LEDGER BEYOND WAYFAIR THE NEW LANDSCAPE OF ECONOMIC PRESENCE
SEPTEMBER/OCTOBER 2018 Mazars USA LLP is an independent member firm of Mazars Group. CONTENTS
2 | Mazars USA Ledger CONTENTS
SEPTEMBER/OCTOBER 2018
4 | Space Oddity or Space Odyssey? 21 | The Ongoing Feud Between Airbnb And New York City, Explained
6 | Putting Healthcare Consumers in the Driver's Seat 22 | Beyond Wayfair - The New Landscape of Economic Presence
8 | US and Germany Auto Markets Both Set For Major Sustainability 24 | U.S. Treasury Report: A signal of an exciting future for Financial Changes Services
10 | 2018 Food & Beverage Industry Study Results Executive Roundtable 27 | Is Your Organization Overdue for a Fraud Check-Up?
13 | How Developers Can Help New York City Reach Zero Waste By 2030 30 | Are You Maximizing Your Data's Value?
15 | Charitable Planning Ideas for Individuals Under the New Tax Law 33 | Employee Misclassification in the Trucking Industry
16 | On The Water 36 | Another Annual Interim Inspection Report
18 | NYC’s boutique hotels poised to draw more travelers—and investors 40 | Healthcare Alerts
19 | A New Standard For Lease Accounting 42 | Tax Alerts
20 | Why Clinical Documentation Improvement (CDI)?
*The Mazars USA Ledger contains articles and alerts published from August 1, 2018 - September 30, 2018.
September/October 2018 | 3 AEROSPACE
SPACE ODDITY OR SPACE ODYSSEY? BY PIERRE RAZZO
“SPACE ODDITY,” THE 1969 SONG BY DAVID philanthropic overtones are particularly attracting Technological innovation, the reduction in the BOWIE PRECEDED APOLLO 11’S MOON the attention of the media, regulatory authorities, cost of accessing space led by groups such as LANDING. IN THIS, THE FIRST HALF OF THE investors, and markets. Space X, and the interest generated by data2 TWENTY-FIRST CENTURY, WHICH NUMER- has shown the possibility of a lucrative busi- OUS EXPERIENCED OBSERVERS PERCEIVE These two competing projects, Oneweb and ness. Thus, many diverse projects have been AS THE FIRST TRUE SPACE AGE, THIS Starlink (working with Space X), have the com- inaugurated, intensifying the race for internet via MELODY IS STILL RELEVANT FOR SEVERAL mon goal of putting an end to the digital divide satellite or related technologies (solar-powered REASONS, LIKE ELON MUSK’S PLAYFUL affecting close to 4 billion individuals (53% of the drones, helium-filled stratospheric balloons, NOD TO IT LAST FEBRUARY DURING THE global population1), by guaranteeing high-speed rocket-launching airplanes), with initial launches LAUNCH OF HIS NEW FALCON HEAVY internet access for all by 2027. The Solution That expected for the end of the year. ROCKET AND PUTTING INTO ORBIT OF Came from Spaaace! … or Satellite Internet HIS STARMAN AT THE WHEEL OF A TESLA STARLINK ROADSTER. DAVID BOWIE’S SONG ISN’T A previous project named Teledesic was created THE ONLY ODDITY WE’RE SEEING IN SPACE in 1994 with the goal of placing 840 satellites in Although the trademark Starlink was not intro- RIGHT NOW – THE WORLD IS IN THE MIDDLE low earth orbit (altitude of less than 2,000 km) in duced until August 21, 2017, this project, which OF A WILD SPACE RACE BETWEEN NA- order to provide high-speed internet. Although it would provide high-speed internet to all, had TIONS AND, RECENTLY, PRIVATE ACTORS, was led by high-profile, internationally recognized been suggested by Elon Musk in 2015. SOMETHING THAT IS TOTALLY NEW. personalities, such as Bill Gates, Craig McCaw, and Saudi prince Alwaleed bin Talal, was a Like its main competitor Oneweb, the idea con- Amid this nebula of futuristic projects (space failure and was stopped in 2002, after incurring sists of putting several small satellites (850 lbs.) hotels, the conquest of Mars, and the explora- nearly $9 billion dollars in costs and only placing into low earth orbit by launching them from Space tion of oceans in space), two major ones with a single demonstration satellite. X’s Falcon 9 and Falcon Heavy rockets. The low
4 | Mazars USA Ledger altitude guarantees a fast internet connection and On June 15, 2015, Oneweb announced the nal documents. For Space X, this “satellite inter- very low latency – 25 to 30 milliseconds3 – owing formation of a joint venture (JV) with Airbus net” activity could result in revenues of $30 billion to the short distance the signal must travel in Defense and Space to manufacture 900 satellites dollars and operating income between $15 and comparison to geostationary4 satellites. However, dedicated to the project. This JV will have to $20 billion dollars in 2025. Although these dizzy- the decreased altitude limits coverage, creating take into account the two major challenges - the ing amounts, which the company never intended the need for a greater number of satellites. expected satellite manufacturing cost ($500,000 to release, and that might have too optimistic in dollars) and the constellation deployment the past, must be regarded with prudence, this In the next five years, Space X, located in Haw- timetable, which will require the production of 15 activity would represent more revenue than the thorne, California, plans to send 4,425 satellites satellites per week, a true break away from the current core business (launches) in 2020, and into space to form its first constellation, which is current model which could take months to build nearly 86% of the company’s revenue in 2025. nearly three times the number of currently active a satellite or to paraphrase the official project satellites! A second constellation of an additional communication “mass production and satellites Morgan Stanley predicted in October 2017 that 7,500 satellites in low earth orbit (at altitudes have never been used in the same sentence.” overall industry revenues would reach $1.1 trillion ranging from 335.9 km to 345.6 km5) is also ex- The first ten satellites will therefore be manufac- dollars by 2040,10 with the provision of satellite pected in the long term, according to information tured in Toulouse. The rest of the production will internet contributing nearly $412 billion dollars. presented to the U.S. Federal Communication take place at Exploration Park, near the Kennedy This would be nearly three times the space Commission (FCC) in May 2017. Space Center in Florida. industry’s current revenues and satellite internet contribution will be similarly tripled11. To this end, two experimental satellites were put On June 25, 2015, Oneweb also signed a in orbit on February 21, 2018. Space X intends to contract with the French company Arianespace It is not surprising that corporate groups, such begin the launches in 2019 with the objective of to launch an initial subgroup of satellites into as Facebook, start-ups and private equity firms12 completing the first constellation in 2024 and thus orbit on 21 Soyuz rockets (with the option of five have also embarked on the race to provide satel- offer high-speed internet on a global scale. additional Soyuz launches and three Ariane 6 lite internet. Welcome to Space Age 2.0! launches). The first launch is expected August Space X differentiates itself from its main com- 19, 2018 from the Guiana Space Center in Pierre is a Manager in our New York Practice. petitor Oneweb because of its integrated model Kourou (ten satellites should be put in orbit during He can be reached at 646.315.6155 or at Pierre. – the company will manufacture the rockets and this launch, then 32 to 36 satellites during each [email protected]. satellites it will launch – and because the ITU following launch). 1 According to the latest figures from the International Telecommunication has yet to assign the company frequencies for its Union (ITU) from June 2016. This entity is a sub-section of the United signal distribution. Two other launch contracts have been signed Nations, in charge of information technology and communication. 2 “Whoever gets the most data wins” declared in 2017 Masayoshi Son, the with Virgin Group and Blue Origin LL (Jeff President General Director of Softbank, who is one of Space X’s reference ONEWEB Bezos). shareholders. 3 Compared to 600 milliseconds to date based on existing technology (figures from Space X’s presentation on the project to the FCC) The Oneweb Project, initiated under the name Oneweb’s internet design, development, and 4 At an altitude of 36,000 km 5 This is the same altitude as the International Space Station (350 km to “WorldVu” in 2014, pursues the same objective infrastructure manufacturing (software, physical) 400km) of providing high-speed internet access to all at were entrusted to Qualcomm Group, which is one 6 Thus, we speak of a fleet of potentially 2,620 satellites in total 7 $500 million dollars in January 2015 from, In particular, Qualcomm, Virgin an affordable price as early as 2027. To this end, of the project’s shareholders. Group, Coca Cola, Boeing, Airbus and nearly €1.7 million euros raised from the Arlington, Virginia based company plans, Softbank in December 2016 and 2017 8 “The web enables us all to participate. This is not just our mission, it’s according to founder and President Greg Wyler, PHILANTHROPY OR BUSINESS? everyone’s.” (Oneweb official website) to place three satellite constellations in low earth 9 “Exclusive peek at Space X Data shows loss in 2015, heavy expectations 6 for Nascent Internet service” (Wall Street Journal January 13, 2017) orbit between 2018 and 2027 . The space race which the key players are en- 10 Michael Sheetz “ Morgan Stanley predicts space industry will triple in gaged is not simply one of philanthropic activities. size: Here’s how to invest” 8 https://www.cnbc.com/2017/10/12/morgan-stanley-how-to-invest-in-1- 648 small satellites (275 lbs. to 330 lbs.) should Underneath the marketing, the financial stakes trillion-space-industry.html be sent into space as the first constellation couldn’t be higher. 11 Michael Sheetz “ These 90 Private Companies are Reshaping the Space Industry, says Morgan Stanley” between 2018 and 2020. In order to achieve https://www.cnbc.com/2017/12/13/morgan-stanley-spacex-blue- this, the company was structured around the key The Starlink project’s launch cost is estimated to origin-and-other-private-companies-reshaping-space.html?__ players so as to guarantee the project’s financial be $10 billion dollars, but the potential profits are source=sharebar|twitter&par=sharebar stability ($2.2 Billion dollars raised at the end of staggering as shown by the Wall Street Journal December 20177) and technical feasibility. on January 13, 2017,9 based on Space X’s inter-
September/October 2018 | 5 HEALTHCARE
PUTTING HEALTHCARE CONSUMERS IN THE DRIVER’S SEAT OF THEIR DATA BY GILLIE MCCREATH
6 | Mazars USA Ledger he use of electronic health records of unprecedented change and innovation, many put pricing information on their websites. But it’s (EHR) came out of the American Re- segments of the healthcare industry are still important to note that there are two types of trans- covery and Reinvestment Act of 2009 leveraging outdated record review and storage parency: cost transparency and price transparen- with $19 billon of the stimulus package processes, ultimately putting their patients as cy. While “price” refers to what the hospitals are Tdedicated to healthcare IT improvements. How- well as their bottom lines at risk. charging consumers, is it going to actually cost ever, the disconnect between medical devices me as a consumer out of pocket? The healthcare and EHR, or even between different systems, While the patients themselves might be willing to system has a relatively long way to go in terms of persists. A movement to connect clinical and share their records and additional data between becoming truly transparent. By and large we still financial data would ultimately allow the industry doctors, specialists, or health systems, they don’t estimate or pre-adjudicate a claim around the as a whole to get new insight into consumer often find that the hospital, perhaps their past whole consumption of care. Patients today want to behavior, and for consumers to make more insurance company, and even the technologies know not only what their hip surgery will cost, but informed decisions about their healthcare. themselves are acting as barriers. The issue of also the complete cost of recovery and rehabilita- data silos not only affects the clinical aspects tion. Many medical practices in other countries are TECHNOLOGICAL CAPABILITIES TO IM- along the provider chain, it affects the revenue able to pre-adjudicate claims, with the full cost of PROVE INTERACTION cycle. service ultimately being paid for upfront.
Today, 50% of consumers are okay with sending When hospitals or physicians are considering Even with new technologies, hospital consol- their health information digitally. Take the ex- improvements to their technical capabilities, they idations, and staffing strategies, maturing the ample of a patient who has recently received an should explore how they will affect consumers Quadruple Aim (reducing costs, reducing physician EKG, but now another health system is asking and staff around the multiple lines of business burn out, improving patient experience, and for a new one. Would the second procedure be they serve, along with the operational, clinical, improving health populations) is still a formidable deemed necessary if the provider had access and financial impact. The ability to relieve challenge. We can’t lose sight of the key elements to more complete data about the patient? This operational pain points often features promi- that healthcare consumers need - accountability,
”While the patients themselves might be willing to share their records and additional data between doctors, specialists, or health systems, they often find that the hospital, perhaps their past insurance company, and even the technologies themselves are acting as barriers. The issue of data silos not only affects the clinical aspects along the provider chain, it affects the revenue cycle.”
duplication of procedures has cost and clinical nently into the decision-making process when accessibility, and affordability. We certainly have implications. And ultimately, it’s just a big waste selecting technology solutions. Often, though, tools that are maturing and going to help us along of healthcare, especially for a system that’s it’s worthwhile to flip the discussion, examining that spectrum, but until we put the consumer in experiencing extremely high rates of physician the operational ineffectiveness of the organiza- the driver’s seat of their own data, it’s going to be burnout and data fatigue. tion that needs technology, and what solutions a real problem to get behavioral health and other will result in the highest return. information across the system. Add to that the fact that 9% of patients’ misiden- tifications ultimately lead to death or permanent COST AND PRICE TRANSPARENCY Gillie is a Principal in our New York Practice. He injury, and that 35% of denied claims are due to can be reached at 212.375.6568 or at patient misidentifications, and the seriousness To better meet their patients’ needs for [email protected]. of this data problem comes into focus. In this era affordability, some hospitals are beginning to
September/October 2018 | 7 AUTOMOTIVE
US AND GERMANY AUTO MARKET BOTH SET FOR MAJOR SUSTAINABILITY CHANGES BY JEREMY RICE AND KRISTIN JOHANNIMLOH
oth the US and German auto markets have been slower than commitment. General Motors has already seen growing, albeit small, inter- other countries to adapt to electric vehicle (EV) technology, est in its electric vehicle (EV) offering, the Chevy Bolt, and has announced partially because of their larger size as countries, both in terms of similar intentions to increase its electric and hybrid fleet. But while sustain- population and geographic area. At the same time, these deeply able mobility momentum is picking up at company level, taking into account Binter-linked markets are going through substantial innovation both individually the geographical make-up and demographics of the US is key to catering and in tandem. for consumer needs and preference.
With large combustion engine SUVs still the best-selling vehicles in the US, Similarly, in Germany, car manufacturing giants such as BMW and Volk- OEMs are struggling to find an approach that takes advantage of cutting swagen have built their reputations on their expertise in combustion engine edge thinking on sustainable mobility development, while at the same time technology and manufacturing excellence built up over the past 80 to 100 keeping Wall Street happy. Conscious that the sustainable winds of change years. Accounting for 20% of total German industry revenue and employing are blowing stronger, Ford has recently announced an $11bn investment approximately 800,000 people, there is little political will to meddle with an program in electric vehicles by 2022, which more than doubles its previous industry that is an integral part of the country’s social fabric.
8 | Mazars USA Ledger However, with the political and regulatory landscape moving firmly in the the public that EVs are both a viable and reliable alternative. direction of car electrification, the industry is having to seriously examine its future. For example, a Federal Administrative Court ruling in February 2018 In both the US and Germany, charging station infrastructure is key to giving cities the right to ban diesel cars, together with a fall in diesel car sales gaining consumer traction. The complexity of changing established infra- and the lingering emissions scandal, are creating the perfect storm forcing the structure to propel EV popularity has been slower than hoped, resulting automotive industry to explore alternatives. in bottle necks as governments struggle to accommodate consumer charging needs. LEVERAGING R&D INVESTMENT IN GERMANY Germany’s recent move to convert 12,000 distribution boxes into The automotive industry is by far the biggest investor and employer in the charging stations is a great example of how to leverage existing R&D arena in Germany, employing over 110,000 people., and has been one infrastructure to create more EV charging points without infrastructure of the main reasons for the country’s reputation for reliability, safety and displacement. manufacturing excellence. According to German’s automotive industry associ- ation, VDA, the industry accounts for more than one third of total global R&D THE CHALLENGE OF SECOND GUESSING INNOVATION spending in the automotive sector, putting it ahead of Japanese and American companies. Moving forward, it will be critical to leverage this investment for While advances in technology, particularly in the area of automated development of sustainable automotive technologies. driving, are disrupting OEMs, it’s equally as hard to envisage what the end game is for those in the US supply chain. As a result, some players Elon Musk’s Tesla has spent millions of dollars developing and testing EV are hedging their bets and investing heavily in technology to cope with batteries. But investing money into new technology doesn’t always equate to a life without combustion engines or traditional car materials. While it’s mass-market ready product as quickly and effectively as anticipated. German a gamble to invest in expertise and capabilities 5-10 years before the auto-makers are still on a learning curve. Learning from pioneers such as landscape becomes readable, companies that delay plans to acquire the Tesla and honing production capability, while learning from pioneers can help right skills and expertise could potentially fall too far behind the curve. achieve a better and more revenue-certain product as is one late-mover ad- vantage that Volkswagen and Daimler are currently exploiting in the EV sector. In Germany, despite the fact that Volkswagen has recently pledged 34 billion euros towards the development of battery-powered and AN URBAN VERSUS RURAL STRATEGY IN THE US autonomous vehicle technology, and has partnered with Silicon Valley start-up, Aurora, to bring self-driving taxis, cars and trucks to the road, it Despite a decrease in engine cylinder size over the past 10 years, the market and other German OEMs are still working to improve traditional engine for larger vehicles such as SUV/Crossovers has never been stronger. This is powertrain development. not surprising based on the sheer size of the US, where 97% of land is rural. The ultimate winners and losers in the global automotive industry will While Ford‘s F150 pick-up truck is America‘s best-selling vehicle, smaller not only be decided by national considerations, but also what happens cars are gaining popularity in more densely populated cities, particularly on worldwide. As players in the industry jockey for position, an increase in the coasts. This gives a potential market for EVs from younger city-based investment and research into sustainable mobility solutions, collabora- consumers who use cars to commute to work and prefer to fly for longer tion and acquisitions will trans-America journeys. With fully 80% of America’s 327 million population liv- become the strategic norm. ing in urban areas it makes sense for OEMs to have a specific urban-focused sustainable mobility strategy. This also opens the door for building partner- Jeremy is a Partner in our Chicago Practice. He can be reached at ships that give access to shared mobility options such as ride-hailing and car 312.863.2406 or at [email protected]. sharing which have more traction in densely populated areas. Meanwhile, in rural areas hybrid vehicles offer an interim solution to current consumer Kristin is a Manager in our New York Practice. She can be reached at reluctance for EVs. 646.435.1623 or at [email protected].
ARE WE THERE YET?
