Getting Past Nexus and Into Voluntary Use Tax Collection Compensation Plans

Last week, in a Washington Examiner commentary, George Pieler presented arguments against permitting states to compel nonresident vendors to collect use tax on their behalf. In one sense, now that the Supreme Court has a case under consideration that deals with this issue, the time for arguments has gone by, at least for the moment. On the other hand, it would not surprise me if the Supreme Court’s disposition of the case re-opens the need to continue debating the issue.

In terms of outcome, I agree with Pieler. I do not think out-of-state merchants should be required to do work for a state with which they have no meaningful connection. I have written about this issue and shared my reasoning in a long string of posts, starting with Taxing the Internet, and continuing through Taxing the Internet: Reprise, Back to the Internet Taxation Future, A Lesson in Use Tax Collection, Collecting the Use Tax: An Ever-Present Issue, A Peek at the Production of Tax Ignorance, Tax Collection Obligation is Not a Taxing Power Issue, Collecting An Existing Tax is Not a Tax Increase, How Difficult Is It to Understand Use Taxes?, Apparently, It’s Rather Difficult to Understand Use Taxes, and Counting Tax Chickens Before They Hatch, A Tax Fray Between the Bricks and Mortar Stores and the Online Merchant Community, and Using the Free Market to Collect The Use Tax.

Pieler makes several arguments. First, he points out that if South Dakota, the state whose attempt to force nonresident merchants to collect taxes on its behalf is being considered by the Supreme Court, prevails, it will open the door to hundreds of states and localities subjecting nonresident merchants to the rigors of collecting use tax. In several of my posts listed above, I have explained why that outcome would be disadvantageous to businesses, consumers, and the national economy.

Pieler points out that South Dakota has admitted drafting a statute that reaches to the far ends of the nation “in order to test how far t coul dgo while keeping enough of a semblance of a nexus to get the court to change its precedent.” That’s not a reason for South Dakota to lose. There are times when the best way to identify the limits of legislative prerogative is to draft a statute that can be tested. The problem isn’t the way South Dakota maneuvered. There’s no rule requiring legislatures to be timid, though at times it might be politically prudent to be careful. The problem is what he statute enacted by the South Dakota legislature requires.

Pieler takes apart the claim by South Dakota that it is losing tax revenue because purchase transactions are increasingly shifting from brick-and-mortar stores within the state that collect sales tax to online shopping sites that don’t collect use tax if they lack a meaningful connection with the state. Pieler explains that South Dakota’s actual revenue loss might be only one-fourth, or perhaps even less than one percent, of its claimed estimate. Another factor in why the estimate is much higher than the actual revenue loss is the fact that there have been steady increases in the number of online merchants who do have sufficient connection with the state. In other words, as Pieler puts it, perhaps South Dakota does not have the revenue loss problem it claims it has.

Pieler laments that the economic arguments presented to the Supreme Court were “so narrowly drawn.” I agree. They were. Dealing with the economic arguments requires analyses that weren’t undertaken, which Pieler describes in his commentary.

My lament is that there was no focus on a more vital aspect of the question. In Tax Collection Obligation is Not a Taxing Power Issue, I explained:

Because states cannot compel a business to do use tax collection for it unless the business has nexus with the state, some states are attempting to expand the definition of nexus so that it makes nexus exist under pretty much all circumstances. For a variety of reasons, it is wrong, both as a matter of policy and as a matter of efficiency and administration, to require businesses lacking a real connection with a state to do use tax collections for the state. * * * What is being imposed on the retailers is the aggravation and financial cost of being required to collect taxes for a state with which the only connection is the ability of a resident of that state to view a retailer’s web site on servers not located in that state.

Compelling a business to collect use tax for a state * * * force[s] out-of-state retailers to function as tax collectors for the state. It constitutes a radical expansion of government police power. In that context, objections can be raised that might not find strong ground if the proposal to expand nexus is viewed as an expansion of the taxing power. * * *

* * * Compelling a business to collect use tax for a state is “forcing a business to do work without representation.” That is, in some ways, a more serious matter. The use tax itself, like a sales tax, can be passed along to customers, because they are the ones with an existing legal obligation to pay that tax, though few do. The cost and aggravation of functioning as a tax collector for a state in which the retailer does not do business can be passed along to customers only if the retailer wants to risk losing customers because of the price increase.

States, of course, could avoid the problem by cooperating with nonresident merchants rather than trying to exercise jurisdiction over them. I offered one possibility in Tax Collection Obligation is Not a Taxing Power Issue:

Perhaps a better approach is for states to seek voluntary contracts with out-of-state retailers, compensating them for serving as tax collectors. There may be state Constitutional provisions or legislation that prohibits contracting tax collection to out-of-state individuals or entities, though I doubt that is the case. For some businesses, being compensated to engage in use tax collection might help the bottom line.

If state governments and out-of-state merchants found a way to communicate productively, the problem could be resolved rather easily. It’s not too late, though depending on what the Supreme Court decides, getting the parties to sit down and work out something that is practical could turn out to be more or less challenging than it would have been a year or two or five or ten ago. I do doubt, though, that the Supreme Court’s decision will resolve this ongoing disagreement over who should be enforcing a state’s use tax law.

