1: Taxes & Taxing Jurisdictions

household tangibles

automobiles and recreational vehicles, pleasure boats, private airplanes, etc

sales tax

based on the retail price of tangible personalty - range from 2.9% in Colorado to 7.25% in California - broad based and apply to most types of consumer goods and even to selected consumer services, such as telephone and cable television services

"person" refers to

both natural persons (individuals) and corporations

eroding tax base example

cities that depend on real property taxes experience a decline in revenues when their populations decrease

Internal Revenue Code of 1986

compilation of all the federal tax laws (income and otherwise). New legislation is enacted each year to amend the code

who makes tax laws?

congress through lobbyists (special interest groups) and the treasury

graduated rate

consists of multiple percentages that apply to specified portions or brackets of the tax base

what do states with no corporate income tax impose instead?

corporate gross receipts tax EXCEPT South Dakota and Wyoming

personal property taxation has ________ in the past century and why?

declined because this tax is much more difficult to enforce than other taxes - personalty is characterized by its mobility; owners can easily hide their assets or move them to another jurisdiction - gov attempts to search for mobile personalty could violate individual privacy rights

tax assessors

elected or appointed officials responsible for deriving the value of realty and informing the owners of the assessed value

revenue ruling

explains how the IRS applies the tax law to a particular set of facts

statutory authority

- refers to the Internal Revenue Code of 1986 - which is updated via legislation passed by Congress at least once a year

Why do governments modify their tax systems?

- tax systems are dynamic because they must be attuned to the fiscal condition of their respective jurisdiction - in every jurisdiction, tax systems are constantly reevaluated by citizens based on the level of services they want from their governments

IRS (Internal Revenue Service)

- the subdivision of the Treasury responsible for the enforcement of the law and collection of tax - provides guidance in the form of revenue rulings and revenue procedures

sales taxes background

- used to be implemented by only 3 states - now 45 states and DC - started in depression era and state govs found that it was simple and effective

Pollock v. The Farmers' Loan and Trust Co.

(1895) Declared the income tax to be unconstitutional.

corporate income taxes

- 44 states and DC tax corporations on their net income attributable to the state - exceptions: Nevada, Ohio, Texas, Washington

sales taxes produce...

- about $290 billion of annual revenue - a third of all state tax collections

treasury regulations

- are written to interpret and explain the internal revenue code - provide help to taxpayers and their advisers - NOT LAWS: a federal court can invalidate a treasury regulation if the court decides the regulation incorrectly interprets the internal revenue code

sales tax form

- business tax levied on the seller, or, most commonly - consumption tax levied on the purchaser who is the final user of the goods or services ***seller is responsible for collecting the tax at the point of sale and remitting it to the state gov

history of the income tax

- first enacted in 1861 to raise money to support Union armies during the Civil War - expired in 1871 -revenue-generating capability made a lasting impression and in 1894, congress resurrected it - but in Pollock v. Farmers' Loan and Trust Company: SC held that Constitution did not authorize congress to levy national income tax - 16th amendment was created and in 1913 Wyoming was the 36th state to ratify it

income tax incidence example

- gov enacts a new tax on corporate business profits - manufacturing corp with a monopoly on a product in great demand by the public RESPONDS by raising the price of the product - the corporation is nominally the taxpayer and must remit the new tax to the gov - BUT the economic burden of the tax is on the customers who indirectly pay the tax in the form of a higher price for the same product

sales tax expansion

- historically only applied to tangible retail purchases - but now states are adding selected services such as utilities, tv, parking, theater tickets, etc

the 3 general classes of taxable personalty

- household tangibles - business tangibles - intangibles

property tax incidence example

- mr. B owns an apartment building with 8 units - gov tells him property tax will be raised by $5,400 - he raises everyones rent price by $675 - 675 x 8 = 5,400 - mr. B remits the tax - the incidence of the tax increase is on the tenants who indirectly pay it through their higher rent

computing corporate taxable income

-all states with a net income tax refer to the federal definition of taxable income as the starting point for calculating state taxable income -but each state COULD have its own set of computational rules

