“I am not an unfair person,” Apple CEO Tim Cook told lawmakers yesterday. “Apple is not an unfair company.”

And yet, Apple was summoned to congressional hearings focusing on how Apple paid almost no tax — basically 2 percent – on over $100 billion in overseas income. Income that if brought home to the good-old USA would have resulted in $35 billion in tax revenues for Washington.

Sen. Carl Levin (D-Mich.) certainly disagrees. He asked Cook, Apple’s CFO Peter Oppenheimer, and especially Apple’s head of tax operations, Philip Bullock, tough questions for long minutes as Bullock’s face grew shinier and shinier with perspiration and the lines on Cook’s face grew deeper and grimmer.

“Let’s get a straight answer,” Levin said. “You’re not bringing the $100 billion in foreign cash home unless we reduce our tax rates … you are able to shift profits to places where you, an American company, don’t pay taxes. That is not right.”

But it’s fairly easy to see a scenario in which both Cook & company feel perfectly justified in doing what they’re doing, and lawmakers feel like Apple is acting in an underhanded, un-American, unpatriotic, and tricky manner.

Big clue here: These ain’t American dollars

Cook and fellow Apple executives are officials of a publicly traded company. As such, they are not just encouraged but obligated to maximize shareholder value. If they don’t, they could be subject to dismissal or lawsuits. Any corporation’s shareholders naturally expect the leadership of the company to minimize expenses in any reasonable way — include tax expenses.

That alone could influence Apple to utilize whatever tax shelters it can. And most big multinationals feel the same way — Google, after all, makes almost $10 billion in its Bahamas subsidiary alone. Avid searchers, those Bahamians.

But there’s another important point.

Lost in all this discussion of how Apple should “bring that money home,” as Levin says, or “repatriate its profits” is that the money is not American to begin with and cannot be “brought home” in any real sense. While it could perhaps be “patriated,” there’s no “re”patriation possible.

The money that Apple earns overseas is exactly that: overseas income. It’s not spent in the U.S., not earned in the U.S., and, one might therefore quite reasonably argue, should not be taxed in the U.S. Which is precisely how Cook sleeps very well at night, thank you very much.

“Everything that we sell in the U.S. is taxed in the U.S,” Cook said. “For a foreign country, everything we sell is generally taxed in the local market.”

(Cook did not mention, of course, that it is primarily due to Apple’s ingenuity and Ireland’s complicity that this foreign market turns out to be largely Ireland, and therefore largely one that taxes Apple at an effective 2 percent rate.)

But, as Sen. Rob Portman (R-Ohio) noted, the United States is one of the last countries in the world to move to a territorial tax system, whereby income is taxed in the jurisdictions it is earned. Most countries do not tax overseas corporate income. As he also pointed out, “no other country in the world has such high barriers to bringing international income home.”

Which means, Portman highlighted, global Apple competitor Samsung can bring its cash home without any penalty. So while Samsung is free to bring profit out of the U.S. and invest it in Korea, Apple cannot do the reverse — without losing 35 percent of it at the border.

“That would be great for growth in this country, Cook said. “We can’t use our overseas cash to make any investments in the United States … which would create more jobs and create more investment.”

But, but, but … it was American know-how that created those dollars

The flip side is also easy to miss.

While on the one side Apple doesn’t feel it should be taxed on overseas income just because it is an American company — “proud to be an American company,” Cook said — on the other side there’s the question of what enabled those profits in the first place.

Source: Foster and Partners

Apple’s proposed “spaceship” campus in Cupertino, Calif.

“Ninety-five percent of the creativity that goes into those products is in California,” Levin told Cook, nailing him with his own testimony. “Most of your global profits are sitting in three Irish companies that you control that don’t pay taxes … and there’s a huge drain as a result.”

In other words, without the environment in which you were created — the access to skills, talent, education, subsidies, ecosystem, everything — Apple would not be what it is. And the products that it created that revolutionized the world would not have been built. Which is precisely why Sen. Claire McCaskill (D-Mo.) asked Cook an impossible question: ”What would it cost you to move out of California?”

The implication, of course, is that while it would currently cost Apple $35 billion to take its overseas earnings home, it would cost Apple its very existence to move out of the womb that birthed the company. Fifty thousand of Apple’s 75,000 global employees reside in the United States, of course, and it is ludicrous to assume that even a sizable fraction of them would follow Apple to some foreign country so that the company could avoid income tax.

Which is why Cook came to testify before the lawmakers in the first place.

“I feel good about participating,” Cook told Sen. John McCain (R-Ariz.) in spite of the hard questioning. “Apple is ready to help.”

So, who’s right?

Levin sounds pretty unequivocally on the side that Apple is doing something wrong. Portman is pretty sure that the problem is an “antiquated, uncompetitive tax system” that is a “relic of the 1960s.” UCLA law professor Edward Kleinbard told the New York Times Apple’s actions showed “unbelievable chutzpah,” and international opinion is similarly divided.

Richard Murphy of the United Kingdom nonprofit Tax Research UK singled out Ireland for blame.

“Ireland is completely complicit in this low tax rate and in the process is guilty of deliberately undermining the tax revenues of states around the world and of destroying fair competition in international markets,” he said.

Pulitzer Prize-winning tax expert David Cay Johnston says the problem is the tax code itself, calling for simplicity. Which, interestingly enough, is exactly what Apple says needs to be done.

“Apple has always believed in the simple, not the complex,” CEO Tim Cook said yesterday. “It is in this spirit that we recommend a dramatic simplification of the tax code … a lower tax rate … and a reasonable tax on foreign earnings.”

Which means that Apple, at least, wants to meet somewhere in the middle.

photo credit: JD Hancock via photopin cc, Shutterstock/Cash

An investigation by the U.S. Senate has turned up some creative maneuvers that Apple used to avoid paying taxes on $44 billion of international income over the past four years.

Yesterday, a bipartisan senate subcommittee released a lengthy report detailing Apple’s tactics, which put the spotlight on Apple’s Irish subsidiaries, Apple Operations International and Apple Sales International. The report describes Ireland as a “tax haven” for Apple.

Even though billions of dollars flow through the Irish subsidiaries — in 2011, the subcommittee claims Apple held 64 percent of total income in Ireland — they apparently qualify as non-tax residents. Apple pays less then 2 percent of corporate sales tax for AOI and ASI in Ireland (far below the country’s typical 12 percent tax rate), and it hasn’t had to pay any taxes to the U.S.

Apple isn’t alone in how it manages it offshore finances, but just like the recent scathing New York Times report which detailed its other tax avoidance tactics, the subcommittee is using Apple to demonstrate the wider problem of elaborate international tax holdings. While the subcommittee doesn’t call Apple’s tactics illegal, it seems to be raising a moral argument about such extreme self-serving tax strategies.

“Apple is exploiting an absurdity, one that we have not seen other corporations use,” said Sen. Carl Levin (D-Mich.) at a Capitol Hill hearing this morning. “And the absurdity need not continue.” Notably, the hearing was Apple CEO Tim Cook’s first appearance on the Hill.

In a statement released yesterday, Apple said it “doesn’t use tax gimmicks” and went on to note:

Apple does not move its intellectual property into offshore tax havens and use it to sell products back into the US in order to avoid US tax; it does not use revolving loans from foreign subsidiaries to fund its domestic operations; it does not hold money on a Caribbean island; and it does not have a bank account in the Cayman Islands. Apple has substantial foreign cash because it sells the majority of its products outside the US. International operations accounted for 61% of Apple’s revenue last year and two-thirds of its revenue last quarter. These foreign earnings are taxed in the jurisdiction where they are earned (“foreign, post-tax income”).

Reacting to the news, Ireland was quick to say that it wasn’t responsible for Apple’s low international tax rate, Reuters reports.

Photo: Sean Ludwig/VentureBeat

France isn’t exactly known as being the friendliest country for big businesses, especially when it comes to tech companies.

Now the country is contemplating a new set of taxes on companies like Apple and Google to fund cultural projects, reports Reuters.

What’s the reason for the new “culture tax”? Apparently, France is looking for ways to fund its cultural projects despite its economy being in the dumps. The country thinks that such projects should be shielded from funding cuts across the board due to an economic downturn.

The news comes weeks after French Industry Minister Arnaud Montebourg told Yahoo he didn’t want an American company to buy the “French Internet success story” that is Dailymotion (for which the French government is a partial owner of). France has also fined Google over a breach of privacy due to its maps product and also tried to force the company to pay royalties to local news publications for featuring links to their websites within Google News. These things all paint France as a place that’s anti-big business, and this new tax certainly won’t help.

The report indicates that French president Francois Hollande will make a decision on the new set of culture taxes by July.

French flag image via Shutterstock

The U.S. Senate voted today to pass a bill that would require large e-commerce companies to collect sales taxes from all of their U.S. customers.

The bill, known as the Marketplace Fairness Act of 2013 (S. 743), passed the Senate by a vote of 69 to 27 (with 4 Senators not voting).

