MWC Tax Policy Update Team

The “listening sessions” for Tax Cuts 2.0 have begun. Ways and Means Republicans gathered last week to discuss which tax provisions should go into the forthcoming legislative package. Ways and Means Chairman Kevin Brady is pushing hard to release a proposal by July 26 before the House leaves for the August recess — an ambitious timeline given that no major decisions were made at the July 11 meeting.

The tax-writing panel is reportedly considering a provision that would index capital gains to inflation. Additionally, Rep. Carlos Curbelo (R-FL) told reporters that Tax Cuts 2.0 would not address international items like the global intangible low-tax income (GILTI) or the base erosion anti-abuse tax (BEAT). These two international provisions might be addressed in the technical corrections bill that Chairman Brady is planning to introduce after the midterm elections. GOP tax writers are waiting to see what the Treasury will do first via guidances and whether the regulatory fixes will be sufficient.

 

The recent enactment of the Bipartisan Budget Act of 2018 extended and significantly expanded the existing tax credit for carbon sequestration under Section 45Q of the Internal Revenue Code. Although the Section 45Q credit for carbon sequestration has been available since 2008, the limitations and uncertainty associated with the credit greatly limited its effectiveness in spurring investment in eligible carbon capture equipment. As amended, the new Section 45Q represents a serious attempt by Congress to make the credit more attractive by incorporating a number of industry-favorable changes.

Check out McGuireWoods’ legal alert on this issue here.

House Republicans are preparing to hit the campaign trails with another tax-cut package in tow. Ways and Means Chairman Kevin Brady (R-TX) is hoping to provide a public preview of Tax Cuts 2.0 in August; this should give lawmakers enough time to review the package of tax proposals before a floor vote in the fall.

Those who have been tracking Tax Cuts 2.0 already know that the centerpiece of the legislation will focus on making permanent the individual and select business tax cuts enacted in 2017. In addition to permanency, the tax package is also expected to include provisions addressing retirement savings and education benefits. McGuireWoods’ Tax Policy Update team has heard that lawmakers are interested in consolidating some of the education tax benefits. And according to a Ways and Means staffer, the retirement provisions under consideration do not include “Rothification,” whereby the pre-tax benefits of certain retirement plans would be limited or eliminated.

For fans of tax extenders, Tax Cuts 2.0 will likely disappoint, as some lawmakers have already indicated that they would not be included. Although President Trump would like to use the forthcoming tax package to cut the corporate tax rate further down to 20 percent from the current 21 percent, the inclusion of such a proposal is highly improbable – it just wouldn’t make a good sound bite ahead of the midterms.

On June 28, the Senate Finance Committee held a confirmation hearing for Charles Rettig, nominee to be the next commissioner of the IRS.

A copy of McGuireWoods’ congressional hearing report is available here if you’re interested in reading some of the highlights. Many thanks to our summer intern Derek Wu for covering the hearing.

 

 

The House and Senate convene today at noon and 3 p.m., respectively.

House

Votes. Lawmakers will take up a series of homeland security and natural resources bills under suspension of the rules — see the complete list here. The following financial services measures are also on deck:

  • H.R. 5783 – the Cooperate with Law Enforcement Agencies and Watch Act would provide a safe harbor for financial institutions that maintain a customer account at the request of a federal and state law enforcement agency.
  • H.R. 435 – the Credit Access and Inclusion Act would clarify federal law related to reporting certain positive consumer credit information to consumer reporting agencies.
  • H.R. 4294 – the Prevention of Private Information Dissemination Act would impose a criminal penalty for unauthorized disclosures of certain individually identifiable information by officers or employees of a federal department or agency.
  • H.R. 6069 – the FIND Trafficking Act would require the U.S. comptroller general to conduct a study on how virtual currencies and online marketplaces are used to buy, sell, or facilitate the financing of goods or services associated with sex trafficking or drug trafficking.

Foreign Investment Risk Review Modernization Act (H.R. 5841). The House will take up FIRRMA under suspension of the rules. The bill would overhaul operations at the Committee on Foreign Investment in the United States (CFIUS) and reform current U.S. export controls. The House bill contains a few provisions that are not included in the Senate version of the measure. For example, the bill includes language that would empower CFIUS to report any foreign investments in the U.S. entertainment industry that may result in censorship. CFIUS would also have the power to suspend certain pending transactions — those that may result in foreign ownership of a U.S. company — until a final determination is made.

Immigration Part II. The House is expected to take up consideration of the Border Security and Immigration Reform Act (H.R. 6136) — the “compromise” immigration bill that would, among other things, offer DACA recipients a pathway to citizenship.

Defense Reauthorization. Lawmakers will consider a motion to go to conference on the FY 2019 defense reauthorization bill (H.R. 5515).