2 largest programs sponsored by federal government

1. Social Security System 2. Medicare

legislative process

1. begins in the House of Representatives: original version of a new tax bill is drafted by the House Ways and Means Committee 2. bill is considered by the full House 3. if House approves of bill, it is moved to the Senate Finance Committee 4. SFC makes revisions, additions, deletions, and presents amended bill to full Senate for approval 5. original and amended bill are both considered by a Conference Committee composed of House and Senate members and a compromise bill is drafted 6. if both house and senate vote to approve, the bill is submitted to the president for signature or veto 7. once prez signs the bill, it becomes law

2 important features of the tax environment

1. pervasive - they are so widespread, come in so many varieties, and affect virtually every aspect of modern life 2. dynamic - tax laws change so frequently

earmarks: 1. local real property taxes 2. federal payroll and self-employment taxes 3. environmental excise taxes on businesses

1. public school systems 2. social security system and medicare 3. EPA's Hazardous Substance Superfund, which subsidizes the cleanup and disposal of toxic wastes

advantages and disadvantages of state conformity to federal income tax law

1. simplicity 2. eases compliance burdens of corporate taxpayers BAD: 1. the states' lack of control over their corporate income tax revenues

highest to lowest judicial authority

1. supreme court (verdict = law) 2. appellate court 3. trial court

sales tax on rentals

Airbnb began collecting and remitting south dakota's state and local sales tax from vacationers who rent lodging there

16th Amendment

Amendment to the United States Constitution (1913) gave Congress the power to tax income.

correlation between the amount of taxes a person pays and the value of government benefits he receives

NON EXISTENT! NO CORRELATION

Revenue Rulings and Revenue Procedures

Second in administrative authoritative weight after regulations written by the Internal Revenue Service (IRS)

Employment Taxes

Taxes that an employer must pay on account of its employees; earmarked for FICA (Social Security and Medicare). Based on annual wages and salaries paid by employers to their employees and on the net income earned by self-employed individuals

tax

a payment to support the cost of government

flat rate

a single percentage that applies to the entire tax base

use tax

a tax imposed on the retail price of tangible goods owned, possessed, or consumed within the state - applies only if the owner of the goods did not pay the state's sales tax at purchase - acts as a backstop to a sales tax by discouraging residents from purchasing products in neighboring jurisdictions with lower sales tax rates * as a result, merchants operating in high tax states are not at a disadvantage

value added tax (VAT)

a tax levied by FOREIGN govs on firms engaged in any phase of the production or manufacture of goods and based on the incremental value added by the firm to the goods ex) if firm M makes products that cost $40 and sells them for $46, the tax would be (r)($6) because 6 is the incremental value that M added to the production process

unemployment taxes

a tax levied by both the federal and the state govs on compensation paid by employers to their employees; earmarked to fund the national unemployment insurance program

transfer tax

a tax levied on the transfer of wealth by gift or at death and based on the market value of the transferred assets

earmarked tax

a tax that generates revenues to finance a specific government project ex) revenues from local real property taxes are typically earmarked to support public school systems

abatement

a temporary tax exemption for a limited amount of time to lure commercial enterprises into their jurisdiction, thereby creating jobs and benefiting the local economy

local governments depend on

ad valorem taxes

revenue procedure

advises taxpayers how to comply with IRS procedural or administrative matters

legalized gambling

aka lotteries and casinos

tax base

an item, occurrence, transaction, or activity with respect to which a tax is levied - usually expressed in monetary terms ex) the dollar value of your property is the tax base for your property taxes

personalty

any asset that is not realty - based on the value of the asset subject to tax

taxpayer

any person or organization required by law to pay a tax to a governmental authority

what is the most common structure for corporate state income taxes?

flat

ad valorem taxes

frequently refers to real property taxes and personal property taxes

US jurisdiction over nonresident aliens

if you live elsewhere and are a citizen of a diff country but your source of income is within the US, the US claims jurisdiction to a portion of your income (because earned in the US)

US jurisdiction over permanent residents

if you permanently reside in the US (via a green card), the US claims jurisdiction to tax your entire income

