Losing Sales Taxes
On Black Friday, the New York Times published an editorial praising a New York state law requiring on-line retailers to collect applicable state sales tax on all purchases. The requirement, in abeyance pending court challenges, makes a lot of sense. Yet history doesn’t bode well for the new law. And states are likely to continue to lose precious revenue as on-line sales grow.
Under current law, on-line retailers—as well as other remote sellers such as catalog stores—need to collect state sales tax from buyers only when the retailer has physical presence in the state (“substantial nexus” in legal terms). That’s because a 1992 U.S. Supreme Court case, Quill Corp. v. North Dakota, found that sales tax on remote sales violated the interstate commerce clause of the Constitution and unfairly burdened retailers.
In fact, the burden falls on states that lose out on billions of dollars of sales tax revenue every year. On-line sales have grown rapidly in large part because retailers charge no sales tax on buyers outside the retailer’s home state and sellers advertise that fact. Other factors may also help lower on-line prices but sales tax avoidance likely provides the biggest kick.
Unbeknownst to most shoppers, however, most states require their residents to pay “use tax” on taxable items they purchase without paying sales tax. Virginia, for example, includes an entry on its income tax return to encourage tax filers to pay their use tax. Not many do. Some years ago, the Virginia Department of Taxation told me that only about one in a thousand returns included use tax. It didn’t help that the then governor had said in a radio interview that, if he weren’t governor, he wouldn’t pay the tax. Talk about giving license to cheat the state out of taxes owed!
For years, the Multistate Tax Commission has worked to develop a “simplified sales tax system” so states could impose a uniform set of taxes on interstate sales. The idea is straightforward: a uniform sales tax would impose no additional burden on sellers beyond what they already face from their own states’ sales taxes. If such a system were adopted, the basis for Quill would disappear. Unfortunately, the commission has yet to reach consensus and there’s no simple tax.
While the commission dithers, states continue to lose out. Forrester Research has projected that on-line sales in 2009 will total $156 billion, up 11 percent from the year before. On-line holiday sales alone have more than doubled since 2003. Even in good times, states need revenue. In the current downturn, losing taxes from on-line sales has huge costs.
White House Tax Reform Report Delayed Until Next Year
The White House is delaying the report of its tax reform panel until “after the holidays.”
According to a blog posting by top economic adviser Austan Goolsbee, the President’s Economic Recovery Advisory Board is delaying the report so it can review new proposals for reform. However, the panel still plans to release only what board chairman Paul Volcker calls “an almanac” of reform ideas. It will not endorse specific proposals or make any recommendations. The report had been due on Friday.
The panel has been severely constrained in its ability to consider broad-based reforms by President Obama’s insistence that taxes cannot be raised on families making less than $250,000. Thus, it is only looking at tax simplification, enhanced enforcement, and corporate reforms.
The White House statement says the board has not yet had time to review the hundreds of ideas it has received from the public. At the time same time, it asked for more suggestions. Yet, it is hard to believe that the panel is going to hear much new. After all, the ground of simplification and enforcement has been pretty well-plowed for years. And, as one observer asks, “How long does it take to type a laundry list?”
Who knows, maybe somebody important wants the panel to publish a more useful document.
Louisiana Tax Amnesty: A $303 Million Success?
The count is in: the recently-ended Louisiana tax amnesty brought in $303 million in revenue for the state.
The lion’s share of the money– $277 million– was paid by delinquent businesses, with individuals ponying up the remaining $26 million.
This result raises three interesting policy questions.
1) Was the amnesty, taken on its own, a good deal for the state? Amnesties are often driven by the need to get revenue immediately at any cost, and all too often the result is that states agree to give up all penalties and interest if delinquent taxpayers just pay the original balance. The problem with this, of course, is that the delinquent taxpayers are essentially getting an interest-free loan, and the state is not getting what they’re legally due. In this particular case, the deal apparently was that if you settled up in full, you got to keep half of the interest that was due. This is less costly than what a lot of states have done. It still does, however, carry a cost to the state. Verdict: Could have been worse.