Most Taxpayers Do Not Know They Are Handing Out Billions to Corporations

The other day, reader Morris presented me with a question that is the title of a New York Times editorial by Nathan Jensen. The article headline asks, “Do Taxpayers Know They Are Handing Out Billions to Corporations?” My answer is not a simple yes or no. My answer is that most taxpayers do not know. And of those who do know, there are some taxpayers who are quite pleased, because what is coming into their corporation is far more than what is going out of their pocket as a share of the burden imposed on all taxpayers. And, of course, there are those who do know but who don’t care, because “it’s too complicated” or “it’s politics” or “I have other things to worry about.”

Jensen points out that “Every year, states and local governments give economic-development incentives to companies to the tune of between $45 billion and $80 billion.” He explains that the wide range reflects the inability of the public to know exactly what is being shoveled into corporations by government officials. He describes some of the ways that taxpayer money ends up in the hands of those who have far less need of money than just about every other American. They include cash grants, reductions in every sort of tax, construction of facilities for the corporation using public funds, and even rebating taxes paid by corporate employees so that those funds end up in the corporate treasury.

Jensen notes that in many instances these deals are being negotiated by lobbyists and not by legislators or executive branch officials. That’s no surprise. Who do you think wrote the federal tax law enacted in December? If you respond with the old civics course answer, “the Congress,” you are way behind the times in terms of the reality of governance. Increasingly, in my opinion, governance is shifting from elected representatives to employees of, and consultants to, the oligarchy. And those folks surely want as many of these deals kept secret, and when deals become known, they still want as many details and components kept under wraps as they can manage to hide. Jensen explains that one reason for the secrecy is the unwillingness of corporations getting these handouts in exchange for their promises of economic benefits inuring to the state or locality to subject themselves to post-handout examinations to determine if the promises were kept. Is this yet not another reason to make tax breaks available only after the tax break recipient performs what has been promised, as I suggested in How To Use Tax Breaks to Properly Stimulate an Economy, How To Use the Tax Law to Create Jobs and Raise Wages, Yet Another Reason For “First the Jobs, Then the Tax Break”, and When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises?.

Jensen sees hope in a recent Elon University poll that surveyed residents of the twenty locations making the finalist list for the Amazon tax break giveaway contest. According to the poll, the percentage of respondents supporting the proposition that Amazon should be offered as much as possible ranged from 8 percent in Austin to 21 percent in Los Angeles, whereas the percentage supporting either the proposition that there should be no financial incentives or nothing more than other businesses receive ranged from 32 percent in Indianapolis to 59 percent in Denver. When asked if they would be willing to pay more taxes to fund financial incentives for Amazon, those responding in the affirmative ranged from 14 percent in several cities to 26 percent in Indianapolis, and those responding in the negative ranged from 74 percent in Indianapolis to 86 percent in several cities.

Those taking a theoretical view claim that these issues can be resolved in the voting booth. I disagree. The practical reality is that taxpayers rarely get the opportunity to vote on these deals because many of the deals are hidden, and most of those that are disclosed aren’t put to a vote. In the latter situation, the best that taxpayers can do is to vote out the politicians who agree to the deal, though that comes too late for the deals already in place, and comes at the cost of voting out a politician whose position on other issues, or even a single issue, gets the attention come election time.

Changes are needed. Yet changes cannot be made until enough people realize changes are needed. Unfortunately, with too many people elevating ignorance to the position of a deity, the chances of this plundering of taxpayer dollars happening before the oligarchs own and control everything are diminishing rapidly.

The Tax is Not Axed

Several days ago, while working on a family history project with the television in the background, my ears picked up during a commercial to hear the phrase, “Axe the tax.” Having not paid attention to the beginning of the commercial, I failed to identify the vendor. The gist of what I did pick up was that one of the pitches involved avoiding payment of sales taxes. The end of the commercial brought a disclaimer to the effect that the sales tax would be paid by the vendor by reducing the item’s price. My search of the television station’s website failed to identify the vendor.

The addition of the disclaimer caused me to consider the commercial differently from the one I discussed in What Is a Retailer’s Obligation Not to Provide Misleading Tax Information?. In that commercial, a vendor characterized sales as “tax free” because the vendor is in Delaware, a state without a sales tax, but the vendor failed to point out that the out-of-state customer faced a use tax in the customer’s state.

In trying to find the identity of the vendor in the television commercial, I discovered that the vendor was not the only one using the “Axe the Tax” slogan. Those who are curious can see and example at this site, although I could not find on that site, or any others using the slogan, a disclaimer or explanation.. Of course, when the “Axe the Tax” phrase grabbed my attention during the commercial, my first thought, which lasted for less than a second, was focused on a political anti-tax theme. There are anti-tax sites using the phrase, but “Axe the Tax” is being used by retailers in an effort to attract customers.

Of course, the tax is not axed. The retailer is reducing the price so that the amount paid by the customer equals the amount that would have been paid had there been no tax and thus no price reduction. For example, if an item is priced at $100 and the sales tax would be $6 because the rate is 6 percent, the retailer charges $100. The retailer isn’t neglecting to collect or remit the sales tax. Instead, the retailer is reducing the price to $94.34, making the sales tax $ 5.66, which bring the total cost to $100.00.

The tax is not axed. The slogan is simply an admittedly catchy way to get people’s attention. It is a marketing gimmick. It’s not much different from the perpetual going-out-of-business or liquidation sales pitches. It’s another version of the everything-must-go-by-tomorrow claim. Retailers can reduce prices for all sorts of reasons, and are under no obligation to explain why. But savvy retailers find something that will entice people to visit their store or website. So long as customers aren’t misled into thinking they aren’t paying sales tax when in fact they are, no harm seems to have been inflicted.