US jurisdiction over citizens

if you were born in the US but have lived in a foreign country all your life, the US still has a jurisdiction to tax your entire income

activity based tax

imposed on the cumulative result of an ongoing activity. taxpayers must maintain records of the activity, summarize the result at periodic intervals, and pay tax accordingly ex) annual income tax

income tax

imposed on the periodic inflow of wealth resulting from a person's economic activities

excise tax

imposed on the retail sale of specific goods, such as gasoline, cigarettes, and alcoholic beverages or on specific services, such as hotel and motel accommodations * states may impose them instead of or in addition to normal sales taxes * seller is responsible for remitting them to the gov

Revenue Act 1913

income tax became a permanent feature of American life

personalty value must be assessed by

individuals (and corporations), and then given to a tax assessor

taxable business tangibles

inventory, furniture and fixtures, machinery, equipment

real property / realty

land and whatever is erected or growing on the land or permanently affixed to it

real property taxes

levied annually on realty and are based on the market value of the property as determined by the local government

government response to problems associated with personal property taxes

linking the payment of personal property tax to asset registration or licensing requirements ex) registering your boat in your state's lake system

intangible personalties

marketable securities (stocks and bonds)

tax differs from fine/penalty because

not intended to punish or deter unacceptable behavior

why are taxes so pervasive?

one reason is because of the number of diff jurisdictions ruling over a place where business is conducted ie) federal gov, state gov, local gov, municipalities, cities, etc.

personal property taxes are taxes levied on

personalty

Medicare

provides hospital insurance for people who are elderly or disabled

Social Security System

provides monthly old-age, survivors, and disability benefits to qualifying citizens and residents

describe the taxes levied by local governments

real property taxes and personal property taxes

Cumulative Bulletins (C.B.)

semiannual compilation of weekly IRBs, compiled until 2009

describe the taxes levied by state governments

state govs rely in almost equal measures on sales taxes and income taxes as major sources of funds (account for 90% of total state tax revenues)

internet sales tax

states have been lobbying for the past 26 years for the federal gov to enact legislature permitting them to collect sales tax on mail-order and internet sales to in-state customers ie amazon orders 1992: SC ruled that company MUST have a physical presence 2018: physical presence requirement overturned

the 3 basic sources of tax law

statutory, administrative, and judicial authority

tax formula

tax = rate x base T = r x B

Internal Revenue Bulletins (I.R.B.)

the IRS's weekly publication containing revenue rulings and revenue procedures

tax law

the body of legal authority consisting of statutory laws, administrative pronouncements, and judicial decisions

administrative authority refers to

the department of the treasury, which writes treasury regulations, includes the IRS, and makes revenue rulings and procedures

the changing rate of tax laws reflects

the fact that the economic and political assumptions on which tax structures are based are constantly evolving

supreme court said

the only benefit to which a tax payer is entitled is that derived from his enjoyment of the privileges of living in an organized society, established and safeguarded by the devotion of taxes to public purposes

tax differs from user's fee because

the payment of a tax doesn't entitle the payer to a specific good/service in return

how are these programs funded?

the revenues from the federal employment taxes are earmarked to pay for social security and medicare

jurisdiction

the right of a government to levy tax on a specific person or organization - exists because of some rational linkage between the government and the taxpayer. ie. our federal gov has jurisdiction to tax any individual who is a US citizen or who permanently resides in this country

unique feature of real property taxes

the tax rate is determined annually, according to the jurisdiction's need for revenue for that particular budget year

revenue

the total tax collected by the government and available for public use

the incidence of a tax

the ultimate economic burden represented by the tax - the incidence can be shifted to a third party. ie the person that pays the tax may not bear the incidence

transaction based tax

triggered only when an event occurs or a transaction takes place ex) a sales tax levied on the purchase of retail goods and services ex) an estate tax levied on the transfer or property from a decedent to the decedent's heirs

use tax and crediting it

use tax = (sales tax in state where person lives) - (state sales tax where property was bought)

if you disagree with the assessed value of property,

you can challenge the assessment in an administrative or judicial proceeding