Investment Advisor Guarantees Don't Protect Against Losses

I'm not an investment advisor, although I have been asked to analyze an investment or a proposed one now and then. I have been watching the Travelers Golf Tournament this weekend and noticed the numerous commercials being aired and directed at investment advisors that are providing for guarantees. A certain investment firm has been offering to refund investment advisory fees when investors are unhappy, while another has been offering to rebate the fees after two quarters of negative performance. Some investors I know have expressed concerns and questioned me over these offers.

The problem: Many investors mistakenly believe that they will get better advice because of these offers and will be protected from investment losses. The guarantees are not a good reason to select a particular brokerage nor, by any means, a useful way to judge the value of the assistance you may get over one quarter of performance activity. .

How some of these offers work: one allows customers who use any of five advisory services to request a refund of fees for the previous quarter for any reason. The services include the firm's Managed Portfolios, whose model of mutual funds and exchange-traded funds (ETFs) are selected with the help of an adviser.  The minimum investment is $25,000. Another is private-client package, which provides an adviser who creates a tailored portfolio.  That minimum investment is a cool $500,000. Annual fees are 0.9% of your managed assets or lower.  I'm also not sure based upon a footnote you'll find with its website, whether or not either of these offers applies to anyone other than a "current client".

Another firm's service fees rebate only applies to a particular service, which provides for an adviser and assists in selecting among several model portfolios. If your holdings experience two consecutive quarters of negative returns, the firm will automatically refund the fees from both quarters (but not the losses that most certainly go along with the negative earnings). This package requires a $25,000 minimum investment and charges an annual fee of up to 1.25% of managed assets. This guarantee does not reimburse your for investment losses, even if your not satisfied.  You will simply get your fees back. 

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It has been said that both firms (and all firms, for that matter) worry about losing clients to much-lower-cost services known as robo-advisers who are offered by firms ranging from online newcomers to giants such as Vanguard and Fidelity. These robo-­advisers generally charge 0.35% or less to generate model portfolios of exchanged traded funds even though most of these so-called investment advisors won’t put you in touch with a human adviser.

So offering a "money-back" guarantee (for fees) is not helpful in choosing an investment, nor an advisor and doesn't protect your funds against losses.

Tennessee Economic Presence Rule on Hold

Tennessee: New Law Prohibits Enforcement of “Economic Presence” Administrative Rule For Sales and Use Tax Until Legislative Approval Received

H.B. 261, signed by gov. May 25, 2017 New law prohibits the Tennessee Department of Revenue from collecting any sales or use taxes authorized under Tenn. Comp. R. & Regs. 1320-05-01-.129(2) and permitted under a ruling of any court, until such court’s ruling has been fully reviewed and the rule has been approved by legislative action.

Under Tennessee's recently passed ruling (Tenn. Comp. R. & Regs. 1320-05-01-.129(2)), out-of-state businesses who have not satisfied the physical presence requirement (that do not have a physical presence in the State) in Tennessee and that engage in regular and systematic solicitation of consumers (end users) in Tennessee and that make sales exceeding $500,000 to consumers (end users) in Tennessee during the previous twelve-month period are generally deemed to have a “substantial nexus” with Tennessee, and as such are required to collect sales tax connected with those sales. 

Additionally, the Tennessee Department of Revenue recently issued a notice [Notice 17-12; see State Tax Matters, Issue 2017-23 for more details on this notice] explaining that pursuant to the April 10, 2017 agreed-upon order issued by a Tennessee chancery court which requires suspension of the enforcement of Tenn. Comp. R. & Regs. 1320-05-01-.129(2), out-of-state dealers are no longer required to collect and remit state sales and use tax as a result of Tenn. Comp. R. & Regs. 1320-05-01-.129(2) – highlighting that this agreed-upon order does not affect any requirement that might apply to collect state sales and use tax under any other provision of Tennessee law.

Tennessee TNTAP Online Taxpayer Portal

The Tennessee Department of Revenue recently launched a new web site called Tennessee Taxpayer Access Point (“TNTAP”).  