How Not to React to a Bad Tax Law

Three Months Ago, in Will My Reaction to Their Tax Plan Break Their Hearts?, I shared my opinion that attempts by states to avoid the $10,000 limitation on the deduction for state and local taxes by providing taxpayers the option of making payments to state-controlled charities in lieu of paying state and local taxes won’t work. The goal of these attempts is to shift the payments from the category of state and local taxes, which are subject to the limit beginning this year, to the category of charitable contributions, which are not limited in that manner. I explained that the charitable contribution deduction is not available because the payments are not voluntary and because the payments are a quid pro quo. The payments are not voluntary because they are made in lieu of a mandatory tax. The payments are a quid pro quo because making the payment to the charity absolves the taxpayer of the mandated state or local tax payments, and because the payment is in return for the state or local services funded by the payments.

I also pointed out that I am not alone n reaching this conclusion. Jared Walczak of the Tax Foundation, put it this way, “IRS and Treasury officials weren't born yesterday. They will see right through these proposals, recognizing the contributions for what they are: payment of taxes."

So it came as no surprise that last week the IRS issued Notice 2018-54, in which it stated:

In response to this new limitation, some state legislatures are considering or have adopted legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay. The aim of these proposals is to allow taxpayers to characterize such 2 transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities.

Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.

* * * * * The Treasury Department and the IRS intend to propose regulations addressing the federal income tax treatment of transfers to funds controlled by state and local governments (or other state-specified transferees) that the transferor can treat in whole or in part as satisfying state and local tax obligations. The proposed regulations will make clear that the requirements of the Internal Revenue Code, informed by substance-over-form principles, govern the federal income tax treatment of such transfers. The proposed regulations will assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.

Reading between the lines, I am convinced that Treasury and the IRS will characterize the payments to the state-controlled charities that are made in lieu of state or local taxes as failing to qualify for the charitable contribution deduction.

Jared Walczak and I are not the only ones suggesting that the Treasury and IRS will torpedo these plans. According to this Bloomberg report, Kevin Brady, chair of the House Ways and Means Committee, and Mark Klein of Hodgson Russ, have chimed in, with Brady calling the plans “tax evasion schemes,” and Klein noting that taxpayers going along with these plans “could be subject to tax, interest and penalties” if the IRS takes action against these plans and those taxpayers.

I wonder how many taxpayers adversely affected by this “cut deductions for the middle class to finance tax cuts for corporations and the wealthy” had been supporting those who promised tax “reform” thinking that those promises would be helpful to them. Surely the wealthy don’t care, because their tax cuts more than make up for the lost deductions, but for those getting little or nothing in the way of tax cuts face tax increases. Trying to falsely claim mandatory taxes are voluntary charitable contributions isn’t an effective, or morally upstanding, way to deal with the problem. People who understand what is happening in Congress, and how income and wealth inequality are incremented by this deduction limitation, should know what needs to be done in the voting booth to fix the problem. Are there enough of those people? Will they act? Or will they throw their hands up in surrender and pave the way for even more wealth and income shifting in the wrong direction?

When Will “First the Jobs, Then the Tax Break” Supersede the Empty Promises?

A little more than a week ago, in Yet Another Reason for “First the Jobs, Then the Tax Break”, I reiterated the need to tie tax breaks to the performance of promises rather than to promises. In that post, and in the earlier ones that it references, I have described instances in which companies funnel most of their tax break money to shareholders, through dividends and stock repurchases, while adding little or nothing to the incomes of their workers. While supporters of the tax cuts get ecstatic over small bonuses that, after taxes, truly amount to crumbs, they ignore the fact that the amounts not being used to increase jobs and wages far exceed the small bonuses. It’s even worse, because some of these companies not only pass very little of their tax breaks to their workers, they also are cutting jobs and shifting jobs overseas.

Now comes news of a particularly galling example of how foolish it is to dish out tax cuts simply because the recipient of the tax break promises to do something. According to this story, and others, Harley-Davidson is closing a factor in Kansas City, Missouri, laying off 800 workers, while expanding operations at a site in York, Pennsylvania where it will hire 450 workers. It’s easy to do the math. The nation’s workforce is shrinking by 350. Although that doesn’t seem like much more than a drop out of the job bucket, it’s just one company. The bucket empties quickly when taking into account the tens of thousands businesses getting tax breaks and cutting jobs and wages. It’s not just the reduction in jobs. At least some, perhaps many or all, of the jobs being created in York are temporary jobs. Worse, the jobs being created in York pay less than the jobs being eliminated in Kansas City. That’s not all. At the same time, Harley-Davidson has increased dividends and is embarking on a stock repurchase plan. On top of that, the company is opening a factory in Thailand, which it claims is being done in order to avoid another unwise Administration decision, tariffs on materials the company needs to manufacture motorcycles to sell abroad. On the one hand, the company is trying to cut costs, presumably because it needs to improve its financial situation, and on the other hand it is handing out dividends and stock repurchase payments as though it is drowning in cash, which it is, thanks to tax cuts the cost of which will be borne by future generations.

Why is this example any worse than the others that have been discussed? Last September, while hawking the Republican tax giveaway, Paul Ryan, one of its, if not its, chief architect, spoke at a Harley-Davidson factory in Wisconsin He claimed, “Tax reform can put American manufacturers and American companies like Harley-Davidson on a much better footing to compete in the global economy and keep jobs here in America.” Seven months earlier, the President told Harley-Davidson’s executives and representatives of its workers’ union that his planned tax cuts would cause the company to create more jobs. If that is what Ryan, the President, and the rest of their tax-cut crew wanted, then why not tie the tax breaks to performance? Logically, if companies get tax cuts for creating jobs, or even promising to create jobs, ought they not face tax increases when they cut jobs or fail to create jobs?