For EVs to match their combustion engine counterparts, significant investment in infrastructure and continued development in longer life battery technology is required. OEMs that can achieve this will be in a better position to convince
September/October 2018 | 9 FOOD & BEVERAGE
MAZARS USA 2018 FOOD & BEVERAGE INDUSTRY STUDY RESULTS EXECUTIVE ROUNDTABLE BY HOWARD DORMAN
SO FAR IN 2018, THE FOOD & BEVERAGE For close to 90 years, the Food Institute Bob: Uncertainty due to government actions is INDUSTRY CONTINUES TO SHOW SIGNS OF has been the best source for food industry causing a lot of concern because companies GROWTH, PAIRED WITH A STRONG SENSE executives delivering actionable informa- don’t know what their true cost of doing business OF TRANSFORMATION THROUGHOUT ALL tion regarding current, timely and relevant is or may be. Tariffs and removal of countries INDUSTRY SUBSECTORS. information about the food industry from long-standing trade programs are two • Richard McArdle, Executive Director at the issues that come to mind. Some announcements HOWARD DORMAN, PRACTICE LEADER Rutgers Food Innovation Center. Richard is come with little advance warning and most don’t FOR THE FOOD & BEVERAGE SECTOR a thought leader in the food and agriculture allow time to develop suitable replacement pro- SPOKE WITH LEADING EXPERTS TO GAIN industry and an authority on product devel- ducers (if they exist) of the products in question. AN UNDERSTANDING OF WHAT’S GOING ON opment and commercialization. AND WHAT IS AHEAD. Brian: The low inflation in commodity prices, in- The three of you represent very important, cluding deflation in some categories, should aid The group included: but different, sectors of the F & B commu- food and beverage manufacturers in their efforts nity. Our study showed optimism and an to increase profitability in the short term, as the • Bob Bauer, President of the American expected increase in sales and profitability positive economy hopefully helps lift sales. Fur- Food Industries (AFI). The AFI is a trade over the short term. At the same time, our ther down the pike, however, commodity prices association of more than 1,000 companies respondents felt the top concerns are rising will likely rise and managing those increases will worldwide involved in importing a wide commodity and other costs, food safety and be vital to maintaining profitability. variety of food products into the U.S. and quality assurance, and the ability to develop Canada. Their specialties range from Food new products. What do each of you view Being aware of the new omnichannel market- Import Issues to Food Safety. as challenges in F & B over the next 12-18 place will also be an important factor so com- • Brian Todd, President of The Food Institute. months? panies and products are relevant to a variety of
10 | Mazars USA Ledger consumers who use multiple channels to buy their food products. Food and leaving their home. beverage processors will have to be fluent in this new language, actually multiple languages, dealing with new means of distribution and sales. And I think down the road we have to deal with a bifurcated consumer pop- ulation who will demand convenience, but also wants products and meals It will also be vital to be aware of any regulatory changes, such as those that meet their own specifications. This will go beyond the refrigerated being implemented through the Food Safety Modernization Act. prepared food cases supermarkets offer now and simply ordering meal kits online. At some point, the process will become more personalized for each Richard: With strong overall economic growth, low unemployment and consumer so they can have exactly what they want in the format they want: rising wages, both retail and foodservice operations should do well for both to prepare themselves, partially prepared, fully prepared, frozen, etc. topline (food businesses have the ability to pass on inflation in higher prices in good economic times) and bottom line, and I see commodity prices being That’s a deep dive into the crystal ball, however that will take a melding of tempered by surpluses and the current trade/tariff issues. I think most technology, food safety, and logistics. large food companies will finally see respectable increases in topline in the next year, and cost-cutting programs will have similar impact on profitability. Bob: A combination of the ongoing trends of better-for-you, sustainability and convenience will drive disruption/innovation. Having said that, the latter For retail products, the competition at the retailer level (store and on-line) two often are at odds with one another and the first is often asked for by will continue to accelerate. I see increased consolidation of retailers and consumers for some products, though they’re willing to make exceptions for retailer space, and expansion of online selling (whether shipped, or store long-standing favorites. to door). This competition may force some price/margin concessions from large manufacturers. With all of this optimism in our study, what can companies improve on to continue the success they are having? I see the biggest issue in the short term as the talent war. After a long period of recovery, demand for skilled employees is outstripping supply and Bob: Since much of AFI’s work focuses on compliance, I’ll go there. Com- there is a significant issue for many businesses around getting skilled work- panies need to spend the resources to ensure they are in compliance with ers for manufacturing jobs, and top talent for management, especially since regulations. One food safety issue, for example, can set a company back management, finance, marketing, and sales tend to move and compete several years, or perhaps even cause its demise, and one regulatory issue across industries. can wipe out the profit made on many other successful entries or production cycles. Everyone talks about disruption. I would rather refer to it as inno- vation. What is causing it and with the crystal ball you have on your Richard: “Digitize” and automate all possible processes. Growth (compet- desk, what is something you see coming down the pike? itive advantage) and profit will come from the value adds of efficiency and convenience, to creating, manufacturing, marketing and delivering the food Richard: F&B in the US is a saturated market, although beginning to frag- and beverage products. While there will be some disruption in the types of ment – especially because of the connectivity and direct sourcing models foods people consume, the highest value will be in taking advantage of the provided by mobile/internet. So the F&B industry will continue to segment, efficiencies and speed available in robotics, IOT, AI, and automation. by age and income (as in the past), but now also by geography. More local, regional and small/direct ship companies will gain a foothold in the market. Brian: Don’t be complacent and to be ready to change as needed to meet the demands of the consumer and the marketplace. Also embrace innova- My prediction for innovation (in 5-10 years) is that the selling and distribution tion, but make sure the numbers work to keep a positive bottom line. models will change, not so much the food. This will include much more direct selling from small/regional players, an increase in out-of-home food Information is key in that effort, from your own people to being informed purchases, an increase in premium segment offerings and especially, direct about the industry…your customers, your competitors and your partners. delivery of prepared meals. This won’t be the result of one technical innova- tion or company’s actions, but a slow change in how consumers obtain their Howard is a Partner in our New Jersey Practice. He can be reached at meals and meal components. 732.205.2040 or at [email protected].
Brian: I believe we are in the midst of the most innovative and disruptive period the food industry has ever experienced. Consumers have the ability to access any type of product from virtually anywhere on the globe without
September/October 2018 | 11 UPCOMING EVENTS
Mazars USA 2018 New York Food & Beverage Executive Forum | October 10, 2018 | New York City, NY The Mazars Food and Beverage Executive Forum is the premiere Food & Beverage Industry event in the New York, New Jersey and Pennsylvania metropolitan markets. Each year over events bring together over 300 food and beverage senior executives collectively for an evening to network and to hear from leading industry panelists.
Mazars USA 2018 Consumer Products Forum | October 24, 2018 | New York City, NY Please join Mazars USA and MMG Advisors for an exclusive, invitation-only retail and consumer products forum. This year's topic will address Growing in the Age of eCommerce - It’s All About Strategy!
Real Estate and Construction Roundtable Breakfast | November 15, 2018 | Philadelphia, PA Please join us for a lively gathering of area Real Estate and Construction professionals to discuss current issues affecting our industry. Our guest speaker will be B. Scott Zuckerman, Principal of Domus Inc. Scott will discuss Domus’ current projects as well as share his views on the state of real estate development in our area. Leaders of the Mazars USA Real Estate and Construction practices will moderate the discussion.
Mazars USA 2018 Pennsylvania Food & Beverage Executive Forum | November 28, 2018 | Bensalem, PA The Mazars Food and Beverage Executive Forum is the premiere Food & Beverage Industry event in the New York, New Jersey and Pennsylvania metropolitan markets. Each year over events bring together over 300 food and beverage senior executives collectively for an evening to network and to hear from leading industry panelists.
FEATURED SURVEY
2018 U.S. Water Industry Outlook We are seeking the views of leaders and decision makers in the water industry. With your help, we will continue to define industry trends and build a knowledge base of challenges and opportunities that are shaping the future of the water industry. Scan the barcode to participate in our survey.
WELCOME OUR NEW PARTNERS
What Mazars Means to Me Stacey Barbaro, Michael LaMantia, Christopher Lieto, Chris Moore, Laura Peth, Jeremy Rice and Jennifer Safran have been elected for admission to the Partnership effective September 1, 2018. Stacey is in the ESG group located in Long Island, NY, Michael is in the Real Estate group located in New York City, Christopher Lieto is in the PCS group located in New Jersey, Chris Moore is in the Management Consulting group located in Maryland, Laura is in the Healthcare Consulting group located in Sacramento, Jeremy is in the Manufacturing & Distribution group located in Chicago and Jennifer is in the Real Estate group located in Long Island, NY. Our new Partners recently made a video on what Mazars means to them. Scan the barcode to watch our video and learn more about our new partners.
Welcome to the Partnership!
12 | Mazars USA Ledger REAL ESTATE
HOW DEVELOPERS CAN HELP NEW YORK CITY REACH ZERO WASTE BY 2030 BY BISNOW, SPONSORED BY MAZARS
Take a walk on one of New York City’s busy sidewalks, and chances are you will see piles of trash blocking the street. A new report recently named New York the dirtiest city in America, but the city’s waste management problem is not new. The Big Apple has a legacy of struggling to manage its approximately 50,000 tons of daily waste.
In 2015, Mayor Bill de Blasio announced plans to mitigate some of these issues through OneNYC, a program to establish a "fair and just city" for the people of New York. In addition to lifting hundreds of thousands of New Yorkers out of poverty by 2025, the comprehensive plan outlines a strategy to send zero waste to landfills by 2030. The city is relying on commercial real estate developers, who control much of the city’s land and property, to help make this goal a reality.
September/October 2018 | 13 REAL ESTATE
“Environmental and economic sustainability must go hand in hand – and Other developers have employed sustainable strategies by recycling OneNYC is the blueprint to ensure they do,” de Blasio said in prepared the ruins of already demolished buildings. This approach requires an remarks at the time. understanding of what kinds of materials are recyclable, including wood, glass, plastic and brick. As the people who build the city’s buildings and facilities, developers are responsible for ensuring the built environment meets the needs of its users. Reducing the disposal of construction and demolition materials not only benefits the environment, it also has positive implications for the developer. One way developers can help manage the city’s waste is by implementing a This strategy eliminates unnecessary building expenses, and developers more sustainable approach to construction and development. As developers who donate recovered materials to qualified nonprofit organizations and mark their territory in neighborhoods across the city, they are demolishing charities are eligible for tax benefits. Reusing C&D materials can also create several existing structures to build new ones. These activities have played a economic growth through increased employment opportunities for workers in role in increasing the city’s waste. According to the Environmental Protection the recycling industry. Agency, an average 13,300 SF commercial demolition project generates over 2 million pounds of waste. The city continues to work with developers and construction managers to push its Zero Waste effort. In 2016, de Blasio challenged local businesses to "Developers need to look at waste as a design flaw," Mazars partner Arthur reduce waste. Participating businesses collectively diverted 36,910 tons of Adams said. "While most have taken steps on energy conservation, they waste that would have otherwise ended up in a landfill. need to take the same approach to waste management. They must make upfront plans for waste segregation for recycling, look to use recycled “This challenge proves that our commitment can be achieved so long as materials in their materials and finishes, plan for off-site or modular every New Yorker does their part to create a more sustainable city,” de Blasio construction, which has been shown to reduce errors and waste, and design said in a release. with the idea of standardized dimensions to reduce cuts that lead to waste. These steps will help the construction industry contribute to a zero-waste As developers rebuild and reshape New York City, they have a crucial role initiative and greater sustainability." to play in the fight for a cleaner and more sustainable city. Implementing a recycling strategy as part of development plans can ensure the city’s Many of these costs can be mitigated through adaptive reuse projects. buildings serve the environment, and the people who live there. Instead of demolishing buildings, developers can repurpose existing structures. This approach has both economic and environmental benefits. This feature was produced in collaboration between Bisnow Branded Content Using existing resources cuts construction costs, which would otherwise be and Mazars. Bisnow news staff was not involved in the production of this allocated to purchasing materials for new construction. This has become content. more of a concern for the industry over the past few months, as tariffs have made materials like steel and lumber more expensive. These adaptive reuse Arthur is a Partner in our New York Practice. He can be reached at projects offer a more sustainable alternative. 212.375.6524 or at [email protected].
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Women@Mazars - Good Day To Be Visible featuring Stacey Barbaro and Tifphani White-King
Welcome to our latest installment of Be Visible! We are taking the conversation outside with intimate one-on- one conversations with our women leaders over coffee and tea at some of NYC's trendiest spots.
Our "Good Day To Be Visible" video features new Partner Stacey Barbaro interviewing Partner Tifphani White- King as they discuss what's at stake when we are not visible and the impact that it has on our clients and staff. Scan the barcode to watch our video.
14 | Mazars USA Ledger PRIVATE CLIENT SERVICES
CHARITABLE PLANNING IDEAS FOR INDIVIDUALS UNDER THE NEW TAX LAW BY LAUREN REO
The Tax Cuts and Jobs Act of 2017 brought with it many changes, fund. This way, they can benefit from the tax deduction in one year as well including several to itemized deductions, such as a limitation as continue to support the charity each year. On the flip side, by making a on the total deduction for state and local taxes, changes to the small direct donation to the charity annually, the taxpayer may not be able to mortgage interest deduction, an increase in the AGI limitation on itemize their deductions and as such claim the standard deduction, resulting cash contributions and the elimination of the deduction for 2% in zero tax benefit for these small annual contributions. miscellaneous itemized deductions. Another option is to bundle your charitable donations into one year, to cover These changes will certainly impact many taxpayers and new planning ideas multiple years of support. This way, you would notify the charity that the are a necessity. Many taxpayers’ largest itemized deduction was the state larger gift covers a multiple-year period and likely increase the opportunity and local tax deduction. With the new law allowing only $10,000, we may for you to itemize deductions in the year you make the donation while still see many taxpayers claiming the standard deduction. For a couple filing giving the same level of support to the charity. married filing joint, the standard deduction is now $24,000. These planning opportunities should be considered as part of your entire These changes will put taxpayers at risk of losing the benefits of most of their tax plan for any given year. If there is a year where you know income will charitable contributions. One strategy to mitigate the potential loss is the use be significantly higher due to a specific tax event, you may want to plan of a Donor Advised Fund (DAF). A DAF gives the owner the flexibility to keep to increase your charitable deductions so that you are able to itemize and their annual charitable giving the same, while maintaining most of the tax maximize your deduction amount to minimize tax. benefits for charitable contributions. The TCJA will impact many planning practices and open the door to many A taxpayer can open a DAF, which is relatively economical to establish and new planning ideas. Be sure to consult your tax-advisor. maintain, and make a large contribution to it one year to ensure the benefit of itemizing their deductions. In subsequent years, where there may not be Lauren is a Senior Manager in our New Jersey Practice. She can be reached a large addition to the fund, they will likely claim the standard deduction, but at 732.475.2145 or at [email protected]. still be able to support their favorite charity by making donations from the
September/October 2018 | 15 WATER
ON THE WATER BY JEROME DEVILLERS
THERE IS NO QUESTION THAT THE U.S. WATER INFRASTRUCTURE and distribution/collection networks is focused on reducing capital NEEDS REPAIR. THE UNPRECEDENTED FLOODING AND DROUGHTS and operating costs, particularly those associated with maintaining or ACROSS THE COUNTRY OVER THE PAST 15 YEARS AND THE LEAD enhancing distribution networks. The traditional economic model for CONTAMINATION OF PUBLIC WATER IN FLINT, MICH., ARE JUST A funding these distribution network improvements is collecting tariffs FEW EXAMPLES THAT HIGHLIGHT WIDESPREAD NEED FOR MORE from users, and banking on these long-term future cash-flows to finance RESILIENT WATER INFRASTRUCTURE. WHILE THERE HAS BEEN construction. As a result, having a financing mechanism in place is MOVEMENT TO IMPROVE U.S. INFRASTRUCTURE – INCLUDING essential for the civil engineering construction vertical to play in that field. A $1 TRILLION PLAN RECENTLY ANNOUNCED BY THE CURRENT On the other end, improved technology offers promising solutions at ADMINISTRATION TO BOOST INFRASTRUCTURE INVESTMENT – THE the point of use and creates opportunities in residential and industrial NEED FOR CONSTRUCTION IN THIS AREA MAY GO WELL BEYOND construction. For example, not all water must be of drinking quality, and CURRENT PLANS. ACCORDING TO THE AMERICAN WATER WORKS self-sustainable building, encompassing re-use of grey water and/or rain ASSOCIATION, THE TOTAL COSTS TO REPLACE ALL PIPES IN THE water for lawn irrigation, production processes, toilets or showers, is a UNITED STATES COULD VERY WELL PASS $1 TRILLION – THAT’S less expensive and easier to implement solution that has been gaining BEFORE ANY WORK ON ROADS, BRIDGES OR OTHER PROJECTS momentum. CONTEMPLATED IN THE PLAN BY THE CURRENT ADMINISTRATION. Finally, real-time monitoring/smart management is becoming a critical More than one-third (41 percent) of survey respondents in the Mazars USA element of innovation. Smart metering and data analytics foster more 2017 US Water Industry Outlook said they expect capital expenditures to detailed and accurate metrics to identify weaknesses and highlight increase in excess of 5 percent compared to the prior year. While water opportunities for improving water and wastewater operational cycles. is currently a very small contributor to the overall construction industry, Construction companies targeting water-related projects must incorporate there are still very large water-related projects with important construction these technologies into their plans for greenfield and brownfield components. For example, the water management project being developed developments. in Fargo-Moorehead Metropolitan Area Flood Diversion Channel P3 Project, which will markedly reduce flood risk. Add to that the fact that there RISK-SHARING MECHANISMS are many pipes that will need replacing soon – 39 percent of respondents estimated less than 10 years of useful life remaining in their water mains Water projects, like all major construction undertakings, are dependent – and there are plenty of potential opportunities for constructions projects on the developer’s ability to predict future cash flows and profitability. The today. accuracy of these projections is a challenging exercise, and the reality sometimes differs significantly, due to delays, poor estimation processes While it can still be a challenging process to get water-related construction and failed risk management. projects off the ground, there are a few key factors that are critical: innovation, risk-sharing mechanisms and financing. As the industry seeks to address challenges, limit costs and attract capital, it will benefit from alternative procurement methods, also known as public- INNOVATION private-partnerships (P3). This alternative procurement process, which allocates risks to different stakeholders based on their ability to manage At the forefront of innovation in water-related construction are them, results in on-time and on-budget project delivery, and thus reduces environmental regulations compliance, reduced capital and operating construction companies’ risks. costs, and real-time monitoring/smart management. The technologies developed address challenges at different levels of the treatment, This model has proven important to successful infrastructure plans in a distribution, use and collection cycle of water management, and they will number of developed countries. Companies looking to seize opportunities affect the opportunities for the construction industry. in water-related projects should build teams of experts who understand the water sector, can educate the construction company team, and can On one end, innovation targeted at large-scale treatment facilities facilitate connections with P3 players.