It now goes to the House of Representatives, where it may face a tougher battle.

The bill imposes a single federal standard requiring all retailers with more than $1 million in online transactions to collect the sales tax required by whatever locality the buyer happens to be in. States would have to do their part by setting up a single entity for sales tax collection and providing a single sales tax return form for retailers to use in reporting tax payments, greatly simplifying the process.

We’ve been expecting this bill to pass for awhile.

So the bill is mixed news for e-commerce fans. For customers, that means they’ll have to pay sales tax even if they didn’t before. For online retailers, it means they’ll have to collect sales taxes for a variety of jurisdictions — but the process will be simpler.

Right now, there’s a patchwork of different state and local laws governing e-commerce. Technically, e-retailers are supposed to collect sales tax in many locations. In reality, not many do: In California, only 1.4 percent of online transactions included the required sales tax.

Some online retailers, such as eBay, have stridently opposed the bill, while others, such as Amazon, are in favor. (Amazon earlier fought, and lost, a battle to keep from collecting sales tax from its California customers.)

Brick-and-mortar retailers supported the bill, viewing it as a way to cut down on “showrooming,” where customers visit physical showrooms to check out the latest products, then go online to purchase them at lower prices. The U.S. governor’s association also supported the bill.

CNN has a handy overview of the bill’s main points and what it will mean for you.

Here’s the full text of S. 743.

Corrected 6:06pm: The bill goes next to the House, not to the President.

Photo credit: kenteegardin/SeniorLiving.org via photopin cc

The U.S. Senate voted to once again advance the Marketplace Fairness Act, a bill that would place a mandatory state sales tax on things sold over the Internet.

The vote is the second favorable push for the bill this week, with the Senate voting 74-20 Monday to end debate on changes within the bill prior to bringing it to the floor. With today’s vote, it seems very likely the bill will gain approval on a final vote expected to happen later this week, reports The Hill.

The bill is better known as the “Internet Sales Tax” law, which consumers generally don’t like because it will boost the total cost of what you buy on the Internet. Brick and mortar retailers love the bill because they view it as a way to level the playing field with online retailers who often already sell items below the cost of what you can find in physical stores. In its current form, the Marketplace Fairness Act gives a free pass to businesses that collect less than $1 million in revenue from out-of-state consumers. States would also need to provide those online retailers with software that would calculate sales tax for customers.

But there’s a reason it’s so popular among senators. Remember that ANYTHING you purchase online is technically supposed to be taxed by the state you live in. If the vendor you purchase something from online doesn’t collect sales tax for your state, it’s assumed that you (the consumer) will keep a record of how much you owe and pay the state government during tax season. Since very few consumers do this, state governments have started going after larger companies that generate tons of revenue, such as Amazon.

Under current law, online retailers are forced to collect state sales tax on purchases if they have a physical presence within the state where the transaction is taking place. For a number of years, Amazon avoided charging sales tax by keeping its distribution centers out of highly populated states.

But Amazon is supporting this bill. Why? Because the company has had plenty of experience handling and collecting sales tax for multiple states, while smaller online businesses could face a huge obstacle collecting these taxes; that could give Amazon yet another advantage over the little guys.

eBay, on the other hand, is against the bill, since it has a huge community of sellers to keep happy, and if the bill passes, those sellers will need to start factoring in sales tax on all the items they sell.

“The Internet sales tax bill threatens small businesses by treating them the same as multibillion dollar retailers that have stores and warehouses around the country,” wrote eBay VP of government relations Tod Cohen in a formal response published on USA Today’s website. “Complying with 9,600 tax jurisdictions nationwide, and more menacingly, being audited and threatened with litigation by tax authorities around the country, is daunting. The family-run business worries about its survival.”

eBay is suggesting to lawmakers that the current bill be changed so that businesses with fewer than 10 employees that collect less than $10 million in revenue from out-of-state consumers be exempt from collecting sales tax on online. That might be a good quick fix, but ultimately, it’s not addressing the real issue.

If the bill does pass both the Senate and the House, I’d expect we’ll see quite a few enterprise-level transaction startups emerge to take on the challenge of processing online sale tax across all 50 states. But it could be pretty harsh for those small businesses in the meantime.

Handling multiple tax codes

One of the biggest problems with collecting taxes that businesses face is knowing the proper taxes to apply.

“Typical businesses do not keep up with tax laws, and neither do software companies. Tax codes change too often,” said Nate Stewart, founder and CEO of point of sale startup ZingCheckout. “Just in New York you’ve got different sales taxes on apparel that’s under $100 dollars. And what about if there’s a sale tax holiday they don’t know about? That’s something that a business owner in another state probably isn’t going to know about.”  If a particular business has a variety of items across multiple categories, the tax collection process could get even more complicated, too.

In fact, there are so many tax codes and stipulations that the ZingCheckout software handles it by allowing clients to create and name their own tax rules for individual items — assuming they know those taxes. Stewart said that, with the businesses he’s worked with, you’d need a dedicated employee working full time just to keep up with all the taxes. That’s something that might not be possible for small businesses.

“You’re not just talking about state (taxes) either, there’s city and county taxes in some cases,” Stewart said, adding that these issues are already being dealt with by businesses who are trying to process transactions from both online and from physical locations. “This would be a definite roadblock to growing the business for some companies because they’d have to decide if it was cost prohibitive to take their physical business online.”

Mitchell Fox is a Co-Founder of GoodApril.

Why is it that each spring, so many of us cringe, cross our fingers, and start filing our taxes without knowing what we’re in for?

What’s worse, we rarely feel confident that we’ve achieved the best possible outcome for ourselves when it comes to taxes – and with good reason.  Back in 2002, the nonpartisan Government Accountability Office (GAO) estimated that people were overpaying their taxes by nearly $1B a year. (And they only looked at one of many ways to mess up – with the real number of overpaid taxes likely much higher).

Even more striking is that these problems affect most Americans regardless of whether they’re firing up tax filing software, working with an accountant, or filling out IRS forms by hand.

So, what will tax filing be like five years from now if technologies continue to advance and consumers demand better tax policies and better software solutions? Will this process be easier or the same? Lets take a look:

You will already know your outcome

While tax rules are complicated, they are well defined.  A majority of the things that affect the average taxpayer’s return are already digital and available online: paychecks, investment gains and losses, mortgage payments, and the like.

Five years from now, this data will be collected, organized, and crunched on your behalf, in near real-time.  You will know whether you’re going to owe the IRS or get a big refund at any point during the year.  That job change, stock market windfall, or new home will have been considered as they happened, and your forecast adjusted.

Tax law changes, like this year’s Taxpayer Relief Act (the “Fiscal Cliff” deal) and Affordable Care Act (“Obamacare”), will have been analyzed in the context of your financial situation, and their impact explained and accounted for.

You won’t owe a dime

If you can already know your tax outcome, then why shouldn’t the tax withholdings on your paycheck (or estimated tax payments if you’re self-employed) have been adjusted automatically to ensure you have paid only what you owe?

Started a freelance gig on the side, or purchased a house? Your tax software should detect that and guide you to make the appropriate adjustments to keep your tax bill as close to $0 as possible. A small refund is probably always in store, but the days of big tax refunds and tax bills should be over.

Your data will be waiting for you

Why is it necessary for me to wait for tax documents to arrive in the mail in order to file my taxes?  While tax prep software providers are making tremendous strides toward financial data aggregation, it’s still a gruesome process of individually looking up each account, digging up long-forgotten passwords, and cursing when the connection invariably fails.

As financial institutions get better at providing secure data connections, and software providers get better at extracting and interpreting it, your tax data should already be loaded when it comes time to file your taxes.

The experience of filing your return should be a lot more like checking out your Amazon shopping cart – clicking to confirm the numbers are accurate and as-expected – rather than an epic weekend of wrangling 1099s, W2s, and 1098s.

You will only pay your fair share

The tax code is full of incentives that taxpayers can use to their advantage to pay less in taxes and get access to services at lower cost.  Getting a college education, home ownership, and paying for childcare are just some of the many activities that are tax advantaged.  The IRS also gives you a break when your expenses pile up: supporting a dependent parent, for instance, or paying excessive medical bills.

You should know what tax benefits are available to you, and what actions you could be taking to pay less.

In order to only pay your fair share, tax software must be watching out for your best interests throughout the entire year, and be presenting this analysis and advice to you in a timely and easily understood way.

You will have access to your own history

You probably have filing folders of tax documents for the last few years somewhere in your house.  If you’re more tech savvy, maybe those are PDFs.  But that data is not stored in a way that you can use it for your own analysis, nor is there an easy way to share it, for instance with a loan underwriter trying to decide whether you can afford to repay that mortgage.  Today you’re still stuck opening or sending the actual tax filing documents, and manually extracting the data.

Your historical tax data should be yours to consume not just as documents, but as bits.  While your tax return provider ought to be giving you access to this data, it’s the IRS that should not only be collecting that data each year, but making it available to you and the financial institutions you authorize.