If Congress is willing to provide some tax breaks after the taxpayer performs an activity or engages in a transaction, such as the residential energy credit, why not condition all tax breaks as responses to taxpayer performance? What’s the point of handing out tax breaks based on promises that the recipients are not required to keep? Empty promises are worthless. Empty promises ought not bring the maker of the false promise any sort of reward. That is one reason I refer to the tax cuts as giveaways, and continue to consider them undeserved. It’s why they need to be repealed with respect to every recipient that has failed to keep its promises.

Incorrectly Breaking Down the Internal Revenue Code

Reader Morris asked me if I agree with the following claims in this article:

What most people don't realize, in fact, is that 99 percent of the Internal Revenue Code is a series of incentives, primarily for businesses and investors to fuel the economy. There are only about 30 pages in the Code that actually raise revenue; they include charts and tables that tell you how much tax to pay. There is one line that basically declares, "All income is taxable unless we say it isn't," and another that basically says, "No expenses are deductible unless we say they are."

Then, there are about 6,000 pages that tell you how to reduce taxes through tax deductions, tax credits and other incentives.

The answer is no.

First, the claim that the Internal Revenue Code contains 6,000 pages is sad proof that once an error or falsehood goes viral, it is impossible to eliminate it, or to prevent further spread. The ignorant claims with respect to the size of the Internal Revenue Code have been exposed and refuted by me in many posts, beginning with Bush Pages Through the Tax Code?, and continuing with Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, How Difficult Is It to Count Tax Words, A Slight Improvement in the Code Length Articulation Problem, and Tax Ignorance Gone Viral, Weighing the Size of the Internal Revenue Code, Reader Weighs In on Weighing the Code, Code-Size Ignorance Knows No Boundaries, Tax Myths: Part XII: The Internal Revenue Code Fills 70,000 Pages, Not a Surprise: Tax Ignorance Afflicts Presidential Candidates and CNN, The Infection of Ignorance Becomes a Pandemic, Getting Tax Facts Correct: Is It Really That Difficult?, and Reaching New Lows With Tax Ignorance. Though the claim of 6,000 pages is not quite as erroneous as the wildly outlandish, totally false, intentionally misleading, and warped claim that the Internal Revenue Code consists of 70,000 or 74,000 or seventy-thousand-whatever pages, it nonetheless contributes to the nation’s descent into what I called in Reaching New Lows With Tax Ignorance the New Stone Age.

Second, the portion of the Internal Revenue Code devoted to incentives is far from 99 percent. Far more than one percent of the Code deals with procedural matters, such as filing requirements, deadlines, information reporting, interest, penalties, audits, and litigation. Far more than one percent of the Code deals with exclusions from gross income, most of which cannot be fairly characterized as incentives. Of the Code sections providing for deductions and credits, more than a few are not incentives. For example, neither the credit for withheld taxes nor the deduction for trade or business expenses are incentives, the first because it is a true credit in the accounting and retail sense, and the second because business entrepreneurs pay and incur expenses for business reasons. Yes, there are incentives in the Internal Revenue Code, and yes, there are too many of them, and yes, they ought to be relocated into the statutes dealing with the federal agencies charged with oversight for the activities and transactions in question, but it is absurdly incorrect to consider 99 percent of the Internal Revenue Code as consisting of incentives.

Ignorance of this sort is appalling. It is dangerous. It is unjustified. It needs to be identified, and discredited. Unfortunately, we live in a world with this sort of misinformation flourishes and spreads. How sad.

Adverse Possession, Basis, and Gross Income

Reader Morris directed my attention to a Philadelphia Inquirer article from several weeks ago that apparently I missed. I think, though, the reason I did not see it was its inclusion in a different Regional section of the paper, because I live to the west of the city and the story involves a situation in the northeastern part of the city.

The facts are simple. About thirty years ago, Frank Galdo and his wife purchased a home in the Fishtown area of Philadelphia. Across the street is a vacant lot, which, when the family moved in, was filled with trash and used by prostitutes and drug addicts. So Galdo cleaned up the lot, and added a concrete parking slab, fire pit, picnic tables, and a tree house. Many years later, the city, which owns the lot, told Galdo his use of the lot was unauthorized and ordered him to remove the improvements. So Galdo sued, claiming that he had acquired title to the property through adverse possession. He lost, because the trial court held that the city is immune to losing real property through adverse possession. He appealed. The Commonwealth Court held that, indeed, the city is not immune from adverse possession. If the city appeals to the Supreme Court, the Commonwealth Court decision could be affirmed or reversed. If the city does not appeal, or if it appeals and loses, the case goes back to the trial court for resolution of the fact question of whether adverse possession occurred.

So reader Morris asked a good question. Actually he asked several questions, and characterized them as “silly.” They’re not silly. They could be used as exam questions in a basic federal income tax course. Reader Morris asked, “If the man in the article is victorious after appeals , what is the tax basis of the lot? Would the new owner need to allocate basis of the property between the land and the tree house? How do you determine tax basis of property acquired by adverse possession? Does it matter that the city was the original owner?”

