Wednesday, June 21, 2017
Within the past few days I’ve become aware of another flaw in this sort of tax. When reading this commentary objecting to Chicago’s march into the soda tax world, I learned that people who request ice in fountain drinks will end up paying tax on the ice. Why? According to supporters of the one-cent-per-ounce tax, the inclusion of ice is discretionary and the amount is not easily measured. Thus, the tax on a 20-ounce drink will be computed based on 20 ounces, even if a portion of the cup is filled with ice. One can argue that the tax is not technically a tax on the ice. The tax is computed based on 20 ounces, but it is applied to the soda put into the cup. If ice is in the cup, then there is less than 20 ounces of soda in the cup. By imposing a tax of 20 cents on, for example, 10 ounces of soda, the city is imposing a tax at the rate of two cents per ounce. Surely there is a violation of some Illinois law when two similarly situated consumers are charged a tax at two different rates on the same product. I doubt, though, that this problem will stop the Chicago soda tax from going into effect next week. Why would it? None of the other flaws have caused the designers of the tax to stop and think logically about the problems they claim to be solving and the way in which they are going about it.
Monday, June 19, 2017
Within a 24-hour period, two developments concerning the Philadelphia soda tax surfaced. One brought bad news to the supporters of the tax, and the other brought good news.
First, news broke that the city planned to lower its estimate for soda tax revenue for the fiscal year. In an announcement that surprised no one, except perhaps the die-hards who claimed that revenues would surge in time to offset the previous shortfalls, the city finally admitted that it would not meet its $46.2 million projection for the fiscal year ending at the end of this month. Why? Through the end of April, only $25.6 million had been raised, and the likelihood of raising more than $10 million in each of May and June was pretty much zero. That conclusion reflects reality, considering that in its best month, the tax generated $7 million, short of the average monthly amount required to meet the city’s revenue projection. Yet, stubborn optimists that they are, city officials decided not to reduce its estimate for soda tax revenues during the fiscal year ending June 30, 2018. Why? A spokesperson explained that the tax has been around for only four months and that the city continues to be “working out the kinks.” It would be enlightening to know what those kinks are, and how “working [them] out” would double the revenue from the tax. Perhaps a travel ban on people leaving the city to make their purchases elsewhere? In the meantime, the City Controller, pointing out an issue I previously raised, suggested that the shortfall in soda tax revenue presented the very real possibility of a “multimillion-dollar burden” for taxpayers. Why? The city has committed to spending money that it anticipated receiving but that hasn’t been flowing into its coffers.
Second, the following day, as reported in this story, Pennsylvania Commonwealth Court upheld a lower court decision that rejected arguments against the legality of the tax. Opponents of the tax plan to appeal. In a split decision, Commonwealth Court concluded that the tax was not a double sales tax even though the burden of both the sales tax and the soda tax fell on the retail purchaser. In its opinion, the court explained that the tax “is not imposed on the ownership of the sugar-sweetened beverages or on their sale; rather, it is only imposed if the beverages are supplied, acquired, delivered, or transported for purposes of holding them out for retail sale in the city.” Does that not appear to be a conclusion that the tax is an inventory or property tax? Commonwealth Court, however, concluded that the tax is not a duplicative property tax violating the state Constitution’s uniformity clause because it is a fixed amount per ounce rather than a percentage of the beverage value, and because the tax is “imposed only when the supply, acquisition, delivery or transport is for the purpose of the dealer’s holding out for retail sale within the City the sugar-sweetened beverage or any beverage produced therefrom.” Is that an inventory tax? If so, is Philadelphia authorized to enact an inventory tax? The court did not address those questions because they had not been raised.
The city’s victory in Commonwealth Court not only is temporary, considering the possibility of reversal by the state Supreme Court, but also is pyrrhic. The city, anticipating Supreme Court affirmance, sees a clear path to collection of a tax that is bringing in far less revenue that the city has committed to spending. That leaves the city with three choices, namely, cut back on those programs, cut back on city services, or enact or increase another tax. Prevailing in a legal battle over a pragmatically failed tax won’t make selecting one or more of those three choices a reason to rejoice.