The website now serves as a web access portal to a taxpayer’s Tennessee tax-related information.  A taxpayer will be able to:

• Access taxpayer account information, including various account balances
• Send and receive secure messages to and from the Department of Revenue
• View tax-related correspondence
• View, print, file, and amend various tax returns
• Make various tax account payments

To access the site, a taxpayer must create a TNTAP login.  Information on how to create a log in and what tax accounts are currently available for access can be found here : 

https://revenue.support.tn.gov/hc/en-us/articles/115001044006-Creating-a-TNTAP-logon

In addition, your tax professionals can also register for the site and thereafter use their registration to collaborate with and gain access to their client accounts. This access will require client (taxpayer) pre-approval.  

For Information on how to gain access to client accounts, go to:

https://revenue.support.tn.gov/hc/en-us/articles/115000817126-I-am-a-CPA-or-tax-preparer-How-will-I-gain-access-to-my-clients-accounts-

What Economic Nexus Means For Your Remote and Online Sales

• May 15, 2017  |  shared from an blog article written by Gail Cole of Avalara

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With sales tax revenue dropping due to an increase in not-taxed (but not exempt) internet and catalog sales, a growing number of states have created economic nexus laws. These new and dynamic laws are designed to now tax sales by out-of-state sellers that otherwise lacked a physical presence in the state.

In many states, economic nexus policies have also been created with an eye toward triggering a legal battle that would land on the steps of the Supreme Court of the United States and provide an opportunity for the court to abrogate its decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). For example, the original ruling in Quill upheld the physical presence precedent: that a state cannot impose a tax obligation on a business unless that business has a substantial connection to the state, i.e. a physical presence. Understanding where economic nexus exists and how policies differ from one state to the next is essential for any business that makes sales in multiple states. The eight states below have adopted economic nexus. The other states listed have considered or are considering the adoption of a similar policy.

 

Alabama economic nexus, January 1, 2016

Alabama was the first state to adopt an economic nexus policy. Department of Revenue Rule 810-6-2-.90.03 took effect January 1, 2016 and holds that “out-of-state sellers that lack a physical presence in the state but make sales of tangible personal property (TPP) in Alabama have a substantial economic presence in Alabama and must collect and remit tax if both of the following are true:

• The seller’s retail sales of TPP in Alabama exceed $250,000 per year (based on the previous calendar year’s sales)
• The seller conducts one or more of the activities described in Alabama Code Section 40-23-68, which includes solicitation of sales through advertising on cable television, and any other contact with the state “sufficient enough to permit Alabama to impose a sales and use tax collection requirement under Code § 40-23-68(b)(9)”

When the policy was first adopted, Gov. Robert Bentley dared retailers to sue the state. Alabama was the first state to issue that challenge to remote retailers. That challenge was eventually answered by a large online retailer, and the case (Newegg Inc. v. Alabama Department of Revenue, No. s. 16-613) is still making its way through the courts.

In a less contentious move, Alabama created the Simplified Sellers Use Tax policy to make compliance easier for remote retailers. It “allows eligible sellers to participate in a program to collect, report and remit a flat eight percent (8%) sellers use tax on all sales made into Alabama,” without worrying about the various combined state and local rates.

 

Indiana economic nexus, July 1, 2017

House Bill 1129 establishes economic nexus for remote vendors in Indiana as of July 1, 2017. Out-of-state vendors lacking a physical presence in Indiana must collect and remit tax on sales to Indiana customers when one of the following is true in the current or preceding calendar year:

• The vendor makes more than $100,000 in gross revenue from Indiana sales transactions
• The vendor makes more than 200 separate sales transactions in the state

Like Alabama, Indiana has created a law it hopes will be challenged. This would create an opportunity for the Supreme Court to overturn its decision in Quill.

 

Massachusetts economic nexus, July 1, 2017

Effective July 1, 2017, out-of-state internet vendors with significant Massachusetts sales must collect sales or use tax under Massachusetts Department of Revenue Directive 17-1. A remote internet vendor makes significant sales in the state when both the following are true:

• The vendor makes more than $500,000 in sales to Massachusetts consumers
• The vendor makes at least 100 taxable sales transactions for delivery into Massachusetts

The department has concluded that large internet vendors have a physical presence in the state through the software and cookies they place on customers’ in-state computers and communication devices to facilitate the vendor’s in-state sales. Read Massachusetts whips up new sales tax obligation for internet vendors that use cookies.