16 | Mazars USA Ledger FINANCING aging infrastructure where rates have increased to a point of becoming an excessive burden to water users. As underscored in the above-referenced Outlook, financing is readily available for infrastructure projects. The administration’s proposed tax Construction companies can take advantage of alliances and programs incentives and infrastructure bills suggest that even more capital can be such as the Water Resources Development Act, which seeks to better expected for the sector in the coming years. However, the water segment manage the country’s water resources, to ultimately bring down financing is hampered by its small size relative to projects in transportation, roads costs. and bridges, ports and airports. Thus, the water industry must ensure its voice is heard and is part of the suite of ideas for the administration With the right mix of factors, it is likely that water-related construction and and Congress, in order to attract its share of the infrastructure capital development in the United States will continue to grow. Those companies poolAs education around the importance of water continues, infrastructure that can work with municipalities, utilities and other stakeholders to address financing will inevitably come through municipal bonds for state programs, local water infrastructure challenges and secure available financing will be public utilities or listed investor-owned utilities. One barrier to greater positioning themselves well for that growth. infrastructure investments, resulting in additional construction spending, might be wider customer acceptance. In today’s model, rate payers end up Jerome is a Partner in our New York Practice. He can be reached at funding these investments, which is particularly troubling in jurisdictions with 212.375.6866 or at [email protected].
September/October 2018 | 17 REAL ESTATE
NYC'S BOUTIQUE HOTELS POISED TO DRAW MORE TRAVELERS—AND INVESTORS BY MICHAEL MOCTON
A BIG FIRST QUARTER AND OTHER TRENDS BODE WELL DESPITE AIRBNB AND FOREIGN POLICY HEADWINDS.
GOOGLING “BOUTIQUE HOTEL MIDTOWN MANHATTAN NY” YIELDS A WHOPPING 713 LODGING OPTIONS. THIS IS A RECENT DEVEL- OPMENT AS THE CITY IS SEEING A BOOM IN BOUTIQUE HOTELS, WHICH ARE DEFINED AS SMALL HOTELS WITH BETWEEN 10 AND 100 ROOMS, UPSCALE ACCOMMODATIONS, AND UNIQUE SELLING POINTS OR A THEME. MANY ALSO HAVE RESTAURANTS THAT REFLECT THE AMBIANCE AND CULTURE OF THE HOTEL.
Much of this can be attributed to a change in the average New York City visitor. Historically, hotels have had a harder time filling rooms on weekends Despite the disruption from Airbnb, occupancy rates for New York City than on weekdays. However, data from STR show weekends are now gen- hotels are growing and anticipated to continue in that direction, at least for erally seeing higher prices (as measured by average daily rate) and higher the near term. The expectation is for the current supply of hotels as well occupancy rates, which suggests that city visitors are now more leisure as those scheduled to open in the next few years (22 hotel openings are travelers; indeed, a 2017 US Travel Association report noted that leisure anticipated in 2018, adding 5,000 rooms) to be fully absorbed by visitors. visitors comprise a healthy 79% of Big Apple travelers. Boutique hotels should enjoy the same occupancy trends. The flip side to this is the average daily rate, which has declined or remained steady throughout 2016 and 2017. However, the first quarter of 2018 was a break- through, with hotels experiencing a 3.5% increase in that rate.
The increase in average price per room was led by the luxury hotel class. This is good news for the boutique hotel industry, which caters to the leisure The pricing for the 713 search results ranged from $53 to nearly $1,000 per market. Boutique hotels usually charge a premium for rooms, and business night. The recent indicators of the return of “pricing power” to city hoteliers travelers' companies are usually not inclined to cover these costs. The may be a great sign for boutiques. standard hotel occupancy rate in the city is 86.7%, and overall in the U.S., boutique hotels enjoy a higher occupancy rate than other hotel categories. With the hotel market’s overall positive performance, hotels continue to be an acquisition target for both institutional investors and private equity If developers and operators are to maintain these high rates in 2018, the nationally. As one of the most significant hotel markets globally, New York 4,000 boutique hotel rooms in New York City would need to attract 1.3 City remains a key investment target. Hoteliers should focus on differenti- million visitors. According to NYC & Company, 65.1 million visitors are ating their offerings to attract this investment capital, and a well-designed expected this year, which means boutique hotels would need to capture 2% boutique hotel is the way to do it. of the market. They comprise 3.5% of the city’s hotel supply, so this seems . achievable. Michael is a Senior in our New York Practice. He can be reached at 646.225.5960 or at [email protected]. Nothing is guaranteed, of course. Risk factors for boutique hotels and the whole hospitality industry include perception of the U.S. as unfriendly to foreign travelers, stemming from the nation's current foreign policy and media narrative, exchange rate issues, and the ever-present risk of natural disasters and terrorist threats.
18 | Mazars USA Ledger HEALTHCARE
A NEW STANDARD FOR LEASE ACCOUNTING BY JASON GUTMAN AND JESSICA HESS
n February 25, 2016, the FASB issued Lessees will classify their leases as either WHEN TO START? ASC 842 Leases - a new standard operating or finance; each classification has its We expect implementing ASC 842 will be a Oseeking to address concerns of financial own unique accounting treatment. All leases are significant challenge for most organizations. Now statement users and provide a clearer picture initially recorded as liabilities equal to the present is the time to gather data and identify solutions in of companies’ leasing activities. For public value of the lease payments, along with a corre- order to achieve compliance by the effective date companies, ASC 842 will be effective for fiscal sponding ROU asset equal to the lease liability. of the standard. Visit mazarsusa.com/hc to see years beginning after December 15, 2018; for all The level of financial statement disclosure around the effective solutions our experts can offer you. other entities, including most non-profits, ASC leasing activities also increases under the new 842 is effective for fiscal years beginning after standard. Tifphani is a Manager in our New York Practice. December 15, 2019. He can be reached at 646.225.5992 or at Jason. WHAT ARE THE STEPS TO IMPLEMEN- [email protected]. WHAT ARE THE MAJOR IMPACTS? TATION? ASC 842 establishes a new concept in lease • Gather and catalog your current inventory Jessica is a Senior in our New York Practice.She accounting known as the “right of use” (“ROU”) of leases, store lease data in a centralized can be reached at 646.315.6125 or at Jessica. asset. An ROU asset results from a contract repository [email protected]. which conveys the right to control an “identified • Design and implement a new lease asset” for a period of time, in exchange for accounting process to manage your organi- consideration. In the healthcare industry this new zation’s lease data standard will affect leases for the use of: • Select a software solution that will support • Inpatient and outpatient treatment facilities your organization’s adoption of the new • Medical and diagnostic equipment lease accounting standards, and ongoing • Offsite document storage lease monitoring and maintenance • Software solutions for case management, • Transition to Business as Usual (BAU), fully billing, and compliance train staff on new software solution, design and implement internal controls
September/October 2018 | 19 HEALTHCARE WHY CLINICAL DOCUMENTATION IMPROVEMENT (CDI)? BY DOUG BARRY AND ALICIA GORDON
RESEARCH REVEALS THAT A LACK OF ADEQUATE CLINICAL DOCUMENTATION IS A PROBLEM THROUGHOUT THE HEALTHCARE INDUSTRY. WHILE HIGH-QUALITY DOCUMENTATION IS ALWAYS SOUGHT, IT REMAINS UNCOMMON WITHIN MOST HEALTHCARE SETTINGS.
Provider documentation is the sole data source for coding professionals, reimbursement and public reporting. Coding professionals use documentation in the patient record and translate it into ICD-10 codes using very specific Centers for Medicare and Medicaid Services (CMS) and National Center for Health Statistics (NCHS) within the US Federal Government’s Department of Health and Human Services (DHHS) guidelines. Once these codes are submitted via claims, the data is used to develop perceptions of 26, 2017, a study by Change Healthcare Healthy accurately reflect medical management/decision- performance in quality of care, mortality/severity Hospital Revenue Cycle Index found there making and illustrate the importance of specific of illness scoring, length of stay and readmission are many reasons for denials, and the second documentation. Appropriate selection of CDI rates. leading cause is missing/invalid claim data staff, effective communication of the CDI program (14.6%). mission, appropriate metrics and C-suite support Consumers are more aware of, and are are essential for sustained success. As providers choosing facilities/providers based upon scores An effective CDI program can help solve learn the goals of the program and query provided by governmental agencies, accrediting this problem. CDI programs are considered process, provider engagement increases. organizations, or non-profit organizations such a bridge between a host of professionals, as health grades and US News and World including physicians, mid-level providers, case In summary, Clinical Documentation programs Report. Some of the challenges with these management, coding, quality management and can lead to improved quality scores, faster scoring systems are the potential inaccuracy of financial services. coding, higher case-mix indices, increased data and the possibility that it may be incomplete revenue capture and help with facility or old. Scoring systems are proprietary. One The goal of an effective CDI program is to compliance. As one of the key areas of focus in organization’s rating attribute(s) may be different support medical staff efforts to most accurately the Mazars Revenue Cycle consulting services, from another organization’s depending on the depict: CDI is driving higher reimbursement and focus of the score/rating. It is up to the patient to • The patient’s comorbidities on presentation improved CMI for clients across the US. interpret these scores and determine where to • What caused the patient to seek treatment seek care. • What happened during treatment Doug is a Principal in our New York Practice. • Reasons for resource utilization He can be reached at 212.375.6558 or at Doug. Payers are also moving from fee-for-service • Reflection of personalized, quality medical [email protected]. to fee-for-value reimbursement models in an care effort to strategically manage costs while also • Continuum of care on discharge Alicia is a Manager in our Sacramento Practice. requiring improvements in care quality. Providers She can be reached at 802.999.4688 or at Alicia. and payers alike struggle with incomplete or Clinical documentation education is often not [email protected]. inaccurate claims based upon incomplete provided during medical training. CDI programs documentation. Per Becker’s CFO Report, June help providers understand what is necessary to
20 | Mazars USA Ledger REAL ESTATE THE ONGOING FEUD BETWEEN AIRBNB AND NEW YORK CITY, EXPLAINED BY BISNOW, SPONSORED BY MAZARS
MAYOR BILL DE BLASIO HAS SIGNED A NEW LAW REGULATING ILLEGAL SHORT- TERM RENTALS IN NEW YORK CITY.
Under this legislation, which was originally proposed by lawmakers in June, the city will be able to track data on Airbnb users and hold hosts responsible for illegal short-term rental activity. Lawmakers are confident that this bill would free up rental units that could be designated as affordable, and help the city maintain safe living environments.
"With this legislation, we are going to go after the most egregious operators, and we're going to help educate New Yorkers about the legality of short-term rentals in New York City," Council- woman Carlina Rivera said. users communicate. The company has criticized Airbnb has not backed down, but city council The law will require Airbnb and online rental the law using several mechanisms, including its members have publically demystified these services to disclose personal information about own platform. In June, the company posted a claims. hosts and their properties to the Office of Special blog entry accusing the bill’s sponsors of bias. Enforcement each month, the New York Times The hotel industry, a group that has long been "The city's not anti-Airbnb," District 4 Council- reported. To comply with this law, companies skeptical of Airbnb driving traditional hospitality man Keith Powers said to ABC 7. "But we have and occupants will need to submit the name of assets out of business, has been one of the concerns around affordability, quality of life and each host, physical address and phone number largest proponents of this law. making sure people who are paying the rent and of each host in addition to the URL to each active living in a neighborhood have peace and quiet." host’s online profile. Companies will also need to "Many in the hotel industry, who are losing valu- inform the OSE how many days each proper- able tourism dollars from short-term rentals on Airbnb has begun to re-examine its business ty was rented, and all fees paid to the rental websites such as Airbnb, argue that these units operations. As the legislation comes into focus platform. are not held accountable to the safe regulatory over the coming months, the company has environment in areas such as fire and safety, agreed to work alongside the city to develop a Those who violate this law by failing to disclose amongst other concerns," Mazars partner Donald plan of action. listings will face at least $1,500 in fines. The Bender said. legislation will also enforce a New York State This feature was produced in collaboration law signed in 2016 making it illegal to advertise Similar laws have been enforced in other cities, between Bisnow Branded Content and Mazars. unoccupied apartment rentals under 30 days on like San Francisco, Barcelona and Vancouver. Bisnow news staff was not involved in the pro- websites and platforms like Airbnb. Failure to When San Francisco cracked down on its short- duction of this content. comply with this state law could cost violators up term rental policy, Airbnb’s listings decreased by to $7,500. 50%. New York City, Airbnb’s most active market Donald is a Partner in our Long Island Practice. at 52,000 listings, could see a similar drop. He can be reached at 516.620.8420 or at Donald. The city's new legislation will ultimately redefine [email protected]. Airbnb’s business model and disrupt the way
September/October 2018 | 21 TAX BEYOND WAYFAIR – THE NEW LANDSCAPE OF ECONOMIC PRESENCE BY JOHN KOSTENBAUDER AND HAROLD HECHT
Get used to it. The way we need to think about the state of affairs for remote sell- ers of tangible and software products for a variety of taxes needs to change in the wake of the US Supreme Court’s June 2018 decision in Wayfair v. South Dakota. The 5-4 decision overturned a 1992 USSC decision (Quill) related to sales tax.
While the Supreme Court remanded the Wayfair case to the South Dakota courts for re-evaluation, most experts expect that the state will ultimately prevail against all challenges. As such, moving forward, it will no longer be required for a company to have physical presence in a state for that state to impose a collection responsibility regarding sales delivered into their jurisdiction.
22 | Mazars USA Ledger lthough there are standards a state has to meet so that they can 3. Review state statutes. Don’t rush into registering with a state that impose the requirement to collect tax, some states have already hasn’t set forth specific requirements. To do so would run the risk that responded to the Wayfair decision by enacting new laws and a state would decide to impose tax from the day you initially may have others are coming on board weekly. One of the messages sent established nexus. byA the USSC via their decision is that there still needs to be some kind of 4. Review and potentially upgrade your tax compliance function to deter- minimum threshold a taxpayer must exceed in order to be required to collect mine its ability to recognize the taxability of products on a state-by- sales tax. The USSC in effect signaled that the South Dakota standard state level, and potentially collect sales tax in more jurisdictions. of $100,000 of sales or 200 transactions appears appropriate. This is 5. Consider alternatives to in-house preparation including proprietary important, because the Commerce Clause requires that there not be undue software, full outsourcing of the sales tax compliance function or restriction on interstate commerce. participation in the Streamlined Sales and Use Tax Agreement. 6. In the event it turns out there was pre-Wayfair nexus, then consider Another key aspect to the USSC receptivity to the South Dakota approach taking advantage of Voluntary Disclosure programs administered by involves retroactivity. South Dakota is not the only state that enacted sales many states. tax-related economic presence standards in advance of the Wayfair. While the USSC’s choice of Wayfair v South Dakota as well as their rationale for Be aware that as of August 13 many states, including Alabama, California, overturning Quill is beyond the scope of this article, there were several oth- Hawaii, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachu- er states that had enacted similar statutes. South Dakota clearly indicated setts, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Jersey, that if it were to prevail, its statute would be enforced prospectively. That is, North Carolina, North Dakota, Rhode Island, South Carolina, South Dakota, despite a statute that could be enforced retroactively, the state was willing Texas, Utah, Vermont, Washington, Wisconsin and Wyoming have reacted to forego that approach in the spirit of effective tax administration. in some fashion to the ruling. Responses have taken the form of specific guidance or a notice that they are evaluating the decision. Many other In the end, the new digital way the world does business caused the USSC states have not responded or do not impose a sales tax (Alaska, Delaware, to change its mind and reverse its own decision. While overturning a prior Montana, New Hampshire, and Oregon). decision is not unprecedented, the concept of stare decisis (keep the status quo), seems to be a guiding principal for the USSC, no matter the era. While the decision should help reduce competitive inequities experienced by small retailers, it is also anticipated that they will feel some pain from this And why did the USSC in effect legislate from the bench? The USSC felt decision because their compliance resources are often limited. it had to step in because Congress has failed to provide a solution. There have been some attempts by Congress to deal with the matter, including the And if you think that states will stop at sales tax, be ready for the next wave Marketplace Fairness Act of 2013 that never saw the light of day, but no real of potential economic presence-driven taxes. Many states, including Ohio effort to develop a comprehensive plan. Congress could still take up the and Washington, already impose gross receipts related taxes that do not issue, but near term that appears very unlikely. require physical presence, just that a company is exploiting their market economically. While these taxes also have a minimum standard that must A number of open questions remain regarding the definition of sales. be exceeded before a tax is imposed (e.g. Ohio sales of $500,000), these Among these are: taxes are becoming more common. Because states are finding income tax- 1. How many transactions are needed to meet a potential threshold? es are subject to annual fluctuation, can be manipulated, and sellers of tan- 2. Does any dollar volume threshold include both non-taxable and gible property enjoy certain protections from the imposition of net income taxable sales? taxes, they are gravitating to more transaction-based, gross income-type 3. When must a seller start collecting? taxes that are easier to administer and harder to avoid. 4. Is there an impact to drop shipments? Please do not hesitate to contact us if you have questions or would like to In the meantime, there are steps remote sellers can take to effectively deal discuss. with Wayfair: 1. Review your activities in each state, including existing salespersons’ John is a Partner in our Pennsylvania Practice. He can be reached at activities, volume and frequency of sales to states. 267.532.4317 or at [email protected]. 2. Get to know your products’ footprint. Are products sold to the end user? Are they taxable in the state to which they are delivered? Are Harold is a Director in our New York Practice. He can be reached at you maintaining exemption certificates in support of any sales made 212.375.6547 or at [email protected]. for resale? States statutes are not always aligned in which products and services they subject to tax
September/October 2018 | 23 FINANCIAL SERVICES
U.S. TREASURY REPORT: A SIGNAL OF AN EXCITING FUTURE FOR FINANCIAL SERVICES BY CHARLES V. ABRAHAM AND GINA OMOLON
The regulatory environment for fintech firms and nonbank financial institutions has been given a breath of fresh air with the U.S. Treasury’s release of its July 2018 report (the “Treasury Report” or “Report”) setting its financial regulatory agenda for this part of the financial services industry. In this last of a four-part series, the U.S. Treasury recommended a number of policy changes that are considered friendly toward fintech firms, innovation, and “agile” regulations. Many of the roughly 80 recommendations listed in the report need further action either from Congress, regulatory agencies or both. In coming up with their recommendations, the U.S. Treasury discussed the concerns of various stakeholders, including 134 financial institutions (both bank and nonbank).
Mazars Insight: Over the past decade we have seen technology-focused and non-traditional competitors challenging larger, better-capitalized incumbents in financial services. The Treasury Report states that this was primarily caused by two factors: (a) the 2008 financial crisis forced banks and traditional financial institutions out of certain products/services, which then created opportunities for fintechs, and (b) the rapid development and investment in tech- nology which created greater efficiencies and lower compliance costs. We agree with the U.S. Treasury’s approach in engaging these institutions and the focus on risks and “com- mon sense” regulations for the innovations in financial services.
