The BDO 600 – 2019 Study of CEO/CFO Compensation Practices

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Executive compensation weighs heavily on the minds of most companies todayas external pressures scrutinizing executive pay practices continue to intensify. Designing a smart, well-balanced compensation strategy and program requires careful consideration of internal and external factors.

The BDO 600 CEO/CFO Study is unique in the industry because it focuses on middle market companies, while most compensation studies focus on much larger companies.The study details the compensation practices for CEOs and CFOs of publicly traded companies in the following industries: energy, financial services –banking, financial services –nonbanking, healthcare, manufacturing, real estate, retail, and technology.


Download the complete study to learn which industries have the highest pay ratio and the linkage between pay plan design and total shareholder return.

Graph of overall results by company size


North Carolina enacts market-based sourcing, adopts marketplace facilitator rules, and more


On November 8, 2019, North Carolina Governor Pat McCrory signed S.B. 557 into law.  These new rules (i) enact market-based sourcing rules for corporation income tax purposes; (ii) make various changes to the allocation and apportionment of income for specific industries; (iii) add a sales and use tax requirement for marketplace facilitators; (iv) expand the definition for a holding company for franchise tax purposes; (v) increase the standard deduction for individual income tax purposes; and (vi) make other technical and minor corrections.
H.B. 399 was also signed into law on November 1, 2019, which allows an income tax deduction for amounts received as a JDIG, JMAC, or OneNC grant, among other changes.
The governor also vetoed S.B. 578, which would have lowered the franchise tax rate, and would have eliminated one of the three alternative franchise tax calculations.


Corporation Income and Franchise Tax
Market-Based Sourcing – Effective for taxable years beginning on or after January 1, 2020, North Carolina has adopted market-based sourcing rules for allocation and apportionment purposes. Specifically, S.B. 557 revised North Carolina corporate income tax law to provide that “receipts are in this State if the taxpayer’s market for the receipts is in this State.” Unless an exception applies, a taxpayer’s market for receipts is in North Carolina if the following applies:

  • In the case of sale, rental, lease, or license of real property, if and to the extent the property is located in the state.
  • In the case of rental, lease, or license of tangible personal property, if and to the extent the property is located in the state.
  • In the case of sale of tangible personal property, if and to the extent the property is received in the state by the purchaser.
  • In the case of sale of a service, if and to the extent the service is delivered to a location in the state.
  • In the case of intangible property that is rented, leased, or licensed, if and to the extent the property is used in the state. Intangible property utilized in marketing a good or service to a consumer is considered to be used in the state if that good or service is purchased by a consumer who is in the state.
  • In the case of intangible property that is sold, if and to the extent the property is used in the state.

S.B. 557 includes a “throw-out” rule for the sales factor. If the market for a receipt cannot be determined, they must be reasonably approximated. In a case where a taxpayer cannot ascertain the state or states to which receipts are assigned using reasonable approximation, the receipts must be excluded from the denominator of a taxpayer’s sales factor.
For taxpayers with 2019 net loss balance, G.S. Section 105-130.4(t3) provides an election to apportion receipts from services based on the percentage of its income-producing activities performed in North Carolina. The election must be made on the 2020 tax year return and must be in the form prescribed by the Secretary of Revenue and contain any supporting documentation the Secretary of Revenue may require. The election is binding and irrevocable, until the existing net loss balance is fully utilized or has expired. Note that this election does not apply to franchise tax apportionment under G.S. Section 105-122(c1).
North Carolina’s S.B. 557 also specifically addresses market-based sourcing for wholesale content distributors and banks by adding the new Sections 105-130.4A and 105-130.4B.  S.B. 557 also modifies sourcing for pipeline companies and adds specific rules for electric power companies.
Expansion of Definition of Holding Company – For North Carolina franchise tax purposes, S.B. 557 expands the definition of “holding company” to include corporations that own copyrights, patents, or trademarks that represent more than eighty percent of its total assets, or receives royalties and license fees that represent more than 80 percent of its gross income, and it is 100-percent directly owned by a corporation that meets all of the following conditions:

  1. Is a manufacturer, as defined by NAICS codes 31 through 33.
  2. Generates revenues in excess of five billion dollars for income tax purposes from goods that it manufactures.
  3. Includes in its net worth, as determined under G.S. Section 105-122(b), an investment in a subsidiary that owns copyrights, patents, or trademarks.

