Internet Sales Can Qualify as DISC Export Property

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 In previous Blogs we talked about the benefits of setting up a domestic international sales corporation (“DISC”).   By using a DISC, domestic manufacturers who export products are able to reduce their overall federal income tax rate on export income by nearly 20 percentage points (from the 39.6% top ordinary income tax rate to the 20% qualified dividend rate).   What many taxpayers do not know is that the benefits of using a DISC extend not just to sale of physical products that are shipped outside the US, but also to sale of certain services and to sale of computer programs, information and other data that are transmitted out of the US electronically.

Under the Internal Revenue Code and the Treasury Regulations, "export property" is defined to mean property:

1. that is manufactured, produced, grown or extracted in the United States by a person other than a DISC;

2. that is held primarily for sale, lease, or rental in the ordinary course of trade or business for direct use, consumption, or disposition outside the United States; and

3. where not more than 50% of the fair market value of the product is attributable to parts, components or other items imported into the United States.

The IRS has treated export sale of domestically produced computer software programs as export property for DISC purposes for many years.   Treasury Regulations were eventually issued to address some of the questions that arose in this area.  Under the Treasury Regulations, the key inquiries are whether the particular software program, data or information is  “export property” and whether the software is for use or consumption outside the United States.    As defined and described in the Treasury Regulations, many different types of electronically-transmitted computer programs, information or data can be export property, including electronically-transmitted computer software programs, films, books, tapes, records, or similar musical, artistic or literary reproductions.    However, the definition of export property does not include patents, inventions, models, decisions, formulas or processes, copyrights, goodwill, trademarks, and other like intellectual property.

In the next blog, we'll look at the types of services that can be included within the definition of export property.  If you have any questions or comments about how to set-up a DISC, or about what type of products or services are within the meaning of export property, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.    Ohio recently amended its corporate dissolution statute. If you are owed money by a corporation that is dissolving, you can be adversely impacted if you do not act in a timely manner.  The dissolving corporation is now required to give notice of dissolution to each known creditor and to each person that has a claim against the dissolving corporation. The notice will advise that you must file a claim for what you are owed and a deadline for filing the claim must be fixed. The deadline must be at least 60 days following the date the notice is given. The claim must be in writing and must “identify the claimant and contain sufficient information to reasonably inform the corporation of the substance of the claim.”  IF YOU DO NOT FILE A CLAIM BY THE DEADLINE THEN ANY CLAIM YOU HAVE AGAINST THE DISSOLVING CORPORATION IS BARRED.  This is not something you can set aside until later. Failure to file a timely claim is fatal.  if you have a claim against a corporation and receive a Notice of Dissolution, you need counsel to advice on the technicalities of the new statute or your claim may be barred.  Please contact one of our Business Attorneys at 937-223-1130 for guidance on these matters.