Tax Update from Miller Cooper & Co.

February 2010

Edited by Ted Gamrat,

Senior Tax Manager, Miller Cooper

In this issue:

Illinois Sales Taxation of Shipping Charges

Gov. Quinn repeals July’s partnership income tax hike

IRS Guidance for “Casual Gamblers”

COBRA Subsidy Extended to the End of February

Five Filing Facts for Recently Married, Divorced or Adopting Taxpayers 

State Tax Focus

Illinois Sales Taxation of Shipping Charges

 On November 19, 2009, the Supreme Court of Illinois ruled in a case involving Wal-Mart Stores, Inc. regarding sales tax it collected on its online shipping charges. Wal-Mart was the defendant in a class action suit brought by online customer Nancy Kean. Ms. Kean claimed that her purchase of a trampoline for $23.33 on Wal-Mart’s on-line store resulted in an improper $0.697 charge for sales tax on a $7.97 delivery charge. Wal-Mart remitted the collected tax to the state of Illinois.

 Ms. Kean claimed that the shipping charge was separate from the selling price of the trampoline and Wal-Mart was incorrect in imposing sales tax on the delivery charge. The court disagreed, pointing out that the online purchase could not be completed without the purchaser selecting some kind of method of delivery. Shipping was unavoidable and therefore part of the purchase price.

 Illinois statutes do not expressly address whether shipping charges are taxable. Sales tax is based on the “selling price” of the goods. The pivotal factor in determining the tax-exempt status of shipping charges is whether they are negotiated separately from the purchase of the goods or if the shipping charges are a component of the purchase. The best evidence that shipping charges were agreed to separately is that there were two separate contracts, one for the goods and one for the shipping. In addition, any documentation showing the purchaser had the option to take delivery at the seller’s location shows that separate agreements were made even if the seller collects both charges through one payment and only one contract. However, making a purchaser pay for the goods and shipping charges separately, without two distinct contracts, when the purchaser has no option to take delivery at the seller’s location does not fall within the exemption. Also, providing a purchaser different shipping options (next-day shipping, standard, etc.) is not a relevant factor for this exemption.

 What does this mean to sellers and their customers? The two methods sellers can use to ensure this sales tax exemption are to form two different contracts for shipping and goods or always provide customers the option to pick up their goods at the seller’s location. Since it is generally not commercially desirable to process separate transactions for product sales versus shipping, an inability of a customer to avoid shipping by picking up the product will attract sales tax for the shipping charge. Delivery must be at the customer’s option. Otherwise, shipping is “inseparably linked” with the sale of the product and subject to sales tax. This is analogous to other types of sales where shipping is not exempt from taxation, such as the sale of concrete delivered on a mixing truck, and sales of food by a home catering business. One item of caution – if the seller’s shipping charges exceeds the actual costs of the delivery, then the excess will always be subject to sales tax.

 Gov. Quinn repeals July’s partnership income tax hike

Governor Pat Quinn has repealed a provision in this summer’s budget bill that changed how partnerships are taxed at the state level.

The July legislation ended the “reasonable allowance” deduction on partnership profits paid to partners, limiting deductions to “guaranteed payments” such as salaries. As a result, the entire amount of partnership profits would have been subjected to Illinois’ Personal Property Replacement Income Tax, hiking taxes by as much as 50% for some partners.

The measure was an attempt to close a perceived tax loophole. The Illinois legislature plans to revisit the issue of partnership taxation this year. But for now, the deduction is still available.

Other Tax Updates

IRS Guidance for “Casual Gamblers”

 Income tax rules for casual gamblers provide that losses from wagering transactions can be deducted up to the amount of the gains from such transactions as itemized deductions. The key question is when does a transaction occur? Is a transaction every single wager in a game of chance? 

 Consider a slot machine gambler. Assume that a casual gambler enters a casino with $100, purchases $100 in slot machine tokens and redeems his tokens for $300 after playing the slot machines. In the course of that visit, he may have had $1,200 of winnings and $1,000 of losses. Does the player have $1,200 of gambling winnings, or only $200? According to the IRS, the gambler has a wagering gain of $200. The term “transaction” is defined by the IRS to mean every time a gambler redeems his tokens. Likewise, a roulette player may have had $1,000 in winning spins and $1,100 in losing spins during a trip to the casino. In that case, he would recognize a wagering loss of $100.

 After wagering gains and losses have been measured for each visit, a taxpayer can determine the amount of losses that may be deducted. For example, suppose a gambler wins $350 over several visits, but loses $610 on other visits. In that case, the $350 of winnings are gross income, but the allowed itemized deduction for the losses is limited to that same $350.

 Here are some other concepts to keep in mind.  

• Gamblers may not carry over excess wagering losses to offset wagering gains in another taxable year or offset non-wagering income.
• Casual gamblers may not net their gains and losses from slot machine play throughout the year and only report the net amount for the year. Instead, they must measure gains and losses at the time they redeem their tokens at the conclusion of their visits.
• Gamblers must report wagering gains, even though their losses over a tax year exceed their gains. In the above example, the taxpayer must report the $350 of wagering gain as gross income. He can then deduct $350 of his $610 in wagering losses to offset the gain.

COBRA Subsidy Extended to the End of February

 As we reported in our January 2010 issue, workers who have lost their jobs between September 1, 2008 and December 31, 2009 may qualify for a 65% subsidy for COBRA continuation premiums for themselves and their families for up to 15 months. Under the law which went into effect early in 2009, eligible former employees enrolled in their employer’s health plan at the time they lost their jobs are required to pay only 35% of the cost of COBRA coverage. Employers must treat the 35% payment by eligible former employees as full payment, but the employers are entitled to a credit for the other 65% of the COBRA cost on their payroll tax return. Subsidies are subject to income ceilings.

 The Department of Defense Appropriations Act extends the eligibility period to February 28, 2010. In addition, a bill approved by the House and now in the Senate would extend the eligibility period to December 31, 2010.

Five Filing Facts for Recently Married, Divorced or Adopting Taxpayers 

If you were married or divorced recently, there are a couple of things you’ll want to do to ensure the name on your tax return matches the name registered with the Social Security Administration (SSA). Here are five filing facts from the IRS for recently married or divorced taxpayers. Proper notification will help avoid problems when you file your tax return.

1. If you took your spouse’s last name or if both spouses hyphenate their last names, you may run into complications if you don’t notify the SSA. When newlyweds file a tax return using their new last names, IRS computers can’t match the new name with their Social Security Number (SSN). So, any name change due to a marriage requires notification to the SSA.
2. If you were recently divorced and changed back to your previous last name, you’ll also need to notify the SSA of this name change.
3. To inform the SSA of a name change, file a Form SS-5 – Application for a Social Security Card at your local SSA office.
4. Form SS-5 is available on SSA’s Web site at www.socialsecurity.gov, by calling 800-772-1213 or at local offices. It usually takes about two weeks to have the change verified.
5. If you adopted your spouse’s children after getting married, you’ll want to make sure the children have an SSN. Taxpayers must provide an SSN for each dependent claimed on a tax return. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number – or ATIN – by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return. The W-7A is available on IRS.gov, or by calling 800-TAX-FORM (800-829-3676).
   
    

For more information on these articles, please contact Ricky Max, Principal or Avrum Katz, Principal. You can also call us at 847-205-5000.

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