still have not seen anything yet. With Notice 2018-67’s release last week, we’re optimistic that guidance may be on the way and will let you know as soon as we see anything from the IRS.

Before we dive in, it’s important to note last week’s notice is just that—a notice, not a Revenue Procedure or some other substantive legislation. While the notice can, and should be relied upon until we receive further guidance, everything in the notice is open to public comment and/or subject to change. With that, here are some highlights:

No More Netting
512(a)(6) requires the organization to calculate unrelated business taxable income (UBTI), including for purposes of determining any net operating loss (NOL) deduction, separately with respect to each such trade or business. The notice requires this separate reporting (or silo-ing) of activities in order to determine activities with net income from those with net losses.

Under the old rules, if an organization had two UBI activities in a given year, (e.g., one with $1,000 of net income and another with $1,000 net loss, you could simply net the two together on Form 990-T and report $0 UBTI for the year. That is no longer the case. From now on, you can effectively ignore activities with a current year loss, prompting the organization to report $1,000 as taxable UBI, and pay associated federal and state income taxes, while the activity with the $1,000 loss will get “hung-up” as an NOL specific to that activity and carried forward until said activity generates a net income.

Separate Trade or Business
So, how does one distinguish (or silo) a separate trade or business from another? The Treasury Department and IRS intend to propose some regulations in the near future, but for now recommend that organizations use a “reasonable good-faith interpretation”, which for now includes using the North American Industry Classification System (NAICS) in order to determine different UBI activities.

For those not familiar, the NAICS categorizes different lines of business with a six-digit code. For example, the NAICS code for renting* out a residential building or dwelling is 531110, while the code for operating a potato farm is 111211. While distinguishing residential rental activities from potato farming activities might be rather straight forward, the waters become muddier if an organization rents both a residential property and a nonresidential property (NAICS code 531120). Does this mean the organization has two separate UBI rental activities, or can both be grouped together as rental activities? The notice does not provide anything definitive, but rather is requesting public comments?we expect to see something more concrete once the public comment period is over.

*In the above example, we’re assuming the rental properties are debt-financed, prompting a portion of the rental activity to be treated as UBI.

UBI from Partnership Investments (Schedule K-1)
Notice 2018-67 does address how to categorize/group unrelated business income for organizations that receive more than one partnership K-1 with UBI reported. In short, if the Schedule K-1s the organization receives can meet either of the tests below, the organization may treat the partnership investments as a single activity/silo for UBI reporting purposes. The notice offers the following:

De Minimis Test
You can aggregate UBI from multiple K-1s together as long as the exempt organization holds directly no more than 2% of the profits interest and no more that 2% of the capital interest. These percentages can be found on the face of the Schedule K-1 from the Partnership and the notice states those percentages as shown can be used for this determination. Additionally, the notice allows organizations to use an average of beginning of year and end of year percentages for this determination.

Ex: If an organization receives a K-1 with UBI reported, and the beginning of year profit & capital percentages are 3%, and the end of year percentages are 1%, the average for the year is 2% (3% + 1% = 4%/2 = 2%). In this example, the K-1 meets the de minimis test.

There is a bit of a caveat here—when determining an exempt organization's partnership interest, the interest of a disqualified person (i.e. officers, directors, trustees, substantial contributors, and family members of any of those listed here), a supporting organization, or a controlled entity in the same partnership will be taken into account. Organizations need to review all K-1s received and inquire with the appropriate person(s) to determine if they meet the terms of the de minimis test.

Control Test
If an organization is not able to pass the de minimis test, you may instead use the control test. An organization meets the requirements of the control test if the exempt organization (i) directly holds no more than 20 percent of the capital interest; and (ii) does not have control or influence over the partnership.

When determining control or influence over the partnership, you need to apply all relevant facts and circumstances. The notice states:

“An exempt organization has control or influence if the exempt organization may require the partnership to perform, or may prevent the partnership from performing, any act that significantly affects the operations of the partnership. An exempt organization also has control or influence over a partnership if any of the exempt organization's officers, directors, trustees, or employees have rights to participate in the management of the partnership or conduct the partnership's business at any time, or if the exempt organization has the power to appoint or remove any of the partnership's officers, directors, trustees, or employees.”