2) What to do with the money? More than half is going to shore up specific funds: the rainy day fund and a “coastal fund.” The rest, more controversially, is going to pay for health care. If this is controversial, it’s because it’s using what is arguably a one-shot revenue inflow to pay for what is clearly an ongoing expenditure. Put another way, finding a dollar bill under the cushions of your couch can help buy you dinner tonight, but then it won’t help you tomorrow night. Gov. Jindal is arguing explicitly that at least some of this revenue should be thought of as ongoing, because they’re bringing taxpayers back into the system. But the official verdict will come from the Revenue Estimating Conference. Verdict: thumbs up for shoring up rainy day fund, but don’t pat yourself on the back for solving the health care funding problem just yet.
3) What are the implications for successful enforcement of the tax laws? A main argument against amnesties is that if folks know they’re coming, they’ll be less afraid to avoid taxes in the first place. This will be a problem if Louisiana continues to do amnesties, but is not clearly so yet. The really interesting question is what you can infer from the huge different between the amount raised from businesses ($277M) and the amount paid by individuals ($26M). Does this mean that businesses are cheating more? Alternative plausible explanations: businesses pay proportionally more of Louisiana taxes to begin with than do individuals (although this really can’t explain the huge difference), or that the individuals who owe the most aren’t taking advantage of the amnesty simply because they can’t afford to, even with half the interest given back.
The $303 million yield of this amnesty will certainly help the fiscal situation in the short run. But Louisiana policymakers should take this opportunity to think strategically about what this success means for future amnesties– and, more importantly, what it tells them about where they need to focus their normal enforcement efforts.
Car With Sign
November 30, 2009 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from Jim in Oklahoma with this challenge. “ I heard somewhere that you could deduct the expenses of a car with a sign on the door as an advertising expense. Any comments?”
Dear Jim,
Certainly you may deduct the expenses related to the car with the sign – the same way you would deduct any other business vehicle. The deduction is based on the total business miles driven.
Read chapter 4 of IRS Publication 463 – it’s all about auto expenses.
http://www.irs.gov/publications/p463/index.html
If you’re thinking that you may deduct all the expenses just because you placed a sign on the car…it doesn’t work that way. IRS addresses this question specifically in Pub 463, since it comes up so often.
I know there folks who are spreading that mis-information. It’s nonsense. Frankly, anything else you’ve learned from that same source is suspect.
And remember, you can find answers to all kinds of questions about auto expenses and other tax issues, free. Where? Where else? At TaxMama.com.
[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]
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- IRS Publication 463 :: Travel, Entertainment, Gift, and Car Expenses
- IRS Publication 463 :: Advertising display on car.
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Estate And Gift Taxes
Since there are no California estate taxes due when a person dies, this post is about federal estate and gift taxes. Estate and gift tax law may be one of the most complex subjects in the Internal Revenue Code. For tax help, I strongly recommend that you consult with an estate tax practitioner (attorney or CPA) who has a lot of experience in these areas of law. You may also find additional information in Publication 950 or some of the other forms and publications offered on the IRS Forms Page as well as on the Forms Page dedicated to estate and gift taxes.
Below are some of the more common questions and answers about Estate Tax issues:
When can I expect the Estate Tax Closing Letter?
What is included in the Estate?
I own a 1/2 interest in a farm (or building or business) with my brother (sister, friend, other). What is included?
What is excluded from the Estate?
What deductions are available to reduce the Estate Tax?
What other information do I need to include with the return?
What is “Fair Market Value?”
What about the value of my family business/farm?
What if I do not have everything ready for filing by the due date?
Who should I hire to represent me and prepare and file the return?
Do I have to talk to the IRS during an examination?
What if I disagree with the examination proposals?
What happens if I sell property that I have inherited?
Below are some of the more common questions and answers about Gift Tax issues:
Who pays the gift tax?
What is considered a gift?
What can be excluded from gifts?
May I deduct gifts on my income tax return?
How many annual exclusions are available?
What if my spouse and I want to give away property that we own together?
What other information do I need to include with the return?
What is “Fair Market Value?”
Who should I hire to represent me and prepare and file the return?
Do I have to talk to the IRS during an examination?
What if I disagree with the examination proposals?
What if I sell property that has been given to me?
Finally, you may need to know about filing estate and gift tax returns which you can read about by clicking here.
State Budgets: Lots of Room on the Trash Heap
The Pew Center on the States has done a good job documenting the dysfunction in current state budgets. “Beyond California: States in Fiscal Peril” uses both political and short-term economic variables to rank the states. And it shows that while California gets all the attention because its numbers are so big, many states across the country face their own severe financial problems. Some are suffering from bad economic fundamentals (think Michigan). Others are struggling with politics (hello, Arizona).