Your taxes will be simpler

Technology can’t solve every part of what makes taxes so painful.  A big part of the blame lays with policy makers who, with the best intentions of rewarding “good” behaviors (like donating to charity or investing in retirement or getting health insurance), create a spaghetti code of tax law so confusing that less than 10% of taxpayers are brave enough to even try to do their taxes without the assistance of software or a professional.  Even the IRS’ own National Taxpayer Advocate called the complexity of the tax code the “#1 most serious problem facing taxpayers.”

In 2005, the GAO estimated that the cost of complying with tax policies, in the form of time and money spent on this like tax planning, preparation, and filing, cost our nation at least $100B annually and projections by the Tax Foundation estimate that by 2015 the cost will reach nearly $500B.

Five years from now, let’s hope that we have done our part as the end-consumers of that tax code to have advocated for simpler, easier to use tax policies that the average American can understand, comply with, and get back to their lives.

Where innovation should come from

Even without tax reform, however, as I hope I have shown, smarter technology can make taxes easier for the average consumer.

The most obvious place where these innovations should arise is within one or both of the consumer tax software powerhouses: Intuit (TurboTax) or H&R Block.

Another possibility is through one of the personal financial management platforms that consumers use today to get a complete perspective on their finances: Mint (also owned by Intuit), PageOnce, Personal Capital, and most recently, Credit Karma.

Additionally, there is an emerging crop of financial planning startups that could develop to include tax capabilities: for instance FutureAdvisor (investments), LearnVest (wealth planning), Ready for Zero (debt), and PlanWise (goals). And yes, my own company, GoodApril, is working on these problems as well, and look forward to collaborating with other financial innovators to realize this vision for pain-free taxes.

Here’s to a future where our taxes are no longer a surprise, and we have confidence that we’re only paying our fair share to Uncle Sam.

Image via Warner Bros.; Illustration by Tom Cheredar

Mitchell Fox is a Co-Founder of GoodApril, an online tax planning startup for consumers. Follow him and GoodApril on Twitter @mitchellwfox and @goodapril.

Congress is conducting a three-day series of hearings to decide how to regulate the explosion of health apps on smartphone and tablet devices.

Lawmakers from the House Energy and Commerce committee have been holed up to discuss how to balance patient’s privacy concerns and inspire innovation in the developer community.

“Developers are mystified by the rules in this highly regulated industry,” said Ben Chodor [below], the chief executive of mobile health app store Happtique, who called me after testifying alongside a handful of medical experts in Congress today.

The Food and Drug Administration (FDA) has been mulling over this problem for years. It remains unclear which medical and consumer health apps come under its jurisdiction.

“Since the 2011 guidance [that it would be seeking public input], the FDA has held a public workshop on mobile medical apps and has received many public comments, but has not yet issued final guidance,” states a letter the committee sent to the FDA earlier this month.

Gaining FDA approval can take years and thousands of dollars, but it’s worth it for companies like AliveCor, a technology that turns your smartphone into a sophisticated heart monitor.

But what about the vast majority of medical apps that are not for clinical use and are designed for scheduling doctors’ visits or devising a healthy eating plan?

Chodor advised the FDA to clarify that apps sold in a consumer environment, like an App Store, will not come under regulation. The vast majority of health apps fall into this category (only about 15 or 20 percent of all apps are for clinical use.) He explained that FDA approval should only be necessary if the app is intended for physician use to make decisions about your health. “The FDA is in the best position to regulate that subset of apps,” he said.

The total market for health-related app services will reach $26 billion by 2017, according to a study from the consulting firm Research2Guidance.

The burgeoning med-tech community fears that the FDA will step up its enforcement, and shackle consumers health products. This is stifling innovation with developers “waiting on the sidelines” for an official decision, according to Chodor.

“FDA needs come up with their guidelines already — sooner rather than later,” he said.

According to the Washington Post, lawmakers are also questioning whether the Patient Protection and Affordable Care Act would encourage the FDA to define smartphones and tablets with health-related apps as “medical devices.” This has repercussions for the tax that will be levied on the next generation of mobile health products. Medical devices are levied far higher taxes than consumer products and services.

Chodor is concerned that investors are already turning to international markets, where tax rates on medical-related products are lower.

The blurry line between a consumer-focused health app and a medical device is a bureaucratic nightmare. To make matters worse, many of these new health-related apps are used in clinical settings and by consumers. “To put it bluntly, that is the area that no one gets,” said Chodor.

Top image via Tyler Olson// Shutterstock 

Microsoft owes the Danish treasury 5.8 billion kroner, or about $1 billion U.S., in unpaid taxes relating to its purchase of financial software vendor Navision in 2002, says the Denmark treasury.

Most tech companies avoid taxes by leaving foreign income overseas or by routing it through Irish or other low-taxation districts, and that’s happening in this case as well. But this case is not primarily, or at least initially about earnings. Rather, this is about Microsoft’s acquisition and transfer of the fundamental assets of Navision to low-corporate-tax regions.

VentureBeat is seeking a comment from Microsoft.

Microsoft bought the company in 2002 for $1.5 billion. So far, all well and good.

The tricky part, according to Denmark, is that Microsoft then transferred its rights in what used to be Navision  – the money-making assets — to an Irish subsidiary. And Denmark says that was done at a vastly unfair market value, which is illegal according to taxation rules, says local press agency Nyheder.

On top of this, revenues from the software that former Navision and current Microsoft Business Solutions sells is on the order of a billion dollars a year. (It’s worth noting that Microsoft’s business software unit consists of more than just a renamed Navision.) That revenue has been routed through Ireland via a Microsoft subsidiary which is in turned owned by companies in Bermuda and the British Virgin Islands, according to Nyheder.

All three of those countries are well-known low-corporate income tax regions.

Governments in Europe and the U.S. are increasingly aware of the complex and obscure ways that international corporations, often U.S.-based, are using to avoid paying tax. This is just one of the first cases in which a European government is attempting to claim and obtain that lost tax.

photo credit: su-lin via photopin cc

A funny thing happened during Facebook’s IPO.

A company that looked like a model corporate citizen, paying high tax rates for its pre-IPO years of 2010 and 2011, suddenly turned into one of those giant corporations that pay no tax at all.

Writing about Facebook’s S-1 a year ago, Benchmark Capital’s Bill Gurley wrote, “Warren Buffet’s secretary would be happy. Facebook’s tax rate is already north of 40 percent. Other multinational companies typically have found a way to reduce this. Facebook is paying full-boat.”

There are some ambiguities to computing the effective tax rate for a corporation, so let’s put it in terms of actual dollars. In the S-1 filing, Facebook reported that it was setting aside $695 million for taxes in 2011 and $402 million for taxes in 2010.

How quickly things have changed. In Facebook’s most recent 10-K annual filing, the company revealed that it’s receiving tax refunds of $429 million for the 2012 fiscal year.

But it doesn’t stop there: The company is receiving an additional $451 million credit for “carrybacks” on the taxes it paid for 2010 and 2011, which means it’s getting a retroactive tax benefit against the taxes it paid in those years.

And Facebook will be carrying forward an additional $2.17 billion in tax credits for use in future years.

The upshot: Despite generating $1.1 billion in profits in 2012, the company is not paying any federal or state taxes this year, according to Citizens for Tax Justice, and it has cut its tax bill for the past two years by about 40 percent — retroactively.

“They probably won’t be paying taxes for several years to come,” Robert McIntyre, the director of CTJ, told me.

The CTJ is a nonprofit advocacy group, which clearly has an agenda in favor of tax fairness, by which it means getting corporations (and perhaps wealthy people) to pay more taxes.

Based on the experts I talked with, corporate tax is a complex issue, so this isn’t exactly a black-and-white issue. There are a lot of ways to slice up a financial report, and the categories used for a 10K don’t correspond with those used for federal taxes, so confusion abounds. CTJ is not alleging that Facebook is doing anything illegal — far from it.

“It’s legal as hell,” McIntyre said.

The question is whether this kind of tax dodge is fair, or ethical, especially in a country that’s struggling to come up with the money to pay for basic things like education.

You can read the CTJ’s report on Facebook’s taxes here (PDF file).

So how did Facebook manage it? Simple: By issuing restricted stock units (RSU) instead of incentive stock options (ISOs).

With ISOs, which were more common in the past, employees don’t pay any taxes when they exercise the options (buying the stock at the option price). Instead, they pay long-term capital gains taxes when they finally sell the stock, assuming they’ve held it long enough. That’s nice for the employee, because the capital gains tax rate in the U.S. maxes out at 15 percent, compared with a top tax rate of 35 percent for normal income in 2012 and 36.9 percent in 2013.

RSUs and nonqualified stock options, which have been the predominant type of option for the past 10 or 15 years, put the tax burden on the employee receiving them. Any increase in value from the option price counts toward the employee’s income for that year — and will be taxed as income, not capital gains.

However, the nonqualified route enables the company granting the options to take a tax deduction equal to the amount of additional income that the employee must declare.

