Uncategorized - Spidell

Then and Now: Worker classification in 1991 and 2019

There has been a lot of focus recently on worker classification, with the California Supreme Court’s ruling in Dynamex and the passage of AB 5 and the subsequent backlash. One of the as-yet unresolved issues is how to treat workers who may have different statuses for federal and California purposes. Amidst all this turmoil, it’s easy to forget that this issue has been quietly percolating for years.

In 1991, Bob Spidell received a letter (reproduced here) from the FTB regarding licensed versus unlicensed contractors and how to report a contractor who’s an employee for California purposes (but an independent contractor for federal purposes) on the California income tax return.

The FTB’s initial response is that they will not follow this ruling but we are continuing to pursue this issue.

Covered California will increase publicity about penalties

Recently, we’ve begun to hear and see ads on the radio, TV, and billboards about Covered California’s open enrollment. In a move that has become more prevalent in California state government, at a meeting on November 14, Covered California stated that they would take a “positive approach” to California’s new requirement for all residents to have health insurance. This approach means they are including only minimal information about the penalty for failing to have health insurance in their marketing efforts.

With the federal penalty at $0, how are Californians to know that they will pay a penalty — if they don’t qualify for one of the exemptions?

In the November 14 meeting with the FTB and Covered California, it was stated that 93% of individuals in California are already covered by insurance. Of the remaining subset of 7%, approximately 2.7 million, many will qualify for an exemption. Unfortunately, many will not qualify for an exemption and, thinking that they won’t pay for a lack of health insurance because of the repeal of the federal penalty, they will be rudely awakened when they file their state tax returns for 2020.

Although we don’t have a figure for Covered California, the FTB was given a budget of $8.232 million for implementation of the mandate and associated subsidy and penalty provisions. This would include form development, processing and other procedures, regulations, implementation, and marketing. The FTB has done the following:

  • Worked on a brochure that provides definitions, explanations, and timelines for the program, including the penalty; and
  • In partnership with the EDD, will notify employers of the potential penalty for employees with no health insurance. Note: These employers may or may not pass the information along to their employees.

Covered California and the FTB worked together to create a letter to about 900,000 households that they have identified as having no health insurance, but it’s unclear how many individuals will receive no notification at all.

However, brochures and letters will not get the saturation of the massive ad campaign put on by Covered California. We are a society who gets their news through television, radio, and social media, not letters and brochures.

A demand for transparency

After we voiced our concerns, the FTB informed us that some of the Covered California ads mention the penalty … but if it is mentioned, it is not emphasized.

In an interview with NBC’s Conan Nolan, when asked about the penalty, Peter Lee, Executive Director of Covered California, stated that the penalty could be more than $2,000 for a family of four and goes up with higher income. He then said that the real penalty was going into the ER and leaving with an $80,000 bill. He next talked about health plans lowering the rates because more people have insurance.

In a public service bulletin, the penalty is briefly mentioned but not highlighted.

As a result of our demand for clear transparency, Covered California has indicated they will start putting more emphasis on the penalty so people aren’t blindsided.

Then and Now: You have some explaining to do…

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.

Then and Now: Get your laws off my ice cream!

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:

  1. In a form which requires no further processing by the purchaser, including but not limited to cooking, heating, thawing, or slicing, and
  2. 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

Top 10 new California nonconformity issues for 2018 returns

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.

  1. Property taxes: Itemized deduction for state and local taxes limited to $10,000 for federal purposes but not for California.
  2. 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.
  3. Moving expenses: This deduction was repealed for federal purposes, but California taxpayers may deduct the moving expense or exclude the reimbursement.
  4. §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.
  5. Charitable contribution limits: Federal law increases the individual charitable contribution limit to 60% of federal AGI, but it remains 50% for California.
  6. Miscellaneous itemized deductions subject to 2% floor: Repealed for federal purposes, but still allowed for California purposes.
  7. 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.
  8. Entertainment expenses: Repealed for federal purposes but still allowed for California purposes for both businesses and as an employee business expense.
  9. 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.
  10. 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.