Taxable Talk

Today is July 1st and Chicago has earned a dubious distinction. The Windy City now has the highest sales tax rate in the country, 10.25%. The old "winner," Memphis, has a 9.25% rate.

The sales tax will likely help suburban retailers of high-end items such as automobiles. Individuals contemplating a $30,000 purchase can save $900, a not insignificant amount, by shopping in DuPage County (7.25% sales tax rate) or $975 by going to Will or Lake County (7.00% sales tax rate).

People who can will vote with their spending dollars. Given the economic climate I'd hope voters in Cook County will remember who approved this increase and take out their anger at the polls. Of course, we're talking about Chicago here....

One of my favorite weekly reads is the Leonard Letter. Bill Leonard is one of the elected members of the Board of Equalization. Mr. Leonard notes,

"Late last year an article entitled "Why Is Buying Hot Chocolate So Confusing?"appeared in a tax journal. It was bandied about as an example of how difficult it is for California retailers to comply with the state's sales tax law. I asked the Board of Equalization staff to respond to the article and have now reviewed a 3 ½ page letter attempting to explain when hot chocolate is taxable. That it takes 3 ½ pages to answer what should be a simple yes-or-no question gives you a window into the absurdity that is state tax law."

The letter that Mr. Leonard references is here. The question arises as sales tax was collected on hot chocolate sold at a Starbucks inside a Target store but not inside a Safeway (grocery) store nor in the lobby of the Bank of America building in downtown San Francisco. From the letter:

"Sales and Use Tax Regulation 1602, Food Products, (copy enclosed), provides that generally tax does not apply to sales of food products for human consumption except as provided in Regulation 1503, 1574 and 1603. “Food products” include among other items, coffee, tea, noncarbonated and nonalcoholic beverages, breads, bakery products, pizzas, candy, confectionery, chewing gum and cookies. Generally, tax does not apply to sales of the above items except when they are sold under circumstances as provided in Regulations 1503, 1574 and 1603."

After nearly three pages of legalese the author of the letter notes, "Based on the information presented in the article, it is not clear why sales tax was collected by Starbucks on the sale of the hot chocolate."

And some legislators want to extend sales tax to services. Oh, joy....

Nevada's constitution exempts food for human consumption. The Nevada Department of Taxation believed that Use Tax was owed on meals that were given out free of charge (either to employees or as complimentary meals to patrons); the Nugget Hotel in Sparks, Nevada thought that the plain language of the Nevada Constitution exempted such food from tax. The Nevada Supreme Court gave the answer earlier this week.

Use Tax is the equivalent of sales tax on items purchased from out-of-state where no sales tax is charged. For example, if you purchase a book on Amazon.com and are not charged sales tax and live in California, you are supposed to remit Use Tax to the Board of Equalization. The Nevada Department of Taxation believed that there's no such thing as a free lunch, and that the Nugget owed Use Tax on the free food.

The Nevada Supreme Court disagreed.

"...[T]he Nugget’s initial purchases of unprepared food did not “escape” sales tax liability since Nevada’s constitution exempts such purchases from sales and use taxation. Indeed, Nevada’s constitutionally mandated food exemption applies to all “food for human consumption,” unless that food is “prepared food intended for immediate consumption.” Because the food at issue in this case was not “prepared food intended for immediate consumption” at the time it was purchased by the Nugget, the Nugget’s initial purchase was exempt from sales taxation. Furthermore, the Nugget’s later “use” of that food to prepare complimentary meals was not subject to use taxation since the Nugget’s “use” did not follow an otherwise taxable purchase that had “escaped” sales tax liability."

So many Nevada casinos may be requesting tax refunds from the Nevada Department of Taxation. Nevada, too, has a state budget crisis. This ruling may exacerbate that a bit, but it does prove that sometimes there really is such a thing as a free lunch.

Hat Tip: TaxProf Blog

Congratulations, Chicago! You now have the highest sales tax rate in the country at 10.25%. Chicago earned that distinction when Cook County doubled its county sales tax to 1.75%.

Who will benefit from this tax increase? Cook County passed the tax increase to balance its budget. Of course, the idea of cutting bureaucracy didn't get considered....

The actual beneficiaries will be stores and malls located just outside of Chicago and/or Cook County. Lake County, Indiana (just over the state line and Chicago city limits) has a sales tax of 6%. The sales tax in Joliet (county seat of Will County, to the southwest of Chicago) is 7.75%. Wheaton, just to the west of Chicago, has a sales tax rate of 7.25%.

Who are the losers? Those who aren't mobile and are stuck paying the higher tax rates. Chicago businesses. Cook County businesses (the tax increase impacts the entire county). And the residents of a great American city stuck with politicians who know tax and spend all too well.

