A Los Angeles-area cannabis product manufacturer is being investigated for conducting unlicensed operations that put illegally manufactured cannabis products back into the legal market. Affected products include 3.3 million Kushy Punch brand gummies with an estimated value of $64 million. The complaint against the company also alleges they were making a product called “Kushy Punch T.K.O.” that contained more than the legal limit of THC. The company’s manufacturing licenses have been revoked, and a penalty could apply in the amount of up to three times the amount of the $75,000 license fee for each day of unlicensed operation. (https://cannabis.ca.gov/2020/09/24/cannabis-licensing-authorities-file-civil-action-against-vertical-bliss-kushy-punch-for-unlicensed-activity/)
CPAs, get four hours of fraud CPE with our 2020 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.
The SBA has released a new set of frequently asked questions addressing PPP loan forgiveness. These FAQs address some, but certainly not all, of the questions we have been asking.
The FAQs clarify the following issues:
- A borrower has 10 months from the end of the Covered Period (8 or 24 weeks) to submit their loan forgiveness application, and they are not required to make any payments until the forgiveness amount from that application is remitted to the lender by the SBA.
- Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount. The borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven.
- Both payroll and nonpayroll costs that were incurred prior to the covered period, but paid during the covered period, qualify for forgiveness.
- Payroll costs include all forms of cash compensation paid to employees, including tips, commissions, bonuses, and hazard pay. However, there is still no clarification as to caps on these amounts, other than the $100,000 on an annualized basis.
- Forgiveness does not apply to retirement or health care benefits “accelerated” into the covered period. Only the amount of benefits proportional to the covered period qualify for forgiveness.
- If a lease that existed prior to February 15, 2020, expires on or after February 15, 2020, and is renewed, the lease payments made pursuant to the renewed lease during the Covered Period are eligible for loan forgiveness.
- If a loan on real or personal property that existed prior to February 15, 2020, is refinanced on or after February 15, 2020, the interest payments on the refinanced loan during the Covered Period are eligible for loan forgiveness.
- Interest on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property.
- Utility expenses for the “distribution of transportation” refers to transportation utility fees assessed by state and local governments. Payment of these fees by the borrower is eligible for loan forgiveness. For more information on these fees, go to www.fhwa.dot.gov/ipd/value_capture/defined/transportation_utility_fees.aspx.
For the full text of the FAQs, go to:
Attend Spidell’s 2020/21 Federal and California Tax Update webinar and get more information on finalizing your clients’ PPP forgiveness applications. Click here for details.
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If you’re going to file an appeal, you should stick around for it. A taxpayer was convicted of tax evasion for not filing returns reporting income from his log cabin home building business. The taxpayer filed an appeal, but then failed to report for prison as scheduled. Under the fugitive-disentitlement doctrine, a court is allowed to dismiss a defendant’s appeal if he or she flees while the appeal is still pending. (U.S. v. Birk (January 9, 2020) U.S. Court of Appeals, Tenth Circuit, Case No. 19-1422)
CPAs, get four hours of fraud CPE with our 2019 Fundamentals of Fraud Prevention and Detection On-Demand Webinar. Click here for more information.
The “pipe dream”: originally a reference to the fantastical hallucinations caused by smoking an opium pipe.
Looking back over the legislation of the past 40 years, there have been numerous occasions in which a sales tax on services bill loomed over California taxpayers, for example AB 194, which we covered in the July 1995 issue of the California Taxletter. These efforts have been stepped up recently; since Robert Hertzberg became a state senator in 2014, he has introduced such a bill each year (SB 8, SB 1445, SB 640, SB 993, and most recently, SB 522). These bills all failed, and Spidell and other tax advocacy groups have consistently been vocal in speaking out against a sales tax on services.
There are other states that tax some services, but the few attempts to enact a broadly applied tax on services have all failed. For example, in four states (Florida, Maryland, Massachusetts, and Michigan) such laws were passed, only to be almost immediately repealed before they went into effect.1
In California, sales tax on services bills are generally met with strong opposition. The basic arguments against taxing services are:
- Increased cost to consumers;
- Increasing the competitive disadvantage faced by California businesses (especially small businesses);
- Compliance and administrative nightmares;
- Creating competitive disadvantages between in-state businesses;
- Tax pyramiding, which occurs when taxes are imposed on various stages of production of an item; and
- In years where California has a budget surplus, the necessity of such a tax is questionable.
Spidell will continue to oppose attempts to implement a sales tax on services. In comparison to the revenue such a tax would bring in, the disadvantages would do more to hurt Californians than benefit them. We think the Legislature can put that in its pipe and smoke it.
1 California Tax Foundation. “The Challenge of Taxing Services” Available at: https://caltax.org/research/sut_20190109.pdf
This week we’re covering a bill that impacts tax and retirement provisions and whether California conforms
To listen to this podcast, go to: http://traffic.libsyn.com/spidellpublishing/SCM_12-22-19.mp3
Subscribers to Spidell’s California Taxletter® or the Online Research Package can access the transcript here: https://www.caltax.com/research/california-taxletter/podcast-transcripts/podcast-tax-extenders-and-secure-act/
For this month’s look-back over the past 40 years, we dug out the 1979 FTB Form 540 and noticed a cryptic note at the very bottom of page 2 under the preparer’s signature line: “If adjusted gross income on Federal return is different from line 31, attach explanation.”