Pew focuses on the Troubled Ten: Arizona, Rhode Island, Michigan, Oregon, Nevada, Florida, New Jersey, Illinois, Wisconsin and, of course, California.
States like Michigan and Rhode Island, where longer term economic trends are driving fiscal problems, may have the toughest time digging themselves out of their budget holes. By contrast, states such as Florida, Arizona, and Nevada may do better in the long term because continuing in-migration suggests that growth will continue, albeit more slowly than at the rah-rah rates that contributed to their current economic collapse and budget trouble. But, for now, those states are struggling with political constraints and a need to figure out how to raise funds without constantly churning housing markets and building. Pew may also come down a little hard on some states. For instance, Oregon seems to have made good progress in solving its fiscal problems with a minimum of trickery assuming voters approve the legislated tax increases in January.
California remains unable to address its fiscal mess, thanks mostly to political gridlock. The most recent estimates show a $20 billion hole after 2010, even if state worker salaries remain frozen until 2013. As long as California continues to require a supermajority to pass a budget or increase taxes, even as it is stuck with voter-mandated spending and excessively generous retirement packages for government workers, it will continue to run structural deficits even during boom periods.
So what does it all mean? State budgets aren’t going to recover for a while. And governors and legislatures will face more tough choices—tax increases and spending cuts. And their lives will get even tougher once federal stimulus money dries up. Congress may extend some of that aid for a while, but not indefinitely.
State lawmakers must take a tough look at what services government should provide, even if it means jettisoning some popular but non-essential programs such as funding for state park maintenance, reducing class size, or providing after-school activities. And voters are going to have to be convinced somehow that mandating increased spending on education and Medicaid even as they limit taxes just doesn’t add up. (Yes, I’m talking to you, Arizona and Nevada.)
Budget wonks should take a look at the Pew report. It’s not happy reading but does provide a useful tool for figuring where the states stand.
Off to the Big House: Penalizing Non-Buyers of Health Insurance
“Democrats health bills depend on forcing individuals to buy insurance or face severe fines or imprisonment.”
George Will, Nov, 19, 2009
Before we spin off into a Thanksgiving reprise of last summer’s death panel lunacy, let’s be clear. Nothing in Will’s statement is true.
This is what is true: Both the House health bill and the measure now being debated in the Senate include a “play or pay” fee on those who don’t buy insurance. Some call it a tax, but whichever word you prefer, if you don’t get coverage, you pay. But “severe fines,” as Will claims? Hardly. Under the Senate bill, someone who refuses to buy would pay an initial annual penalty of $95. Will probably spends more than that for one of his bow ties.
And imprisonment? Give me a break. There is no such penalty in either bill. The argument, as I understand it, is that those who don’t buy insurance and refuse to pay the fine could be charged with criminal violation of the tax laws and, if convicted, could be sentenced to prison. Some of the tax cheats recently caught up in the UBS scandal got a few months for failing to pay millions of dollars in back taxes, but I have never heard of anyone being sent up the river for failing to pay $95 in taxes. More likely, the IRS would garnish their wages for the 95 bucks. Not exactly hard time in the big house.
In truth, the problem is not that the penalty is too harsh. It is that it is much too weak. Here’s why: Serious health insurance reform is built on four pillars: insurance companies must not deny coverage or boost premiums because someone is sick, everyone (even the young and healthy) must have insurance, a mechanism must exist for people to buy in the individual insurance market at reasonable prices, and the government must provide subsidies to make insurance affordable for the working poor.
Unless coverage is both guaranteed and mandated, reform falls apart. Government should not require people to buy insurance while allowing carriers to pick and choose their customers. But neither should it require insurers to sell to all comers, but allow the healthiest to opt out. If only the sick buy, insurers must raise rates or go bust. And the higher they raise rates, the more likely only the sickest will purchase. In the insurance biz, they call this the death spiral.
The fine for non-buyers eventually rises to $750 in the Senate bill. The House penalty is much stiffer for many– 2.5 percent of income. If insurance reform is going to work, it needs to combine the carrot of both subsides and (hoped-for) market-driven lower prices with the stick of non-buyer penalties. While they don’t say so publicly, this low tax on going bare is a big reason why insurance companies now oppose the health bills.