Hat Tip: Tax Prof Blog

I haven't posted on the new taxes that citizens in Maryland face. The overwhelmingly Democratic General Assembly passed a huge tax increase last November. One portion of the increase is an increase in the state's sales tax.

But a problem has surfaced: Maryland Republicans have filed a lawsuit to stop the tax increase. According to this report by WJZ, the Maryland Senate took five days off during the special session (called to have the tax increases passed) without permission of the General Assembly. Apparently the Maryland state constitution prohibits such a vacation.

Senator Allan Kittleman told WJZ, "This is actually an attempt to make sure that we have transparent government, that we have integrity in our government and that the rule of law is kept." But Maryland Democrats say the whole thing is a bunch of hot air.

Meanwhile, if you live in Maryland you're paying higher taxes. It's possible you won't be paying as much after a judge rules (likely in the next two weeks) on the lawsuit. Of course, it's only a technicality....

It hasn't been a good year for Governor Eliot Spitzer (D-NY).

First, he's been accused of using state troopers to spy on political opponents. Next, he proposes to give illegal aliens drivers licenses—a measure that's overwhelmingly not supported by New York residents. Eventually he abandons the idea. Then he supports a stretching of the definition of "nexus" for state sales taxes to include affiliate programs. Yesterday, he dropped the idea—at least for the time being.

Republicans were going to paint Spitzer as the "Grinch who stole Christmas." Spitzer won't have to deal with that, for now.

However, New Yorkers should still watch what happens in Albany. The State Department of Taxation and Finance still believes they're right in their expansive view of nexus. This plan will likely reappear sometime in 2008.

Governor Eliot Spitzer (D-NY) is leading the way. But it's a taxing way. The New York Department of Taxation and Finance says that any company that has an affiliate program that has any affiliates in New York must charge sales tax on sales shipped to New York.

Currently, companies must charge sales tax when a business has a "nexus" in the state. That's usually caused by having a physical presence (an office) or employees in that state. Amazon.com doesn't have an office or employees in New York. Thus, they haven't charged New Yorkers sales tax.

However, New York now says that having an affiliate in the state is enough to give a company a nexus in New York. This is an interesting theory, but it could run into difficulties. Glenn Reynolds, the Instanpundit, thinks it wouldn't stand up in court.

In any case, Governor Spitzer is looking at a $4 billion deficit for next year and has pledged not to increase taxes. The Department of Taxation and Finance calls this a policy clarification. I hope they have a big budget for legal fees as that's likely where this is headed.

Food and food ingredients are defined as substances that are sold for ingestion or chewing by humans and are consumed for their taste or nutritional value.

So reads the Iowa Department of Revenue's policy on what is food. Why is this important? Because the Iowa Department of Revenue decided (apparently in 2006) that pumpkins are mainly sold for decoration, and that sales tax should apply on those pumpkins sold for decoration but not on those sold for food.

I can just imagine a conversation at a supermarket in Des Moines. "Mrs. Smith, are you buying that pumpkin to eat or for decorating your front porch on Halloween?"

And what would the Iowa Department of Revenue think about someone who bought a pumpkin for both decorating and for food? Tax only half the pumpkin?

Yesterday, stories about the tax began circulating on the Internet and mass media (Google News showed 287 stories on the topic).

Luckily, some sanity has hit Iowa. Governor Chet Culver announced, "It has come to my attention that a policy change made in December of 2006 - before I took office - is resulting in this ridiculous pumpkin tax. I have directed the Department of Revenue to do the common-sense thing and suspend collection of this tax and offer refunds to consumers or retailers who have been affected."

Three stories today, all with a recurring theme: fraud. We'll look at a new but not so good method to sell for less. Then we'll take a peak at two accountants, and how they made money...for themselves.

Tommy James Hudgins owns Affordable Tires in Chattanooga, Tennessee. He found a way to make sure he beat his competitors' prices: not remitting the sales tax he collected to the state of Tennessee. He did keep his prices down, but the Department of Revenue wasn't happy with his methods. He'll spend two years on probation, and must make restitution of $17,000. He may also face civil penalties, according to this story.

In Baltimore, a longtime accountant pleaded guilty to wire fraud, money laundering, and tax fraud charges. Wilkins McNair, Jr. faces up to 38 years in prison, but will likely serve a significantly shorter sentence through his plea bargain. McNair, in the indictment, was accused of avoiding paying $550,000 in taxes by delaying filing his returns and under-reporting his tax. The Baltimore Business Journal has more on this story.