To answer those questions, one must back up and ask a preliminary question. Is the value of real property acquired by adverse possession included in gross income? The answer, I think, is yes. There does not appear to be any case dealing with the question. So I reach my conclusion through analogy. A person who finds something of value and takes possession of it has gross income equal to that value. In turn, to prevent double taxation, the person takes a basis in the item equal to the value at the time the item is found and taken into possession. Of course, as a practical matter, many taxpayers fail to report the income, and the basis question does not arise because the item eventually is consumed, thrown out, or sold for an amount less than what it was worth when found. Real estate, though, is different, and the basis question is an important one.

The basis in the tree house is the cost of the materials used to construct it. The tree house was not acquired by adverse possession so there is no reason to allocate to it any of the basis arising from including the value of the lot in gross income. And it does not matter whether the previous owner is the city, a corporation, an individual, a trust, a partnership, a limited liability company, or some other entity.

What Does It Mean to Be Retired for Tax Purposes?

When people ask me if I am retired, I tell them, “Not really.” Yes, I’m retired, because I stepped down from my full-time tenure-track position on the law faculty. But I continue to teach, as a part-time employee, and I hold another small part-time position, as an employee, the proceeds of which I donate back to the organization; I’d rather be a volunteer but that’s a tale for another day. So it was interesting to me to encounter a recent Tax Court decision, Voight v. Martin, T.C. Summ. Op. 2018-25.

The taxpayer has worked for Tulane University from February 8, 1985, to June 7, 1991. When Tulane encountered financial difficulties, it eliminated the taxpayer’s job. As part of the arrangement, the taxpayer received a severance package that included an extended tuition waiver for himself and his dependents. The separation notice showed the petitioner’s reason for leaving as “Elimination of Position,” and neither the box “Not Physically Able to Work” nor the box “Retirement, Pension” were checked. Because the taxpayer had six years of service, the taxpayer was granted six annual tuition waivers. After leaving Tulane, the taxpayer worked at Cornell and at America Online before becoming self-employed.

In the fall of 2012, the taxpayer’s daughter entered Tulane, and attended through the spring semester of 2015. The taxpayer filed applications to apply the tuition waivers for the spring and fall semesters of 2013. On the application, he identified his eligibility for the waiver as “Laid Off-Benefits Package.” Tulane granted a waiver of $21,575 on August 6, 2013. In 2014 Tulane sent a Form W-2 to the taxpayer, showing wages of $21,575, social security tax withheld of $1,338, and Medicare tax withheld of $313. Tulane also billed the taxpayer $1,650 for “2013 Waiver FICA Taxes.” The taxpayer did not report the $21,575 on the joint income tax return he filed with his spouse.

At some point before April 4, 2016, the taxpayer sent an email to Tulane asking about the Form W-2. On that date, a Tulane payroll department official replied, explaining, “[b]ecause you were not an employee with the University, and you received the Tuition Waiver Benefit, the waiver is considered income to you”. On the next day, the taxpayer responded and asked, “Please send me something that shows my dates of employment when I was actually working for Tulane as a staff member.” On May 16, 2016, the payroll official replied, “Per your request; your dates of employment were 02/08/85-06/07/91.”

The IRS issued a notice of deficiency, and among the adjustments was a determination that the taxpayer had failed to report the $21,575 tuition waiver as income for 2013. The taxpayer and his spouse timely filed a petition in which they made two assertions. First, the tuition waiver benefit is not taxable. Second, the IRS determined that a similar tuition waiver benefit for 2012 was not taxable.

At trial, the taxpayer argued that including the tuition waiver benefit as income in 2013 would be improper because the tuition waiver benefit represents “money that I earned 20 years ago,” apparently claiming that the benefit should have been taxed in 1991. The Tax Court determined that the benefit would be included in income in the year in which it was actually or constructively received, that it was actually received in 2013, and was not constructively received in 1991 because in that year neither the taxpayer nor his dependents had satisfied Tulane’s admissions standards and enrolled in the university. Therefore, unless an exclusion applied, the year in which the income would be included was 2013.

The taxpayer argued that the section 117 exclusion for scholarships and qualified tuition reductions applied to the waiver. The Tax Court explained that under section 117(d)(2), in order for the waiver to be a qualified tuition reduction, it must be provided to an employee of a qualified education institution for the education, below a graduate level, at a qualified education institution of either the employee or someone treated as an employee under section 132(h). Persons treated as employees under section 132(h) are former employees who separated from service “by reason of retirement or disability” and the dependents of employees, spouses and surviving spouses, and others not applicable to the taxpayer’s situation. Because the parties agreed that the taxpayer’s daughter was his dependent in 2013, that Tulane is a qualified education institution, and that the taxpayer did not end employment with Tulane by reason of disability, the issue was whether the taxpayer was either a current employee of Tulane in 2013 or was treated as an employee because he had separated from service by reason of retirement under section 132(h).

The taxpayer argued that he was an employee because he received a Form W-2, because the references on that form to “employer” and “employee” suggested to the taxpayer that sometime in 2013 “Tulane University thought I worked there.” The Tax Court noted that the issuance of a Form W-2 does not create an employment relationship, and that a Form W-2 may be required even when there is no longer an employment relationship, such as when social security and Medicare taxes are imposed on wages as defined in section 3121, which can include payments for employment “even though at the time paid the relationship of employer and employee no longer exists.” Thus, whether the taxpayer was an employee in 2013 is a factual question, resolved under common law rules. Aside from the Form W-2, the taxpayer did not present any evidence of an employment relationship. The taxpayer conceded he did not work for Tulane after 1991, and Tulane’s records confirm that he had not been an employee since 1991.