24 | Mazars USA Ledger The Treasury Report categorizes its recommendations into the following: principle of a regulatory sandbox is not new in the international space. The • Adjusting regulatory approaches to changes in the use of consumer United Kingdom, Singapore, Australia and Hong Kong, among others, have financial data endeavored to set up similar “innovation facilitators.” The different level • Streamlining the regulatory framework to avoid regulatory of regulatory and structural landscape of the United States compared to fragmentation and to respond to risks associated with new business its counterparts abroad will require across-the-board coordination both at models national and state levels. We expect that more and more fintech firms will • Updating activity-specific regulations to address new products and come forward with their innovative technologies once the sandbox system is services offered by fintech and nonbank institutions in place. • Advocating an approach to inspire responsible experimentation in the financial sector Mazars Insight: The identification of the responsible regulator for this “sandbox” is The Report also summarized four key requirements in developing a the key challenge for this recommendation. The effectiveness of a tailored regulatory approach: regulatory sandbox will be greatly diminished with a cadre of regulators, (a) Accelerate the harmonization of state regulatory regimes. which would mirror the existing regulatory fragmentation at the state Compliance costs have been significant for firms, as well as and federal levels. If the U.S. Congress can identify an appropriate the monitoring of the various regulatory requirements, and regulator to oversee the “responsible experimentation” as discussed resources needed to respond to various state examinations. in the Treasury Report – the benefits of this process can be better These findings are similar to the U.S. Government Accountability realized. Office report issued in March 2018, titled “Financial Technology: Additional Steps by Regulators Could Better Protect Consumers That the Office of Comptroller of the Currency (OCC) move forward and Aid Regulatory Oversight.” with prudent and carefully-considered applications for special purpose (b) Support for the OCC’s SPNB charter (see further discussion national bank (“SPNB”) charters. below). (c) Enable partnerships between banking and nonbank institutions. The Treasury Report recommended that the OCC SPNB chartered fintech In addition, clarify the legal and regulatory pitfalls noted in these firms should not be permitted to accept FDIC-insured deposits to reduce partnerships. See further discussion below. risks to taxpayers. In addition, the Treasury asked the Federal Reserve to (d) Enable innovations in banking by updating existing bank determine whether OCC-chartered fintech firms should receive access to the regulations. Federal Reserve Payment Systems. The Treasury Report states that “it is important that [the SPNB] charter not provide an undue advantage to newly Below are some recommendations from the Report that we consider most chartered firms relative to the banks that have operated with the existing noteworthy. regulatory system for years. Striking the right balance to appropriately enable a tailored regulatory framework is important.” Formation of a “regulatory sandbox” – as testing grounds for innovation Mazars Insight: On July 31, 2018, the OCC announced it will begin accepting The Treasury Report highlighted that these sandboxes can enhance and applications for national bank charters from fintech companies promote innovation by providing for a single unified process that permits engaged in the business of banking. In the press release announcing meaningful experimentation by fintech firms to create innovative products, the new charter, the Comptroller of the Currency, Joseph M. Otting, services and processes. stated “The decision to consider applications for special purpose national bank charters from innovative companies helps provide The formation of a regulatory sandbox is in response to current frustration more choices to consumers and businesses, and creates greater expressed by financial technology firms and their stakeholders who indicated opportunity for companies that want to provide banking services in the significant time and resources spent addressing the complex regulations America. Companies that provide banking services in innovative ways and even confusion as to which regulatory agency or agencies should be deserve the opportunity to pursue that business on a national scale involved in the process of consulting, registering, licensing and bringing in as a federally chartered, regulated bank.” Applying for a national bank a new product or service to the market. The idea of a regulatory sandbox charter is one option among many, in addition to state banking charters is to enable a company to test a new product or service with real customers and partnerships with other federal or state financial institutions. on a small-scale controlled basis without the burden of regulations with Nonbank entities engaged in the business of banking can now opt for which incumbent regulated entities are mandated to comply. The core federal supervision if their business model, operating structure and
September/October 2018 | 25 FINANCIAL SERVICES
strategic goals dictate so. To ensure risk to taxpayers is mitigated, the For Congress to codify the “valid when made” doctrine. OCC clarified in its licensing manual that companies seeking a fintech charter “will be expected to make a commitment to financial inclusion This would be in an effort to preserve the functioning of U.S. credit markets and develop and adhere to a contingency plan that includes options to and the long¬standing ability of banks and other financial institutions, sell, wind down, or merge with a nonbank affiliate, if necessary.” While including mar¬ketplace lenders, to buy and sell validly made loans without the OCC’s decision to move ahead on the Treasury recommendation the risk of coming into conflict with state interest rate limits. received positive feedback from the industry, it did not come without criticisms from state regulators, including the Conference of State This Treasury recommendation tackles the issue that online lenders are Bank Supervisors (“CSBS”) and the New York State Department of battling in the wake of a court case, specifically in Madden v. Midland Financial Services. The President and CEO of CSBS John W. Ryan Funding, LLC, relating to how state interest rate caps should apply to loans believes that an OCC fintech charter is a mistake and that “state originally underwritten by a national bank and purchased by a third party financial regulators will continue to fight to stop preemption efforts and nonbank lender. Under U.S. law, national banks generally are able to charge preserve the state financial regulatory system.” While the CSBS does higher interest than under state limits. However, under the Madden decision, not support the SPNB charter, they have repeatedly expressed support the sale of loans by a national bank to a third party nonbank lender would not for an efficient supervisory environment for fintech firms. In fact, they preempt state usury laws against the third party nonbank that had purchased have set up a series of initiatives that they hope to accomplish by 2020 the loan. The Treasury report recommends that federal banking regulators – these initiatives are called Vision 2020. In the Report, the Treasury address challenges resulting from the Madden case. has also expressed support for Vision 2020. Refer to www.csbs.org/ vision2020 for further details. Mazars Insight: The Madden v. Midland Funding, LLC case led to a surprising decision, For the Bureau of Consumer Financial Protection (the “Bureau”) to where the purchaser of a validly issued loan is unable to enforce the rescind its “Payday Rule” that is considered to restrict customer interest rate due to prohibitions by state usury laws. A clarification of access to credit and decrease product choices. the “valid when made” doctrine as well as concerns regarding the “true lender” of these loans, when banks and fintech firms have partnerships Back in the fall of 2017, the Bureau issued a final rule (the Payday Rule) that to provide lending solutions, would significantly reduce the legal risks in applies to lenders of nonbank, short-term, small-dollar loans requiring these this space. lenders to determine upfront whether the borrowers have the ability to repay the loans. The determination covers those loans that require all or most of The Treasury Report also briefly discusses crypto-currencies, digital assets, the debt to be paid back at once, including payday loans, auto title loans, and distributed ledger technologies. This area is being explored in more deposit advance products, and longer-term loans with balloon payments. detail by the Financial Stability Oversight Council (established by the Dodd- The Treasury Report indicates that states currently already have developed Frank Wall Street Reform and Consumer Protection Act). wide-ranging product restrictions and licensing requirements on this type of lending and therefore additional federal regulation is unnecessary. It Other recommendations are aimed towards ensuring secured data access, also states that the Rule will significantly prohibit lenders from issuing efficient regulatory processes, customer protection, regulatory modernization loans, leaving customers vulnerable to dangerous alternatives. In addition, and promotion of innovative digital and technological solutions in response to the Treasury also recommends that federal and state financial regulators changing business and market conditions and consumer needs. re-evaluate its guidance on direct deposit advance services by banks, a product which has since been withdrawn from the market due to identified Stay tuned for further information as the regulatory changes continue to supervisory risks, to open more room for short-term, small-dollar lending develop. from the traditional banking system. Charles is a Partner in our Long Island Practice. He can be reached at Mazars Insight: 516.620.8526or at [email protected]. While we are generally supportive of the Treasury Report recommendations, the purpose of the Payday Rule is to discourage Gina is a Senior Manager in our New York Practice. She can be reached at unfair and abusive lending practices, especially to low-income 212.375.6867 or at [email protected]. borrowers. We believe that further thought is needed here to ensure that there is a balance between the consumer’s access to credit; and avoiding losses by originating low quality loans.
26 | Mazars USA Ledger HEALTHCARE
IS YOUR ORGANIZATION OVERDUE FOR A FRAUD CHECK-UP? BY SCILLA OUTCAULT Just like our bodies or our cars, organizations need check-ups, too. Unfortunately, unlike us, organizations do not receive reminder postcards in the mail to make sure they come in for an annual check-up, nor does a handy check engine light switch on brightly and chime from their dashboard. Instead, it is up to an organization’s leadership to ensure that regular check-ups are performed to prevent unnecessary wear, tear and breakdown. In the current climate where fraud is all too common, a fraud check-up is one that organizations cannot afford to skip.
September/October 2018 | 27 HEALTHCARE
The healthcare industry is particularly susceptible to fraud due to its overemphasizes “trusting its people” may inadvertently contribute to an complexity, size, reliance on personal and confidential information, environment where fraud can thrive. and highly-regulated nature. According to the Association for Certified Fraud Examiners (ACFE), estimates of fraud, both public and 2. Review internal controls private, run between 3% and 10% of total healthcare expenditures. The evaluation of internal controls serves a crucial function for organizations Similarly, the FBI leans towards the high-end of the ACFE’s figures – not only can it identify fraud risks, but often also can identify opportunities with an estimate of 10% of total healthcare expenditures being to increase efficiency and effectiveness in processes and operations. For fraudulent. Given that in 2015 the United States spent approximately example, executive management may be reassured about the security $3.2 trillion on healthcare, healthcare fraud is a significant problem of a software system because of the elaborate functionality it offers, but with an estimated $320 billion price tag.1 without the implementation of appropriate user access controls, the security of even the most sophisticated system can be nullified. Maintaining good For any organization that receives government funds, a fraud, waste and controls across all functions, not just financial processes, in an organization abuse (FWA) program is a requirement. For all other organizations, a FWA is vital. Effective controls can establish compliance with applicable laws program is an important best practice that is in the organization’s best and regulations, reduce redundant or duplicative steps, and prevent loss of interest. Within most organizations the responsibility for fraud deterrence resources, including assets, cash, and proprietary information. However, to and prevention is delegated to the compliance function regardless of its size assess the effectiveness of controls, periodic audits or reviews should be and resources. conducted.
While addressing fraud is part of an organization’s overall compliance A review of internal controls provides organizations with a unique function, it is important that attention is paid to the effectiveness of the perspective into their operations - specifically, which processes are FWA program in particular. Not only are there enormous financial costs performed manually, where segregation of duties is lacking, which units associated with FWA, organizations can suffer significant reputational face operational risks due to current staffing issues and where risky work- costs and face disruptions to operations as a result of FWA. In light of these arounds have been adopted to overcome system, staffing, or other barriers. associated risks, organizational leadership cannot afford to assume their Internal controls reviews provide valuable information about which fraud FWA program is effective and must insist upon the regular performance of a risks are most significant, the likelihood and likely severity of occurrence. fraud check-up. 3. Ongoing monitoring and periodic auditing A fraud check-up involves a series of steps to identify issues and to ensure Ongoing monitoring is essential in order to establish a baseline against continued healthy performance: which future performance can be compared. Without monitoring performance, neither trends nor significant variances can be easily 1. Consider organizational culture identified. For example, if an organization is not regularly monitoring its When considering fraud risks, it is imperative to assess an organization’s per member per month claims costs, a sudden spike in costs could go culture. According to the Society for Human Resource Management, unnoticed for months. Similarly, if ongoing monitoring of the incurred but not “organizational culture consists of shared beliefs and values established by reported (IBNR) liability is not performed, changes go undetected. leaders and then communicated and reinforced through various methods, ultimately shaping employee perceptions, behaviors and understanding. In addition to monitoring, organizations should perform more in-depth Organizational culture sets the context for everything an enterprise does.”2 auditing to identify root cause issues. In-depth audits should be performed on a routine basis, as well as based on identified risk factors such as recent Organizational culture creates the environment within which employees unexplained variances. Risk-based approaches are particularly useful to work and is frequently cited as a significant contributing factor to fraud. organizations with limited internal auditing resources. If monitoring has not Organizational culture can contribute to fraud by failing to prevent it, failing historically been performed for a certain activity or operation, organizations to detect it, or failing to deter fraud through effective enforcement actions. should consider performing in-depth audits first to understand current Additionally, the overall tone at the top can contribute to a fraudster’s practices and identify and address any significant operational issues prior to justification of their deeds. Fraudsters may justify fraud by citing the implementing ongoing monitoring. Moreover, the targets for in-depth audits executive team’s lack of appreciation of employees, focus on unrealistic should be selected using a risk-based approach. performance goals, or by comparing their own actions to executives’ own unethical behavior. For example, an organizational culture that focuses on While ongoing monitoring and periodic auditing is easily recognized as productivity goals above all else faces a greater fraud risk, especially when a means to detect FWA, the awareness among organizational staff that financial incentives are attached. Similarly, an organizational culture that operational activity is regularly monitored and audited can also have a
28 | Mazars USA Ledger deterrent or preventative effect. The performance of monitoring and auditing reporting of FWA issues or concerns from both internal and external can also provide organizations with valuable information to improve other sources. After establishing these lines of communication, such as a aspects of their operations and identify other types of issues. phone hotline or an online site, it is important to disseminate information about these reporting options on a regular basis. Moreover, to engender 4. Evaluate your FWA program trust in the reporting process, it may be helpful to provide accompanying A FWA program is an important, and often required, element of an information about the organization’s investigative and enforcement process, organization’s compliance program. The Department of Health and Human reiterate the organization’s anti-retaliation policy, and outline the process for Services Office of the Inspector General has identified seven elements reporting call volume and call outcome to the Board of Directors or relevant of an effective compliance program. Like a compliance program, there governing body. Periodically, as a part of other survey activities, employees, are also seven general elements of an effective FWA plan. Not only is it providers, and vendors should be asked about their awareness of this important to institute these elements when establishing a FWA program, but hotline to gauge information dissemination. Also, the organization should it is important to evaluate your FWA program periodically to determine its monitor call volume to the hotline as well as monitor patterns in the calls. effectiveness. For example, establishing a FWA hotline will not be effective if information about the hotline is not well-distributed or if the hotline does vi. Perform ongoing monitoring and periodic auditing to identify trends and not allow confidential and anonymous reporting. The following are key variances as well as determine root causes to issues identified and ensure elements to developing and maintaining an effective FWA program: ongoing compliance. Monitoring and auditing are necessary to ensure ongoing compliance with established practices as well as to help identify i. A written FWA plan with detailed policies and procedures. The plan unusual trends. Not only is it important that these efforts are supported should ensure compliance with state and federal laws with particular by organizational values and appropriate allocation of resources, but that attention to applicable laws that pertain to government programs, such an internal audit department or other designee is empowered to perform as HIPAA, Federal False Claims Act, and the Social Security Act. Written unscheduled reviews and granted unfettered access to records. documentation should include a code of conduct and ethics as well as a requirement for conflict of interest disclosure statements. vii. Perform prompt and thorough investigation and corrective action. Upon the identification of a potential FWA issue, the organization ii. Disciplinary standards should be described within the FWA plan and should thoroughly investigate the issue. Depending on the result of the associated policies and procedures. These standards should clearly state investigation, disciplinary action should promptly be sought for the involved that FWA violations may result in corrective action including suspension or parties. Any weaknesses in operations or processes identified through the termination of employment or contracts. investigation should be addressed formally in a remediation or corrective action plan to ensure that they are resolved and will not persist. As part iii. Establish roles and responsibilities for implementing the FWA plan of an organization’s overall compliance program, these issues should be including designated positions such as the Compliance Officer and tracked, and implementation of the remediation plans should be validated to Compliance Committee to administer the program as well as oversee ensure resolution. enforcement action and the effectiveness of the program. To ensure efficacy, the implementation of the FWA plan should be allocated adequate Just like how a routine maintenance check for your car can reveal a resources for successful execution. Moreover, the Compliance Officer lurking problem before it occurs, performing a fraud check-up can should regularly report activities to the Board of Directors and relevant help organizations reduce the occurrence and impact of fraud through committees. prevention, deterrence, detection and correction. While check-ups or preventative maintenance are easy to postpone, it is far less costly for iv. Establish training and education programs for employees, Board and organizations to address fraud risks proactively. Moreover, the steps Committee members, and other relevant parties such as providers and involved in a fraud check-up can yield valuable information that offers vendors. Fraud awareness training should be provided initially upon other benefits to your organization – such as identifying opportunities to hiring or commencing duties and refresher training should be performed improve organizational culture, increase efficiency, or strengthen an overall annually. Additionally, targeted training should be provided for individuals compliance program. associated with activities with heightened fraud risks. All trainings should be provided by qualified trainers and the trainings should be updated to include Scilla is a Manager in our Sacramento Practice. She can be reached at ongoing improvements as well as reflect any changes to state or federal 916.696.3682 or at [email protected]. requirements. 1 ACFE, “Fraud against Government Health Care Programs” Training, 3/29/2017 2 https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/ v. Create lines of communication to allow anonymous and confidential understandinganddevelopingorganizationalculture.aspx
September/October 2018 | 29 LUXURY
ARE YOU MAXIMIZING YOUR DATA’S VALUE? BY EMMANUEL CESBRON-LAVAU
LAST YEAR, HUMANS CREATED MORE DATA THAN IN THE PAST tion continues to increase in the United States, despite already having the 5,000 YEARS. YET, VERY LITTLE OF THAT DATA IS ACTUALLY ANA- world’s highest internet inclusivity rate2, and, more importantly, average LYZED AND USED FOR STRATEGIC AND OPERATIONAL DECISION e-shopper spending is increasing every year. We can expect these figures MAKING OR TO GENERATE NEW REVENUE. to continue increasing as millennials, now the largest and most influential consumer group, are moving into their prime spending years. A survey conducted by McKinsey & Company in 2017 suggests that efforts to monetize data are fairly new and a majority of companies have only As a result, ecommerce departments within small and midsize businesses started doing so in the past 2 years. Yet, more than half of the respondents will be exposed to mountains of data collected from increased online traffic in that study agree that the most important change in their competitive envi- and sales. They might just be the best players within their organization to ronment is new entrants launching data-focused business and disrupting tra- exploit this immense potential for growth if they are given the right tools: a ditional businesses. There is urgency for companies to make effective use structured database to choose data metrics from and a clear understanding of their data if they want to remain competitive. With data changing the way of the company’s objectives. that business is done, how can you put your data to good use to increase your sales and profitability, and stay ahead of the competition? Finding the Right Data Metrics for Your Business Cecile Peters, senior e-commerce director at Clos19, Moët-Hennessy’s Ecommerce Departments in a Data Driven World ecommerce platform dedicated to luxury champagnes and spirits of the Recruiting the best team members or implementing complicated data mining LVMH group, sees the volumes of data and metrics as one of the main and analysis tools might seem like an insurmountable barrier for small and challenges faced by ecommerce departments. Data is collected through a midsize companies. Simply observe what large companies are experiencing. wide variety of channels and has to be prioritized in order to extract useful Implementing a data-driven culture and conducting profound changes in a analysis and derive insights that are actionable. company’s organizational structure, leadership and culture is a monumental challenge and takes years. However, companies with an online presence Vincent Van de Maele, a data scientist at Zettafox, a data science and might just have unexpected resources within their organization to help prescriptive analytics firm acquired by Mazars in 2017, explains that the maximize the value of the data that they are collecting, their Ecommerce first challenge for companies is to optimally gather and organize their data departments! for analysis. For instance, data created by different departments within a company, or through different systems, is often stored in silos. Data silos According to the 2017 Global Ecommerce Report executed by the Ecom- are isolated from each other and the rest of the organization and, if they are merce foundation and Mazars1, 78% of internet users in the United States not integrated, cannot be used to their full potential. The first step that an have made purchases online in the last 12 months. The e-shopper popula- Ecommerce or Marketing executive should take is to inventory those internal
30 | Mazars USA Ledger systems collecting data and identify the type of data that is being collected New York-based cosmetic and beauty company, Zettafox helped increased in order to integrate them in the most efficient way. by 280% the conversion rate of samples for direct online orders by better characterizing customer perception of samples, more efficient bundling and If a Company lacks the resources internally to perform this task, data ana- understanding of buying frequency. lytics firms such as Zettafox can provide these data architecture services to assist their clients in “cleaning up” their databases. “We do this on a daily Traditional Data Metrics Used by E-Commerce Departments basis” assures Vincent. Let’s discuss some of the metrics that can be used by companies based on data that is readily available to Ecommerce departments. Once your data has been cleaned, the next step is to identify the right data metrics to provide the best insight for your business operations. The right Cecile, from Clos19, explains that with the growing importance of online data metrics should be quantifiable and closely tied to your company’s retail, companies have shifted in recent years to omni-channel sales and objectives. They should track both the company’s main areas of business marketing strategies to provide clients with a continuous and integrated cus- (for an ecommerce department, website traffic) and critical areas of perfor- tomer experience. She points out that online stores are the new flagships. In mance (for instance, the contribution of ecommerce sales to incremental that respect, the first metrics that an Ecommerce department should explore sales). This implies that management should ask the right questions on are related to online traffic, such as first visits and returning visitor metrics, how to best achieve its goals and know how to measure such achievement. web traffic sources to understand what is driving visitors to your website, or For instance, do you know what fuels your company’s growth? Is it fueled brand awareness metrics to track how people hear about your brand (social rather by new customers or returning existing customers? Can you identify media, search engines). your customers’ buying cycles and triggers? Data metrics should measure the company’s progress in achieving a goal (i.e. be trackable) and inspire Once the website has attracted and spurred a customer in interacting with actions (i.e. explainable). the company, Ecommerce departments are interested in predicting how much revenue a customer will contribute throughout their lifetime. This is For an ecommerce department, identifying the right data metrics will help achieved by computing a Customer Lifetime Value (CLV), which is calculat- monitor and understand customer purchasing behavior and improve client ed by analyzing a customer’s transaction history, along with various behav- knowledge. As a consequence, thanks to an understanding of the custom- ioral indicators. There are no plug-and-play solutions; this data metric can er’s expectations, coupled with an anticipation of the customer’s needs, the be computed in different ways depending on how a customer can generate company will gain a competitive advantage. revenue (direct purchases, referrals, indirect marketing, etc).