Senate

FY 2019 Appropriations. The Senate is expected to resume consideration of H.R. 5895, the “minibus” spending package that would cover Energy-Water, Legislative Branch, and Milcon-VA funding for fiscal year 2019. A final vote on the package is scheduled for 5:30 p.m. today.

Farm Bill. The chamber will also take its first procedural vote to kick off debate on the Senate version of the 2018 farm bill.

Senate Banking Hearings. The Senate Banking Committee will hold hearings on Tuesday and Thursday to discuss legislative proposals related to increasing access to capital and examining corporate governance.

Key Hearings and Meetings

Tuesday, 6/26

  • House Financial Services Committee. Subcommittee hearing on “International and Domestic Implications of De-Risking.”
  • House Appropriations Committee. Committee markup of FY 2019 Labor-HHS-Education appropriations bill.
  • Senate Appropriations Committee. Markup of an original bill making appropriations for the Department of Labor, Department of Health and Human Services, Department of Education, and Related Agencies FY 2019.
  • Senate Finance Committee. Hearing on prescription drug affordability and innovation, focusing on addressing challenges in today’s market.
  • Senate Banking Committee. Hearing to examine legislative proposals to increase access to capital.

Wednesday, 6/27

  • Senate HELP Committee. Hearing to examine how to reduce health care costs, focusing on understanding the cost of health care in America.
  • Senate Appropriations Committee. Subcommittee hearing to examine proposed budget estimates and justification for fiscal year 2019 for the Department of State.
  • House Financial Services Committee. Hearing on “Oversight of the Department of Housing and Urban Development.” HUD Secretary Ben Carson to testify.

Thursday, 6/28

  • Senate Banking Committee. Hearing to examine legislative proposals to examine corporate governance.
  • Senate Appropriations Committee. Markup of the FY 2019 Defense spending bill and Labor-HHS-Education spending bill.
  • SEC. Opening meeting to consider whether to propose a rule that would permit ETFs that satisfy certain conditions to operate without first obtaining an exemptive order from the commission. The commission will also consider potential amendments to smaller reporting company definition; rules to require the use of the XBRL format for the submission of operating company financial statement information and fund risk/return summary information; potential amendments to Form N-PORT and Form N-1A. More details here.

On June 21, breaking with nearly half a century of legal precedent, the U.S. Supreme Court ruled 5-4 in South Dakota v. Wayfair, Inc. that online retailers may now be required to collect sales tax in states where they do not maintain a physical presence. The implications of the court’s decision are monumental, since this opens the door for every state with a sales tax (45) to follow in South Dakota’s footsteps and require online retailers to collect tax. According to a December 2017 Government Accountability Office report, this could amount to over $13 billion in revenue for states.

 The road to repealing the Court’s 1967 Bellas Hess v. Illinois and 1992 Quill v. North Dakota decisions has been long. In Quill, the Supreme Court limited a state’s ability to collect sales tax to retailers with a physical presence (e.g., a warehouse or store) in the taxing jurisdiction. Quill followed the Bellas Hess decision in which the Supreme Court determined that states cannot tax mail order companies for in-state sales, unless they maintained a physical presence in the state.

 In 2015, nearly 50 years after Bellas Hess, Justice Kennedy issued an invitation to revisit both these cases, signaling a potential shift in the court’s opinion. In Direct Marketing Association v. Brohl, Justice Kennedy noted that in light of technological and social changes that have taken place in an increasingly interconnected economy, the Supreme Court should reconsider its previous decisions. Justice Kennedy also recognized the negative financial repercussions for states as a result of potentially outdated decisions in both these cases.

In Wayfair, the majority recognized that a physical presence requirement puts traditional brick-and- mortar companies at a disadvantage since they still have to collect sales tax, though online sellers do not. It also recognized that the physical presence requirement imposes an arbitrary standard on sales tax collection – while sellers with a pervasive Internet presence and a large customer base in-state were not required to collect sales tax, businesses with only a few items of inventory in the state were still subject to sales tax requirements.

 Of course, the dissent took a different view, noting that this is more of a policy issue for Congress to take action. While the justices may have hoped that Congress might resolve the situation for states and online retailers, most sales tax collection bills have repeatedly failed. In 2013, the Senate passed the Marketplace Fairness Act, but the House did not act on the bill. More recently, earlier this year, Rep. Kristi Noem (R-SD) unsuccessfully pushed for the passage of the Remote Transactions Parity Act in the House.

Given the Supreme Court decision in Wayfair there is now additional pressure on Congress to act. Without congressional action, retailers may face a myriad of state sales tax collection statues, creating major administrative burdens, especially for small sellers. In the coming months, many online retailers will place increasing pressure on Congress to create a uniform set of rules in this space. However, given Congress’ other priorities, the chances of passing a bill remain remote.