By: Kevin F. Reilly, April, 1997

Kevin F. Reilly, JD, CPA, is managing director of Pannell Kerr Forster PC in Alexandria, Virginia.

It’s springtime! Thoughts turn to baseball, flowers, outdoor activities, and young love. Unfortunately, for the more prosaic among us, April means taxes. It is appropriate that this column appears when the American Hotel and Motel Association is holding its annual convention in Washington. Since January, Congress has introduced more than 750 bills, almost twenty percent having something to do with taxes.

Among other issues, these bills could affect how you conduct your business, the profit you get to keep, the education of your children, and the taxation of your estate. While many will never see the light of day, it appears that a major tax bill will be part of the budget process. Some form of relief for capital gains and tax breaks for education seems to carry the most momentum; however, the push for a balanced budget will require tax increases as well.

A number of tax items arose in 1996 which will have an affect on the hospitality industry. Much has been written about last summer’s legislation, but numerous administrative rulings and judicial decisions were issued and may be just as important. Two items of particular interest are the new deposit requirements and the status of the Service’s position on cash tips.

EFTPS

Businesses withhold and pay a variety of federal taxes, including FICA, FUTA, and income taxes. Generally, these taxes are deposited in a government depository and accompanied by a paper coupon. The bank processes the information and forwards it to the government. In 1993, Congress required the IRS to develop an electronic funds transfer system to remit most tax payments to Treasury. The Electronic Federal Tax Payment System (EFTPS) was developed and would have required all employers depositing more than $50,000 in 1995 to use EFTPS by January 1, 1997. The program is an attempt to move from a paper system to a “more efficient electronic” system.

The IRS sent letters to approximately 1.2 million taxpayers informing them of the new requirements. Not surprisingly, taxpayers complained and Congress reacted. Legislation was passed last summer that delays the requirement to learn about, enroll, and begin using EFTPS until July 1, 1997. The IRS is encouraging early adoption of the program. In a recent meeting, the Commissioner of the Internal Revenue Service indicated that no further delay is expected. However, Congress, again, is entering the picture. The earlier anxiety dealt with taxpayers being able to comply with the new requirements. While still a concern, the emphasis has shifted to whether the IRS can deal with the influx of electronic transactions. Regardless, unless legislation is passed, all federal taxes formally deposited with a paper coupon must be deposited using the new system.

TIPPED EMPLOYEES

The Internal Revenue Service has taken a very aggressive position when it comes to tipped employees. The Service believes that cash tips are drastically underreported. It believes that many employees hide the total amount of tips received, and employers do not encourage compliance. The fewer tips employees report, the less FICA tax an employer will have to pay. At the end of 1995, the IRS established the Tip Reporting and Compliance program (TRAC). The purpose of this program is to encourage employers to conduct educational sessions with their employees with the ultimate goal of increasing the amount of cash tips reported by the employees. One method the IRS has used to “encourage” compliance is its policy of assessing the employer share of FICA tax on the estimated unreported tip income.

A recent case addressed the manner in which the IRS may make an employer FICA tax assessment with respect to tips allegedly received but not reported by tipped employees. The Service’s position is that an assessment may be made based on an aggregate estimate of tips received by all employees, and not on individual determinations of each employee.

The court disagreed and held “the aggregate estimate proffered by the IRS in this case is fundamentally inconsistent with the FICA tax and Social Security statutory scheme.” Although courts are sympathetic to the problems of unreported income, this is the second major case the IRS has lost. In Morrison Restaurants, Inc. v. United States, the court said that employers should not have to police the reporting of tips by employees on behalf of the IRS. Because of these two cases, the IRS may be losing some of its leverage in encouraging the food service industry to sign up for its TRAC program. As a result, expect the Service to take its argument to Congress.

ELECTRONIC COMMERCE

The hospitality industry has been at the forefront of finding practical uses for technology. Not to be left out, the Treasury Department released a discussion paper on the issues related to taxation of electronic transactions, including those using the Internet. The paper deals with the federal income tax, and takes the position that new technologies should not be used to justify new taxes.

The Treasury Department is attempting to be proactive in a rapidly changing environment. It is searching for ways to tax electronic transactions in the same manner as physical transactions. States also enter the picture. They are worried because it is very difficult to determine the source of an electronic transaction. States are looking for money, and many already feel that they are losing sales tax on business occurring within their jurisdictions. In the past, taxation of these types of transactions occurred on a source-basis, but now, residence-based taxation will take on more importance. Perhaps of greater significance, the government is concerned with the anonymous nature of many electronic transactions and the potential for abuse of the tax system.

The difficulty in planning for tax issues now is the number of players in the game. Businesses must be concerned about Congress and the IRS, as well as state and local governments. Creativity is the key for these taxing authorities in finding new, or revisiting old, ways in which to raise revenue. Property, amusement, sales and use, and a myriad of other taxes and licensing fees can drastically change the profit picture for a hotel. The fact that problems with tax collectors is not new provides little comfort. An anonymous citizen of Lagash in approximately 4000 BC summed up the issue as follows: “You can have a Lord, you can have a king, but the man to fear is the tax collector.”

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