Tax and financial advice from the Silicon Valley expert.

Equity compensation isn’t subject to Railroad Retirement Tax

The U.S. Supreme Court resolved a conflict of interpretation about whether employee stock options are subject to Railroad Retirement Tax.

The Court ruled that equity compensation isn’t subject to the Railroad Retirement Tax.

The retirement system for the railroad industry was nationalized by the Railroad Retirement Act of 1937.  Railroad employers pay taxes on employee compensation, somewhat like the social security system.

Under the Railroad Retirement Act, the tax applies to “any form of money remuneration.”

The IRS claimed that stock options should be considered to be “money remuneration.”

The Supreme Court said that money is understood to be currency issued by a recognized authority as a medium of exchange.  While stock can be bought or sold for money, it isn’t usually considered to be a medium of exchange.


Supreme Court changes the game for sales tax on interstate sales

For many years, companies that sold their goods in states where they had no physical presence (no assets or employees located in the state) haven’t collected sales tax.  They relied on U.S. Supreme Court rulings in National Bellas Hess (1967) and Quill Corp. (1992) that they weren’t obligated to collect the tax.

With the explosion of the internet and world wide web, a growing share of U.S. commerce is now conducted online.  The states have suffered declining sales tax revenue and “bricks and mortar” merchants have suffered a disadvantage from having to collect sales tax while online merchants don’t have to.

The Supreme Court, at the request of 41 states, two territories and the District of Columbia, reversed the National Bellas Hess and Quill decisions on June 21, 2018.  The Court basically said that making a sale creates sufficient nexus to be required to collect sales tax.

This decision will have a significant impact on businesses that make interstate sales.  They now need to determine the sales tax for a huge number of jurisdictions in the U.S.  Counties and cities have their own sales tax rates.  Businesses might be required to file hundreds of sales tax reports.

Some states have thresholds to eliminate the burden for smaller businesses.  For example, in South Dakota, only sellers that deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services into the state are required to collect sales tax.

Hopefully Congress will develop legislation to ease the burden for collecting, reporting and paying state and local sales taxes.


Tax and financial advice from the Silicon Valley expert.