The taxpayer next argued that because the term “retired” in section 132(h) is not defined, being “laid off” as he was constituted early retirement. The Tax Court concluded that the taxpayer’s employment with Tulane had not terminated because of retirement. Because there is no definition in the Code of the term “by reason of retirement,” the court applied the principles that the plain language of a statute must be enforced, and that words must be construed so that they are not superfluous or insignificant. Turning to Black’s Law Dictionary, the court adopted the definition of “retirement” as the “[t]ermination of one’s own employment or career, esp. upon reaching a certain age or for health reasons; retirement may be voluntary or involuntary.” The court explained that this definition’s specific mention of termination of a career and special focus upon age or health as reasons for termination conforms with the ordinary meaning of the term “retirement” to refer to a time after an individual stops working. Thus, to give meaning to the inclusion of the term “retirement” requires that retirement be recognized as different from other methods by which an employee may separate from service, including being laid off, because otherwise the term “retirement” as used in section 132(h) would be is rendered superfluous or insignificant. The court also noted that this definition of retirement was consistent with the definition applied by the Supreme Court in the context of bankruptcy.

The Tax Court explained that the taxpayer had not retired because Tulane identified the reason for the termination of employment to be “Elimination of Position” even though retirement was a preprinted option, because the taxpayer’s severance package included assistance in finding further employment, and because the taxpayer testified that he was laid off because Tulane was having “money troubles.” Thus, the termination of the taxpayer’s employment was not contingent on age, years of service, or health considerations. Additional proof that the taxpayer was not retired was found by the court in the taxpayer’s continuing to work for a variety of other employers and for himself after he was laid off by Tulane.

So in order to be retired, at least for purposes of section 132(h) and the provisions that reference it, a person needs to leave employment on account of age, years of service, or health, without thereafter undertaking self-employment or employment with the same or a different employer. By that definition, I am not retired. Perhaps someday I will be. Check back later.

Yet Another Reason For “First the Jobs, Then the Tax Break”

So that big tax giveaway last December was touted as the impetus for an increase in good-paying jobs in this country. As I pointed out in posts such as You’re Doing What With Those Tax Cuts? and More Proof Supply-Side Economic Theory Is Bad Tax Policy, that wasn’t going to happen, isn’t happening, and isn’t going to happen. Oh, sure, there has been an increase in low-paying jobs and a drop in the unemployment rate that might be more a reflection of people dropping out of the job market than a surge in good-paying jobs, but as I described in Much More ado About Almost Nothing and the previous posts cited therein, the two or three percent of workers getting a few hundred after-tax dollars of one-time bonus payments aren’t exactly heading out to buy yachts or even cover the increased cost of fuel for their vehicles.

Now comes yet another example of the tax cut scam. As reported in many stories, including this one, Walmart, recipient of a very large tax break, has used a chunk of that money, on the order of $16 billion, to acquire control of India’s largest retail company. That will permit that company, Flipkart, to create more jobs, in India. At the same time, Walmart is closing stores in this country and laying off thousands of workers in the United States. And despite all the buzz about raises and bonus payments, a significant number of Walmart employees need public assistance such as Medicaid, SNAP, and subsidized housing in order to survive.

As I suggested in How To Use Tax Breaks to Properly Stimulate an Economy and How To Use the Tax Law to Create Jobs and Raise Wages, it’s time to stop with the “here’s a tax break, now create the jobs you promised and if you don’t, oh well, see you at my next campaign fund raiser” approach to tax legislation, and to implement the “create jobs, get a short-term tax break, don’t cut those jobs next year, get another short-term tax break” style of holding tax break recipients’ feet to the fire. When a child says, “Give me a cookie and I’ll behave properly,” sensible parents reply, “Show me you can behave properly and then you’ll get a cookie.” It’s that simple, really.

What Should Taxes Fund?

Several days ago, an article about a tax proposal dispute in Wichita, Kansas caught my eye. The Fraternal Order of Police, the International Association of Fire Fighters, and the Downtown Neighborhood Alliance came together and announced a plan for a public vote to establish 0.25 percent to the sales tax, with the proceeds earmarked for public safety funding. The proposal is a reaction to stagnant and decreasing funds for public safety.

The debate ensued when the city’s mayor announced opposition to the proposal. He explained that City Council knows more funding is needed for the police and fire departments and that it is examining ways to find the money from sources in the existing budget. He expressed disappointment that those advocating the sales tax increase did not consult with him before issuing their plans.

The mayor argues that sales tax add-ons should be reserved for “extras” and not for items that are “top priorities,” such as public safety. The advocates for the sales tax increase referendum point to sales tax add-ons and special tax districts set up for a variety of projects, including a new municipal library and a “privately held pickle-ball theme restaurant.” They think that their proposal has a better chance of success than a one-percent sales tax increase proposed in 204 to fund water supply improvements, street repairs, public transit, and business development. That plan received only 37 percent of the vote.

The entire situation puzzles me. City services, including safety, transit, roads, and water supply, need funding, and yet a private restaurant gets its hands on tax revenue that other restaurants don’t get. Voting down road repair funds while voting for taxes that enrich a privately owned restaurant makes no sense. And it’s wrong. I have written many times about the short-term and long-term adverse consequences of shifting public tax revenue into private pockets in reliance on unproven claims that the general public will be better off economically. As I’ve written before, and will write again, if a person wants to start a business, it will flourish if it is properly managed and the public desires the goods or services being offered. If it cannot succeed on its own, it’s not worth operating. I’m not objecting to public money being loaned to businesses at appropriate interest rates that generate interest income for governments, provided the loans are properly secured and the money eventually returns. I’m objecting to individuals and corporations with enough money to fund tax referenda or to lobby governments to shift tax revenue into their pet projects, who reap huge profits, and who then lead the way in opposing tax increases.