In other words, Facebook isn’t exactly cheating the government out of $429 million in taxes for 2012; it’s just transferring that tax burden to its employees (now presumably much wealthier thanks to all that Facebook stock they own).

A Facebook spokesperson made the same point in an email to me today: ”Billions of dollars went to the U.S. treasury and to the California state treasury, as well it should have. It’s fairly typical for a company in the period after an IPO to have most of its taxes collected this way, while not having a large corporate tax burden. … It’s a mistake to look only at the corporate tax revenue while ignoring the billions in taxes paid from the initial shareholders.”

This is one reason Facebook founder Mark Zuckerberg sold 30.2 billion shares on IPO day, netting him an estimated $1 billion. Most of that money, Facebook’s S-1 said, would be going to pay his tax bill — taxes Zuck would have incurred as he came into ownership of his Facebook stock.

On the other hand, Facebook got a huge deduction for granting those stock options — a deduction that cost them absolutely nothing. It’s a common move in the tech industry, but one that McIntyre, and others, feel is unfair.

Many Facebook employees are probably facing a similar situation as Zuck did, albeit on a smaller scale. If they want to exercise their options and turn them into Facebook stock, they’ll have to sell some of that stock in order to pay for the taxes they’re about to owe. (And by doing so, they’ll be helping contribute to the company’s tax deductions.)

I suspect, however, that plenty of tax lawyers out there could help them reduce their tax bill.

Perhaps Facebook’s corporate finance department could make an introduction, as they’ve clearly mastered the art.

Correction 3:30pm Pacific: Facebook issued its employees restricted stock units, not nonqualified stock options, as I wrote earlier. The tax implications are the same, however — both count towards the employees’ income, not capital gains, and are deductible by the corporation issuing them.

Top image via Francis Luu/Facebook

Back in September 2011, Saverin decided to renounce his  U.S. citizenship for permanent residence in Singapore, which has no capital gains tax. It was said that Saverin would save upwards of $100 million in U.S. taxes because of the move.

According to PrivCo, a data analysis firm that ran a bunch of potential estimates, the $100 million Saverin would have saved was based on a fixed cost-per-share of around $30.  Since the Facebook share price has since dropped, it is estimated Saverin will owe the U.S. Treasury for every dollar below that fixed cost. With Facebook hovering around $27 per share, down nearly 30% in two weeks, he could owe around $43 million. If that share price goes up past the $30 mark, then the taxes owed changes. The calculation only applies to where the share price current sits.

Saverin has been bashed by the American media for skipping out on his obligations to Uncle Sam as soon as Facebook went public, but he countered that he had filed the citizenship paperwork back in January 2011 and only just got approved in September.

It’s worth noting that Saverin hasn’t exactly taken all of his money and run. He’s been active in the startup ecosystem as an investor and has put money into several startups, including Jumio, ShopSavvy, Qwiki, and CrowdMob.

Senator Chuck Schumer (D-N.Y.) hijacked the senate floor today to address critics of his recently proposed Ex-PATRIOT act legislation, which would impose new taxes on people who give up their U.S. citizenship to avoid taxes and bar them from re-entering the country.

Schumer, along with Sen. Bob Casey (D-Pa.), introduced the Ex-PATRIOT act (Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy Act) last week after the public had caught wind of Facebook co-founder Eduardo Saverin’s decision to renounce his citizenship. The move ended up saving Saverin an estimated $100 million.

“When you renounce your citizenship to swell your bank account, you’re un-American,” Schumer said. “What Saverin is doing is free-riding on America, and dodging taxes from an IPO.”

The Senator also called out the Wall Street Journal for labeling him a vocal spokesperson in the “age of envy”, and scalded republican opponents of his legislation, saying “they make Eduardo Saverin into their patron saint.”

Honestly, I don’t think Saverin would argue with being called “un-American,” considering that he didn’t feel compelled to continue being a citizen. And while I agree that having the ultra rich dodge taxes is a bad thing for the country, Schumer’s plan for handling this situation is utterly awful.

Under the proposed bill, expatriates with either a net worth of $2 million or an average income tax liability of at least $148,000 (over the last five years) will be presumed to have renounced their citizenship for tax avoidance purposes. Any person who fits this description does have a chance to appeal to the IRS to prove they aren’t just dodging taxes. Anyone who the IRS determines was indeed dodging taxes by renouncing citizenship will be slapped with a new tax on all future investment gains — no matter where he or she resides. The senators said this stipulation would eliminate any tax benefit/financial incentive associated with renouncing one’s citizenship. Also, the rate of the new capital gains tax will be 30 percent, which is consistent with the current rate applied on non-resident aliens for dividends and interest earnings.

So to summarize, Schumer wants to tax people who give up their citizenship as if they were still citizens. And if they refuse to pay these taxes, they can’t come back into the country.

I highly doubt this is going to prevent people from giving up their citizenship. I do, however, think the Ex-PATRIOT act (if passed into law) would end up driving investment into Europe and Asia in the long run.

Please feel free to sound off with your own thoughts in the comment section.

Photo via Sen. Schumer/ Flickr

Sparked by Facebook co-founder Eduardo Saverin’s renouncement of citizenship, two U.S. Senators are planning to unveil a new plan focused on preventing the super rich from dodging taxes.

Saverin has been taking quite a bit of heat over dropping his citizenship, which was announced coincidentally just weeks before Facebook goes public. Many viewed the action as a way for him to save an estimated $100 million on taxes, a sentiment Saverin denies, as VentureBeat reported yesterday.

The plan, put forward by Senators Charles Schumer (D-NY) and Bob Casey (D-Pa.) is called the “Ex-PATRIOT Act” (Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy Act) and seeks to bar people like Saverin from reentering the U.S. after they’ve renounced their citizenship to avoid heavy taxation. While I understand how it could be upsetting that some people don’t value their citizenship despite everything the U.S. offers, deciding to block them from ever visiting the country is just asinine. The goal is to compel the super rich to continue paying taxes, not excommunicate them. (See update below with more details on the bill.)

In dramatic political fashion, Schumer’s office labels Saverin’s renouncement a “scheme” and tries to bring a sense of urgency to the matter due to the recent news. What’s funny about this move is that its anything but urgent. Saverin filed the paperwork to give up his citizenship in January 2011 but was only approved the following September.

Also, people giving up their citizenship to avoid paying taxes is not a new concept. As my fellow staffer Jolie O’Dell previously pointed out, filing taxes as a U.S. citizen while living abroad can be an expensive and complicated nightmare. Nearly 1,800 people renounced their citizenship in 2011 to avoid having to deal with those taxes.

Generally speaking, Schumer does some really good things with his power, such as trying to speed up the adoption process for sweet German Shepherd dogs that have served in the military. But when it comes to the “Ex-PATRIOT Act,” it seems like little more than banging pots and pans for the sole purpose of grabbing attention.

The senators are scheduled to explain their Ex-Patriot Act plans later today. We’ll update the post with any interesting bits from the press conference.

Update 5/17/2012 – 9:08 a.m. PST: The senators just wrapped up the press conference, offering up some additional details about their proposed legislation.

Under the proposed bill, expatriates with either a net worth of $2 million or an average income tax liability of at least $148,000 (over the last five years) will be presumed to have renounced their citizenship for tax avoidance purposes. Any person who fits this description does have a chance to appeal to the IRS to prove they aren’t just dodging taxes.

Anyone who the IRS determines was indeed dodging taxes by renouncing citizenship will be slapped with a new tax on all future investment gains — no matter where he or she resides. The senators said this stipulation would eliminate any tax benefit/financial incentive associated with renouncing one’s citizenship. Also, the rate of the new capital gains tax will be 30 percent, which is consistent with the current rate applied on non-resident aliens for dividends and interest earnings.

Official statements from Schumer and Casey follow below:

“Mr. Saverin has decided to ‘defriend’ the United States of America just to avoid paying his taxes. We aren’t going to let him get away with it so easily,” Schumer said. “It’s infuriating to see someone sell out the country that welcomed him and kept him safe, educated him and helped him become a billionaire. This is a great American success story gone horribly wrong. We plan to put a stop to this tax avoidance scheme. There should be no financial gain from renouncing your country.”

“We simply cannot allow the ultra-wealthy to write their own rules,” said Senator Casey. “Mr. Saverin has benefited greatly from being a citizen of the United States but he has chosen to cast it aside and leave U.S. taxpayers with the bill. Renouncing citizenship to simply avoid paying your fair share is an insult to middle class Americans and we will not accept it.”

Schumer photo via lev radin / Shutterstock

Around 1,800 U.S. citizens living abroad formally renounced their citizenship in 2011 — just like Facebook co-founder Eduardo Saverin — and many did so for tax purposes.

Saverin told Bloomberg today that his decision was one of convenience; it’s widely assumed that the young would-be billionaire refers to financial convenience. Filing taxes as a U.S. citizen living abroad can be an expensive and complicated nightmare, and at least 1,788 (and likely many more) made the choice to sever their U.S. ties rather than dealing with it.