According to Lynn Freer, some taxpayers ([cough] her father) provided the following explanation: “Beats the heck out of me” and never heard anything back from the FTB.
You can see the entire 1979 Form 540 at www.caltax.com/spidellweb/public/editorial/cat/1119-1979ca540.pdf.
In the June 1991 issue of the California Taxletter, we ran an article that highlighted the seemingly arbitrary rules that determined whether a food was taxable. The article stated that (at the time) sales tax applied to certain foods based on random quantity, depending on what the BOE determined was a “suitable” amount for consumption. For example, a pint of ice cream was not considered a suitable amount for consumption so no tax applied, but a one-half pint was suitable and so tax applied. (This anonymous author can eat a whole pint, no problem, and will pay the tax to prove it.)
The issue stemmed from language in 18 Cal. Code Regs. §1603: “… tax applies to sales of cold food products … in a form suitable for consumption on the seller’s premises [emphasis added].”
However, the current version of §1603(c) now includes a clarifying definition:
(A) For purposes of this subdivision (c), the term “suitable for consumption on the seller’s premises” means food products furnished:
- In a form which requires no further processing by the purchaser, including but not limited to cooking, heating, thawing, or slicing, and
- In a size which ordinarily may be immediately consumed by one person such as a large milk shake, a pint of ice cream, a pint of milk, or a slice of pie. Cold food products (excluding milk shakes and similar milk products) furnished in containers larger in size than a pint are considered to be in a form not suitable for immediate consumption.
Note the somewhat subjective terms “large milkshake” and “a slice of pie.”
Sales tax oddities as related to food continue to this day. A favorite is hot food versus cold food:
- The mere heating of a food product constitutes preparation of a hot prepared food product (e.g., grilling a sandwich, dipping a sandwich bun in hot gravy, using infrared lights, using steam tables, etc.).
- On the other hand, the sale of a toasted sandwich, which is not intended to be in a heated condition when sold, such as a cold tuna sandwich on toast, is not a sale of a hot prepared food product.1
Sales of food products are considered taxable sales of hot food items when a seller’s premises includes microwave ovens accessible only to the seller. If the microwave ovens are accessible to the public, the sales are generally nontaxable because the customers are buying the food cold and heating it themselves.2
1 18 Cal. Code Regs. §1603(e)
2 CDTFA Annot. 550.1753
This week we’re covering the redesigned FTB website and some of the changes to how it works.
To listen to this podcast, go to: http://traffic.libsyn.com/spidellpublishing/SCM_6-30-19.mp3
Subscribers to Spidell's California Taxletter® or the Online Research Package can access the transcript here: https://www.caltax.com/research/california-taxletter/podcast-transcripts/podcast-ftb-launches-new-website/
With the enactment of the Tax Cuts and Jobs Act (TCJA), nonconformity issues are raised to a whole new level. As we’ve said numerous times before, California does not conform to the vast majority of the changes enacted by the TCJA.
Here are a few of the changes that could have the greatest negative impact on the California return or could easily be missed, causing clients to overpay their California taxes.
- Property taxes: Itemized deduction for state and local taxes limited to $10,000 for federal purposes but not for California.
- Mortgage interest: The amount of deductible mortgage interest is limited to $750,000 of acquisition indebtedness on the federal return, but this limitation does not apply to the California return.
- Moving expenses: This deduction was repealed for federal purposes, but California taxpayers may deduct the moving expense or exclude the reimbursement.
- §529 plans: Federal law allows tax-free distributions to pay for K-12 expenses at private or religious schools, but for California these distributions are includable and subject to the 2.5% penalty.
- Charitable contribution limits: Federal law increases the individual charitable contribution limit to 60% of federal AGI, but it remains 50% for California.
- Miscellaneous itemized deductions subject to 2% floor: Repealed for federal purposes, but still allowed for California purposes.
- Casualty and theft losses: federal law repeals the individual casualty loss except for those taxpayers in Presidentially declared disaster areas; California still allows a casualty loss deduction.
- Entertainment expenses: Repealed for federal purposes but still allowed for California purposes for both businesses and as an employee business expense.
- Technical terminations: Federal law no longer requires a partnership to terminate after a greater than 50% change in ownership, but California still requires two short-period returns.
- Small business accounting methods: Federal law provides a uniform small business exemption from various accounting method requirements; California nonconformity means separate books and records for state purposes.
Nonconformity issues are clearly laid out in the 2019 edition of The Big Blue Answer Book™ and is now shipping. Click here for more information.
This week we’re covering some federal form updates, and notices that business in California will be receiving in early 2019.
To listen to this podcast, go to: http://traffic.libsyn.com/spidellpublishing/SCM_12-23-18.mp3
Subscribers to Spidell's California Taxletter® or the Online Research Package can access the transcript here: https://www.caltax.com/research/california-taxletter/podcast-transcripts/podcast-pre-filing-season-update/