For companies that now meet the modified definition of a holding company, their franchise tax is effectively capped to $150,000.  According to the Legislative Analysis Division, the purpose of the holding company cap is to prevent the taxation of assets that are included in the net worth of the subsidiary, and indirectly in the net worth of the parent company by virtue of its investment in the holding company.
The change to holding companies is effective for tax years beginning on or after January 1, 2020, and is applicable to the calculation of franchise tax reported on the 2019 and later corporate income tax returns.
Sales and Use Tax
Marketplace Facilitators – S.B. 557 amended North Carolina’s economic nexus provisions to apply to both remote sellers (which originally became effective on November 1, 2018) and marketplace facilitators.  The economic nexus threshold is gross sales in excess of $100,000, or 200 or more separate transactions, in the previous or the current calendar year.  When calculating whether it exceeds North Carolina’s economic nexus thresholds, the marketplace facilitator must include its own sales, as well as all marketplace-facilitated sales.
Effective for sales occurring on or after February 1, 2020, S.B. 557 requires “marketplace facilitators” who meet the economic nexus thresholds to collect and remit sales tax on all “marketplace-facilitated sales.”  A marketplace-facilitated sale is the sale of an item by a marketplace facilitator on behalf of a marketplace seller that occurs through a marketplace. 
Similar to many states with marketplace schemes, North Carolina defines a marketplace facilitator as a person that, directly or indirectly does both of the following:

  1. Lists or otherwise makes available for sale a marketplace seller’s items through a marketplace owned or operated by the marketplace facilitator.
  2. Does one or more of the following:
    1. Collects the sales price or purchase price of a marketplace seller’s items or otherwise processes payment.
    2. Makes payment processing services available to purchasers for the sale of a marketplace seller’s items.

A marketplace facilitator is considered a “retailer.”  As such, it is required to comply with the same registration requirements, along with collection and remittance requirements, as any other retailer in North Carolina.  Marketplace facilitators also follow the same provisions for the refund of any sales tax that a retailer would follow.
Within 10 days after the end of each calendar month, S.B. 557 requires marketplace facilitators to provide a report to each marketplace seller that contains the gross sales and the number of separate transactions that were made on behalf of the marketplace seller and that were sourced to North Carolina.
Also similar to other marketplace states, North Carolina includes a liability relief provision.  The marketplace facilitator may be relieved of liability if it can demonstrate that the failure to collect the correct amount of tax was due to incorrect information from the marketplace seller, and that the marketplace facilitator did not receive “specific written advise from the Secretary [of Revenue] for the transaction at issue.”  The liability relief provision does not apply if the marketplace facilitator and marketplace seller are affiliates.
Throughout the country recently, one of the topics discussed has been the ability of marketplace facilitators and marketplace sellers to agree to shift collection responsibilities to marketplace sellers, particularly in telecommunications industry.  Along those lines, North Carolina specifically included a provision indicating that nothing in S.B. 557 should be construed to interfere with the ability of a marketplace facilitator and a marketplace seller to enter into an agreement with each other regarding the fulfillment of North Carolina’s marketplace requirements.  However, an agreement may not require a marketplace seller to collect and remit tax on marketplace-facilitated sales.
Other Changes
Allowing an Income Tax Deduction for Amounts Received as a JDIG, JMAC, or OneNC Grant Effective for taxable years beginning on or after January 1, 2019, H.B. 399 has expanded the allowable deductions to federal taxable income to include amounts received by a taxpayer from specified North Carolina economic incentives. Specifically, amounts received from the following programs can be deducted in calculating state taxable income to the extent they were included in federal taxable income:

  1. Job Development Investment Grant (JDIG) A performance-based, discretionary incentive program that provides cash grants directly to new and expanding companies to help offset the cost of locating or expanding.
  2. Grants under the Job Maintenance and Capital Development Fund under G.S. Section 143B-437.012 (JMAC) A discretionary incentive program that requires at least a $200,000,000 investment in capital improvements within a six-year period.
  3. One North Carolina Grant (OneNC) Discretionary cash-grant program for competitive job-creation projects. Awards are based on the number of jobs created, level of investment, location of the project, economic impact of the project and the importance of the project to the state and region.