I wonder why many of the people who argue for reduced taxes or for the elimination of all taxes don’t oppose these deals. Most anti-tax advocates claim that governments waste tax revenue, or spend it in ways that violate whatever standards and values the particular anti-tax individual or group has in mind. Raising taxes to fix highways gets criticized and opposed every day, and yet somehow increasing the regressive sales tax, or some other tax, to fund a pickle-ball restaurant, or a sports stadium owned by billionaires gets a green light.

When Winning Money Isn’t the Cure

Several days ago, a television commercial caught my ear as it came to a close. Generally, I don’t pay much attention to commercials, letting them drone on in the background as I do work that doesn’t require full concentration. So the next time this commercial aired, about twenty minutes later, I listened. I heard a pitch for a Publishers Clearing House sweepstakes. The prize is $1,000,000 payable immediately and $1,000 per week for life. Then came the bit that caught my ear the first time. It was something along the lines of never worrying about money again.

Curious, I did a quick search, and found a more detailed version of the commercial. I had the prize amounts right, and then comes the guarantee that amuses me: “That’s a lot of dough! And when you think of all the possibilities of how you can spend it, it would be a dream come true to win, wouldn’t it? Say goodbye to bills and debt, and say hello to a financially stress- free life!”

What amuses me, or perhaps saddens me, is the notion that this amount of money can deliver a financially stress-free life. Let’s think about this for a minute. Someone already living a financially stress-free life, like a person with $20 million in the bank and income of $1,000,000 a year, would not consider winning this sweepstakes to be the reason for that financially stress-free life. Someone with little or no assets and a meager income would be delighted with winning, but a financially stress-free life would not be guaranteed. After taxes, $1,000,000 could end up being somewhere between $600,000 and $700,000, depending on where the winner person lives (assuming the winner lives in the United States). Why no guaranteed financially stress-free life? Though $500,000 in the bank and $50,000 of income a year before taxes might seem wonderful, ten, twenty, thirty years from now it will pale in the face of inflationary increases in the cost of goods and services. For example, even if the after-tax remains of the $1,000,000 is invested well, it won’t keep pace with the rate of increase in the cost of health care, education, and some other items. On top of that, think of all the possible financial demands that might hit a person. An illness requiring medicine that costs $50,000 a year, not covered by insurance. An accident, with damages exceeding insurance coverage, letting the victim clean out the winner’s investments. For many people, handling this sort of money is in and of itself stressful, though perhaps that’s not technically financial stress.

True, for a few people on the edge between the economic position of those with little assets and meager income and those wallowing in wealth, the sweepstakes prize might be enough to tip the scales and move the person from a worrisome financial situation to the presumed comfort of wealth. But I doubt it. Studies show that most lottery winners aren’t very well off a few years after they hit it big.

What saddens me about the sweepstakes is its status as a mirror on the dire economic straits in which too many people find themselves in this new era of robber barons, income and wealth inequality, and money addiction. Life should not be such that only a handful of people, whether those who win the contest lottery or the birth lottery, can luxuriate, while some of the others labor tediously, with a scant few hitting the “rags to riches” lottery because their idea happened to synchronize with everything else in the world, and while the rest of the others throw their hands up in despair and surrender to misery. A quick read of the comments to the Publishers Clearing House announcement reveals the depths of despair and false hope into which this nation has fallen.

There are times when I think the worse addiction is money addiction. No, that’s not when someone without money or with insufficient money to meet basic needs yearns for financial security. It’s when people drowning in wealth beg, borrow, and steal more, cry for more, demand more, and never admit to how much would be enough. I doubt they enter sweepstakes or lotteries because those running the contests have yet to offer a prize consisting of an infinite amount of money. Even that would be insufficient. How sad.

Perhaps if a cure for money addiction is discovered, there would be no more need for people to pin their last dollar and all their hopes on a lottery or sweepstakes contest. But I doubt those suffering from the addiction want to fund a search for the cure.

Perhaps Chocolate Should Be Its Own Food Group?

Perhaps I don’t write about chocolate as much as I should. I’d like to, but there are so many other topics to discuss. So few, if any, of my commentaries touch on music, model trains, religion, or the First Amendment. T appears that chocolate is the focus of a MauledAgain blog post about once every two years. The list is short: More Praise for Chocolate, with a Tax Twist, Proof Chocolate is Medicinal: More Reason to Buy Me IRS Chocolates, Should the Tax Law Provide a Fix for This Looming Catastrophe?, Chocolate: Good News. Bad News. Tax News?, Chocolate? Yes!, One More Price Comparison: Chocolate, Income and Wealth Inequality Becoming a Disaster, and Horrors! Say It Isn’t So! .

Sadly, the last two of that series of posts about chocolate were far from heartening. They were reactions to bad news about chocolate. But now comes good news, though it is in many respects, an unsurprising repeat of the good news shared in the at least three of the first five posts in that series listed in the preceding paragraph.

According to this story from late last month, studied presented at the Experimental Biology 2018 annual meeting demonstrate that consumption of dark chocolate with a minimum of 70 percent cacao “has positive effects on stress levels, inflammation, mood, memory and immunity.” The report indicates that this is the first time the effect of the flavonoids in cacao on human subjects has been measured.