The Massachusetts policy differs from the others on this list in that it only applies to internet vendors, not retailers who sell to customers via catalogs or the phone. As a result, the physical presence precedent upheld in Quill doesn’t apply.

 

North Dakota economic nexus, contingent effective date

North Dakota Senate Bill 2298 creates economic nexus for out-of-state sellers that lack a physical presence in the state but meet one of the following criteria in the current or previous calendar year:

• The vendor has gross sales from TPP and other taxable items delivered in North Dakota of more than $100,000
• The vendor makes at least 200 separate taxable sales transactions in North Dakota

Unlike Alabama and Indiana, the state that was involved in the seminal Supreme Court case, Quill Corp. v. North Dakota, is not interested in another lengthy legal battle. Therefore, the  effective date of the economic nexus law is contingent “on the date the United States Supreme Court issues an overturning of Quill v. North Dakota” or other confirmation that “a state may constitutionally impose its sales or use tax upon an out-of-state seller” under certain circumstances.

 

South Dakota economic nexus, May 1, 2016

As of May 1, 2016, Senate Bill 106 requires remote sellers with no physical presence in South Dakota to collect and remit sales tax as if they have a presence in the state, if one of the two following criteria in the previous or current calendar year is true:

• The remote seller’s gross revenue from sales of TPP, electronically delivered products, or services delivered into South Dakota exceeds $100,000
• The remote seller has 200 or more separate transactions of TPP, electronically delivered products, or services delivered into South Dakota

SB 106 was challenged before it even took effect and is under an automatic injunction during the pendency of the action. Earlier this spring, a state circuit court found South Dakota’s economic nexus law to be unconstitutional, which is what the state wanted: “The South Dakota law was designed to be challenged” because an eventual decision in the state’s favor could require “abrogation of the United States Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).”

 

Tennessee economic nexus, July 1, 2017

The Tennessee Department of Revenue’s economic nexus rule requires out-of-state dealers to register with the department and report and pay tax on all taxable sales to Tennessee consumers when both the following conditions are true:

• The remote seller engages in the regular or systematic solicitation of consumers in the state through any means
• The remote seller makes sales that exceed $500,000 to consumers in the state during the previous 12-month period

Affected out-of-state sellers were required to register with the state by March 1, 2017, and must begin collecting and remitting sales tax by July 1, 2017, “unless a later date is established by the Department by notice.” Additional information, including FAQs, is available from the Department of Revenue.

 

Vermont economic nexus, contingent effective date

Out-of-state vendors that don’t have a physical presence in Vermont are required to collect and remit sales tax when they engage in “regular, systematic, or seasonal solicitation of sales of TPP in Vermont” and one of the following is true during a preceding 12-month period:

• The vendor makes at least $100,000 in sales to Vermont consumers
• The vendor makes at least 200 individual sales transactions for delivery into Vermont

Under Act No. 134, a vendor is considered to regularly and systematically, or seasonally, solicit sales in Vermont by: displaying advertisements in Vermont; distributing catalogs, periodicals, advertising flyers, or other advertising by means of print, radio, or television media; or using internet, mail, telephone, computer database, cable, or other communication systems for the purpose of affecting sales of TPP.

Vermont economic nexus will take effect “the later of July 1, 2017 or beginning on the first day of the first quarter after a controlling court decision or federal legislation abrogates the physical presence requirement of Quill v. North Dakota, 504 U.S. 298 (1992).” Read Vermont economic nexus law hinges on Supreme Court, Congress.

 

Wyoming economic nexus, July 1, 2017

Under House Bill 19, out-of-state vendors lacking a physical presence in Wyoming are required to collect and remit Wyoming sales and use tax starting July 1, 2017, if one of the following conditions is met in the current or previous calendar year:

• The sellers’ gross revenue from the sale of TPP, admissions, or services delivered into Wyoming exceeds $100,000
• The seller sold TPP, admissions, or services delivered into Wyoming in at least 200 separate transactions

The authors of the legislation expect remote vendors to fight its new economic nexus policy. And like many of the above-mentioned states, Wyoming would relish the opportunity to argue for the repeal of Quill before the United States Supreme Court.