Right now, Saverin controls around four percent of Facebook stock (although Facebook CEO Mark Zuckerberg controls the votes for those shares due to some contractual jiu jitsu). That stock will be worth billions as of Facebook’s IPO day, and as a result, Saverin could lose billions in a quick stock sale through capital gains taxes.

Singapore, the country in which Saverin currently resides, is a tax haven that levies no tax on income generated outside Singapore. Also, as a non-U.S. citizen, Saverin would get to skip disclosing his personal and other bank account balances to the IRS.

Though his decision is highly controversial, Saverin is hardly alone is his decision. The State Department said it records around 1,100 citizens voluntarily renouncing their citizenship each year, but the tax-related expatriations list from the IRS tells a different story.

And the number of U.S. citizens voluntarily expatriating in 2011 was more than double the number in previous years. In fact, more U.S. citizens turned in their passports in 2012 than in 2007, 2008, and 2009 put together.

Because the U.S. is one of just a handful of countries that taxes expats for income earned outside the United States, our expats have more hurdles than most come tax-time, including lots of disclosures and paperwork on foreign and domestic income and accounts. And a new tax law requires foreign banks and other financial institutions to turn over data about U.S. clients to the IRS each year. Failure to comply can lead to fines (fines that start at $10,000) and criminal charges, even when the taxpayer in question doesn’t actually owe any money.

Saverin and other expats do face a departure or exit tax, but in the future, they will be exempt from having to disclose their financials in ways that many clearly consider too invasive.

In a blow to Uncle Sam, Facebook co-founder Eduardo Saverin has renounced his U.S. citizenship ahead of the company’s hotly anticipated initial public offering.

Facebook is expected to make its public stock market debut on May 18. The company priced its shares in the $28 to $35 range last week, and will raise as much as $11.8 billion with a $96 billion valuation through its offering.

Saverin, the famed co-founder of Facebook, is listed on a April 30, 2012 IRS document that includes the names of individuals losing their U.S. citizenship, a fact first reported by Bloomberg.

“Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time,” Saverin spokesperson Tom Goodman told Bloomberg.

Practical indeed. The expatriate’s stake of the social network, pegged at around 4 percent, could be worth as much $3.84 billion on IPO day. With Saverin giving up his U.S. citizenship and taking up residency in Singapore, the Brazilian billionaire and startup investor will save big on his tax bill. There is no capital gains tax in Singapore, and Saverin will be beholden to the U.S. government for far less since he renounced citizenship prior to Facebook’s IPO.

Saverin isn’t the first person to change locations just prior to a transaction in order to avoid a tax hit. Gilbert Hyatt moved from La Palma, Calif. to Las Vegas before receiving a patent for inventing the microprocessor. The relocation caused a lengthy legal battle with the California Tax Bureau. And big businesses such, as Tyco, Seagate, and Halliburton have been known to relocate their corporate headquarters to save some dough.

Still, the news appears to have tech circles split in their reaction. Some are applauding Saverin’s timely relocation as savvy, while others are chastising the decision.

As for Facebook, the IPO appears to be on track, despite a rumored investigation by the FTC into the company’s purchase of mobile photo-sharing service Instagram. The offering, which will be the biggest Internet IPO to date, is either seeing weaker than expected demand or is already oversubscribed, depending on who you choose to believe (we’re leaning toward the latter here).

Photo credit: Eduardo Saverin/Facebook

As one of the most profitable companies in the world, it’s hard not to think that Apple would try to reduce its taxes wherever possible. But according to a detailed report today by the New York Times, the company is going to extreme lengths to avoid taxes — so much so that it’s pioneered accounting techniques that many others have followed.

For example, Apple has opened a subsidiary in Reno, Nevada — cheekily named Braeburn Capital — to collect the company’s profits, as well as invest them. Nevada offers a corporate tax rate of zero, while California’s is 8.84 percent, so the subsidiary allows Apple to legally able to avoid millions in taxes to California.

Of course, Apple isn’t alone with its tax avoidance methods. But just as with the New York Time’s extensive reports on Apple-related labor abuses in China, the paper seems to be holding up Apple as an example to point out greater business concerns. Apple is a particularly interesting subject as well, given its record-high profits and cash reserves of $110 billion.

“Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean,” writes the NYT’s Charles Duhigg and David Kocieniewski.  “Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies.”

Without its creative accounting, Apple could have owed $2.4 billion more to the U.S. government last year, according to former Treasury Department economist Martin A. Sullivan. Apple paid $3.3 billion in cash taxes last year on profits of $34.2 billion, whereas retailer Walmart paid $5.9 billion on $24.4 billion in profits, the NYT points out.

The NYT report, which mentions plenty of other interesting tax tactics by Apple, is particularly damning against Apple given how much California and its home city of Cupertino are struggling. I suspect we’ll see the usual amount of Apple bashing thanks to this report, but there’s likely little the company will do about the criticism. Apple doesn’t really have much room to improve if its competition continues to take advantage of legal tax loopholes.

In response to the New York Times report, Apple issued the following statement‘ to the paper:

Over the past several years, we have created an incredible number of jobs in the United States. The vast majority of our global work force remains in the U.S., with more than 47,000 full-time employees in all 50 states. By focusing on innovation, we’ve created entirely new products and industries, and more than 500,000 jobs for U.S. workers — from the people who create components for our products to the people who deliver them to our customers. Apple’s international growth is creating jobs domestically since we oversee most of our operations from California. We manufacture parts in the U.S. and export them around the world, and U.S. developers create apps that we sell in over 100 countries. As a result, Apple has been among the top creators of American jobs in the past few years.

Apple also pays an enormous amount of taxes which help our local, state and federal governments. In the first half of fiscal year 2012 our U.S. operations have generated almost $5 billion in federal and state income taxes, including income taxes withheld on employee stock gains, making us among the top payers of U.S. income tax.

We have contributed to many charitable causes but have never sought publicity for doing so. Our focus has been on doing the right thing, not getting credit for it. In 2011, we dramatically expanded the number of deserving organizations we support by initiating a matching gift program for our employees.

Apple has conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules. We are incredibly proud of all of Apple’s contributions.

Photo: Sean Ludwig/VentureBeat

July 9-10, 2013
San Francisco, CA

Early Bird Tickets on Sale

New York Attorney General Eric Schneiderman announced this morning that the state has filed suit against Sprint Nextel for more than $300 million over tax fraud concerns.

He claimed that Sprint deliberately failed to charge customers more than $100 million in wireless service taxes over a period of seven years, Reuters reports. Schneiderman said this was the first case filed under New York’s False Claims Act.

The suit, which was filed this morning in the New York State Supreme Court, calls for three times the amount underpaid by Sprint, plus additional penalties. Schneiderman claimed that the move by third-place Sprint was a way to snatch customers from rival carriers. He’ll be taking over a whistle-blower lawsuit originally filed in New York in March 2011.

Sprint just announced its first LTE 4G devices, the Evo 4G One, Galaxy Nexus, and LG Viper, ahead of the launch of its LTE network this summer. The company is moving quickly to deploy LTE to catch up with Verizon and AT&T, after spending hundreds of millions on its slower WiMax 4G network.

It’s unclear if this lawsuit will affect Sprint’s future plans, but the carrier certainly can’t afford a delay, especially since it likely won’t receive the new iPhone without an upgraded network.

Update: Sprint has issued a statement denying the allegations:

This complaint is without merit and Sprint categorically denies the complaint’s allegations. We have collected and paid over to New York every penny of sales taxes on mobile wireless services that we believe our customers owe under New York state law. With this lawsuit, the Attorney General’s office is claiming New York consumers, who already pay some of the highest wireless taxes in the country, should pay even more. We intend to stand up for New York consumers’ rights and fight this suit.

Image via Consumerist on Flickr

More than 53 million Americans, or roughly one in four active web users, visited tax-related websites in February for help with their returns.

Altogether, Americans raked up 1.4 billion pageviews in February across the top tax sites, according to analytics firm Nielsen. More Americans visited tax websites in February, historically the peak month for online tax activity, than in prior years.

click to enlarge

IRS.gov was the most visited tax site with more than 28 million unique U.S. visitors. TurboTax, from Intuit, came in close second with 25 million unique visitors, and H&R Block rounded out the top three with 19.5 million unique visitors. The latter noticed a 58 percent bump in year-over-year visits.

Web denizens, however, were especially interested in exploring their online tax options this year, as a majority flittered about the web and flirted with multiple sites. Nearly half of all visitors to IRS.gov later visited TurboTax in the same month, and 39 percent also jumped to H&R Block. And college-educated ladies were most likely to turn to the web for help with their taxes, according to Nielsen.

Photo credit: Dave Dugdale/Flickr

July 9-10, 2013
San Francisco, CA

Early Bird Tickets on Sale

It’s April 8 and I haven’t started on my taxes yet. They’re due in about a week, but a combination of travel, the workload here at VentureBeat, and the general fear of what I owe have kept me from taking the first step.