Challenges to Data Analytics Ecommerce departments should also track the cost of acquiring customers Any company can go online to any given marketing website, use the (CAC) because the gross profit of an initial purchase should be compared to traditional data metrics that are listed and follow the different approaches to the costs incurred to generate that sale. In fact, companies should be trying selecting the metrics. However, because choosing the right data metrics will to maximize their CLV in relation to their CAC. be an iterative process, they will not all be relevant for your business. Data metrics will evolve and will need to be tweaked and tailored to the compa- An adage in business says that it is 5 times more expensive to acquire ny’s needs in order to achieve the best measure of performance, progress customers than it is to retain an existing one. We are not here to argue over and goal achievement. whether it is a universal truth or a myth. What is certain is that retention requires constant engagement with your customers and a strong commit- Zettafox’s data driven solutions can greatly streamline this iterative process. ment to deliver relevant content and value. As such, in addition to monitor- Zettafox uses artificial intelligence, more precisely machine learning ing the CLV, an Ecommerce department could monitor data metrics such as algorithms, to develop its models. Machine learning is defined as a method customer attrition, the customer response rate to e-marketing campaigns of data analysis that automates analytical model building. The tailored pre- (newsletters, social media or targeted emails) or the purchase frequency. scriptive model developed by Zettafox can learn from data, identify patterns Such data will give the company insight in terms of targeting the right cus- and suggest decisions, with minimal effort from the operational teams. tomers and addressing customer churn. The company will simply have to ask the right questions and an unlimited number of questions can be asked! Evaluating Your Data In a data focused world, being able to accurately predict the lifetime value For a Swiss flavor and fragrance company, Zettafox helped find key ingredi- of a customer and implement a data-driven strategy to retain customers are ent combinations related to fragrance performance that optimize an existing paramount. We went over some of the data metrics that could be monitored formula, based on both customer surveys and technical properties. For a to provide insight on these challenges. These techniques are only as effec-
September/October 2018 | 31 LUXURY
tive as the reliability of the data being gathered. diagnose their strengths and weaknesses in collecting and storing data and could lead to improve the collection and storing processes. Implementing a Data Metric Rating System As we discussed above, data is found in a variety of states and is often The increased importance of data and the interest shown by new entrants stored in silos. It can be a familiar database populated through “market- in using this data to disrupt the market place and fuel growth have pushed place” solutions and from which a team member can easily download the re- companies of all size to reorganize their business model to adapt to these quired data. Or it could originate from a proprietary system that few people new factors. Potentially implying profound internal reorganization, these know how to exploit. changes can be driven by the Ecommerce department, as they already col- lect and deal with data on a daily basis. The main challenges to overcome Caitlin Hudon, author of data science blog Haystacks3 and senior data are the ability to inventory and structure the data, often originating from var- scientist at Shelfbucks, an in-store merchandising optimization and mobile ious systems and stored in as many databases, and use this data efficiently media platform, points out that “not all of the data is equally relevant to the and in alignment with the company’s objectives. Many solutions exist in the questions we are asking of it, not all of the data is trustworthy and not all of market to assist businesses in that process. However, because becoming the analyses are neatly reproducible.4” She put together a data meta-metric a more data focused firm is an iterative process, none are plug-and-play. rating system that she used to “convey the quality of the data and its collec- Companies would be well-advised to seek the expertise of specialized data tion process” to her team based on: analytics firms. • Relevance - (1) data is perfectly relevant, (2) data is useful to add color to arguments or decisions, and (3) important decisions should not be Emmanuel is a Manager in our New York Practice. He can be reached at made based on this data; 212.375.6707 or at [email protected]. • Trustworthiness - (1) Data is trustworthy, including its source and ways it is captured, (2) there are reservations on the data trustworthiness, 1 Access the e-commerce study here: https://www.mazars.com/Home/News/Our- and (3) data is not trustworthy due to the way it is collected or stored; publications/Surveys-and-studies/Global-E-commerce-Report-2017. • Repeatability - (1) process to retrieve data is fully automated or autom- 2 The Ecommerce Foundation and Mazars ranked countries across four categories: atable, (2) the process is standardized but involves manual operations, availability (quality and breadth of available infrastructure), affordability (cost of access and (3) the data does not live in a data based and extraction is very relative to income and competition on the market place), relevance (existence and manual. relevance of local language content) and readiness (capacity to access the internet including skills and cultural acceptance). This system could be a source of inspiration for companies when inven- 3 Haystacks, a data science blog: https://caitlinhudon.com torying they type of data that there are collecting. It will help Companies 4 Haystacks, November 2017, https://caitlinhudon.com/2017/11/14/data-meta-metrics/
UPCOMING WEBCASTS
We are pleased to announce our Mazars Online Insights webcasts! These informative sessions, led by our service line and industry segment leaders, are designed to educate our connections on the latest developments in the accounting industry and the technical resources needed in today’s business environment. Scan the barcode below to view the 2018 schedule and register!
OCTOBER 25TH OCTOBER 30TH
Real Estate Investment Trusts – Common Key Differences between IFRS 9 & 17 and Traps to Avoid their US GAAP Equivalents Time: 12:00 – 1:00 PM EDT Time: 12:00 – 1:00 PM EDT Speakers: Donald Zief and Bonni Zukof Speakers: Gina Omolon, Laurence Karagulian and Florie Bourrel-Heleine
32 | Mazars USA Ledger TRANSPORTATION & LOGISTICS
EMPLOYEE MISCLASSIFICATION IN THE TRUCKING INDUSTRY BY MICHELE LARRINAGA
WORKER CLASSIFICATION ISSUES AFFECT BUSINESSES ACROSS sation insurance, and complying with numerous state and federal statutes THE COUNTRY, AS THE WORKER’S STATUS AS EITHER EMPLOY- and regulations governing the wages, hours, and working conditions of EES OR INDEPENDENT CONTRACTORS, HAS AN IMPACT ON MANY employees. If, alternatively, the worker is classified as an independent AREAS INCLUDING FEDERAL TAX, STATE WAGE AND HOUR LAWS, contractor, the worker is responsible for paying their entire portion of FICA WORKERS’ COMPENSATION, AND UNEMPLOYMENT TAX LAWS. and social security taxes and the employer is exempted from the costs and THESE EMPLOYMENT CLASSIFICATION ISSUES ARE ESPECIALLY responsibilities associated with employee status. IMPORTANT WHEN IT COMES TO THE TRUCKING INDUSTRY DUE TO EMPLOYERS’ PROPENSITY TO RELY ON INDEPENDENT CONTRAC- Worker Classification Tests TOR TRUCK DRIVERS TO FACILITATE THEIR BUSINESSES. THUS, The ever-growing rift in the worker classification realm stems largely from CHANGES TO WORKER CLASSIFICATION LAWS AND CASE PRECE- varying treatment among federal and state agencies, resulting in confu- DENT STAND TO GREATLY IMPACT THE INDUSTRY. sion about what standard applies and how particular jurisdictions address various situations. For example, the IRS utilizes a “multifactor” test to If a worker is classified as an employee, the employer bears the respon- determine whether a worker should be classified as either an employee or sibility of paying federal Social Security and payroll taxes, unemployment an independent contractor, focusing on three basic categories including insurance taxes and state employment taxes, providing workers’ compen- behavioral control, financial control, and the type of relationship involved.
September/October 2018 | 33 TRANSPORTATION & LOGISTICS
Additionally, there is the “right to control” test, which is highly fact-specific In Oregon, courts care less about the owner-operators having their own and examines several factors to ultimately determine who has the right to federal operating authority, concluding that only possession of a valid state control the means and manner of the worker’s performance. The “economic driver’s license was required, because the truck drivers were providing realities test” focuses on the economic reality of the relationship at hand by services to the trucking company’s customers, not providing transportation looking at degree of control, relative investments of the parties, degree to to the public. As such, the drivers were not interstate motor carriers for which opportunity for profit or loss is determined by the employer, skill and which licensing authority would be required and were properly consid- initiative required, and permanency of the relationship. ered independent contractors under the state’s statute. This distinction is important because it shows the varying treatment among states, concerning Further, various states utilize the “relative nature of the work test” or a seemingly identical facts. modified version to evaluate whether the work performed is the type that normally could be carried out by an employee in the usual course of Some trucking companies have shifted to use of a modified model, referred business and whether the activities performed are an “integral part” of the to as the Settlement Carrier Model, where carriers use a broker or freight employer’s regular business. The “Borello test,” a version of the economic forwarder authority to contract with an owner-operator working under their realities/multi-factor test, has been cited in California case law and is mainly own motor carrier authority. Use of this model would be advantageous in concerned with whether the person to whom service is rendered has the states like Washington, where the trucker’s lack of motor carrier authority right to control the manner and means of accomplishing the result desired, was highly determinative when analyzing worker’s classification. Some among other factors. states, including Illinois, have already seen similar models used, where the trucking company functions as a trucking brokerage entity of sorts, assisting Lastly, various states have shifted to use of the “ABC test,” where, in order owner-operators in starting their own trucking companies, and then leasing to be classified as an independent contractor the worker must be free from equipment and resources to them. There, courts determined the drivers their employer’s control or direction in performing their work, the work were properly characterized as independent contractors. performed is not in the normal course, occupation, trade, business or pro- fession of the employer’s business, and workers are customarily engaged in To gain independent contractor status, some jurisdictions, including Wash- an independently established trade or profession. If one of the three prongs ington D.C., focus on the driver’s ability to engage in multiple routes, sell are not met, the worker should in theory be classified as an employee for all their existing routes to other drivers without permission, and hire additional relevant purposes. The ABC test is evolving and being modified by recent drivers. Other jurisdictions, such as Indiana, consider independent con- case law and judicial interpretation. tractor status if the driver receives remuneration solely upon a commission basis and is the master of their own time and effort. There, courts leaned State Turmoil Regarding Worker Classification toward independent contractor status if the trucking company functioned as States have stirred up even more turmoil than usual in the world of worker an intermediary or middleman, pairing those who needed freight moved with classification issues, particularly concerning how workers are classified in drivers who were licensed to do the actual work. This is another glimpse at the trucking industry. For instance, in Washington, trucking business owners a Settlement Carrier-type model, where the company is seen as distinct and must keep in mind that they need to be able to prove three things to properly apart from the owner-operators it hires. treat their workers as independent contractors: • The worker is free from the employer’s control or direction in perform- Trucking companies should be cautious when trying to implement the ing their work; Settlement Carrier Model, or something similar, because another court in In- • The work takes place outside the usual course of the business of the diana determined that because the trucking company was also a registered company and off the site of the business; and motor carrier with the DOT, the use of transport and delivery licensed con- • Customarily, the worker is engaged in an independent trade, occupa- tractor drivers was determined to be within the company’s “usual course of tion, profession, or business. business,” failing prong B of the ABC test. Thus, companies should ensure they comply with the second prong of the ABC test if they want to implement If one of the prongs is not met, the owner will likely face scrutiny and runs something akin to the Settlement Carrier Model. the risk of having their workers reclassified as employees. There have been cases where independent contractors have been reclassified as employees Dynamex and its Impact on Worker Classification when the trucking company failed to prove prong A listed above, because Worker classification issues have been exacerbated by the Dynamex the court determined they had the right to control the method and details decision issued on April 30, 2018, where the Supreme Court of California of driving services performed. Courts in Washington have also historically seemingly implemented a new, more stringent worker classification test for focused on the owner-operators lack of federal operating authority, and their purposes of Industrial Welfare Commission (“IWC”) wage orders. While the dependence on the trucking companies’ authority to complete their work. holding is limited to facts involving IWC wage order No. 9, it could poten-
34 | Mazars USA Ledger tially affect other areas of California law such as workers’ compensation, Alternate Model for Worker Classification unemployment tax, state tax laws, special state laws, and could impact how Post-Dynamex, companies are struggling to understand the case’s impli- other states deal with worker classification issues. This case arose out of a cations on the trucking industry, and how the holding will affect day-to-day suit brought by two individual delivery drivers against Dynamex Operations operations. The Dynamex decision expanded the definition of employee in West (“Dynamex”), a transportation services company in the business of California, which may result in a decrease in utilization of owner-operators delivering packages and documents across the United States, based on the in the field, greatly impacting the trucking industry across the board. Moving assertion Dynamex misclassified the workers as independent contractors, forward, businesses will likely change their practices to account for the violating California’s wage order governing transportation, along with other recent decision’s implications. Thus, use of a new model, referred to as the provisions of California’s Labor Code. “Settlement Carrier Model,” as briefly mentioned above, might be advanta- geous. The main issue decided in Dynamex ultimately dealt with whether or not the “suffer or permit to work” language in the wage order could be applied to The Settlement Carrier Model focuses on the relationship between the worker classification issues to determine whether or not a worker should be carrier and owner-operator, where the motor carrier functions akin to a prop- defined as an employee or an independent contractor. The court concluded erty broker and the owner-operator acts as the authorized motor carrier, that they agreed with the trial court’s determination that the definition of then the ‘broker’ pays the motor carrier via settlements. Further, use of “employ,” containing the language “suffer or permit to work,” may be relied chargebacks for purchased goods could essentially be deducted from the upon in evaluating worker classification for purposes of the obligations driver’s weekly settlement payment. This model has predominantly been imposed by the wage order. Dynamex’s main argument was based on the used in the home delivery area of the transportation industry, so has not contention that a literal reading of the “suffer or permit to work” standard been involved in many multi-truck, multi-customer fleet operations to date. would undoubtedly characterize all individual workers who directly provide However, the potential for successful application within the larger trucking services to a business as employees, even enveloping individuals hired by industry is feasible. a business who have traditionally been viewed as working in their own inde- pendent business. The court agreed with Dynamex’s argument to a certain This contemporary model works to eliminate issues inherent in the ABC test degree, but concluded that the language in the wage order has substantial by requiring the owner-operator to maintain their own motor carrier author- bearing on the determination of a worker’s status as either an employee or ity/license, functioning to minimize compliance control, and demonstrating independent contractor. the contractor/motor carrier is in an independently established trade or business. This also works to satisfy other independent contractor prongs of As such, the “suffer or permit to work” standard should be construed to the ABC test by evidencing a substantial investment in the driver’s business encompass all individual workers who can reasonably be viewed as working and a prominent holding out of their separate business by way of federal in the hiring entity’s business, and should exclude traditional independent filings, placards, etc. contractors who instead are viewed as working only in their own indepen- dent business. The court listed various examples of work taking place within This model is not without complications; it brings an additional level of com- the hiring entity’s normal course of business, pointing to a bakery who hires plexity based on the requirement that owner-operators maintain their own cake decorators, or a seamstress who supplies the company with clothing, motor carrier license, as this involves permits, federal filings, state filings, and examples of when the work is validly considered outside the usual etc. Further, utilizing the Settlement Carrier Model would result in customers course of business, including an electrician hired to install an electrical line, dealing with property brokers as opposed to motor carriers, a change they or a plumber hired to fix a leak. The court also cautioned that simply using may not be inclined to accept. Also, lack of precedential case law on the the label independent contractor is not enough. model could deter companies and workers from implementation. That being said, in time, the Settlement Carrier Model could prove to be a useful tool The court in Dynamex did not ultimately conclude that the drivers in ques- in the trucking industry, especially for companies concerned with worker tion were employees as opposed to independent contractors; however, it misclassification issues. makes clear the inclination to do so based on their class certification allow- ance and brief analysis of the ABC factors. It is worth noting that Dynamex Michele is a Senior Associate Tax Attorney in our New York Practice. She applies, in a limited manner, to a defined class of persons, that being single can be reached at 212.375.6911 or at [email protected]. drivers who do not work for another company or for personal customers, and only discusses classification issues as they relate to wage order No. 9. However, as mentioned above, the case could affect other areas of the law and other states who look to the Supreme Court for guidance in an everchanging area such as employment classification.
September/October 2018 | 35 FINANCIAL SERVICES ANOTHER ANNUAL INTERIM INSPECTION REPORT BY CHARLES J. PAGANO AND BONNIE S. MANN FALK
August each year brings another PCAOB Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers (the “Seventh”). With no clarity on the PCAOB’s direction in proposing a final inspection program since the in- spection of August 2017, can this be the year that a permanent program is finally implemented? Maybe or maybe not. On one hand, the Trump administration has made significant personnel changes at the decision makers - the SEC and PCAOB. During 2017, Jay Clayton was named Chairman of the Securities and Exchange Commission, and in 2018 three new Commissioners rounded out the five-person Board. In December 2017, five new Board members were appointed to the PCAOB followed by considerable turnover in staff in 2018. The new Board is interested in obtaining formal and informal feedback on the broker-dealer inspection process.