Friday, June 16, 2017
Even if the novelty item could be used as a band-aid, its cost would not qualify as a medical expense deduction. The deduction does not apply to over-the-counter items such as band-aids.
The price of the chocolate band-aid is not a child and dependent care expense for purposes of the child and dependent care credit. Why? Because it is food, and food costs don’t qualify.
Because the home office deduction reflects a portion of the costs of operating the home in which the office is located, the cost of a chocolate band-aid would not be part of the computation.
In contrast, the cost of chocolate band-aids might qualify as a trade or business expense if the business purchases them as items to be given to customers, clients, or patients. At less than $1 per band-aid, there’s little risk that that annual $25 per-person business gift deduction limitation would be exceeded. Years ago, and perhaps to some extent even now, barbers and eye doctors gave their young customers and patients lollipops. I’m guessing that practice is fading, in part because of increasing efforts to reduce sugar consumption. But, because chocolate is medicinal, it isn’t quite the same as non-chocolate candy.
It’s a good thing these chocolate band-aids are not intended for, nor adaptable, to actual use. Why? Because if they were, it would bring an entirely new perception to the phrase licking one’s wounds.
Wednesday, June 14, 2017
Though a variety of definitions and distinctions have been suggested over the years, I distinguish a fee from a tax by identifying a fee as an amount paid in exchange for a service provided by a government directly to the person making the payment. Thus, for example, the amount charged by a township for trash pick-up is a fee. The amount charged by a state government or agency for the use of a toll highway is a fee. The amount charged by a local government for filing a zoning variation application is a fee. On the other hand, amounts paid to a government that bring indirect benefits, such as an income tax, is not a fee. A portion of what is paid in federal income tax funds national defense, which in turn provides a benefit to citizens, but there is no one-on-one relationship between the amount of tax paid that ends up financing national defense and the value of military protection afforded to a particular individual or business. Sometimes the line is blurred. The township in which I live charges a storm water fee, but it is a flat amount regardless of the size of the lot or the amount of storm water discharged from the property into the storm sewer system. Is it truly a fee? Yes, in the sense that the township provides a system for removing storm water back into the creeks. No, in the sense that a person who diverts most storm water into on-site tanks nonetheless pays the fee, which makes it more difficult to describe the payment as one made for a direct service.The reader also asked, “Does it matter?” I noted that although some commentators, for example, Lawrence Reed, distinguish taxes and fees by characterizing fees as charges that one can escape, I did not agree, because there are fees that cannot be escaped and taxes that one can avoid.
In this era of tax hatred, it has become commonplace for legislators, lobbyists, and other advocates to use the label that sells. Thus, in Please, It’s Not a Tax, I criticized the use of the term “tax” by opponents of a fee, who clearly were trying to ride the anti-tax wave to prevent enactment. And in So Is It a Tax or a Fee?, I criticized the use of the term “fee” by proponents of a fee that they had earlier labeled a “tax,” because calling something a fee doesn’t get the attention of the anti-tax crowd to the extent a tax does.
In Tax versus Fee: Barely a Difference?, I concluded by suggesting, “Ultimately, whatever it is called, it ought to be measured sensibly, imposed only after appropriate public notice, hearings, and legislative action, and paid if the legal obligation to do so exists.” So, unsurprisingly, along comes news that the “tax or fee” debate is at the root of a controversy in Oklahoma.
Oklahoma has enacted a new $1.50 per-pack “fee” on cigarettes. This action comes on the heels of four previous failures to increase the state per-pack cigarette tax by $1.50. Opponents have sued, asking the Oklahoma Supreme Court to invalidate the legislation. They argue that the fee originated in the state Senate, thus violating the requirement in the state Constitution that revenue-raising legislation originate in the state House. The opponents also argue that enactment of the legislation during the last week of the legislative session violated the state Constitution’s requirement that revenue-raising legislation not be enacted during the last five days of a legislative session. The opponents also argue that proponents of the $1.50 charge were trying to characterize the legislation as not revenue-raising by labeling it a fee. The opponents explain that the fee “simply reincarnated the earlier cigarette tax bills under a new name.”