Will not only has his facts wrong, but his ideas would doom insurance reform to failure. But that, I suppose, is the idea.
IRS Freedom of Information Act
In a policy statement issued by the Internal Revenue Service about the Freedom of Information Act, the IRS states the following:
The Internal Revenue Service is committed to full compliance with the Freedom of Information Act (FOIA), 5 U.S.C. § 552. The FOIA provides that agency records are to be made available to the public unless required or permitted to be withheld. The FOIA accommodates the countervailing interests in disclosure and nondisclosure. The IRS is committed to administering the FOIA with respect to agency records in a manner consistent with preserving the fundamental values held by our society, including public accountability, safeguarding national security, enhancing the effectiveness of law enforcement agencies and the decision-making processes, protecting sensitive business information, and protecting personal privacy.
The Freedom of Information Act (FOIA), 5 U.S.C. § 552, provides public access to agency records unless protected from disclosure by one of the FOIA’s nine exemptions or three exclusions. The FOIA applies to records created by Federal agencies and does not cover records held by Congress, the courts, or state and local government agencies. Each state has its own public access laws which should be consulted for access to state and local records.
The IRS provides guidance accessing FOIA information. Click on any of the following:
Proof of Identity and Right to Access
Here’s a sampling of frequently asked questions about FOIA:
This page answers Frequently Asked Questions about FOIA. Please also see How to Write a FOIA Request and the Guide to Accessing Treasury Records .
Who can make a request under the Freedom of Information Act?
What is a reasonable description of records?
What authorization is required if I make a FOIA requests about myself?
What authorization is required for FOIA information to be released to a third party?
What the FOIA does not require.
When can I expect a response?
How and Under what circumstances may I receive expedited processing?
What is the 30-day rule?
What will cause a delay in the processing of a request?
What if I can’t specify exactly where the records are located, but I have some information?
Contract records, solicitation and winning bid records are sometimes available to the public. How do I know when a FOIA request is needed?
Will the FOIA allow me to see records on my neighbor/coworker who is being investigated by the Treasury?
Why should a request sent by fax also contain my signature?
Why should I send my request to the specific Treasury bureau and not one office at Departmental Offices (DO)?
Why should requests for tax records go to the IRS when the Secretary of the Treasury is authorized by law to make tax assessments?
Are there fees associated with a FOIA request and what are they?
What are the various requester fee categories?
What services are free and what are chargeable for the various fee categories?
How are fees determined?
Can a fee be waived?
Under what circumstances may records be withheld?
Can I appeal a denial of request?
Can the New Health Subsidies Be Administered?
An old congressional hand once confided that tax legislation usually looks like sausage making, but, compared to health legislation, it starts to look like French cooking. His main boeuf? The extraordinary amount of hand waving in health bills due to the questionable assumption that administrators can solve problems the legislation can’t.
Ask TaxMama Issue 530 - Thankful Muchly
November 20, 2009 by Tax Blog
Filed under Questions & Answers
Dear Family,
Have you ever had one of those weeks when you just couldn’t seem to get into the groove? Yup, it’s been really hard to focus – especially since my head and sinuses have felt as if they were filled up with balloons. You know you should be able to pop them, or depressurize, but nothing seems to work. It took me all week to figure out that I probably have a cold. It’s hard to tell when you’re not really showing signs of fever – just grogginess and the inability to clear your nasal passages so you can breathe. I remember breathing. It felt so natural. Never had to think about it. Now, it’s becoming a taxing experience.
Oh well, lots of hot liquids and sleep should help. Should try not to do the sleeping thing while typing, right? Naturally, this would come now, just as we are about to take a week’s vacation. Lulu and I were talking about this a couple of weeks ago. How busy people never seem to get sick while there’s work to do. It’s so true. I can remember as far back as age 10. I never got sick while I had tons of homework and obligations. But once all the deadlines were met, around the December holidays, that’s when I’d have a cold. My body would store up all the illnesses all year long and just hit me with it for about a week in December. It’s still doing it when the pressure is off. Of course, I keep forgetting it’s coming. Does that happen to you?
Regardless, we’re taking a week off. So you won’t be getting any TaxQuips next week. And probably not even an Ask TaxMama. After all, you’re getting ready for Thanksgiving and don’t want to be following tax issues anyway.
And it is time to be thankful, isn’t it! What’s been great about this year? Well, pretty much everything.