36 | Mazars USA Ledger But wait there’s more! The Small Business Audit Correction Act of 2018 The PCAOB selection for the Seventh was 75 firms and 116 audits, a was proposed. If enacted, this legislation would exempt most broker-dealers consistent sample compared to prior years. The PCAOB selected 7 firms from PCAOB auditing standards, reverting us to the days of auditing under to review randomly and another 68 based on firm characteristics defined in AICPA standards. Both the House and Senate bills call for those non-custo- the report, including: dial broker-dealers, with less than 150 registered persons, in good standing, • The number of broker-dealer audits performed to be exempt from the PCAOB standards. With Congress back from recess, • Whether the firm audits issuers both bills, H.R. 6021 and S. 3004 may see movement soon. By a vote of • Previous history of inspections 36 yeas to 16 nays in the House Financial Services Committee, H.R. 6021 • History of the firm or firm personnel in auditing broker-dealers took one step further in committee where it will be revised and continue to • Existence of disciplinary actions against the firm or engagement progress though the bill making process. partner.
Mazars Insight The PCAOB’s selection process, since the inception of the interim It is important to review the current inspection report regardless of inspection program, resulted in 310 audit firms and 630 audit engagements whether the PCAOB remains in the picture. Many of the comments inspected. Some firms have been inspected multiple times, and a signifi- in the report would be applicable under both PCAOB and AICPA cant number of auditors have not been inspected under PCAOB standards. standards. The Seventh was issued on August 20, 2018, with many of Due to the decrease in auditors each year, and some auditing firms being the same comments and high deficiency rates found in the preceding inspected multiple times, it is difficult to ascertain how many firms have not six inspection reports. Clients and auditors should discuss the key been inspected. The statistics show as of this past inspection year, that areas emphasized in the report to understand audit implications of there were 157 auditors who audited only 1 broker-dealer, and 280 auditor their business activities. who audited 2 to 20 broker-dealers. However, during the period that audits have been under PCAOB standards only 59 auditors have been inspected Annual Inspection Report Selection of those who audit only 1 broker-dealer, and 211 audit firms who audit 2 to For the fiscal year ended June 30, 2017, the population consisted of 475 20 broker-dealers. audit firms who audited 3,829 broker-dealers, as compared to 531 audit firms who audited 3,933 broker-dealers for the fiscal year ended June 30, The Findings 2016. Overall, since the initial interim inspection covering the 2011 fiscal The inspection noted 91% of the firms inspected with a deficiency, down year, there has been a downward trend in the number of firms auditing from 97% in the prior year’s inspection. broker-dealers, a decrease of approximately 41%, while the number of broker-dealer filings decreased by approximately 13%. Is regulation and The engagements inspected had the following rates of deficiency in particu- audit risk contributing to contraction? lar areas, which were consistent with last year. • Independence (8% from 10%) • Revenue (73 % from 66 %) • Risks of material misstatements due to fraud (64% from 57%), • Engagement quality review (59% from 57%)
Other deficiency areas included net capital, fair value measurement, exemption and compliance reports, and related parties. Interestingly, these deficiencies are similar to those noted in the first interim inspection. The PCAOB statistics show that there is a significantly better deficiency rate for those auditors who audit a greater number of broker-dealers, and those who audit issuers.
Mazars Insight Clients should discuss with their auditors the results of the auditor’s inspections. Auditors should be able the to perform a quality audit, and the client needs to perform due diligence to ascertain the auditor’s ability to execute. Inquiring regarding various relevant audit quality Source: Data from PCAOB Annual Reports on 2011-2017 Inspections indicators such as firm leadership, audit experience of the partners (https://pcaobus.org/Pages/BrokerDealers.aspx) and staff, training, workload, the monitoring process, and ability to
September/October 2018 | 37 FINANCIAL SERVICES
keep abreast with the ever-changing landscape enables the client to processed differently, one would have to sufficiently understand and distinguish one auditor from another. test each material revenue stream. If separate clearing brokers are used for a product, one would also have to understand and test those Independence processes. Other considerations might include a change in personnel The PCAOB and SEC continue to bring independence sanctions against where processes may change. It’s important for the auditor to gain auditors of broker-dealers. SEC Rule 17a-5 requires that an auditor must this understanding as early as possible, preferably in the planning be independent in accordance with Rule 2-01 of SEC Regulation S-X. stages. Currently, certain carve outs exist under PCAOB standards for non-issuer broker-dealers. The carve outs include partner rotation and the ability to Regarding controls with the clearing organization, clients need to establish perform tax compliance services for those in financial reporting roles. Might controls to get comfort that what they are inputting to the clearing broker these carve outs change in the future? is being properly captured. Simply accepting what the clearing firm has recorded without procedures in place does not give the auditor comfort that Considerations where a mutual or conflicting interest may exist, or where all transactions are being properly recorded. the accountant is placed in the position of auditing his or her own work, or acts in a management capacity, or an accountant advocates for the client The Seventh also notes that in a large portion of audits reviewed, 38%, the are all prohibited pursuant to SEC Rule 2-01. extent of testing was insufficient, and not in accordance with AS 2301, The Auditor’s Responses to the Risks of Material Misstatements. In addition to The Seventh inspection revealed, as in prior inspections, instances where the insufficient testing of various revenue streams discussed above, there the auditor prepared or assisted in the preparation of the financial state- were instances of insufficient sample sizes, inappropriate samples selected, ments or provided bookkeeping services. While editorial suggestions and samples not representative of the population, and remaining material educational materials can be supplied to the client, it is important to realize balances left untested. that the auditor is not the decision maker in the financial reporting process. Once again, as in previous years, there was one instance where an engage- Mazars Insight ment letter included an indemnification clause, which is also prohibited. Much of the cost associated with auditing a broker-dealer is contingent upon the number and processes involved in the revenue steam. Effec- Mazars Insight tive planning through understanding of the aspects of the broker-deal- Independence is essential in the auditing profession. An auditor er’s business can make the audit more cost efficient and effective, who performs audits of broker-dealers and is not complying with the especially when considering the new Revenue Recognition accounting independence rules is providing a disservice to the client, as the audit standards. Ineffective planning resulting in insufficient audit proce- cannot be relied upon, may subject the broker-dealer to re-audit, and dures can cause the audit to be deficient, which could result in a the auditor to sanctions. Clients should question the auditing firm as re-audit and regulatory oversight or action for both the broker-dealer to what systems are in place to monitor independence. Appropriate and auditor. communication to management regarding independence should occur periodically, at a minimum annually. Once again, the PCAOB also found numerous instances where the auditor did not properly evaluate the service auditor’s report (“SOC-1” report). Revenue When an auditor relies on controls at the clearing organization with the The PCAOB points out that the deficiency rate in this area has remained purpose of decreasing substantive testing, the auditor needs to consider constant at 65% (66% previous inspection). several procedures. First, the auditor must consider testing the operating ef- fectiveness of the user controls as noted in the SOC- 1 report. If a sub-ser- The PCAOB notes instances where auditors have not properly performed vice provider is mentioned in that report, the auditor must also consider that procedures (26%) in accordance with AS 2110, Identifying and Assessing sub-service provider’s user controls. The PCAOB also noted that where the Risks of Material Misstatement. An auditor needs to understand and period included in the service organization report does not coincide with the document an understanding of the client’s revenue streams, and controls audit period, the auditor would have to perform substantive work for that un- over financial reporting, including controls at the service organization such covered period. The effect of the above could conceivably make the auditor as the clearing broker for any material stream of revenue. Revenue sources conclude that substantive procedures and, therefore, increased testing, is that are grouped together in the financial statements, need to be separately the practical approach, and not rely on a service provider’s SOC-1 reports. analyzed. Mazars Insight Mazars Insight Clients who prepare documentation and perform procedures to ensure For example, if the commission line consists of products which are that they maintain the user entity controls prescribed in their agree-
38 | Mazars USA Ledger ment with the service provider protect themselves and their customers. stantial portion of the deficiencies were due to an insufficient review being Ensuring that their internal control environment intertwines with the performed. service provider’s control environment enhances their risk manage- ment program and heightens the protection of their customers’ assets. The EQR should include reviewing the report and work papers that are In addition, sharing this documentation with the auditors enables the essential in developing an opinion, evaluating the audit response to identi- auditors to connect the dots to thoroughly understand the control en- fied risks, reviewing for compliance with independence, and reviewing the vironment in place at the client. This understanding is required under engagement completion document. In other words, step into the engage- PCAOB auditing standards, regardless of whether or not the auditor ment partner’s shoes and perform a thorough review to gain comfort that is able to perform tests of controls that could decrease the amount or sufficient work has been performed to issue an audited report. The EQR type of substantive testing. Always remember, that tests of controls responsibility of challenging the engagement team demands that the person alone are not sufficient audit procedures. in this role possesses the requisite knowledge, experience, and fortitude to take and maintain a position as deemed necessary. Assessing and Responding to the Risks of Material Misstatements Due to Fraud Mazars Insight This area saw a 64% deficiency rate, compared to 57% last year. Clients need to gain comfort that the firm engaged has sufficient expertise and resources to ensure that a qualified EQR will be con- In last year’s inspection report, the PCAOB noted, “when identifying and ducted by a person with the appropriate qualifications, as discussed assessing the risks of material misstatement due to fraud, the auditor above in relation to assessing the qualifications of the engagement should presume that there is a fraud risk.” The presumption is that improper team. Smaller firms who may not have a suitable in-house partner, revenue recognition is always a fraud risk. When the auditor concludes that or the equivalent, for this role, may need to farm out this function to a improper revenue recognition is not a fraud risk, the rationale supporting qualified individual. this conclusion must be thoroughly documented. This year’s inspection commented on how collaboration of others beyond the CEO is essential in The Audit Landscape, The Future identifying and assessing the risks of material misstatement. As the number of qualified auditors continues to shrink, and standards continue to evolve, broker-dealers need to be even more diligent in auditor The auditor needs to identify fraud risk and address management override selection. Further contraction in the number of auditors is certainly possi- of controls. Journal entry testing should include the following consider- ble. If the Small Business Audit Correction Act of 2018 is enacted, resulting ations: in a reversion to AICPA standards, some audit procedures may change the • Include a sample not only during the year, but at the end of the report- auditor’s work, but most of the auditing principles remain the same, with ing period much of broker-dealer auditing remaining unchanged. • Comfort that there are controls in place that is not overriding controls • Perform inquiries of management and document such procedures The PCAOB has scheduled its annual Forum for Auditors of Broker-Deal- • Include test of detail of the journal entry testing ers on November 2, in Jersey City, NJ. The forum brings additional insight • Design testing to specifically address fraud risks on the PCAOB’s thought process and enables attendees to address their concerns. Mazars Insight Clients and auditors need to discuss what keeps the client up at night As we wait to see whether the inspection program will become final or there related to fraud risks. While journal entry testing can shed light on will be changes in the law, auditors and broker-dealers should be aware fraud risks, it is imperative for the auditor to go beyond the accounting that quality audits are important not only to avoid regulatory issues but to department. Seeking input from management and non-management maintain high standards in the industry. personnel from all areas of a broker-dealer, including compliance, trading, and back office operations, diversifies the information the au- Charles is a Partner in our Long Island Practice. He can be reached at ditor processes during the planning and execution of the engagement. 516.620.8553 or at [email protected].
Engagement Quality Review (“EQR”) Bonnie is a Director in our New York Practice. She can be reached at The Seventh noted a 59% deficiency rate existed in EQR review. 212.375.6552 or at [email protected].
The engagement quality review (“EQR”) process is, in many cases, the last control an accounting firm utilizes to ensure a quality audit. While in a few cases there was no evidence of any EQR being performed, a sub-
September/October 2018 | 39 HEALTHCARE CALIFORNIA CONSUMER PRIVACY ACT OF 2018 Published on August 22, 2018
By Melissa Borrelli
Recently, California’s government passed A concerning part of the Act is the private right a sweeping new privacy law, the California of legal action that allows consumers, either Consumer Privacy Act of 2018 (the “Act”). individually or as a class, to seek statutory or actual damages, injunctions, and other relief. The Act raises a number of practical Statutory damages can be between $100 and implementation and compliance questions for $750 per resident per incident, or actual damages, those health care entities subject to its stringent whichever is greater. The California Attorney requirements. General has also been empowered to enforce the Act, with the civil penalty for intentional HC The major provisions include the following four violations up to $7,500 per violation (although what rights that apply to “consumers,” essentially constitutes a “violation” has not yet been defined). defined as California residents: While compliance is not required until January §§ Right to Know: consumers have the right to 1, 2020, the Act will require significant changes know what personal information a business and upgrades to policies, procedures, web sites, A has collected about them, where it came and data gathering/storing software systems. It from, what it is being used for, whether it is will also result in the need to review third party being disclosed or sold, and to whom it is agreements, including Business Associate being disclosed or sold; Agreements, and to expand risk assessments and §§ Right to Opt Out: consumers can opt out monitoring of third parties. L of allowing a business to sell their personal information to third parties; The Mazars USA Health Care Consulting Group §§ Right to Delete: consumers can request that has decades of experience in privacy and a business delete their information, with information security compliance and operations. some exceptions; and If you have questions or need assistance E §§ Right to Non-Discrimination: those who complying with the new Act, the GDPR, a refresh exercise their privacy rights under the Act of your HIPAA training, a review of policies and cannot be discriminated against in either procedures, or are interested in obtaining HiTrust service or pricing. Certification, please contact us.
R There are also protections for minors and numerous requirements regarding the process for consumers to exercise their rights. While the Act does not apply to protected health information, it does apply to “personal information,” which is T defined as “information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household.”
40 | Mazars USA Ledger $188 MILLION MEDICARE FRAUD ALLEGATIONS FILED AGAINST HEALTH SYSTEM AND CLINICAL DOCUMENTATION IMPROVEMENT VENDOR ELEVATES RISK NATIONALLY September 6, 2018
By Doug Barry and Alicia Gordon
A False Claims Act lawsuit was filed by a data analytics company alleging Based on the lawsuit, clinical validation through a data analytics approach inappropriate business practices of Providence and its consultant, clinical is the first recommended step for assessing your potential risk exposure. documentation improvement company J.A. Thomas and Associates (“JATA”) Review of existing Clinical Documentation Improvement/Integrity (CDI) now Nuance. The lawsuit alleged that Providence's false Medicare claims program processes, guidelines, policies and procedures, and query forms are were not only intentional but were part of a systematic effort with JATA, to also highly recommended to assure compliance with AHIMA’s Guidelines for boost its Medicare revenue through up-coding inpatient claims. a Compliant Query Practice (2016 update).
A multi-faceted investigation, which included interviewing former employees, Current CDI practice may need to be revamped and additional education reviewing documentation training materials, and JATA’s CDI improvement provided to assure program compliance. The goal of any best-practice CDI program software, resulted in the following allegations: program is to support providers’ documentation efforts to most accurately depict the patient’s co-morbidities on presentation, what caused the §§ Providence, aided by JATA, trained doctors to up-code encounter, what happened during the encounter, why all services were §§ JATA’s software systematically promoted up-coding provided, and reflect patient-focused quality of care and the continuum of §§ JATA’s up-coding strategies extend beyond Providence care upon discharge, which allows the most accurate code assignment and reporting of diagnosis and procedures. Most troublesome is the filed document contends that JATA trained CDI RNs are part of the clinical team and have more “leeway” by providing a different As a leading change facilitator, Mazars USA LLP’s Healthcare Consulting standard for nurses than coders. This lawsuit has had a far-reaching effect Group can assist you with your effort to validate the integrity of your CDI on CDI programs nationally, as facilities are initiating risk mitigation initiatives Program. For more information about timely, valuable information and to evaluate any exposure. These allegations highlight the need for stronger insights into policies, best practices and industry developments, visit compliance oversight and controls for CDI programs. mazarsusa.com/hc.
HEALTHCARE ALERT CONTACTS
Melissa Borrelli Doug Barry Alicia Gordon 916.696.3683 858.242.2684 802.999.4688 [email protected] [email protected] [email protected]
September/October 2018 | 41 TAX
By Richard Bloom, Tifphani White-King, Mark O’Loughlin and Mark Tadros
TAX The Internal Revenue Service (IRS) and US Treasury Department have issued the first set of highly anticipated proposed regulations with respect to the international tax provisions of the Tax Cuts and Jobs Act (TCJA). They address Internal Revenue Code Section 965, otherwise known as the mandatory toll tax, transition tax or repatriation tax. They also follow on the release of several IRS Notices (Notice L 2018-07, Notice 2018-13 and Notice 2018-26) which provided preliminary guidance with respect to several challenges affecting the application and operation of the transition tax rules.
For a refresher on the fundamentals of this transition tax, see our alert titled TAX E REFORM: The International Provisions (Part 1) – Section 965 Deemed Repatriation Tax published on February 7, 2018.
The purpose of this alert is to make taxpayers aware of the new proposed regulations and highlight areas to pay close attention to, especially for purposes of R any tax return reporting and compliance for the fall / winter tax filing deadlines.
Note the proposed regulations are divided into the following sections: §§ Proposed Regulations Section 1.965-1: general rules and definitions §§ Proposed Regulations Section 1.965-2: adjustment to E&P and basis T §§ Proposed Regulations Section 1.965-3: determination of section 965(c) deductions §§ Proposed Regulations Section 1.965-4: disregarded transactions §§ Proposed Regulations Section 1.965-5: foreign tax credits §§ Proposed Regulations Section 1.965-6: foreign tax credits T §§ Proposed Regulations Section 1.965-7: elections and payments §§ Proposed Regulations Section 1.965-8: affiliated/consolidated groups §§ Proposed Regulations Section 1.965-9: dates of applicability
Proposed Regulations Section 1.965-1 These proposed regulations provide general rules and definitions with respect to
42 | Mazars USA Ledger IRS AND TREASURY DEPARTMENT RELEASE PROPOSED REGULATIONS PROVIDING TRANSITION TAX GUIDANCE: PART 1 OF 2 Published on August 3, 2017
Section 965(a) inclusion amounts, US shareholder status, controlled foreign step process for analyzing earnings and profits, taking into account any corporation status, specified foreign corporation status, reductions to Section reductions for subpart F income and distributions governed by section 959. 965(a) earnings and inclusion amounts, cash measurements dates, cash equivalents, accounts receivables, domestic pass thru entities, etc. Regarding basis, a US shareholder’s basis in an asset is generally increased for their share of subpart F income. Similarly, the regulations provide for a A few interesting items to highlight here include the fact that a specified corresponding basis increase related to a US shareholder’s section 965(a) foreign corporation (SFC) includes a controlled foreign corporation as well as inclusion amount. However, the regulations are reserved on this basis a 10% US-owned corporation (that is also not treated as a passive foreign increase as it relates to instances in which a US shareholder elects Section investment company). The indirect and constructive attribution rules come 962 status. See our accompanying article, IRS and Treasury Department into play in determining US shareholder status for purposes of ascertaining Release Proposed Regulations Providing Transition Tax Guidance: Part 2 of if an entity is a SFC (including partners of a partnership owning a potential 2. SFC). For these purposes, the proposed regulations provide a special carve out exemption for tested partners in a partnership that arguably own an Additionally, the proposed regulations prescribe limitations on gain insignificant capital or profits interest in the partnership (i.e., less than 5%). recognition and special netting rules for specified basis adjustments.