Though I’m no expert in Oklahoma constitutional law, it seems to me that the fee raises revenue, and thus has been enacted in revenue-raising legislation. Accordingly, the process by which it was enacted appears to have violated the Oklahoma Constitution. If, for some reason, the Oklahoma Supreme Court determines that the provisions in the constitution applies to taxes but not fees, then deciding whether the $1.50 charge is a tax or fee would be determinative. The label alone should not resolve the question. The state is not selling cigarettes to people, nor is it selling licenses to use tobacco, and thus it is difficult to characterize the charge as a fee. It would not be surprising if the Oklahoma Supreme Court, if it were to limit the requirements in the state Constitution to taxes, decided that this particular charge was a tax. It will be interesting to see what the court decides, probably sometime later this year.
Monday, June 12, 2017
Now comes news that the Kansas legislature, by significant margins, has voted to override the governor’s veto of tax increases enacted to repair, at least in part, the damage caused by the unsurprising consequences of cutting taxes for the wealthy. The legislation does not fully repeal the original tax cuts but it offsets a portion of those cuts. The governor called the legislation “bad for Kansas” but neglected to point out how “bad for Kansas” his trickle-down, supply-side tax policy has been.
The Kansas experience is not the first in which the flaws of trickle-down, supply-side tax policy have required subsequent adjustments. The ballyhooed 1981 Reagan tax cuts required subsequent corrective legislation. The Bush tax cuts contributed significantly to the economic woes of the late 2000s, and required subsequent corrective legislation. The trickle-down tax legislation in Minnesota generated a budget crisis that was solved through corrective legislation that eliminated a budget deficit and stimulated the state’s economy to a degree unmatched by the trickle-down, supply-side approach.
The idea of using the Kansas tax-cut policy as a model for federal tax reform, as urged by the governor of Kansas, and as reported in this article, caused me to ask, in Kansas As a Role Model for Tax Policy?, “Does it make sense to take reading lessons from illiterate people?”
As I also pointed out in Kansas As a Role Model for Tax Policy?, “Kansas indeed is a role model for national tax policy, but it’s not the lesson Brownback wants to teach. What the Congress needs to understand from the Kansas fiasco is that supply-side trickle-down tax and economic policies do not work.” I noted that in Kansas, the failures of extremist tax policies had carved a divide between centrist Republicans and the extremists in the party. The best prospects for effective tax policy are found in cooperation between centrists of both parties, and not on the either extreme edge.
I repeat the advice I shared in Kansas As a Role Model for Tax Policy?. “If Congress wants to learn what works, it can examine states where demand-side policies have been enacted and have worked. Otherwise, as a Republican legislator warned, economic failure makes voters angry, and when voters get angry, they ‘go to the polls and get rid of you.’ That, too, is a lesson.” Moderate Republican legislators in Kansas appeared to have learned both lessons. It remains to be seen what happens in the nation’s capital.
Friday, June 09, 2017
Though it might appear that I am glued to the television, the reality is that with so many other things on my to-do lists, I only see television court shows when I happen to turn on the television. In other words, I don’t make any effort to see every episode of every show. I’m not sure that’s even possible without giving up sleep for the next five years. But, to my rescue comes a reader, who pointed me in the direction of a People’s Court episode from late last month that I had not seen. Of course, it involved a tax issue.
The defendant in the case is the biological aunt of the plaintiff, who raised the plaintiff. During the time in question, the plaintiff lived in the defendant’s home and used the defendant’s automobile. The plaintiff testified that she needed help doing her taxes, so she asked her aunt to prepare her return. The plaintiff claimed that the defendant put the defendant’s daughters on the plaintiff’s return as dependents, and selected head of household filing status. The plaintiff also asserted that the federal and tax refunds were deposited into the defendant’s bank account.