As a consequence of the federal tax reform commonly known as the Tax Cuts and Jobs Act of 2017, amounts received by state economic incentives were being included in federal taxable income. This state modification now removes the income received from these North Carolina incentives from North Carolina’s state taxable income so that the incentives’ purpose is not contradicted.


BDO Insights

  • After many failed attempts since the phase-in of single sales factor apportionment, North Carolina has finally enacted market-based sourcing. This change makes a significant impact on companies who generate revenue via services and intangible property.
  • Following the trend of other states, North Carolina becomes the latest state to apply sales and use taxes on marketplace facilitators. This legislation will have an effect on both marketplace facilitators and marketplace sellers who sell through the marketplace platforms.



Angela Acosta
Managing Director
  Ilya Lipin
Managing Director

Mariano Sori-Marin
  Jeff Saltzberg 
Managing Director

Elil Arasu
Managing Director


  Scott Smith
National Tax Office
Technical Practice Leader – State and Local Taxes


Year-End Reminder Regarding Common Fringe Benefits, Special Treatment for 2-Percent Shareholders and Changes Under TCJA


As 2019 draws to a close, we remind you about the proper inclusion of common fringe benefits in an employee’s and/or 2-percent shareholder’s taxable wages, as well as changes made under the 2017 tax reform, referred to herein as the Tax Cuts and Jobs Act (TCJA). Fringe benefits are defined as a form of pay for performance of services given by a company to its employees as a benefit and must be included in an employee’s pay unless specifically excluded by law. Please note the actual value of the fringe benefits provided must be determined prior to December 31 to allow for the timely withholding and depositing of payroll taxes. Below you will find information regarding the identification and tax reporting for several fringe benefits that are customarily provided. The TCJA changed the treatment of several fringe benefits as discussed below.

We also remind you that a failure to properly report to the recipient and the IRS before January 31, 2020, on Form W-2 or Form 1099 may result in lost deductions and additional tax and civil penalties.

Common Taxable Employee Fringe Benefits

Employer-paid group-term life insurance coverage in excess of $50,000
Group-term life insurance coverage in excess of $50,000 is subject to only the withholding of Social Security and Medicare taxes (FICA). Though the amount is included in taxable wages, withholding of federal income tax (FIT) and state income tax (SIT) is not required, but employers may withhold at their option. Report it as wages in Boxes 1, 3, and 5 of the employee’s Form W-2. Also, show it in Box 12 with code “C.”

Employee business expense reimbursements/allowances under non-accountable plans
Any payments of an allowance/reimbursement of business expenses for which the employee does not provide an adequate accounting (i.e., substantiation with receipts or other records), or return any excess allowance/reimbursement to the company, are considered to have been provided under a non-accountable plan and are required to be treated as taxable wages for purposes of federal and applicable state and local income tax withholding; employer and employee FICA tax; and federal and state unemployment taxes (FUTA and SUTA).

However, if the employee provides an adequate accounting (i.e., substantiation with receipts or other records) of the expenses incurred, or is “deemed” to have substantiated the amount of expenses under a per diem arrangement, then the reimbursement amounts are excludable from taxable income/wages.

Value of personal use of company car
The value of the company car used for personal travel must be treated as additional wages on any frequency chosen by the employer up to and including an annual basis, unless the employee reimburses the employer for such personal use. FIT withholding on fringe benefit wage additions can be calculated as a combined total with regular wages or generally can be withheld at a flat 22-percent supplemental wage rate if the employee earns under $1 million.

Alternatively, employers can choose not to withhold FIT if the employee is properly notified by January 31 of the election year or 30 days after a vehicle is provided and the value is properly reported on a timely filed Form W-2. But employers must withhold FICA taxes on such benefits.

For administrative convenience, an employer can calculate the value of personal use for the current year based on the 12-month period beginning November 1 of the prior year and ending October 31 of the current year (or any other 12-month period ending in November or December) if the employee is properly notified no earlier than the employee’s last paycheck of the current year and no later than the date the Forms W-2 are distributed. Once this valuation period is elected, the same accounting period generally must be used for all subsequent years with respect to the same automobile and employee.