Finally, a pair that were Washington state tax preparers are alleged to have found a not-so-legal method of earning a living. They made up phony tax returns using relatives' names, and, according to this story, collected about $40,000 in refunds. The story has an interesting twist. The accused are Kandi Rose Roberts, formerly of Bellingham, Washington, and Ernest Roberts, of Everson, Washington. Ms. Roberts moved to Las Vegas and is now known as "Kandi Kroon." She's going to be sent to Seattle for trial, so this is one thing that happened in Las Vegas that won't stay in Vegas....

As I mentioned previously, New Jersey increased its sales tax earlier this year. The Garden State also expanded what is covered by sales tax. Tattoos, massages, limousines, and data processing services are just some of the itmes that the state will now get a cut of, as of October 2nd. And ITunes downloads.

Yes, online music downloads are taxable in the swamplands. So if you want the latest song from Disturbed (my writing partner's favorite band) or the Red Hot Chili Peppers, Apple will be collecting sales tax. All to balance a budget by not cutting spending.

News Story: cnet

There are lots of ways to become a millionaire. You can build a successful business, have real estate appreciate, and of course inherit money. You can win the lottery. Or you can do it illegally.

One way is to collect $1,078,392.27 in sales tax and not remit that money to the state. That's what Randall Lee Malin is accused of doing in Tennessee. If Mr. Malin is convicted on all charges, he faces 92 years in prison and fines of $181,000.

News Story: Jackson Sun

Arco Arena is the home of the Sacramento Kings of the NBA. The 442,000 square foot arena opened in 1988. But the owners of the Kings, the Maloof brothers, want a brand new arena, so that they can have more revenue from the team.

And like most businessmen, they'd prefer others pay for it. So through a complex deal (reported here in the Sacramento Bee), the sales tax for Sacramento County would be increased from 7.75% to 8.00% for 15 years to pay for the arena.

But two groups must approve the measure. First, four of the five Supervisors on the Sacramento County Board of Supervisors must approve that the measure go before voters this November. Then, voters must approve the measure; through allocating some of the funds to general usage the measure requires just a majority vote rather than the state-mandated 2/3 vote for most tax measures.

The tax would raise over $1 billion; of that, a little less than half would be used to build a new arena. The Maloofs would pay $4 million in rent for 30 years and contribute $20 million to a capital improvements fund.

But there's opposition in California to publicly funded sports complexes. Sacramento Assemblyman Dave Jones is rushing home from a vacation to campaign against the project. It will be an interesting battle in Sacramento, with the Maloofs, their radio station (KHTK 1140 AM), and private developers eying the current Arena for redevelopment, versus an unusual combination of taxpayer organizations and liberals who don't like government funding of arenas.

Sometimes you just can't make this stuff up. If you're a proprietor in New York state of "Gentleman's Clubs," make sure you add sales tax on those lap dances, if they're in a private room at your establishment. That's definitely taxable because "...it's an admission fee to that particular room," according to Michael Bucci, a spokesman for the New York State Department of Taxation and Finance. And, as this news story notes, Bucci noted that lap dance in the public part of the club are not taxable.

Still, Richard Snowden and his "Tally-Ho Club" of Cheektowaga, NY (suburban Buffalo) are in trouble with the Department of Taxation. New York alleges that he owes $216,000 in sales taxes on private lap dances. Additionally, he has a residency dispute with New York. Snowden believes his primary residence was in Nevada in 2002 and 2003 (he owns a Las Vegas strip club, too); however, New York tax authorities disagree and want another $250,000 in income tax.

Still, the idea of a tax on lap dances is certainly intriguing...and different. Which is one reason I believe that the chances for uniform sales tax rules and regulations throughout the United States is essentially zero.

California's sales tax rules, enforced by the Board of Equalization are far too complicated. Then throw in political shenanigans and you get...a lawsuit.

San Francisco International Airport is located just south of the City by the Bay in San Mateo County. United Airlines has a major hub at SFO. This sounds like a sales tax boon for San Mateo County.

Except for a law that relocates the sale from the airport to an office building in Oakland, in Alameda County. The Governator signed a bill that will eliminate this "quirk" in 2008. San Mateo County decided they couldn't wait that long.

Did I mention that Oakland gives a kickback of $0.65 to United for every dollar of sales tax collected? But as Aero-News notes, the Legislature believes the deal is currently legal.

Given the backlog in California's courts, the case will likely not be decided for a couple of years.

News Stories: Aero-News Net, San Francisco Business Journal

Last October, I inched my way towards the 21st Century and bought an iPod. I find it wonderful, because when I'm at the gym I can listen to music that I like, not the techno-garbage that my gym plays.

iPods haven't been bad for Apple, either, as they've become a ubiquitous symbol of the 21st Century. Apple's iTunes store is doing a booming business, selling downloads of music.

And the Tax Man Cometh.