The defendant, in turn, claimed that the plaintiff did her own tax return. She admitted that she did not file tax returns for the year in question. She admitted that the refunds went into her bank account but did not know that happened until notified at a later time. In response to the judge’s question of how the plaintiff would have the necessary information to direct the refund deposit into the defendant’s bank account, the defendant said that the plaintiff, by living in the defendant’s house, had access to the bank information. The defendant counterclaimed for alleged unpaid rent and automobile repair expenses.
The judge concluded that there was no dispute that the defendant owed the amount of the tax refunds to the plaintiff. That amount was offset by the automobile expenses but, for failure of proof, not for unpaid rent.
Unlike Judge Judy, who in a previous case, advised a litigant to contact the IRS, the judge in this case made no such suggestion. Perhaps it’s because she could not figure out which party committed the fraud. Did the defendant prepare the plaintiff’s return and put her own children on the return as plaintiff’s dependents because she had no use for those deductions? Or did the plaintiff prepare her own return and claim the defendant’s children because she knew the defendant was not filing a return? Why did the defendant not file returns? Why would the plaintiff direct that the refunds be deposited into the defendant’s bank account? Did the plaintiff and defendant act in concert, and then have a falling out that triggered the dispute? Do IRS employees watch television court shows? Do they collectively manage to do what I haven’t done, which is to watch all of the episodes looking for tax issues?
Wednesday, June 07, 2017
In my last commentary, I shared some revenue data with respect to the soda tax. In January, the tax generated $5.7 million in revenue. In February, the tax generated $6.4 million. Additional information has been provided. In March, according to this report, revenues reached $7 million, but in April, according to this recent report, revenues fell to $6.5 million. Thus, for the first four months of the year, the city collected $25.6 million in revenue. At that rate, total revenue for 2017 will reach $76.8 million. That’s woefully short of the $91 million that the city has already committed to spending from soda tax revenues. A bit of arithmetic reveals that to reach $91 million for the year, revenue for the remaining eight months – including May, for which figures have not been released –needs to be $65.4 million. That amounts to $8.175 million per month, an amount more than $1 million higher than the city’s best month to date, and almost $2.5 million higher than its worst month. It is $1.775 million per month higher than what the city has averaged during the first four months of the year. It’s difficult to construct scenarios under which revenues will reach an average of $8.175 million per month.
There is one silver lining in this mess. Philadelphia’s experience, along with those of other states and cities, demonstrate why local and state approaches to transaction taxation needs serious reform. When the nation was far less populous, greater distances separated towns and villages, mail order and internet shopping weren’t even dreams in their inventors’ eyes (because they had not yet been born), a state or town could establish a tax policy without too much concern about the tax policies in other places. Now states and towns engage in tax credit battles with each other, and technology, including the automobile, coupled with the population growth in the spaces once separating localities makes it easy for people to escape most types of transaction taxes. Tax policy in a global age needs to be something more unified than the disparate decisions of tens of thousands of states, counties, cities, towns, school districts, sewer authorities, and other revenue entities that reflect the long-gone environment of centuries ago.
In the meantime, one can wonder where the first blink will occur. Will it be the repeal of the Philadelphia soda tax, or the rejection of colonial era approaches in favor of twenty-first century tax policy reality? My guess is that another of my soda tax commentaries will show up before either of those two thing happen.
Monday, June 05, 2017
The simpler the tax, the fewer objections I have to the computation being performed initially by someone other than the taxpayer, because the simpler the tax, the easier it is to spot mistakes. One of the examples I use is the sales tax. Taxpayers do not compute the sales tax (though they are responsible to compute the accompanying use tax). Merchants, and more specifically nowadays, the computer programmers who put algorithms into check-out devices, compute the sales tax. Some consumers would take quick notice if they were charged a $60 sales tax on a $100 purchase in a jurisdiction with a 6 percent sales tax (though, sadly, some would be oblivious). Sharp-eyed consumers would spot much smaller errors, not only in arithmetic but in identification of taxable items.