Many companies have moved away from providing company cars in lieu of a cash payment to reimburse the employee for the business use of their personal automobile. Car allowances paid in cash without any substantiation of business use are fully taxable and subject to FICA, FUTA, FIT, and SIT withholdings.

Value of personal use of company aircraft
This fringe benefit (unless reimbursed by the employee to the extent permitted under FAA rules) is subject to FICA, FUTA, FITW, and SITW. The value calculated is based on the Standard Industry Fare Level formula provided by the IRS. Expenses related to personal entertainment use by officers, directors, and 10-percent or greater owners that are in excess of the value treated as compensation to key employees are nondeductible corporate expenses.

Benefits that exceed the de minimis exclusion
De minimis benefit amounts can be excluded when the benefit is of so little value (taking into account the frequency) that accounting for it would be unreasonable or administratively impractical. A common misconception is that if a fringe benefit is less than $25, then it is automatically considered a de minimis benefit. However, there is no statutory authority for this position. If a fringe benefit does not qualify as de minimis, generally the entire amount of the benefit is subject to income and employment taxes (FICA, FUTA, FITW, and SITW). Season tickets to sporting or theater events, use of an employer’s home, apartment, boat, or vacation home, and country club or athletic facility memberships do not qualify as de minimis benefits. De minimis benefits have never included cash, gift cards/certificates or cash equivalent items, no matter how little the amount and the TCJA made that clear. Gift cards/certificates that cannot be converted to cash and are otherwise a de minimis fringe benefit, which is redeemable for only specific merchandise, such as ham, turkey or other item of similar nominal value, would be excluded from income. However, gift cards/certificates that are redeemable for a significant variety of items are deemed to be cash equivalents. Any portion of such a gift card/certificate redeemed would be included in the employees’ Forms W-2 and subject to income and employment taxes as detailed above.

Meals furnished by employers to employees often exceed the requirements for exclusion as de minimis. Still, most employer-provided meals are excluded from the employees’ taxable income under the accountable plan rules for working condition fringe benefits. The TCJA did not change the rules of taxation of meals to employees, even though the limitations on an employer’s deduction of meals and entertainment were modified.  Under the new rules, food and beverage satisfying the de minimis fringe benefit rule and quiet business meals with customers and clients are 50-percent deductible by employers. Food or beverage expenses related to employee recreation, such as holiday parties or annual picnics, remain 100-percent deductible when provided primarily for the benefit of rank and file employees.  Entertainment expenses, even with a business purpose, are no longer deductible under the TCJA.

There is no change in the federal payroll tax treatment of de minimis meals and corresponding meal facilities.

Caution: We have recently seen an aggressive position raised for businesses upon examination by the IRS, where the agent proposes that the company expenditure for on-site food and beverage regularly furnished to employees should be treated as employee compensation on account of being too frequent or extravagant to be excludible as a working condition or de minimis fringe benefit.

Value of employee achievement awards, gifts and prizes
This fringe benefit is subject to FICA, FUTA, FITW, and SITW. In general, employee achievement awards, gifts, and prizes that do not specifically qualify for exclusion are only deductible for the employer up to $25 per person per year, unless the excess is included as taxable compensation for the recipient. Any gifts in excess of $25 per person per year to employees in the form of tangible or intangible property are includable as a taxable fringe benefit for employees.  There are two exclusions from the general rule: (i) achievement awards for length of service or safety and (ii) certain non-cash achievement awards, such as a gold watch at retirement or nominal birthday gifts, which fall within the exclusion for de minimis benefits.

In order to be an excludible length of service or safety award, there must be a meaningful presentation of the awards, and service being recognized must exceed five years and must not be awarded to same employee in the prior four years. The exclusion applies only for awards of tangible personal property and is not available for awards of cash, gift cards/certificates, or equivalent items. The exclusion for employee achievement awards is limited to $400 per employee for nonqualified (unwritten and discriminatory plans) or up to $1,600 per employee for qualified plans (written and nondiscriminatory plans).

Job-related moving expenses paid by employer
Moving expenses incurred during 2019 must be included in the employee’s taxable compensation under the TCJA changes, unless the employee is a member of the U.S. Armed Forces on active duty, whose move is to a permanent change of station. The exclusion from employee income will be reinstated January 1, 2026.

