October 2012 Archives

Higher Taxes in 2013: The California Wood and Lumber Tax

October 24, 2012,

As 2012 is coming to an end, corporations and individuals alike are already thinking about taxes that they will need to pay at year-end. Every meeting I have with business owners lately somehow comes around to talking about taxes and how much I expect taxes to increase next year. The passage of Assembly Bill 1492 added yet another tax to the mix - the wood and lumber tax. This tax may affect homeowners, contractors and real estate developers.

We have all heard that ordinary federal income tax rates, currently maxing out at 35%, are scheduled to increase to 39.6%. Dividends could lose their special tax treatment and be taxed at this ordinary income tax rate as well. Federal long term capital gains rates will go from 15% back up to 20%. Payroll taxes may go back up from 4.2% to 6.2%. The AMT exemption amount may go back to 2010 levels. And high income earners will have an additional 3.8% Medicare tax. But on top of all that, starting January 1, 2013, those of us in California will also have to pay an additional 1% tax on the sales price of engineered wood and lumber products. (Assembly Bill 1492 (Ch. 12-289)).

Normally I would write this off as minor, but this year my husband and I are actually right in the middle of planning a huge fencing and deck project for our new house. (Did you know there was still residential land in the Silicon Valley that has not been fenced?) So, it was quite annoying to read about how this tax is going to be instituted on lumber, decking, railings and fencing as well as particle board, plywood and other wood building products, and even non-wood but wood-like products such as plastic lumber and decking. Even more so because it is already the middle of October and I'm pretty sure our project won't be completed until early 2013. So, if I buy all the wood before the end of the year, I save 1%... but probably end up with more than I need and the inability to return it. But, if I wait until January to buy it just in time to install it, I am going to hate paying that extra 1%.

The good news is that the tax will not be imposed on furniture or firewood, so at least I can wait to buy the new outdoor table and chairs and fill up the new fire pit.

[Source: Spidell's California Taxletter, Volume 34.10, October 1, 2012.]

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

Tax Update: IRS Ruling Affects Automatic Gratuities

October 15, 2012,

Whether it is a group lunch to welcome a new employee to our law firm, a birthday dinner for family, or Moms' Night Out with friends, I often find myself enjoying Silicon Valley restaurants from San Jose to Palo Alto with a group of six or more. It is not uncommon to have the restaurant automatically add the gratuity, which is usually 18%, to our bill. This has always bothered me - not because I have a problem with paying the 18% (I often tip more than that), but because it is sometimes not obvious on the bill, and they still provide the blank line for you to add a tip, as if they are trying to trick people into double-tipping. Well, if you do not like the automatic 18% gratuity added to your bill, you will be happy to hear about a recent IRS ruling (Revenue Ruling 2012-18, June 25, 2012). This ruling clarifies the definition of tips verses service charges, each of which is treated differently for tax purposes. The result will likely be the end of automatic gratuities.

The IRS ruling states:
"The employer's characterization of a payment as a "tip" is not determinative. For example, an employer may characterize a payment as a tip, when in fact the payment is a service charge. The criteria of Rev. Rul. 59-252, 1959-2 C.B. 215, should be applied to determine whether a payment made in the course of employment is a tip or non-tip wages under section 3121 of the Code. The revenue ruling provides that the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge: (1) the payment must be made free from compulsion; (2) the customer must have the unrestricted right to determine the amount; (3) the payment should not be the subject of negotiation or dictated by employer policy; and (4) generally, the customer has the right to determine who receives the payment. All of the surrounding facts and circumstances must be considered. For example, Rev. Rul. 59-252 holds that the payment of a fixed charge imposed by a banquet hall that is distributed to the employees who render services (e.g., waiter, busser, and bartender) is a service charge and not a tip. Thus, to the extent any portion of a service charge paid by a customer is distributed to an employee it is wages for FICA tax purposes."

This definition may cause several different tax and reporting issues for restaurants, including:

- Restaurants can benefit from applying a general business credit toward employer side Medicare and Social Security taxes on tip earnings, which would be lost if these tips are considered service charges.
- Services charges will have to be reported as wages, affecting overtime rates.
- Services charges would be included in the restaurants calculation of Gross Receipts.
- Restaurants could choose to keep the service charge rather than pay it to employees.

So, next time you go out to eat with a large party, take a closer look at the check when it comes. I am guessing the automatic gratuities will soon change to something like a "suggested tip amount."

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.