Thankfully, it’s now easier than ever to tackle my taxes, courtesy of a slew of new mobile tax apps. Computers have simplified taxes beyond the dark days of pen and paper, first with boxed software, then with online solutions that were able to keep information from the previous year’s taxes. But now, if you’re lucky, you can get the job done simply by snapping a photo of your W2 with your phone.

Snaptax

If your taxes are fairly simple, and you normally file a 1040EZ form, then Snaptax is the easiest way to get the ordeal over with. The app lets you snap a photo of your W2 form to instantly populate the relevant information. I tried the app on my forms and all the information, including complicated numbers like my employer’s federal ID, was accurate.

Sure, it doesn’t take much time to fill in your W2 information into a typical tax program or site, but there’s a certain wow factor to being able to file your taxes from your phone. (For an alternative app that works similarly, check out H&R Block at Home 1040EZ.)

Free for iPhone, Android (pay to file federal and state)

Taxcaster

If you’re curious about what you owe in taxes, or will receive as a refund, Taxcaster lets you quickly plug in your income and financial situation to get an estimate. It’s certainly not as accurate as a full-fledged tax program, but for a quick guess, it’s enough to steer you away from big purchases until your taxes are done.

Free for iPhone, Android, Amazon Kindle (Also available online)

Turbotax for iPad

If you need something more than SnapTax, Intuit has brought pretty much all of the features of its popular TurboTax desktop software over to the iPad. This year, for the first time, the company is also offering free tax advice through the app via a network of 700 tax specialists.

The app can also import your previous year’s tax information. If you have old tax files stored on your computer, you can import them into the Turbotax iPad app via iTunes.

Free for iPad (pay to file federal and state)

IRS2go

It’s terribly named, but the official IRS app offers a ton of useful features. You can use it to track your return and when you can expect a check, plus you can also request a previous year’s tax return.

Free for iPhone, Android

Other tax apps worth mentioning

EITC Finder (free) will make sure you don’t miss out on the Earned Income Tax Credit, which could grant you up to $5,700 if you make under $49,000. And if you still need time to file your taxes, Easy Extension (free) offers the simplest way to file a tax extension with the IRS.

Tax piggy bank image via Shutterstock

It’s tax season, and you can almost smell the sweat dripping from nervous small business owners’ noses. Accounting software maker Outright wants to be the sweatband by connecting a data hose to your website’s point of sale product.

“We’re going after the small and simple businesses where the business owner is doing all of the tasks inside that business,” said Outright chief executive Steven Aldrich in an interview with VentureBeat. “They are unhappy and frankly worried that they’re not organized for tax season.”

The company is integrating online shopping carts to its accepted data sources, and is starting with the Cashie Commerce cart. Outright takes data feeds from products that many small business owners use to make transactions such as PayPal, Etsy, eBay, banks, and credit. It then organizes the data in your Outright online account so owners can see what profit they’ve had, what they’ve already taxed, their operating costs, and more.

All you have to do to set up the data feed is go to a webpage within your Outright account and “click a button” to allow Outright to access that data. Outright will make the back-end connection on its own. You do have to sign up with Cashie separately if you’re not already using it. If the need arises, Aldrich says Outright would create a page where customers can create a Cashie account as well as sign up their data feed. That does not yet exist, however.

Outright decided to spur its shopping cart data program with Cashie due to customer feedback. The shopping cart company allows people to sell their wares on individual blogs or websites, and makes money through transaction fees. Outright isn’t going to stay exclusive with Cashie, however, and hopes to branch out into competing products.

Aldrich claims that 70 percent of these small businesses are still working with pencil and paper to keep up with their bookkeeping. But pen and paper isn’t their only competitor. Companies like Intuit’s Quickbooks, Xero, recently funded by Peter Thiel, and inDinero provide similar services.

According to Aldrich, these companies cater to the SMB, or the small to medium-sized business. Instead, he puts emphasis on the “small and simple” customer, the artist selling their paintings online, or the fashion-forward couple reselling vintage clothes through Etsy.

As for inDinero, Aldrich said, “They’re small, from what we can tell, in the marketplace. We haven’t seen them in the discussions that small businesses have with us.”

It’s free to sign up with Outright, the company only makes its money through sign ups to its premium service, Outright Plus, which costs $9.95 per month. There is otherwise no cost associated with integrating Cashie. To take advantage of the tax season, Outright is offering free admission to Outright Plus through the end of April, after which regular monthly payments will be due.

Outright was founded in 2008 and is headquartered in Mountain View, Calif. The company thus far has 150,000 customers and has taken on $10.5 million in funding. Investors include Sequoia Capital, Shasta Ventures, and First Round Capital.

Image via Shutterstock

Amazon is by far the largest online retailer with more than $34 billion in annual sales. Until now, Amazon and other digital retailers have had a significant advantage over local stores because it doesn’t have to charge sales tax in any state where it doesn’t have a substantial corporate presence.

In an e-mail to its California affiliates, Amazon said it opposed the bill because it is “unconstitutional and counterproductive.” Amazon further asserts that the bill is supported by big-box retailers that are out to harm their competitors.

California introduced the law, which requires Amazon and its affiliates to pay sales taxes, in the wake of a staggering budget deficit and amid hopes the online sales tax could help narrow the gap. In 2008, Amazon axed its affiliate programs in New York, North Carolina, Hawaii, and Rhode Island after those states added online sales taxes. Last year, Amazon cut off Colorado for the same reasons.

Other states are still fighting with Amazon on this issue as well. Texas, for example, sent Amazon a $269 million invoice on four years of unpaid taxes in late 2010.

What do you think of Amazon’s move? Do you think Amazon should continue to not have to issue sales taxes?

This series is brought to you by TurboTax Home & Business Edition – Guides You to Your Biggest Tax Refund. As always, VentureBeat is adamant about maintaining editorial objectivity. TurboTax had no involvement in the content of this post.

This week’s tax question:

I’m used to getting stock options, but my new employer offers restricted stock instead. Does this change what I’ll owe in taxes, and do I need to do anything now?

We passed the question on to Steve Henley, national tax practice leader at CBIZ MHM, the seventh largest accounting provider in the U.S. Here’s his answer:

The receipt of restricted stock as part of compensation results in tax consequences that depend upon whether the taxation is delayed to a future year or whether a special election is made to be taxed in the current year.

Generally, restricted stock received by an executive contains certain restrictions, the most common of which being that the employee doesn’t “earn” full rights to the stock until he or she has satisfied a vesting requirement, which is often three years. The employee will not be taxed on the value of the stock until the vesting requirement has been met. Under this circumstance, the stock is taxed to the executive at the time the vesting requirements are met at the current value. For example, if the restricted stock is granted in 2011 and the vesting period is three years, the general rule is the stock will be taxed to the executive at the value of the stock in 2014, which may be considerably higher. Also, the value of the stock is taxed at ordinary income tax rates — not capital gain rates — because the tax rules consider the stock to be compensation and ordinary income, just like the executive’s salary.

However, the employee could make a Sec. 83(b) election with the IRS within 30 days of the stock grant. The value of the stock will then be included in the executive’s tax return at that time (i.e. in 2011 rather than 2014). The value of the stock will also be treated as ordinary income ($1,000 in the example above) rather than the value at the end of the vesting period. If the stock increases in value after receipt, then upon a future sale the increase in value will be taxed at the favorable capital gain rates, which are currently 15 percent for federal purposes versus the current maximum ordinary rate of 35 percent. Assuming the stock value increases, the employee benefits significantly by making the election. The employee could also claim a capital loss if the stock value decreases after the election and is lower at the time of sale. A capital loss is generally not very beneficial because it can only offset capital gains, except to the extent of $3,000.

From now through April 15, VentureBeat will be taking your tax and accounting questions and getting you expert answers. You can send us a question by email, leave one in the comments below, or reach us by Twitter or on Facebook or Quora.

This series is brought to you by TurboTax Home & Business Edition – Guides You to Your Biggest Tax Refund. As always, VentureBeat is adamant about maintaining editorial objectivity. TurboTax had no involvement in the content of this post.

This week’s tax question:

If I live abroad, and my businesses are all online, do I still have to pay U.S. taxes?

We passed the question on to Michael Bowen of the law firm Akerman Senterfitt, where he’s chair of the state and local taxation practice. He also is a guest lecturer at Harvard University on corporate taxation. Here’s his answer:

This question – although simple – elicits a somewhat complicated answer.

First, it’s important to distinguish between federal as opposed to state and local taxes. In general, if the businesses are incorporated, domiciled, etc., in a foreign country and the owner is not a U.S. citizen, then no federal taxes would be due. If either of these assumptions is incorrect, the answer can quickly change depending on the specific facts. The other complicating factor on the federal side is the presence or absence of a tax treaty existing between the U.S. and the home country of the business. A tax treaty may provide additional protections to a foreign business not otherwise available in the general federal income tax law. (Look on the IRS website for detailed information about such treaties.)