Value of qualified transportation fringe benefits
One of the most significant changes to fringe benefits in the TCJA is the elimination of any employer deduction for expenses incurred in providing any transportation fringe benefits to employees. Transportation fringe benefits may still be provided to employees, and the payroll tax treatment of employee parking, van pool, and transportation benefits remains unchanged.

Qualified commuting and parking amounts provided to the employee by the employer in excess of the monthly statutory limits are subject to FICA, FUTA, FITW, and SITW. For 2019, the statutory limits are $265 per month for qualified parking and $265 for transit passes and van pooling. An employee can be provided both benefits for a total of $530 per month, tax-free, with the excess included in Form W-2. Note that amounts exceeding the limits cannot be excluded as de minimis fringe benefits.

Under the TCJA, bicycle commuting benefits incurred on or after January 1, 2018, are included in taxable wages subject to FIT, FITW, FITA, and FUTA.  The taxation to the employee as regular compensation sustains the deduction by the employer. Prior to the TCJA, $20 per month could be provided by employers to bicycle commuters, excluded from the employee’s taxable income and deducted by the employer.

The value of any de minimis transportation benefit provided to an employee can be excluded from Form W-2. For example, an occasional taxi fare home for an employee working overtime or departing a business function such as a holiday party may be provided tax-free.

Pleases note that some local jurisdictions require mass transit options. For instance, the District of Columbia requires employers with 20 or more employees to offer qualified transit benefits. While D.C. employers are not necessarily required to subsidize the cost of their employees’ commuting expenses under the new law, they are required to provide an arrangement for employees to make a pre-tax election to take full advantage of the maximum statutory limits for transit, commuter highway, or bicycling benefits. San Francisco and New York City have adopted similar laws in an attempt to promote the use of available mass transit options and to reduce automobile-related traffic and pollution. Employers should check local requirements for each employee location.

Value of non-compensatory cell phones (and other devices)
The value of the business use of an employer-provided cell phone (and other communications devices), provided primarily for noncompensatory business reasons, is excludable from an employee’s income as a working condition fringe benefit. Personal use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee’s income as a de minimis fringe benefit. Employers provide a cell phone primarily for noncompensatory business purposes if there are substantial business reasons for providing the cell phone. Examples of substantial business reasons include the employer’s need to contact the employee at all times for work-related emergencies; the requirement that the employee be available to speak with clients at times when the employee is away from the office; and the need to speak with clients located in other time zones at times outside the employee’s normal workday.

Employers can’t exclude from an employee’s wages the value of a cell phone provided to promote goodwill of an employee, to attract a prospective employee, or as a means of providing additional compensation to an employee.

Special rules for taxing certain employee fringe benefits to 2-percent S corporation shareholders
In addition to the adjustments previously discussed, certain otherwise excludable fringe benefit items are required to be included as taxable wages when provided to any 2-percent shareholder of an S corporation. A 2-percent shareholder is any person who owns, directly or indirectly, on any day during the taxable year, more than 2 percent of the outstanding stock or stock possessing more than 2 percent of the total combined voting power. These fringe benefits are generally excluded from the income of other employees but are taxable to 2-percent S corporation shareholders similar to partners. If these fringe benefits are not included in the shareholder’s Form W-2, then they are not deductible for tax purposes by the S Corporation. (See Notice 2008-1.) The disallowed deduction creates a mismatch of benefits and expenses among shareholders, with some shareholders paying more tax than if the fringe benefits had been properly reported on Form W-2.

The includable fringe benefits are items paid by the S corporation for:

Health, dental, vision, hospital and accident (AD&D) insurance premiums, and qualified long-term care (LTC) insurance premiums paid under a corporate plan
These fringe benefits are subject to FITW and SITW only (not FICA or FUTA). These amounts include premiums paid by the S corporation on behalf of a 2-percent shareholder and amounts reimbursed by the S corporation for premiums paid directly by the shareholder. If the shareholder partially reimburses the S corporation for the premiums, using post-tax payroll deductions, the net amount of premiums must be included in the shareholder’s compensation.  Two-percent shareholders cannot use pre-tax payroll deductions to reimburse premiums paid by the S corporation. Two-percent shareholders can deduct the premiums using the self-employed health insurance deduction on Line 29 of Schedule 1 of Form 1040.