Also, for purposes of calculating earnings and profits of a deferred foreign Proposed Regulations Section 1.965-3 income corporation (i.e., SFC with positive earnings and profits or DFIC), Section 965(c) provides for the participation deduction for a US shareholder there are now special rules for reducing the earnings and inclusion of a DFIC. This participation deduction effectively reduces the section amount of an impacted US shareholder for the period during which such 965(a) inclusion amount of the US shareholder. These proposed regulations US shareholder did not have US shareholder status in reference to their provide rules regarding the section 965(c) deduction including disregarded ownership in the entity (i.e., a period during which the US person owned less amounts to alleviate double counting, the recapture of certain deductions than 10%). for expatriated entities and special rules for partnerships and S corporations with respect to treatment of their section 965(c) deduction amounts. Guidance is provided with respect to adjustments for cash equivalent amounts, in particular, adjustments related to derivative financial instruments Proposed Regulations Section 1.965-4 (excluding bona fide hedging activities). These proposed regulations put forth rules that disregard certain transactions designed purposefully to avoid the transition tax (i.e., anti-tax avoidance Multi-tiered domestic partnership structures and determination of the rules). They include check-the-box elections and accounting method reporting US shareholder for purposes of section 965 are also discussed. changes.
Proposed Regulations Section 1.965-2 Proposed Regulations Section 1.965-5 These proposed regulations contain prescriptive rules related to the These proposed regulations provide rules governing the allowance of a calculation of earnings and profits as well as basis adjustments for purposes foreign tax credit or deduction in relation to the section 965 mandatory of determining the transition tax. Specifically, the regulations include a five inclusion. The essence of the rule is that an applicable amount of foreign
September/October 2018 | 43 TAX
tax credit or deduction is allowed for that amount of the section 965 inclusion that is taxable in the US and that no foreign tax credit or deduction is allowed for the portion of the inclusion that is not taxable as a result of the section 965(c) participation exemption deduction. Amounts not allowable as a foreign tax credit by application of this rule are also not allowable as a deduction.
The proposed regulations provide an “applicable percentage” mechanism to disallow the portion of foreign tax allowable for credit or deduction to .771 for taxes attributable to the shareholder inclusion taxed at the 8% rate and .557 for credit or deduction for the shareholder inclusion taxed at the 15.5% rate.
There is also a coordination provision regarding deemed foreign income taxes paid which limits the deemed foreign tax to the proportion of the excess of the inclusion amount over the section 965(c) deduction amount. .
Proposed Regulations Section 1.965-6 This section provides rules for the computation of foreign income taxes deemed paid TAX and the allocation and apportionment of deductions. For purposes of determining foreign taxes deemed paid with respect to the section 965 inclusion, section 902 applies to treat the inclusion translated at the spot rate into the functional currency (if necessary) on December 31, 2017 as a dividend. The section 902 fraction amount for this purpose is the inclusion amount over the foreign L corporation’s post-1986 undistributed earnings and profits. Where the denominator of the fraction is less than the numerator, but more than zero, the fraction is one. When the denominator is zero the fraction is zero and no foreign taxes are deemed paid.
E For purposes of allocation and apportioning expenses, a section 965(c) deduction does not result in any gross income, including a section 965(a) inclusion being treated as exempt, excluded or eliminated income within the meaning of section 864(e)(3) or 1.861-8T(d). Nor does a section 965(c) deduction result in the treatment R of stock as an exempt asset within the meaning of those sections. Proposed Regulations Section 1.965-7 These proposed regulations address the time and manner for making certain elections with respect to the transition tax. Summarily, they clarify each of the available elections, instructions for installment payments, accelerated T payments, consolidated group reporting matters and what happens in the case of underpayments, misrepresentations and omissions.
Proposed Regulations Section 1.965-8 This section provides rules for applying section 965 and the section 965 regulations T to members of an affiliated group, including members of a consolidated group. These include rules regarding the determination of section 965(a) inclusion amounts for members of an affiliated group, guidance for designating the source of aggregate unused earnings and profits deficits, rules regarding earnings and profits and stock basis adjustments, rules that treat members of a consolidated group as a single person for certain purposes, definitions that apply for purposes of this section and
44 | Mazars USA Ledger examples of how these rules should be applied. In summary, the 200+ pages of the section 965 proposed regulations have certainly clarified and enhanced many of the challenges faced by taxpayers These are fairly specific rules to be applied under the relevant facts of and practitioners in computing the transition tax. However, there are still varying affiliated and consolidated group circumstances and not the subject issues to resolve in terms of not only the calculation but also reporting and for topical synopsis here. compliance. The proposed regulations are now subject to a 60 day public comment period. We will continue to monitor the development of these Proposed Regulations Section 1.965-9 proposed regulations and will report accordingly. Proposed Regulations Sections 1.965.1 through 1.965-8 apply beginning with the last taxable year of a foreign corporation that begins before January Please contact your Mazars USA LLP professional for additional information. 1, 2018, and with respect to a US person, beginning with the taxable year in which, or with which, such taxable year of the foreign corporation ends.
Proposed Regulations Section 1.965-4 (concerning disregard of certain transactions) applies regardless of whether, with respect to a foreign corporation, the transaction, effective date of a change in method of accounting, effective date of an entity classification election or specified payment under Proposed Regulation 1.965-4 occurred before the first day of the foreign corporations last taxable year that begins before January 1, 2018 or with respect to a US person those same matters occurred before the first day of the taxable year of the US person in which, or with which, the taxable year of the foreign corporation ends. IRS AND TREASURY DEPARTMENT RELEASE PROPOSED REGULATIONS PROVIDING TRANSITION TAX GUIDANCE: PART 2 OF 2 Published on August 3, 2018
By Richard Bloom, Tifphani White-King, Mark O’Loughlin US tax treaties generally state that a US individual may claim foreign tax and Mark Tadros credit relief for foreign individual income taxes imposed, while a domestic corporation may claim foreign tax credit relief for foreign corporate taxes Background imposed. While the concept is simple - individual to individual and corporate The passage of the Tax Cuts and Jobs Act (TCJA) in December 2017 to corporate, challenges are faced by US individual shareholders with introduced the highly complex Internal Revenue Code (IRC) section 965, respect to their deemed income inclusions from foreign corporations. which imposes a “transition tax” on accumulated earnings & profits of certain Namely, the recognition of income under code section 951(a), better known foreign corporations. As this was effective immediately for the 2017 tax year, as Subpart F, would leave an individual in a position of being subject to tax many taxpayers and tax professionals were left with little time to prepare and on foreign sourced income with no associated foreign tax credits. With the adjust for the changes. On the evening of Wednesday, August 1st the IRS passage of the TCJA, IRC section 965 has increased the prominence of the released the highly anticipated proposed regulations with respect to section scarcely used provisions of IRC section 962. 965. The 249 page release provided much needed guidance and clarity. This article will highlight how the proposed regulations impact IRC section In general, under Section 965, US shareholders of a Specified Foreign 962 and 986. Corporation (SFC) which is also a Deferred Foreign Income Corporation
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(DFIC) are subject to tax on their post-1986 untaxed earnings & profits (Post-1986 E&P). The Post-1986 E&P is measured at November 2, 2017 or December 31, 2017, with the transition tax imposed on the higher of the two amounts. A SFC is any Controlled Foreign Corporation (CFC) or any foreign corporation which has a 10% or more US shareholder, while a DFIC is any SFC that has untaxed Post- 1986 E&P greater than zero. The untaxed Post-1986 E&P held in cash & cash equivalents is taxed at 15.5%, with the remaining amounts taxed at 8%.
Section 965(a) states that any untaxed Post-1986 E&P will be deemed repatriated and taxed as Subpart F income under section 951(a), while section 965(c) provides a deduction in order to achieve the effective tax rates of 15.5% and 8%.
Code Section 962 provides that an individual who is a US shareholder may make an election to be taxed as a domestic corporation with respect to their gross income under section 951(a) for purposes of claiming the related foreign tax credits. Seemingly, this would provide an individual with foreign tax credit relief from the new tax imposed under section 965. However, section 962 further states that the taxable income determined for computing the corporate tax amount may not be TAX reduced by any deduction of the US shareholder. As the deduction under 965(c) is considered to be separate from 951(a), code section 962, as written, would not allow this deduction.
Additionally, there was ambiguity as to whether an individual could make a section L 962 election with respect to their share of a 965(a) inclusion coming from a domestic pass-through entity, and whether their share of the section 965(c) deduction would be allowed in the computation of taxable income undersection 962.
Mazars Insight E When making a section 962 election, only the net tax paid will be considered previously taxed income. Careful analysis should be done to consider if this election is the optimal position for the taxpayer.
Section 962 Proposed Regulations R The proposed regulations clarify that the taxable income determined when making a section 962 election will allow for the deduction as outlined in section 965(c), thus alleviating concerns that no code section or regulation specifically allowed for it. Further, the proposed regulations clarify that an individual US shareholder of a DFIC through a domestic pass-through may make a section 962 election with T respect to their share of the 965(a) inclusion of a DFIC, but a person who is a foreign shareholder cannot.
Taxable income under section 962 will be computed as: 1. Section 965(a) inclusions and their share of 965(a) inclusions from T domestic pass-throughs, PLUS 2. Deemed foreign tax paid with respect to income included in part 1 (section 78 gross up), LESS 3. Section 965(c) deductions and their share of 965(c) deduction amounts from domestic pass-throughs.
46 | Mazars USA Ledger Section 986 Proposed Regulations Income included under section 965(a) is considered to be previously taxed income (PTI). Thus, a taxpayer is not subject to tax when the PTI amounts are actually distributed. However, the distributions of cash will create a foreign currency gain or loss with respect to the PTI. The proposed regulations clarify how foreign currency gains and losses should be computed under section 986 with respect to section 965.
The proposed regulations provide that a foreign currency gain or loss with respect to previously taxed 965(a) inclusions should be determined based on Additionally the proposed regulations clarify that a 962 election may be made the currency exchange rate differences between December 31, 2017 and the only by an individual (including a trust or estate) who is a US shareholder, date of any actual distribution. specifically mentioning that this includes those who are US shareholders by reasons of indirect ownership through a domestic pass-through. Mazars Insight This eliminates confusion for those subject to the transition tax with a Mazars Insight measurement date of November 2nd. The wording of the proposed regulation on the computation of taxable income under section 962 creates confusion as to whether the deemed In addition, any currency gain or loss recognized with respect to section foreign tax paid amount (IRC section 78) is reduced in the same 965(a) inclusions should be reduced in the same proportion as the section proportion as the section 965(c) deduction, thus including only the 965(c) deduction associated with the 965(a) inclusion that created the PTI. amount of allowable deemed foreign tax paid in taxable income. Based These rules apply only to distributions of PTI created as a result of section on the coordination with the section 78 rule in the proposed regulation 965. They do not apply to distributions related to other PTI. 1.965-5(c)(3), we believe this is the case. Please contact your Mazars USA LLP professional for additional information. KEVIN BRADY, HOUSE WAYS AND MEANS COMMITTEE CHAIRMAN, ANNOUNCES “TAX REFORM 2.0” Published on August 6, 2018
By Michele Larrinaga and Nathan Pliskin 1. Protecting Middle Class and Small Business Tax Cuts a. The Framework proposes that Tax Reform 2.0 would contain On July 24, 2018, House Ways and Means Committee Chairman Kevin Brady provisions that make permanent the TCJA provisions related to (R-TX) released a two page document containing the House Republican’s individuals and small businesses. This would give some certainty objectives regarding the next round of tax reform that would expand upon the to individuals and small businesses with respect to their tax rates and Tax Cuts and Jobs Act (“TCJA”) passed in December 2017. other tax provisions similar to corporations. 2. Spur New Business Innovation The release, titled “House GOP Listening Sessions Framework” (the a. Tax Reform 2.0 will contain provisions that allow new businesses Framework) proposed annual Congressional updates to the tax code and to write off initial start-up costs. This is intended to help grow new outlines several additional reforms. The Framework has three objectives: businesses by alleviating the burden associated with such costs.
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3. Promoting Family Savings a. Reforming retirement savings accounts and Section 529 accounts, and creating a new “Universal Savings Accounts” to provide a fully flexible savings tool for families are proposed to be part ofTax Reform 2.0. b. Creation of expanded 529 educational accounts is intended to help families save earlier and more throughout their lives by allowing tax-free withdrawals to assist taxpayers in paying for “apprenticeships to learn a trade, cover the cost of home schooling, and help pay off student debt.” The proposal also suggests allowing penalty-free withdrawals from retirement accounts upon the birth or adoption of a child.
Although the “Tax Reform 2.0” proposal suggests several changes, the House has not presented any bills to date and there is very little detail associated with the proposal. We are in the very early stages of the legislative process.
We will continue to monitor the “Tax Reform 2.0” proposals and developments TAX closely. Please contact your Mazars USA LLP professional for additional information. L E R T T
48 | Mazars USA Ledger NEW JERSEY’S FISCAL YEAR 2019 BUDGET CONTAINS SIGNIFICANT TAX CHANGES Published on August 3, 2018
By Harold Hecht, Seth Rabe And Julie Montrone §§ Disallows any deduction, exemption, or credit allowed for federal income tax purposes under IRC Section 965 for tax years beginning on New Jersey’s fiscal year 2019 budget bill includes a new “millionaire’s tax” or after January 1, 2017 for individuals as well as dramatic corporate business tax reform. Below are §§ Disallows the IRC Section 199A deduction for qualified business the highlights. income from pass-through entities for both the Corporation Business Tax and the Gross Income Tax. Gross Income Tax §§ Applies the interest deduction limitation of IRC Section 163(j) on a pro- §§ For tax years beginning on or after January 1, 2018, a new 10.75% rata basis for interest paid to both related and unrelated parties, both gross income tax rate is imposed on individuals with taxable income in for tax years beginning after December 31, 2017. excess of $5 million. This is being referred to as the “millionaire’s tax.” §§ New Jersey modified its interest addback exception. The taxpayer is The previous top marginal gross income tax rate was 8.97%. not required to add back interest if the following criteria are met: §§ Effective for 2018, the maximum property tax deduction has been o The taxpayer can demonstrate that the increased from $10,000 to $15,000. interest was paid to a related member in a §§ New Jersey also recently amended the Gross Income Tax Act by foreign country; adding a 17% surtax on carried interest earned in the state. However, o The related member was subject to tax in in an attempt to prevent asset managers from relocating their funds that country on a tax base that included to other states, the new tax will remain in abeyance until identical the interest payment; and legislation passes in Connecticut, Massachusetts and New York. o The effective rate of the tax was equal to or greater than New Jersey’s rate, minus Corporation Business Tax three percentage points. §§ Effective January 1, 2019, New Jersey will require combined reporting §§ Effective January 1, 2019, New Jersey will use market-based sourcing for a unitary business under common control. “Unitary business” for services. In other words, services will be sourced to New Jersey if means a single economic enterprise that is made up either of separate the benefit of the service is received by the customer in the state. parts of a single business entity or of a group of business entities under §§ The old pre-apportioned NOL provisions are eliminated and instead a common ownership that are sufficiently interdependent, integrated, and new ‘prior net operating loss’ (PNOL) conversion carryover has been interrelated through their activities so as to provide synergy and mutual enacted, to be computed for the final separate return year (the 2018 benefits that produce a sharing or exchange of value among them, and tax year) and applied on a post-apportioned basis against entire net a significant flow of value among the separate parts. New Jersey states income. that the definition of a unitary business should be interpreted “to the broadest extent permitted under the U.S. Constitution.” A taxpayer can Mazars Insight elect worldwide combined reporting; the default is water’s edge filing. As some of the provisions of the bill have already taken effect, New §§ For tax years beginning in 2018 and 2019, New Jersey enacted a Jersey will not assess penalties or interest for the underpayment of tax 2.5% surtax for taxpayers with apportioned net income greater than $1 related to those items. In view of these significant changes, this is a million. The surtax is reduced to 1.5% for tax years beginning in 2020 good time to review with your Mazars USA tax team your corporation’s and 2021. potential New Jersey tax liabilities and to ensure you have plans in §§ Effective for tax years after December 31, 2016, New Jersey will allow place to institute the new market-based sourcing rules. a 95% deduction for dividends included in the calculation of federal taxable income, but only if the taxpayer has an 80% or more ownership Please contact your Mazars USA LLP professional for additional information. in the subsidiary. The deduction is lowered to 50% if the taxpayer only has a 50% or more ownership interest in the subsidiary.
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100% BONUS DEPRECIATION MAY APPLY TO QUALIFIED IMPROVEMENT PROPERTY PLACED IN SERVICE PRIOR TO JANUARY 1, 2018 Published on August 10, 2018
By George Moffa and Kyle Wissel
With the enactment of the Tax Cuts and Jobs Act (TCJA), bonus depreciation under TAX Sec. 168(k) was substantially modified to allow businesses to deduct 100% of the cost of eligible property when placed in service, subject to annual 20% phasedowns starting in 2023. While the IRS had informally stated that qualified leasehold improvement, qualified retail improvement, qualified restaurant and qualified improvement property placed in service after September 27, 2017 and before L January 1, 2018 would be eligible for bonus depreciation, it wasn’t until August 3, 2018 that this was formalized through the issuance of proposed regulations under Internal Revenue Code (IRC) Section 168(k).
Qualified property for purposes of the 100% bonus depreciation rules is now E expanded to include qualified leasehold improvement, qualified retail improvement and qualified restaurant property as defined under the Internal Revenue Code of 1986, as amended on the day prior to the TCJA’s enactment (i.e., January 1, 2018). The proposed regulations clarify that the depreciable life of qualified leasehold improvements, qualified retail improvements and qualified restaurant property does R not change to 39 years from 15 years until after December 31, 2017. These three types of property therefore have a 15 year life, and if acquired and placed in service after September 27, 2017 and before January 1, 2018 will be eligible for 100% bonus depreciation.
T Under the TCJA, qualified improvement property was ascribed a 39 year life and was not eligible for bonus depreciation. The primary significance of qualified improvement property is that, in contrast with qualified leasehold improvements, there is no requirement that the placed-in-service date occurs more than three years after the date the base building was first placed in service. The proposed T regulations provide relief here and allow 100% bonus depreciation on qualified improvement property acquired and placed in service after September 27, 2017 and before January 1, 2018.