My friends have been terrific to me, showering me with income and great contacts. We’ve been working a little bit more than we wanted to – but this will only last for another year. And it’s worth it.
Reconnecting with friends I haven’t had time to see for ages. That’s been really special. And new additions to the family. That’s always nice. We’ve lost some friends and family members, alas. They were ready to go. Medical science bought them extra time. But, you can’t live forever. They will be missed. A lot.
And my EA Exam students. What a wealth of wonderful people, with interesting backgrounds, issues and perspectives. I love getting to know each and every one of you. And each time you succeed in passing an exam, getting a job, or a new client, or reaching any of your own personal targets, I am thrilled for your successes. You have no idea how exciting that is—it’s like seeing your own children thrive. Each one of you makes me proud.
And confused. We have students in the class from many nationalities, with a variety of language skills and backgrounds. They all get along and treat each other well. See, it’s not that difficult. You find the same sort of experience at universities. People get along. If we can get along on a small scale, why can’t countries? And why is it necessary for …never mind… back to feeling good.
a href=”http://taxquips.com/index.php?id=1413” target=”_blank”>So tell me, what are you thankful for?
Oh yes, another milestone. My friend, Dr. Bryan Knight is Canada’s foremost hypno-psychotherapist. A few years ago, he created some self-hypnosis tools that my EA students use to help increase they confidence and improve their photographic memory skills. The students that tap into those tools love it!
Well, based on problems you’ve brought to us, about your own financial attitudes and fears, Dr. Knight has put together a self-hypnosis tool to help you overcome your own money fears. It comes with an e-book to give you instructions on how to use it safely. Perhaps you know some who is totally dysfunctional when it comes to money. This is a nifty holiday present.
http://www.hypnosisdepot.com/money.htm
In IRS News this week you learn that a Military spouse’s income might be tax-exempt, as a result of the Military Spouses Residency Relief Act (PL 111-97)
http://taxquips.com/index.php?cat=IRSNews
This week’s AllVoices column deals with the 32% increase in tuition and fees by the Regents of the University of California. If you want an idea of just how long ago I went to UCLA, read on…
http://www.allvoices.com/users/TaxMama
You will find some interesting questions, including TaxMama’s answers at the TaxQueries site. Discussions range from Game Show winnings to when to report 1099 income if you didn’t get the money until the following year – and more.
http://www.taxqueries.com/
In this week’s AccountingWeb.com blog – TaxMama tells you about IRS Notice 2009-93 – that will let you send out the payee copy of the Information Returns this year, using a truncated taxpayer identification number. In fact, you have time to comment on IRS’ new procedure. So read the blog post for more information.
AccountingWeb.com Blog
In today’s Money Funny we address the Important Questions in life.
http://taxquips.com/index.php?cat=MoneyFunnies
In TaxQuips this week we learn what you can deduct when you have to spend a fortune to repair your vandalized property; How to prove absolutely nothing; whether an auto service bay/garage will qualify for the first time homebuyers credit; and how to be creative about your flexible spending account.
http://taxquips.com/index.php?cat=TaxQuips
As always, we love your feedback, opinions and ideas.
You are what makes all this fun – and interesting!
Please use the Comments link online.
http://taxquips.com/index.php?id=1413
Have a lovely Thanksgiving week!
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www.TaxMama.com
www.TaxQuips.com
www.IRSExams.com
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TAX CALENDAR 2009
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12.15.2009 Employers Make monthly Payroll tax deposit
12.15.2009 Corporations – 4th Quarter Estimate Due
12.31.2009 Last Day to Open KEOGH account for 2009 deposits
01.15.2010 4th Estimated Payment for 2009 Due
01.15.2010 Employers Make monthly Payroll tax deposit
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- Ask TaxMama :: Where taxes are fun and answers are free
- www.TaxQuips.com :: The number ONE free tax podcast online
- Money Funnies :: The Important Questions in Life
- IRS News :: Military Spouses Residency Relief Act
- TaxMama's AllVoices Column :: UC tuition spike - ouch!
- TaxMama's AccountingWeb.com Blog :: IRS Notice 2009-93 - Truncated taxpayer ID Numbers
- TaxMama at TaxQueries.com :: Lots of answers - and a question
- Dr. Bryan Knight's Special Self-Hypnosis ebook :: Money Fears - Lose them NOW!