Cafeteria plans
A 2-percent shareholder is not eligible to participate in a cafeteria plan, nor can the spouse, child, grandchild, or parent of a 2-percent shareholder. If a 2-percent shareholder (or any other ineligible participant, such as a partner or nonemployee director) is allowed to participate in a cafeteria plan, the cafeteria plan will lose its tax-qualified status, and the benefits provided will therefore be taxable to all participating employees, therefore nullifying any pretax salary reduction elections to obtain any benefits offered under the plan.

Employer contributions to health savings accounts and other tax favored health plans
This fringe benefit is subject to FITW and SITW only (not FICA or FUTA). If the shareholder partially reimburses the S corporation for the health plan contribution, using post-tax payroll deductions, the net amount of the contribution must be included in the shareholder’s compensation.  Two-percent shareholders cannot use pre-tax payroll deductions to reimburse plan contributions paid by the S corporation. However, 2-percent owners can take a corresponding self-employed deduction for the cost of their health savings account contributions on Line 25 of Schedule 1 of Form 1040.

Short-term and long-term disability premiums
For 2-percent shareholders, employer-paid short-term and long-term disability premiums are subject to FITW and SITW, but not to FICA or FUTA. Because the disability insurance premiums are paid with after-tax dollars, any disability insurance proceeds generally would be tax-free.

Group-term life insurance coverage
All of these premiums should be included in Boxes 1, 3 and 5 of a greater than 2-percent shareholder’s W-2. The entire premium paid on behalf of a 2-percent shareholder under a group-term life insurance policy is treated as taxable, not just the premium for coverage in excess of $50,000. Although the value is taxable income to the 2-percent shareholder, the cost of the insurance coverage (i.e., the greater of the cost of the premiums or the Table I rates) is subject to FICA tax withholding only. The cost of the insurance coverage is not subject to FUTA, FITW, or SITW. Please note that any life insurance coverage for which the corporation is both the owner and beneficiary (e.g., key man life insurance) does not meet the definition of group-term life insurance and therefore there is no income inclusion in the shareholder’s Form W-2.

Other taxable fringe benefits
Employee achievement awards, qualified transportation fringe benefits, qualified adoption assistance, qualified moving expense reimbursements, personal use of employer- provided property or services, and meals and lodging furnished for the convenience of the employer must also be included as compensation to 2-percent shareholders of an S corporation. All of the above fringe benefits are subject to FICA, FUTA, FITW, and SITW.

Nontaxable fringe benefits
The following fringe benefits are NOT includible in the compensation of 2-percent shareholders of an S corporation: qualified retirement plan contributions; qualified educational assistance up to $5,250 (tax-free benefits are not available if more than 5 percent of the educational assistance benefits are provided to 2-percent S-corporation shareholders, their spouses or dependents); qualified dependent care assistance up to $5,000 (tax-free benefits are not available if more than 25 percent of benefits paid during the year are provided to those who own more than 5 percent); qualified retirement planning services, no-additional-cost services, qualified employee discounts, working condition fringe benefits, de minimis fringe benefits, and on-premises athletic facilities.



Joan Vines
National Tax Office Managing Director, Compensation & Benefits
  Norma Sharara
National Tax Office Managing Director, Compensation & Benefits

Thomas LeClair
Managing Director, Employment Tax Services
  Paul Cheung
Managing Director, Employment Tax Services National Leader