According to this report, a woman living near Pittsburgh, Pennsylvania, Mary Bach, sued Kmart in magisterial court because the store charged her sales tax on toilet paper, which is exempt from sales taxation in Pennsylvania. The over-charge happened at the Kmart store in North Versailles. According to Bach, it also happened on a previous visits, and on toilet paper purchases at five other Kmart stores scattered throughout the state.
When Bach pointed out the error to the cashiers, they did not reimburse her for the improperly charged tax. Bach noted that “When a merchant is charging sales tax on non-taxable merchandise, somebody has to hold them accountable.” So how would the IRS be held accountable if it made errors on a Ready Return?
This was at least the third time Bach sued Kmart on the same issue. She prevailed in 2007 and in 2009. This time, the judge awarded her $100 plus court costs. Bach, who describes herself as a “consumer advocate and careful shopper” might be one of the few who would catch a Ready Return error. One wonders how many sales tax dollars were collected by Kmart on exempt items, and whether those dollars ended up with the Department of Revenue or with Kmart. Kmart’s attorney described the matter as unintentional, “a mistake at the store level,” but it seems to me that a problem occurring at multiple stores over a ten-year period is a computer programming error that should have been fixed a decade ago.
If something as simple as a sales tax computation can be so easily miscalculated, what happens with “we’ll do it for you” government-prepared income tax returns? Perhaps Ready Return legislation should contain a provision for $100 judgments in favor of careful taxpayers for each Ready Return error that they spot. The tax return preparation industry that Ready Return is designed to eliminate might simply switch to Ready Return error checking, and at $100 a goof, they will continue to be flush with cash. And who would pay those $100 judgments? Taxpayers, of course.
Friday, June 02, 2017
According to this story, the Australian Taxation Office has revealed it has terminated its attempt to provide a definition of “salad” for purposes of the goods and services tax. That tax is very similar to a sales tax.
Under current law, Australia does not subject fresh salads to the 10 percent goods and services tax. On the other hand, the tax applies to pre-prepared meals. One need not be a math whiz or an arithmetic genius to see the problem. Food retailers asked for guidance, and in March the Taxation Office disclosed it was initiating a process to determine whether existing guidelines were sufficient to deal with the “very rapidly moving nature of salads.” Last week, when asked about the plan, a representative of the Taxation Office explained that it had abandoned the effort. The reason, the representative explained, was that retailers and others in the food industry, reacting to a draft of the guideline revision, decided it wasn’t going to be helpful.
Two months ago, when asked specifically about salads, the Taxation Office representative replied, “It depends on what you define a salad as. Some may define it as a bowl of lettuce, some may define it as a BBQ chicken shredded up with three grains of rice on it. I'm not trying to be facetious... there [are] a range of products that are very, very different that are marketed as salads." The legislator who asked about the salad guidelines noted, "Adding [the goods and services tax] to fresh salads would hurt household budgets. The chief medical officer advised that it could also discourage people from making healthy choices and see more Australians eating junk food." Surely a salad isn’t “anything that isn’t junk food.”
The arithmetic is easy. The definition is challenging. What is a salad? Must lettuce or spinach be in the mixture of foods in order for it to be a salad? Is egg salad a salad? Is chicken salad a salad? Is taco salad a salad? Is fruit salad a salad? If the exemption for salads is designed to promote healthy nutrition, what is the response to those who tag egg salad, for example, as unhealthy because of the cholesterol in eggs and the fat in mayonnaise? If putting the word “salad” into the name of what is being sold, then what of candy salad? Yes, there is such a thing, something I discovered while writing this commentary and deciding, on a whim, to google the phrase “candy salad.”
On my first day as a law student, the professor started my first class by walking into the room and asking, “So, what is property?” It is tempting to walk into a basic tax class and ask, “So, what is a salad?” Though I would not do that, I can imagine the reaction would be fun, especially when the phrase “candy salad” was, sorry, tossed into the discussion.