State and local taxes should be considered separately. This is true whether or not federal taxes apply. In the U.S., states are sovereign and have their own tax laws. The state and local rules of taxation vary widely across jurisdictions. To add a further layer of complexity, unlike federal tax, there are many varying types of state and local taxes. For example, there are corporate excise taxes, gross receipts taxes, sales tax, use taxes, franchise taxes and net worth taxes—to name a few.

The fact that the business is online (or virtual) does not necessarily mean that it will escape federal or state and local taxes. Much will depend on the specific facts of the case and what states and localities it does business.

Disclaimer: This “Ask the accountant” article discusses general legal, tax and financial issues, but it does not constitute legal, tax or financial advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of appropriate professionals in the relevant jurisdiction. VentureBeat, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.

From now through April 15, VentureBeat will be taking your tax and accounting questions and getting you expert answers. You can send us a question by email, leave one in the comments below, or reach us by Twitter or on Facebook or Quora.

This series is brought to you by TurboTax Home & Business Edition – Guides You to Your Biggest Tax Refund. As always, VentureBeat is adamant about maintaining editorial objectivity. TurboTax had no involvement in the content of this post.

This week’s tax question:

How am I supposed to keep track of all these tax deadlines? What’s due when?

We passed the question on to Betty Kayton, who assists startup firms and entrepreneurs with financial, human resources and tax matters until these firms are ready to hire a full-time chief financial officer. She submitted this answer to VentureBeat:

The requirements vary by jurisdiction. The information in this article was prepared for a startup corporation located in San Francisco. Depending upon where you are located (and if you are a corporation or a limited liability company), some of these items may or may not apply to you. And you may be subject to other local rules, such as city and county business licenses, which aren’t listed below.

Before last payroll is run for the year

401(k) top heavy testing.

Be sure all payroll-related payments are included on W-2.

Make all payments to 401(k), FSA, HSA. Include the following on W-2: group term life insurance > $50K, HSA payments (employer and employee), taxable benefits (if any).

If an employee exercised NSO stock options during the year, then you need to include the “paper profit” on the options as part of their W-2 taxable wages.

Jan. 31

After you make sure everything is correct, then prepare W-2 forms and give then to employees. Usually, your payroll service will do this for you.

Prepare and mail 1099 forms to service providers and recipients of interest income, rent and royalties.

Prepare and mail forms 3921 and 3922 to persons who purchased stock by exercise of incentive stock options and/or purchase of stock through ESPP.

Prepare and pay California sales and use tax.

Feb. 28

Mail 1099, 3921 and 3922 forms to the IRS with form 1096 cover sheet(s). (See VentureBeat’s complete coverage of

form 1099 issues

.)

Delaware franchise tax due.

San Francisco business license due.

March 15

California QSBS election due on form 3565 (for stock sold by the company during the year)

California franchise tax return due, but you can get automatic extension of time to file

Federal income tax return due, but you can get extension by filing form 7004

If you have foreign activities and/or bank accounts, then you probably need to file forms 5471, 5472 and/or TD F 90-22.1. The fine for not filing is $10K, so don’t miss it

Remind employees that if they did 83(b) elections (for purchase of unvested stock), they need to include a copy of the 83(b) election when they submit their personal income tax on form 1040

April 15

$800 minimum franchise tax due to state of California (except the first year, when no payment is required)

Varies

California “annual statement of information” is due prior to your annual anniversary of incorporation (or qualification to do business in California).

After the deadline

You’ll note that some of these deadlines have already passed. What should you do? As I noted in my discussion of form 1099, do your best to catch up — but watch out for filing requirements that carry heavy fines if missed, like the foreign-activities forms.

As with anything related to the government, the rules are constantly changing. And local laws only apply within a particular state or city, so you may have a different set of rules that apply to you.

Disclaimer: This “Ask the accountant” article discusses general legal, tax and financial issues, but it does not constitute legal, tax or financial advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of appropriate professionals in the relevant jurisdiction. VentureBeat, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.

From now through April 15, VentureBeat will be taking your tax and accounting questions and getting you expert answers. You can send us a question by email, leave one in the comments below, or reach us by Twitter or on Facebook or Quora.

This series is brought to you by TurboTax Home & Business Edition – Guides You to Your Biggest Tax Refund. As always, VentureBeat is adamant about maintaining editorial objectivity. TurboTax had no involvement in the content of this post.

This week’s tax question:

My business had subcontracted employees and paid them through their own LLCs. Do I need to provide them with Form 1099s?

We passed the question on to Betty Kayton, who assists startup firms and entrepreneurs with financial, human resources and tax matters until these firms are ready to hire a full-time chief financial officer. She submitted this answer to VentureBeat:

There are a lot of misconceptions about 1099 forms. I’ll try to address the main issues here through a list of frequently asked questions.

Who needs to get 1099?

You must send a 1099 form to anyone that you pay money to, unless they meet one or more of the following exceptions:

the recipient is a corporation
you included the payment in a W-2 form (to an employee)
the payment is for a tangible product (office supplies, computers, etc), or
the total payments during the calendar year were less than $600.

So what are some examples of things that need a 1099?

Anything not excluded the above list. Examples include: legal fees, marketing consultants, outsourced programmers, interest paid to lenders, rent paid to landlords, and public relations fees. There are some real surprises lurking around “who is a corporation”. For example, few people know that AWS (Amazon Web Services LLC) isn’t a corporation; so if you paid AWS more than $600 during 2010, you need to send them a 1099 form. Likewise, 37 Signals, a major provider of Web-based software to many startups and other companies, is an LLC. On the other hand, some accounting firms are corporations (and thus don’t need a 1099).

This sounds impossible to deal with. How am I supposed to know who is a corporation? My Magic 8-Ball and Oujia board are both packed away in the attic.

You don’t need to guess. The easiest way to gather the needed information is to always get every new vendor to provide you with a W-9 form (or, if they are a non-USA entity, a W-8BEN form). This form has their correct legal name, their type of entity (corporation, partnership, etc), their address, and their tax ID number. With this information, you can prepare their 1099 form. When you enter the vendor into your computer system, be sure to include its correct legal name (“Amazon Web Services, LLC”), not a nickname like “AWS” or “Amazon”, and input the tax ID number into the appropriate field in your accounting system.

The deadline for 1099s was January 31. It’s the middle of February, and I didn’t take care of this stuff yet. What do I do?

The forms aren’t due to the IRS until February 28. So just crank out the forms as quickly as you can, and mail them before February 28. It’s a good idea to mail the black copies of the forms to the service providers ASAP, and then wait a week or two (but not after February 28) so the service providers can tell you about any mistakes. And then you can fix the mistakes before sending the red copies to the IRS on February 28.

Do subcontracted employees get 1099s?

“Subcontracted employees” is a dangerous choice of words. Workers are either consultants (on form 1099) or employees (on form W-2). There is no such thing as a “1099 for an employee.” But that’s the topic for another column.

Disclaimer: This “Ask the accountant” article discusses general legal, tax and financial issues, but it does not constitute legal, tax or financial advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of appropriate professionals in the relevant jurisdiction. VentureBeat, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.

From now through April 15, VentureBeat will be taking your tax and accounting questions and getting you expert answers. You can send us a question by email, leave one in the comments below, or reach us by Twitter or on Facebook or Quora.

This series is brought to you by TurboTax Home & Business Edition – Guides You to Your Biggest Tax Refund. As always, VentureBeat is adamant about maintaining editorial objectivity. TurboTax had no involvement in the content of this post.

Got tax questions related to starting a new venture, running a fast-growing business, or working in the technology sector? Ask away. VentureBeat’s Ask the Accountant series will get expert answers.

A reader asks:
If a business is registered in one state, and the owner of the LLC moves to another state, does the LLC need to be reestablished in the new state?

We passed the question on to Doug Collom, vice dean of Wharton San Francisco, where he runs the business school’s West Coast operations and serves as an adjunct professor, teaching a class on startups and venture capital. Here’s his answer:

An LLC, like any corporation (such as the usual Subchapter C corporation), can serve as the form of business entity in any state. If the business operations being run out of the LLC should expand, or if the LLC members want to take the business to a different state than the one where the LLC is organized, as a general premise there is no requirement to reincorporate. Depending on the kinds of activities that the business is conducting in its new location, it may be necessary to qualify with the secretary of state’s office of that state, as well as that state’s franchise tax authority, in order to conduct business there. But the original “situs” of incorporation will be respected, and there will be no requirement to reincorporate.

That being said, depending on the kind of business that is expanding or relocating, it would be a good idea to check out in advance the laws of each state that may pertain to the business. This may influence the decision on how or whether to conduct business in that state.

From now through April 15, VentureBeat will be taking your tax and accounting questions and getting you expert answers. You can send us a question by email, leave one in the comments below, or reach us by Twitter or on Facebook or Quora.

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Users looking for an accountant, whether for taxes or other services, can visit the site and search by geographic area. Users can choose to contact one of the listed accountants by email or phone.

After both parties agree to work with each other, a payment is processed through the site. The user then has 2 weeks to upload all their needed documents to TeaSpiller for the accountant to access and begin the process.