Remote Sellers Assessed Sales Tax for Pre-Wayfair Periods

In the wake of the U.S. Supreme Court’s 2018 decision in Wayfair, every state that imposes a general sales tax (except Florida and Missouri) now require remote sellers to administer sales taxes on sales shipped to customers in the destination state.[1] Many remote sellers have complied with the post-Wayfair world by beginning to collect and remit sales taxes in states where they ship goods.
What is catching some remote sellers by surprise is that California is issuing sales tax notices and assessments for pre-Wayfair periods. California apparently has identified these remote sellers because they use Amazon’s “Fulfillment by Amazon” (FBA) service.  With FBA, Amazon says “leave the shipping, returns, and customer service to us.”  What remote sellers may not be mindful of is the location(s) where Amazon may be warehousing the remote seller’s inventory.  Some state tax officials maintain that the in-state presence of inventory – even if held by a third-party – constitutes a sufficient in-state presence that triggers nexus.
For example, California’s Department of Tax and Fee Administration (CDTFA) is pursuing sales tax from remote sellers that had “inventory nexus” in California.  However, not all California government officials agree with CDTFA’s actions. California’s State Treasurer Fiona Ma sought for the CDTFA not to pursue sales taxes from those remote sellers for pre-Wayfair periods.  Treasurer Ma’s protests have been ignored. 
Many remote sellers, when registering for sales taxes prospectively in light of Wayfair, knew they had some physical presence in the destination state, but figured states would be overwhelmed with the influx of new taxpayers and would be satisfied with the new-found money and, as such, would not trouble the seller for sales taxes for pre-registration periods.  However, that’s not always the case.  Further, many remote sellers who did register for sales taxes because of Wayfair are finding out that, in many states, they are disqualified from coming clean for back periods (pre-Wayfair) via voluntary disclosure because they are already on the tax rolls.
To avoid unwanted notices and assessments, sellers and their advisors need to review the activities being performed in a state, for both past and present tax periods.  If potential exposures are uncovered, then next steps need to be discussed to limit notices and tax bills, before a state discovers the seller.  Because once a state discovers a seller on its own, then the state is in control of the situation.  And rather than the seller having the ability to be proactive and limit taxes owed and limit lookback periods, the seller is now playing defense.
Physical Nexus
The Wayfair Court reversed its prior decisions in Quill (1992) and National Bellas Hess (1967).  For the past 50-plus years, physical presence was required to establish a “sufficient nexus” or connection between a state and a retailer for sales tax purposes.  Wayfair now allows for another activity to establish sufficient nexus – economic presence.  Wayfair did not replace physical presence with economic presence.  Rather, it created an additional test for determining whether an out-of-state seller has nexus in state.  Even with economic nexus provisions, states are continuing to pursue sellers that performed other nexus-creating activities within their jurisdiction for periods before Wayfair.
As mentioned, California is pursuing back sales tax from remote sellers with “inventory nexus.”  The CDTFA’s notices and assessments are based on marketplaces, like Amazon, having possession of the remote seller’s inventory in California.  So, the remote sellers, perhaps unknowingly, had physical presence in California based on their inventory being located in California.
The concept of “inventory nexus” is controversial.  On one hand, the remote seller owns inventory in a state.  And marketplaces like Amazon, upon request, can provide to sellers reports that identify where the seller’s inventory is located.  The in-state physical presence of inventory likely created a substantial nexus under the Commerce Clauses of the U.S. Constitution under the pre-Wayfair rule of law.  However, the fact that the inventory is placed by a facilitator could invoke limits to state taxation under the Due Process Clause.   
Conversely, some, like California Treasurer Ma, argue that the CDTFA’s position on inventory nexus is wrong.  According to Ma, due to Amazon’s degree of control over the seller’s goods, the relationship is similar to that of a consignment store, which means that Amazon is the de facto retailer for sales tax purposes and Amazon (not the remote seller) should receive the sales tax notices. So far, Ma’s efforts, which included pleas to add protective language in Assembly Bill 147 (which was signed into law April 25, 2019) and letters to the Governor and CDTFA, have been unsuccessful. 
For now, however, remote marketplace sellers that sold through platforms like Amazon for periods before California’s marketplace facilitator laws became effective on October 1, 2019, should evaluate whether they may have had “inventory nexus” in California, and other states.  If so, consult with your advisor to determine the next course of action to prevent notices and assessments.  There are various ways that taxpayers can mitigate past tax exposures, like voluntary disclosure agreements, amnesty programs, taxpayer-initiated disclosures, and others, depending on the state.
Other Methods of Discovery
It is not sufficient to simply review a retailer’s annual summary of sales-by-state to determine whether the retailer has nexus in a jurisdiction.  Even in this post-Wayfair world of economic nexus provisions, physical presence continues to create nexus for sellers.  And, just as importantly, physical presence can  create nexus for tax periods prior to the enactment of a state’s economic nexus statutes.  Because of this, state agencies are finding creative solutions to discover out-of-state sellers that have, or have had, physical presence in their state.  
For example, states are actively working with the U.S. Customs Department to identify foreign commerce transactions coming into the states. Similarly, at least one state is working with their local Highway Patrol commercial vehicle inspection facilities to identify the delivery of goods through interstate commerce. Both of these agencies, in their normal course of business, have access to vendors shipping manifests or bill of ladings that will identify the customer, delivery location, quantity of goods and their insured value of the property entering in the state.
In addition to monitoring interstate and foreign commerce, the Federation of Tax Administrators has a working “Exchange of Information Agreement” in place, which provides a mechanism for state and local taxing agencies to exchange confidential information for the purpose of administering and enforcing their tax laws. This information sharing includes, but is not limited to, nexus information and questionnaires, tax returns and supporting working papers, audit reports, and research and revenue estimating materials.
If a seller did have some form of physical presence nexus in a state, and that seller did not file and pay sales taxes owed, then typically there is no a statute of limitations to prevent the state from assessing taxes to when the seller first established nexus.[2]  As a result, out-of-state sellers could have large, unknown sales tax liabilities that they are not aware of because they are only focused on complying with economic nexus provisions since the Supreme Court issued Wayfair in June of 2018.
Now is the time to be proactive and review an out-of-state seller’s activities, as well as sales, for current and previous tax periods.  Doing so could save an unexpected, and certainly unwanted, notice or assessment.