States considering economic nexus policies

• Hawaii
• Illinois (see the amendment)
• Maryland
• Minnesota
• Mississippi
• Nebraska
• New Mexico
• Rhode Island
• Washington

The above references are organic: state sales and use tax policies are always subject to change. And it should be noted that economic nexus policies aren’t the only way states are striving to capture tax revenue from remote sellers. Many states have adopted affiliate and click-through nexus policies, whereby out-of-state sellers establish a substantial connection to the state through ties to in-state affiliates, or when links on an in-state business’s website generate a certain amount of business for a remote seller.

Furthermore, some states have adopted or are considering use tax notification requirements for remote retailers, rather than affiliate, click-through, and economic nexus laws. Use tax notification and reporting requirements such as the one adopted by Colorado require non-collecting remote retailers to notify consumers of their obligation to remit use tax to the state if sales tax wasn’t collected at checkout. Some of these policies require vendors to annually report their sales to customers, and some take it a step further, requiring the vendor to provide the state department of revenue with a list of customers and the total amount of their purchases. In their own way, many of these policies are also designed to challenge Quill.

 

What you can do to stay in compliance

Businesses need to be vigilant in order to remain in compliance in all states where sales are made.

Cell Phones and Other Reimbursements

Cell Phone and Other Reimbursements

Some employers provide an allowance for business use of a personal cell phone, such as paying $20 per month. These payments may be excluded from taxable income only if the employer follows the accountable plan rules.

The accountable plan rules have three requirements:

• There must be a business connection to the expense
• The employee must account for the funds within a reasonable time
• Any excess allowance must be returned to the employer.

Giving an allowance to an employee without substantiating the business expenses would make the allowance taxable income. In simple terms, the employee must verify the date, time, and business purpose of expense. The employee must also provide receipts and, if the allowance was more than the actual costs, return any excess. Otherwise, the entire allowance is taxable and must be reported on the employee’s W-2.

Employers may choose to report an allowance as income (even if it could have been excluded) and then advise the employee to keep records of business use. The employee could then claim a personal tax deduction for any business use.

Per Diem Reimbursements

IR-2006-175, Nov. 9, 2006

Revenue Ruling 2006-56 tells employers that if they routinely pay per diem allowances in excess of the federal per diem rates, but do not track the allowances and do not require the employees either to actually substantiate all the expenses or pay back the excess amounts, and do not include the excess amounts in the employee’s income and wages, then the entire amount of the expense allowances is subject to income tax and employment tax.

Generally, amounts employers pay employees to reimburse them for substantiated business expenses are not subject to income tax or employment tax. For reimbursements for expenses for meals and other incidentals associated with business travel, employees get this exclusion for reimbursements for each day of travel up to the federal per diem rates without having to actually substantiate the amounts of the expenses. However, if an employer pays expense allowances that exceed the federal per diem rates, the excess amounts are subject to income tax and employment tax if they are not repaid to the employer, unless the employee actually substantiates all of the expenses covered by the per diem allowance.

The IR (revenue ruling) illustrates when a per diem allowance arrangement that fails to track the excess amounts and does not include the unsubstantiated, unrepaid excess amounts in the employee’s income and wages constitutes a pattern of abuse of the rules for tax-free expense reimbursements. The finding that the arrangement is abusive causes all allowances paid under the arrangement to be subject to income tax and employment tax, not just the excess amounts. While the revenue ruling uses a scenario in the trucking industry because of the industry’s widespread use of per diem allowances, the analysis in the revenue ruling applies to any employer in any industry that uses per diem allowances to reimburse employee expenses. 

IRS Revenue Ruling 2006-56 is effective immediately upon issuance. However, the IRS recognizes that employers may need some time to adjust their systems so they can track excess allowances and account for them correctly. The IRS is issuing instructions to its agents not to apply the results under the revenue ruling for taxable periods ending on or before Dec. 31, 2006, in the absence of intentional noncompliance.