As noted above, we recommend your organization review any K-1s you currently receive. It’s important to take a look at Line I1 and make sure your organization is listed here as “Exempt Organization”. All too often we see not-for-profit organizations listed as “Corporations”, which while usually technically correct, this designation is really for a for-profit corporation and could result in the organization not receiving the necessary information in order to determine what portion, if any, of income/loss is attributable to UBI.

Net Operating Losses
The notice also provides some guidance regarding the use of NOLs. The good news is that any pre-2018 NOLs are grandfathered under the old rules and can be used to offset total UBTI on Form 990-T.

Conversely, any NOLs generated post-2018 are going to be considered silo-specific, with the intent being that the NOL will only be applicable to the activity which gave rise to the loss. There is also a limitation on post-2018 NOLs, allowing you to use only 80% of the NOL for a given activity. Said another way, an activity that has net UBTI in a given year, even with post-2017 NOLs, will still potentially have an associated tax liability for the year.

Obviously, Notice 2018-67 provides a good baseline for general information, but the details will be forthcoming, and we will know then if they have a hit. Hopefully the IRS will not Take It To The Limit in terms of issuing formal guidance in regards to 512(a)(6) & (7). Until they receive further IRS guidance,  folks in the not-for-profit sector will not be able to Take It Easy or have any semblance of a Peaceful Easy Feeling. Stay tuned.

The late science fiction writer (and college professor) Isaac Asimov once said: “I do not fear computers. I fear the lack of them.” Had Asimov worked in higher ed IT management, he might have added: “but above all else, I fear the lack of computer staff.”

Indeed, it can be a challenge for higher education institutions to recruit and retain IT professionals. Private companies often pay more in a good economy, and in certain areas of the nation, open IT positions at colleges and universities outnumber available, qualified IT workers. According to one study from 2016, almost half of higher education IT workers are at risk of leaving the institutions they serve, largely for better opportunities and more supportive workplaces. Understandably, IT leadership fears an uncertain future of vacant roles—yet there are simple tactics that can help you improve the chances of filling open positions.

Emphasize the whole package

You need to leverage your institution’s strengths when recruiting IT talent. A focus on innovation, project leadership, and responsibility for supporting the mission of the institution are important attributes to promote when recruiting. Your institution should sell quality of life, which can be much more attractive than corporate culture. Many candidates are attracted to the energy and activity of college campuses, in addition to the numerous social and recreational outlets colleges provide.

Benefit packages are another strong asset for recruiting top talent. Schools need to ensure potential candidates know the amount of paid leave, retirement, and educational assistance for employees and employee family members. These added perks will pique the interest of many candidates who might otherwise have only looked at salary during the process.

Use the right job title

Some current school vacancies have very specific job titles, such as “Portal Administrator” or “Learning Multimedia Developer.” However, this specificity can limit visibility on popular job posting sites, reducing the number of qualified applicants. Job titles, such as “Web Developer” and “Java Developer,” can yield better search results. Furthermore, some current vacancies include a number or level after the job title (e.g., “System Administrator 2”), which also limits visibility on these sites. By removing these indicators, you can significantly increase the applicant pool.

Focus on service, not just technology

Each year, institutions deploy an increasing number of Software as a Service (SaaS) and hosted applications. As higher education institutions invest more in these applications, they need fewer personnel for day-to-day technology maintenance support. In turn, this allows IT organizations to focus limited resources on services that identify and analyze technology solutions, provide guidance to optimize technology investments, and manage vendor relationships. IT staff with soft skills will become even more valuable to your institution as they engage in more people- and process-centric efforts.

Fill in the future

It may seem like science fiction, but by revising your recruiting and retention tactics, your higher education institution can improve its chances of filling IT positions in a competitive job market. In a future blog, I’ll provide ideas for cultivating staff from your institution via student workers and upcoming graduates. If you’d like to discuss additional staffing tactics, send me an email.