In California, music is not subject to sales tax because it is not considered tangible personal property (something you can hold). But that's not the case in many states. If you live in Washington, Texas, or Indiana, you need to pay either sales tax or use tax on your iTunes downloads. And as this CNET story states, many other states are looking at taxing the downloads.

Of course, you could live in Oregon—the state with no sales tax. If you don't, you may find that download costs an extra 5% to 10% as states continue to move forward in taxing the Internet.

You're a business owner, and you've just won a nice contract with the State of California. Don't forget to add sales tax.

Yes, if you're selling to the State of California, you must charge California sales tax. Let's look at this logically, based on a $10,000 sale to a state agency.

We'll assume that the sale is made in Orange County (sales tax rate of 7.75%), resulting in sales tax of $775.00. You collect $10,775, keep $10,000, and then remit $775 back to California. The Board of Equalization collects the money, and then turns it over to the General Fund. The General Fund allocates the money to the appropriate state and local agencies, including the agency that you sold to.

Wouldn't life be simpler if the state were exempt from state sales tax? You could argue that local and state agencies wouldn't benefit from the sale. However, the real beneficiaries of California's policy are the bureaucrats administering sales tax. California's rules increase their workload and lead to more employees. If California were to exclude government sales from sales taxes, sales tax revenues would go down, of course. But so would expenses.

In the end it would be a wash (as far as direct revenues and expenses). However, because you would need fewer employees to administer the Board of Equalization, and a bit less time for companies to prepare their quarterly reports to the BOE, costs would decrease and productivity would increase.

What are the chance of this happening? Just about zero.

I live and work in beautiful Orange County, California. Several years ago the voters of this county passed a 0.5% sales tax increase to fund transportation issues (such as the widening of Interstate 5 through Orange County). That sales tax increase expires at the end of 2011. The Orange County Transportation Authority (OCTA) administers the tax, and has been running a somewhat blatant advertising campaign in support of renewing Measure M. Just one little problem: that's probably illegal.

No matter what your view is on Measure M, it's irrelevant; it's illegal (under California law) for a government agency to publicly campaign for a proposition. And as the Orange County Register noted in an editorial, the OCTA issued an 8-page campaign mailer an 8-page informational brochure praising the benefits of Measure M. Sort of sounds like the campaign for pre-schools that Rob Reiner ran. You can see the ad/brochure here.

While Rob Reiner has suffered the consequences of his actions, it's uncertain whether the OCTA will. Hopefully, the Legislature and the Orange County Board of Supervisors will tell the OCTA to spend their money on improving the freeways and not on glitzy campaign literature informational brochures.

If you're a plastic surgeon, and you use breast implants as part of your work, do you have to pay sales tax on the implants you use?

Yes, in Alabama.

The Alabama Department of Revenue recently took a doctor to task for not paying use tax on the breast implants he was using in his surgery practice. (Use tax is when the user is required to pay the equivalent of sales tax when the seller doesn't charge sales tax. Almost all states have use tax laws. For example, that book you bought on Amazon tax free—well, you're probably supposed to pay use tax on it. Indeed, many states have added a "use tax" line on their income tax forms.)

Alabama considers "...doctors, as members of a learned profession, are not making retail sales when they provide or supply tangible property to their patients incidental to their professional services. Hamm v. Proctor, 198 So.2d 782 (Ala. 1967); Haden v. McCarty, 152 So.2d 141 (Ala. 1963). However, the use or consumption of the property by the doctors in providing the services in Alabama is clearly subject to Alabama use tax." So those stitches, bandages, and, yes, those silicone implants are taxable.

California appears to be headed in the opposite direction. The Board of Equalization ruled on February 1st that cosmetic medical treatments, including Botox and silicone implants, should be exempt from sales tax.

But one state taxes cosmetic surgery—New Jersey. Specifically exempted from the New Jersey ordinance are reconstructive procedures. However, cosmetic dentistry is taxable. Teeth whitening is specifically cited as taxable. Would orthodontia be taxable? I can imagine a sales tax auditor peering into some childs' mouth, seeing how bad the overbite is. "Your son only has a 40% overbite, so you must pay sales tax." But I digress....

Of course, when I read the Alabama story, I remembered the wonderful Chesty Morgan. Humorously, Chesty tried to deduct the implant surgery as a medical deduction (subject to a 7.5% AGI limitation) and lost in Tax Court. But the judge allowed her to deduct the surgery as an unreimbursed business expense (subject to a 2.0% AGI limitation).

So, the moral of this tale is that if you're a plastic surgeon in Alabama, you'd better charge sales tax on those silicone implants or you could be busted.

Thanks to the NAEA for alerting me to this story.
Link: Alabama Administrative Law Judge Ruling