Beginning January 1, 2018, all of the foregoing property types will fall under the category of qualified improvement property. As the law is currently drafted, qualified
50 | Mazars USA Ledger improvement property will have a 39 year depreciable life and will not be Self-constructed property is not subject to the foregoing rules for written eligible for bonus depreciation. binding contracts. The proposed regulations provide that the September 27, 2017 timing requirement is met if manufacturing, constructing or production Of course, Congress may choose to correct this, as it does appear the commences after that date. Regardless of the date the property is deemed intention was to include it as bonus eligibility. Also worth noting is the acquired, the rules are clear that it be placed in service prior to January 1, interplay between this and other recent changes to the tax law (e.g., interest 2018. expense limitations under 163(j)). Mazars Insight In order to qualify for 100% bonus depreciation, the proposed regulations With the extended due date of 2017 calendar year tax returns quickly provide that the property be acquired after September 27, 2017, or acquired approaching, these clarifications may allow for bonus depreciation that by the taxpayer pursuant to a written binding contract entered into after was questionable before the introduction of the proposed regulations. September 27, 2017. It is further provided that property manufactured, One may want to consider whether bonus depreciation is available constructed or produced under a written binding contract entered into prior on returns that were already filed without the clarifications provided to an activity’s commencement is acquired pursuant to a written binding by these proposed regulations, and whether those returns could be contract. The date on which the contract is entered into is the date the amended to provide immediate tax benefits. property is acquired, notwithstanding any closing, delivery or similar date referenced on the contract. Please contact your Mazars USA LLP professional for additional information.
A letter of intent is not a binding contract under the proposed regulations. IRS ISSUES GUIDANCE ON SMALL BUSINESS ACCOUNTING METHOD CHANGES Published on August 10, 2018
By James Wienclaw and Minako Steel This Revenue Procedure clarifies that taxpayers seeking to change to one The Internal Revenue Service recently issued Revenue Procedure 2018-40, or more TCJA permitted accounting method changes for small businesses which provides guidance to small business taxpayers regarding how to must, if eligible, use the automatic change procedures in Rev. Procs. obtain automatic consent to change their method of accounting as a result 2015-13 and 2018-31 (or any successors), as modified. However, the above of certain statutory changes enacted as part of the Tax Cuts and Jobs Act method changes are subject to reduced filing requirements where only (“TCJA”). The TCJA allows small business taxpayers with average annual portions of Form 3115 need be completed, and more than one of the above gross receipts of $25 million or less (indexed for inflation) in the prior three- method changes can be reported in a single filing as long as each change is year period the option to use certain simplified tax accounting methods. identified. This is a welcome update, as method change applications can be The simplified tax accounting methods allow eligible taxpayers to: onerous and costly.
§§ Use the overall cash basis method accounting, Generally, under prior law, IRC Section 481(a) would require taxpayers to §§ Be exempt from certain accounting rules for inventories, recognize the resulting expense from a method change in the year of the §§ Be exempt from capitalizing costs related to real and personal property change and to recognize income from a method change over a four year and period. Revenue Procedure 2018-40 gives taxpayers some flexibility with §§ Be exempt from long-term contract reporting. respect to Section 481 adjustments originating in a year prior to 2017 if the taxpayer makes a related change in method of accounting under this Click here to read our February 19, 2018 Tax Alert that further discusses Revenue Procedure. these method changes.
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For example, a taxpayer that changed from the cash method to an overall accrual method in a prior year and was required to take the relevant § 481(a) adjustment into account over four years could continue to take into account any remaining adjustment or choose to combine or net the remaining portion of the prior § 481(a) adjustment with the § 481(a) adjustment required by the related change in method of accounting made under Revenue procedure 2018-40. Any taxpayer choosing to combine or net the § 481(a) adjustments must indicate this choice in the statement required on Line 26 on the Form 3115, Application for Change in Accounting Method.
The Revenue Procedure is generally effective for tax years beginning after December 31, 2017. However, for method changes involving exempt long-term contracts, it is effective for contracts entered into after December 31, 2017, during tax years ending after December 31, 2017. In addition, the IRS has waived the five year restriction on eligibility for making automatic changes for a taxpayer's first, second, or third tax year beginning after December 31, 2017. Method change applications may be made with a timely filed return.
Mazars Insight TAX While some of the business provisions in the new law created additional complexity and uncertainty, the tax accounting method changes for eligible small business along with Revenue Procedure 2018-40 expand eligibility for the use of cash basis accounting methods as well as simplify the tax compliance burdens on small businesses in making a method change. In L addition, one or more of these method changes can provide planning opportunities for acceleration of expenses or income deferral.
For example, where a business has more receivables than payables, the cash method will generally defer income over the accrual method. Conversely, E where a business has more payables than receivables, the cash method may accelerate income relative to the accrual method. It is important to project business income over a few years and convert results to the cash basis. Business owners must be mindful of cash management and requirements to pay taxes as well as possibly losing eligibility to use any of the above methods R and switching back.
Careful consideration and planning is required before adopting an overall change to cash basis tax reporting. Furthermore, taxpayers that made prior, but related, method changes must consider the transition rules outlined in the T Revenue Procedure.
Rev. Proc. 2018-40 also indicates that the Treasury Department and the Internal Revenue Service expect to publish future guidance to implement legislative changes enacted by the TCJA and invite comments for future guidance. We will monitor T future developments and report accordingly.
Please contact your Mazars USA LLP professional for additional information.
52 | Mazars USA Ledger U.S. TREASURY ISSUES PROPOSED REGULATIONS ADDRESSING THE NEW SEC. 199A 20 PERCENT PASS-THROUGH TAX DEDUCTION Published on August 13, 2018
By Richard Bloom, Faye Tannenbaum and Nathan Pliskin §§ Any entity that is engaged in multiple trades or businesses must report, on Schedules K-1 issued to its owners, amounts of income, wages, The Tax Cuts and Jobs Act (TCJA) created a new 20% deduction for basis in qualified property, etc. for each trade or business to its owners. qualified business income to reduce the tax burden on sole proprietors, the owners of S Corporations and partnerships and certain trusts and estates Aggregation Rules and their beneficiaries. On August 8, 2018, the Department of the Treasury The proposed regulations permit (although do not require) individuals to (Treasury) issued proposed regulations interpreting the new provision. aggregate multiple separate trades or businesses. This will help some Taxpayers should take careful note of the new regulations as the pass- taxpayers maximize the available pass-through deduction by combining the through deduction is effective for tax years beginning after December 31, available W-2 wages and basis in qualified property, thereby allowing the 2017. wages and basis of one business to increase the available deduction of a separate aggregated business. The proposed regulations provide computational and definitional guidance §§ In order to aggregate trades and businesses the following regarding the availability of the pass-through deduction. The regulations requirements must be met: are voluminous and detailed. For an overview of the basic mechanics of 1. The same person or group (directly or indirectly) must own a the pass-through deduction, please see our tax alert “Utilizing the New 20% majority interest in each aggregated trade or business. Pass-Through Tax Deduction.” 2. All items attributable to each trade or business must be reported on returns with the same taxable year (excluding short years). Qualified Trade or Business 3. None of the aggregated trades or businesses is a specified service Only a qualified trade or business is eligible for the pass-through deduction. trade or business. §§ The regulations adopt Section 162’s definition of a trade or business for 4. The taxpayer must establish two of the following three factors purposes of the pass-through deduction (with very limited exceptions, demonstrating the existence of a larger integrated business: such as certain rental activities). i. The businesses provide products and services that are the §§ Entities are responsible for determining the specific trades or same or customarily offered together; businesses in which they are engaged. They must also determine ii. The businesses share facilities or share significant centralized whether any such trades or businesses constitute a specified service business elements, such as personnel, accounting, legal, trade or business (discussed below). manufacturing, purchasing, human resources, or information §§ Both individuals and entities that conduct multiple trades or businesses technology resources; and/or must allocate all relevant items (wages, basis, income, etc.) amongst iii. The businesses are operated in coordination with, or reliance the multiple trades or businesses using a “reasonable method based upon, one or more of the businesses in the aggregated group on all the facts and circumstances.” (for example, supply chain interdependencies). o Treasury is still considering how to apply rules concerning the §§ Individuals may elect to aggregate trades or businesses owned both reasonable allocation of items and is requesting comments on a directly and through an entity. method to allocate items that are not clearly attributable to a single §§ Multiple owners of a business do not need to elect to aggregate in the trade or business and on any safe harbors that may be appropriate. same manner.
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§§ Aggregation must be disclosed on the individual’s tax return identifying each aggregated business. §§ Treasury is still examining, and has requested comments on, the aggregation of trades or businesses by entities and tiered structures.
Mazars Insight The Treasury Department and the IRS considered using aggregation methods consistent with those used for purposes of the passive activity rules. However, for various reasons, they felt the passive activity aggregation rules were not appropriate for section 199A. As a result, taxpayers now face added complexity and, potentially, additional compliance costs since they may have to track different aggregated businesses under the passive activity rules and the pass-through deduction rules.
Specified Service Trade or Business (SSTB) The law provides that certain enumerated SSTBs are not eligible for the pass-through deduction (unless the individual owners’ taxable income is below a threshold amount). §§ The proposed regulations provide additional guidance on each type of SSTB. TAX Please see the chart of SSTB Guidance Under Proposed Regulations at the end of this Tax Alert for a summary of this guidance. §§ Treasury has also interpreted the law’s catchall provision that defines SSTB to include any trade or business where the principal asset is the reputation or skill of one or more employees or owners. This vague provision has been interpreted L relatively narrowly, identifying three types of businesses to which it applies: 1. A trade or business in which a person receives fees, compensation, or other income for endorsing products or services; 2. A trade or business in which a person licenses or receives fees, compensation or other income for the use of an individual’s image, likeness, name, E signature, voice, trademark, or other symbols; or 3. Receiving fees, compensation, or other income for appearing at an event or on radio, television, or another media format. §§ The regulations provide a de minimis rule that allows trades or businesses to perform certain minimal amounts of SSTB activities without being treated as a R SSTB. If less than 10% of gross receipts of the trade or business are attributable to SSTB activities, then the trade or business will not be treated as a SSTB. For businesses with gross receipts greater than $25 million, the de minimis rule threshold is lowered to 5%. §§ The regulations also provide rules to prevent taxpayers from segregating certain T back-office and administrative functions from a SSTB or shifting income via rental or other expenses. These rules will limit the feasibility of various strategies that have been proposed as a way for taxpayers to circumvent the SSTB limitations. The following rules apply where a trade or business has 50% (direct or indirect) or more common ownership with a SSTB: T o A trade or business will be treated as a SSTB if it provides 80% or more of its property or services to a commonly controlled SSTB. o If a trade or business provides less than 80% of its property or services to a commonly controlled SSTB, then that portion of the trade or business providing property or services to the commonly controlled SSTB will be treated as part of the SSTB.
54 | Mazars USA Ledger o If a trade or business has common ownership with a SSTB and used by the business that is either (i) still depreciable under the property’s has shared expenses with the SSTB, including wage or overhead applicable recovery period, or (ii) was placed into service within the prior 10 expenses, then the business will be treated as a SSTB if the years. gross receipts of the trade or business do not exceed 5% of the total combined gross receipts of the trade or business and the SSTB in The proposed regulations provided the following additional guidance on the the tax year. UBIA of qualified property: §§ A taxpayer who takes 100% bonus depreciation or expenses property Mazars Insight under Sec. 179 will still be able to utilize the cost basis of the asset for The preamble to the proposed regulations discusses the rationale purposes of the UBIA limitation. behind how the various SSTBs were defined and provides insight into §§ For property contributed to a partnership or S Corporation, the UBIA will the existing authorities that were used as guidelines. Even with the generally be the carry-over basis. guidance provided by the proposed regulations, many taxpayers will §§ For property acquired in a like-kind exchange, the date the exchanged continue to face substantial uncertainty about whether certain trades or basis in the property was placed into service will generally have the businesses constitute SSTBs. Treasury is requesting comments on its same placed in service date as the relinquished property. Any excess proposed rules and the clarity of the definitions it has provided. basis in the replacement property will be treated as placed in service on the date the replacement property is placed in service by the business. Determination of W-2 Wages §§ Partnership special basis adjustments under 734(b) and 743(b) are not The total amount of “W-2 wages” paid by a business during the year treated as separate qualified property and therefore will not increase a can serve to limit the amount of pass-through deduction available to the business’s UBIA. business’s owners. Treasury provided the following guidance on calculating §§ An improvement to pre-existing qualified property is treated as separate the wage limitation: qualified property with a placed in service date based on the date the §§ The definition of wages generally follows the rules under repealed code improvement (not the underlying property) was placed in service. section 199, with some modifications. §§ The depreciable period of any improvement of qualified property is §§ Wages paid by third parties, on behalf of a business, can qualify as determined by treating the improvement as separate qualified property eligible “W-2 wages” eligible for the pass-through deduction. This that is first placed in service on the date the improvement is made. clarifies that businesses will not be penalized for utilizing the services §§ Treasury is implementing anti-abuse rules to prevent taxpayers from of a professional employer organization (PEO). However, Treasury has acquiring property specifically to increase UBIA. Property will not be indicated that taxpayers would be expected to treat PEOs consistently deemed qualified property if it is acquired within 60 days of the end of a for all areas of taxation. This could impact the treatment of such tax year and disposed of within 120 days without having been used in employees with respect to items such as profits interests. a trade or business for at least 45 days prior to disposition, unless the §§ The wage limitation applies separately for each trade or business of taxpayer can demonstrate that the principal purpose of the acquisition a taxpayer (unless the trades or businesses are aggregated by an and disposition was something other than increasing the pass-through individual taxpayer). The regulations provide that the wages should deduction. be allocated to each trade or business in the same proportion as deductions associated with the wages are allocated amongst the trades Other Issues or businesses. §§ The proposed regulations clarified that the pass-through deduction will §§ In an acquisition or disposition of a trade or business, where employees not affect a partner’s or S Corporation shareholder’s outside basis. are employed by multiple taxpayers during the year, the total W-2 §§ Previously disallowed losses (for example suspended passive activity wages for the year of the acquisition/disposition are allocated between losses, at-risk loss carryovers, and losses suspended due to a lack of each taxpayer based on the period during which the employees were outside basis) are factored in when determining a taxpayer’s qualified employed by such taxpayer. business income and thus the amount of the pass-through deduction in §§ In a simultaneously released proposed revenue procedure, the IRS has the year allowed. This rule only applies to losses disallowed after 2017. provided three methods for calculating W-2 wages. §§ Losses carried forward to offset against qualified business income in future years will not affect the deductibility of such losses under any Determination of Basis in Qualified Property other area of the code. A taxpayer’s “unadjusted basis immediately after acquisition” (UBIA) of §§ Net operating losses deducted in the current year are not relevant for certain qualified property used in a trade or business can also limit the determining qualified business income. amount of pass-through deduction available to a business’s owner. The §§ The pass-through deduction is only allowable with respect to income amount is generally equal to the cost basis of purchased qualified property effectively connected to a US trade or business. The pass-through
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deduction will not be allowed in instances were a taxpayer elects to treat certain income as effectively connected. For example, a foreign taxpayer may not take advantage of the pass-through deduction by making an election to treat certain income from US real property as income effectively connected with a US trade or business. §§ Treasury is concerned about employees changing their status to non-employees and continuing to provide the same services to their former employer to take advantage of the pass-through deduction. In order to stop this practice, the proposed regulations provide that any such person will be presumed to be in the trade or business of performing services as an employee and therefore ineligible to take advantage of the pass-through deduction. The presumption is rebuttable upon a showing of non-employee status. §§ Treasury is also concerned with individuals creating multiple taxable trusts to reduce total income below the threshold amounts for limitations. The proposed regulations provide a rule that will treat multiple trusts as a single trust for purposes of section 199A if a significant purpose of the trusts is to receive a deduction under section 199A. Regulations were also proposed under section 643 that treat two or more trusts as a single trust if such trusts have substantially the same grantor or TAX grantors and substantially the same primary beneficiary or beneficiaries, and if a principal purpose for establishing such trusts is the avoidance of Federal income tax.
Mazars Insight L The proposed regulations provide a significant amount of guidance with respect to different aspects of section 199A. They also attempt to curtail or eliminate some of the planning strategies that have been discussed since the passage of the TCJA. A public hearing on these proposed regulations is currently scheduled for October E 16, 2018. We will continue to monitor the development of administrative guidance concerning the pass-through deduction and report accordingly. R Please contact your Mazars USA LLP professional for additional information. T T
56 | Mazars USA Ledger September/October 2018 | 57 TAX
By Harold Hecht and Seth Rabe
The South Dakota Supreme Court issued its decision in South Dakota v. Wayfair, Inc. on June 21st (see our Tax Alert: The Wayfair Decision and the Changing Landscape of Sales Tax). Since that time, even though the Wayfair case was remanded to the South Dakota courts for further evaluation, numerous states that already had economic nexus-type statutes have issued guidance, including effective dates, for taxpayers to register and begin collection of sales tax. Others have enacted legislation designed to be similar to the standards of the South Dakota law. Clearly, these states believe that South Dakota will ultimately prevail on the remand and any further challenge. However, this outcome is not final until all reviews and appeals are decided. During this period of TAX uncertainty, companies will need to decide whether to begin complying with these state standards, or risk potential liability for failure to collect tax in the future.
Although approximately 25 states currently have legislation similar to South Dakota, not L all of them have issued guidance as to when they require registration and collection. E Below is a sample of just a few of the states that have weighed in on Wayfair: R T T
58 | Mazars USA Ledger STATES RESPOND TO THE WAYFAIR DECISION Published on August 20, 2018
Alabama New Jersey On July 3, 2018, the Alabama Department of Revenue issued guidance for Effective October 1, 2018, remote sellers with more than $100,000 in gross online sellers stating that the Department will prospectively tax remote sales revenue or 200 or more transactions into New Jersey will be required to made on or after October 1, 2018. Alabama requires at least $250,000 of register and collect sales tax. sales into the state in order to establish nexus. Mazars Insights Connecticut As noted, the above are just a sample of the states that will require Effective December 1, 2018, Connecticut will expand its sales tax nexus collection of sales tax in the very near future. Companies selling standard to include remote sellers who surpass $250,000 and 200 annual taxable products remotely at retail, via the internet or otherwise, will transactions to customers in the state. need to quickly review their prior sales, both dollar amount and order volume, and evaluate whether to collect sales tax in impacted states. Illinois Effective October 1, 2018, Illinois remote sellers with sales exceeding Please contact your Mazars USA LLP professional for additional information. $100,000, or 200 or more transactions in the state have nexus.
Michigan After September 30, 2018, remote sellers with sales exceeding $100,000, or 200 or more transactions with Michigan residents have an economic nexus with the state.
TAX PRACTICE BOARD
Charles Schneider Howard Landsberg Faye Tannenbaum 212.375.6515 212.375.6604 | 516.282.7209 212.375.6713 Charles.Schneider @MazarsUSA.com [email protected] [email protected]
James Toto James Wienclaw Richard Bloom (EDITOR) 732.205.2014 516.620.8551 732.475.2146 [email protected] [email protected] [email protected]
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