BDO Insights

  • When evaluating whether a seller has nexus in a state, it is not sufficient to review only whether the seller exceeded a state’s economic nexus thresholds.  Physical presence activities did, and will continue to, create nexus for unsuspecting sellers. 
  • Retailers and their advisors need to continue to delve into the retailers’ activities or fact patterns to determine whether they have a sufficient connection to the state to constitute nexus, other than just review sales amount and transactional thresholds.
  • Retailers cannot focus only on current and future sales to determine their sales tax nexus footprints.  States are attempting to collect unpaid sales tax from sellers that had some form of physical presence in the state for tax periods before Wayfair
  • Retailers and their advisors should review previous tax periods for outstanding sales tax liabilities and determine whether remediation efforts are required, such as voluntary disclosure agreements, amnesty programs, etc.




    Steve Oldroyd
    Managing Director
      Eric Fader
    Managing Director

    Scott Smith 
    National Tax Office
    Technical Practice Leader – State and Local Taxes



    [1]  States commonly provide a safe harbor for small retailers, based on sales and/or transaction volumes.  However, Kansas is an exception; Kansas has no published safe harbor thresholds.
    [2]  While the general rule is that there is no statute of limitations for assessment if no return was filed, some taxing jurisdictions do provide a statute of limitation for sales tax return non-filers.  See, e.g., California (8 years); Idaho (7 years); Nevada (8 years); North Dakota (6 years); Virginia (6 years); Chicago (6 years). 

    Treasury Finalizes Regulations for Certain Ownership Attribution Rules and the Active Rental Exception to Subpart F Income


    On November 19, 2019, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) published final regulations regarding the attribution of ownership of stock or other interests for purposes of determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under Section 954(d)(3) in the Federal Register. In addition, the final regulations provide rules for determining whether a CFC is considered to derive rents in the active conduct of a trade or business for purposes of computing foreign personal holding company income. The regulations finalize the proposed regulations published on May 20, 2019 (REG-125135-15), without change. For a summary discussion of the proposed regulations, see our May 2019 tax alert. For the dates of applicability for the final regulations, see Treas. Regs. §§1.954-1(f)(3), 1.954-2(i)(2), and 1.958-2(h).

    Treasury notes in the preamble to the final regulations that it is separately studying the application of Section 958(b) following the repeal of Section 958(b)(4), and the final regulations do not address the application of the constructive ownership rules of Section 958(b) for purposes other than Section 954(d)(3). 

    BDO Insights

    As discussed in the prior tax alert, these ownership attribution rules should prevent certain entities from being treated as related for certain purposes and the changes made to the active rental exception may make it more difficult for some CFCs to meet the substantiality safe harbor. Please contact an International Tax Specialist if you would like more information regarding the content of this tax alert.  




    Joe Calianno
    National Tax Office Partner and International Tax Technical Practice Leader
      Monika Loving
    Partner and International Tax Practice Leader

    Brandon Boyle
      Reese Fredrickson

    Annie Lee
      Chip Morgan

    Robert Pedersen
      Jerry Seade 

    Natallia Shapel


      Sean Dokko
    National Tax Office Managing Director