With more than 1 million accountants in the U.S., the company has begun the process of using its search and indexing algorithms to find and add them automatically to the directory. Each accountant includes their own profile, similar to a resume, that includes an overall rating, comments/reviews and fees. Additional information like licenses, work experience and education are also included.

TeaSpiller plans to make money in two ways: giving accountants “pro” accounts for added features, like bumping their profiles higher in search results, and taking a cut of each transaction through the site.

The company has several competitors, including CPAFinder.com and AccountantsWorld.com, both of which act as directories for searching and finding accountants. While the search function works similarly, TeaSpiller offers more information on accountant profiles, including ratings and reviews, as well as the means for managing payments and documents online. TeaSpiller also doesn’t charge accountants to be listed, while the competitors charge rates of around $400 a year.

The New York City-based company was founded in 2009 by Amit Vemuri, a former vice president of product development strategy at online travel comparison site Travelocity. No funding has been secured to date.

This series is brought to you by TurboTax Home & Business Edition – Guides You to Your Biggest Tax Refund. As always, VentureBeat is adamant about maintaining editorial objectivity. TurboTax had no involvement in the content of this post.

As April draws near, our thoughts turn to taxes. More than a bit unwillingly, for most, because the workaday parts of running a business can distract from building the great products that drew us into this world.

But getting the operations of your business right can be key to success — and getting them wrong can be a painful, if not fatal, distraction.

So from now through April 15, VentureBeat will be taking your tax and accounting questions and getting you expert answers. You can send us a question by email, leave one in the comments below, or reach us by Twitter or on Facebook or Quora.

Not that there’s just one answer to the questions of how you structure, run, and reap rewards from your business. Some tax subjects are cut-and-dry matters of law. Others vary by situation. So we’ll be hosting conversations here and elsewhere. It’s the least we can do to make paying your due a bit less taxing.

Got a question? Leave a comment or send it by email.

July 9-10, 2013
San Francisco, CA

Early Bird Tickets on Sale

Intuit just released what may be the easiest way possible to do your taxes — an iPhone and Android application called SnapTax.

With SnapTax, you don’t have to fill out a bunch of complicated forms. Instead, you just use your smartphone camera to scan your W-2 form from your employer, answer a few more questions, then file your taxes from your phone. You don’t have to pay for any expensive software, either. Instead, the app is free to download, then if everything works out properly, you pay $14.99 when you’re actually file your taxes.

You can watch Intuit’s demo video below, though it doesn’t show real footage of the app in-action. Intuit demonstrated an earlier version for me a few months ago, and I an attest that the scanning part, at least, works as smoothly as promised.

Now, as you can probably guess from the description, the app is meant for people whose tax situation is pretty simple.Specifically, Intuit says it’s for people who make $80,000 or less a year; only have income from W-2s, interest, and unemployment; and don’t owe any property. I suspect that excludes a lot of VentureBeat readers. But, like the company’s acquisition of Mint, this seems like a way for the finance software giant to try to reach a young, tech-savvy audience.

Intuit also released the SnapTax application last year, but it was only on iPhones, and only worked for California residents. This year it’s available on Android too, and can be used to file taxes anywhere in the United States.

Heads up, entrepreneurs! There’s increasing political interest for an Internet sales tax.

Although we’ve seen calls for this in the past, the topic has seen a resounding resurgence amidst budget deficits in almost all 50 states. This deficit crisis has presented many lawmakers with a golden opportunity to recoup some revenue by collecting tax on online purchases.

As a brief recap, online businesses are only required to charge sales tax in a state where they have nexus, such as a physical location. For example, if you’re running an e-commerce site from a home office in New Jersey, you only have to charge sales tax to customers that reside in New Jersey. Although your customers are required to pay use taxes on sales made in other states, this is a complicated process that’s nearly impossible to enforce.

While this lack of enforcement is enticing to online shoppers, state governments claim that they’re losing over $23 billion in revenue because of the current tax code. In Texas alone, the state comptroller notes that almost $600 million in local and state sales taxes were lost from online purchases in 2009.

On the federal level, the push for new tax legislation came with the introduction of The Main Street Fairness Act. This proposal calls for an online sales tax under the reasoning that online stores should face the same tax regulations as their retail counterparts. To complicate things even further, several states are independently working to broaden the definition of nexus so that they may be entitled to online sales tax. The most vocal cases come from states like Nevada, Florida and Washington, all of which rely on sales taxes in the absence of a state income tax.

Debates and opinions don’t impact bottom lines, though. Here are five major implications you would face if you do business online. (Some are more obvious than others and I should note that this list is by no means comprehensive.)

Need for additional software: Since there are over 7,500 independent tax jurisdictions with varying regulations, you’ll need to invest in software that can automate tax calculations, collections and filings for you. Managing differences across these jurisdictions would be impossible without drowning in maps and numbers.

To further complicate matters, each state has varying tax exemptions. For example, some states require no sales tax on digital products like software. Other states have reduced rates for food items or children’s clothing.

Thus, be ready to shell out some extra cash or wait for an integrated system to automatically process sales tax for you.

A big push in paperwork: An Internet sales tax will require you to place an extra emphasis on record keeping and form filing. To begin your new path to tax compliance, you must register in every state in which your business sells. Thus, if you’re selling nationwide, you’ll have to submit business registration forms in all 50 states, and various cities, counties, boroughs, etc. , each of which have different requirements.

Next, you’ll need to submit tax forms at the end of each tax season to each jurisdiction in which you’ve sold something. And in the event of an audit from any of these states, you’ll be required to keep detailed documentation of each transaction to protect yourself.

So whether you decide to hire an extra hand, invest in a giant filing cabinet, or create a new database, be prepared for an unprecedented increase in record keeping.

Inability to position on price: In this current heyday of ecommerce, many marketing strategies are based on price. This is particularly true if you’re active in comparison shopping engines like Google Product Search. Online shopping trends, particularly during the economic downturn, demonstrate that customers are more price conscious than ever.

With the passage of this proposed sales tax, you’ll now have to convince customers to shell out money for an additional 7-9 percent sales tax, on top of convincing them to pay those dreaded shipping fees.

In a world with an online sales tax, your business will have to shift its marketing promise away from price to focus on product benefits and customer service. These two selling points will become more and more important to help justify higher prices to customers.

Smaller margins: Unfortunately, price will always remain an issue, and smaller online businesses must remain competitive with their larger counterparts. So even though your customers will be the ones paying the tax, you’ll likely have to lower prices to compensate for this new surcharge and prevent prices from becoming astonishingly high. This will be particularly true for luxury items.

With an Internet sales tax, customers will become even more price-conscious than before, leading to an increased dependence on discounts. And once you start slashing prices and running more promotions, your profit margins will begin to diminish. This revenue hit will then require cost-cutting measures in other aspects of your operations.

A shift toward local marketing: An Internet sales tax will also require your business to take a more local approach in its marketing strategy. This includes an increased push toward local SEM, such as targeted PPC and local listings like Yellow Pages. While interstate e-commerce will continue to play an important role in any revenue stream, it will be much easier and convenient to sell within your own state.

This impact should actually be beneficial. It’s typically easier to manage local marketing campaigns, particularly in regards to budget allocation. There will also be a shift of marketing dollars to more traditional advertising, such as local newspapers.

What’s carried interest? Let’s sharpen Wikipedia’s entry: Carry is a share of the profits of a successful partnership that is paid to the manager of, say, a private-equity fund. It’s a form of compensation designed to reward the manager when they make money for investors.

In private equity, in order to receive carried interest, the manager must first return all capital contributed by the investors, and, in certain cases, the fund must also return a previously agreed upon rate of return — the hurdle rate — to investors.

The details vary from firm to firm and fund to fund, but here’s what matters: Carry is taxed as capital gains, just like the profits from a successful IPO.

HR 4213, if passed into law, will change the tax status of carried interest to a blend. One fourth of the income remains capital gains, but 75% will be taxed as regular income. To investors, the change not only cuts into their take, it also implies the value they’ve built is the same kind of money as a regular paycheck. That’s why they’re extra-angry.

Carried interest is one of several easy targets for Congress, which is looking for ways to bring in fresh revenue for the U.S. government while also granting temporary extensions to corporations that might otherwise need to cut jobs, or to get creative with the accounting books in ways that won’t end up as taxes paid at some point.

But the bill, according to the National Venture Capital Association which represents more than 425 VC firms, “effectively removes any meaningful tax incentive for long term investment in new companies” by averaging out to a 35 percent tax rate on fund managers’ carry.

A group of conservative Democrats known as the Blue Dogs failed to keep the House from passing the bill, or from reducing the increased carry tax.

NVCA issued a statement on the bill’s passage that said, “If this bill is signed into law, Congress should expect a further decline of venture investment over time, a move away from seed and early stage investment, and less innovation and job creation for our country.”

The Senate will pick up the bill in early June. The Wall Street Journal reports that the paper’s Senate sources think slackening the 75-25 split on carry to 60-40 would improve the overall bill’s chances of passing.