Perhaps I have not been consuming enough chocolate. Perhaps, in light of the report’s mention of the need for more studies, I can become a volunteer. Imagine, volunteering to eat more chocolate in return for having blood drawn every few days. It’s a deal.

It’s So Easy to Criticize a Revenue Plan, and So Much More Difficult to Present a Revenue Solution

Almost two years ago, in Does the “No New Taxes” Crowd Think Tax-Financed Public Goods Are Free?, I criticized Connecticut Republicans who accused the state’s governor of “planning a new tax” simply because the state’s Department of Transportation applied for federal grant money to set up a pilot program exploring how mileage-based road fees could be used on the heavily congested I-95 corridor. Connecticut has a problem. Current law prohibits tolls on its roads and highways. The state’s highways need repair, reconstruction, and maintenance. Without some sort of revenue, at least $4.3 billion of those repairs will be postponed or canceled.

According to this report, the Speaker of the House has predicted that no matter which party controls the state house and the legislature, those in office in January 2019 will face the challenge of dealing with the funding shortfall. Both the speaker and the outgoing governor support reinstituting tolls, which were eliminated several decades ago after a fatal crash at a tollbooth. Tolls would generate roughly $1.2 billion annually.

It did not take long for opponents of tolls to jump into the debate. They claim that state citizens already pay too many taxes. They make this argument even though pending proposals include a variety of discounts for state residents, a concept I discussed six years ago in User Fees: Differential Rates Based on Residency.

If Connecticut limits its tolls to interstate highways, its residents could easily avoid the tolls in most situations by using parallel highways. One of the reasons Connecticut’s interstate highways are in bad condition and congested is their use as local roads by residents. Unlike most interstate highways, I-95 in Connecticut has exits and entrances almost every mile. Traffic is slowed, and wear and tear increases, by vehicles that pop onto the highway at one exit, move slowly as though they are on local roads, and then jump off at the next exit, probably with the goal of avoiding one or two traffic lights. If the use of Connecticut’s interstate highway system as a local street system were deterred by tolls, there would be a double benefit. Tolls would be paid mostly by interstate traffic, and the wear and tear on the highway would be reduced, thus cutting costs.

Connecticut Republicans claim that a better approach is to borrow money to pay for the repairs and maintenance. What is unclear is how those loans would be repaid. Would not some source of public revenue, whether taxes or user fees such as tolls, be required? My reaction to that idea remains what it was two years ago in Does the “No New Taxes” Crowd Think Tax-Financed Public Goods Are Free?:

[Connecticut state senator Toni] Boucher and her anti-tax colleagues also fail to understand that Connecticut taxpayers are financing the cost of providing highways for nonresidents who travel through the state, especially those who do not stop and patronize Connecticut businesses. There are no toll roads in Connecticut, perhaps another indication that somehow, some way, magically, highways will appear and take care of themselves without anyone being “hit” by a tax, fee, or other charge, ever.

The fact that the grant [to study mileage-based road fees] being sought by the interstate coalition is nothing more than money for learning about the mileage-based road fee doesn’t matter to the anti-tax crowd. Opposition to funding this grant is nothing more than opposition to education. It does not surprise me that anti-tax and anti-education efforts are political comrades, if not one collective.

Another Republican legislator, state senator Fasano, claims that “More taxes and more burdens on Connecticut drivers is not the way to improve transportation in our state.” Then what is the way, senator? Taxes on milk? Slave labor? Pretense that potholes don’t exist? Deporting half the population and thus cutting down on traffic congestion? Walls at the border so that nonresidents of Connecticut cannot use Connecticut highways? What wonderful plan do you have to fix the problem? Criticizing everyone else is not a plan. It’s an indication that you have no plan, other than to appeal to the basic selfishness of drivers who want free highways and think someone else is going to pay for them. It’s an appeal for support from “takers not makers” who you claim to despise.

* * * * *

If the anti-tax crowd had their way, there would be no taxes. But then there would be no highways, or police, or anything else. Or there would be corporate-owned highways, corporate-owned police, and corporate-owned everything else, dictated by the oligarchy and impervious to the voting booth. Once we reach that point, surely most of the people sucked into the anti-tax movement will realize it was nothing more than a front for oligarchic takeover of public services, and they’ll be screaming for the do-over or reset button. Unfortunately, in much of life, there is no reset button.

Though the failings of the anti-tax movement and its corollary let-the-oligarchs-own-and-control-everything plan should be obvious to anyone with a pulse, the inability of too many people to balance the long-term with the short-term makes it too easy for the manipulators to prevail. Maybe when they’re on a collapsing bridge or recovering from a pothole-induced injury supporters of the “no taxes, everything is free the way it was when I was two” movement will find enlightenment.

Lawmakers “Hoping” But That’s Not Enough

It came as no surprise to read the report that Apple has increased its dividend payment and is investing $100 billion to buy back stock, which will drive up the per-share stock price and increase earnings per share without increasing earnings. Where is Apple getting the money to do this? If you answer “tax cut,” you are correct. The writer of the article notes that, “Lawmakers have been hoping Apple and other companies would use the overseas cash to create more jobs in the U.S. and spend more on other projects that will help accelerate economic growth.” That makes me laugh. Lawmakers are hoping? Perhaps lawmakers should have been studying, reading, learning, analyzing, and thinking. Perhaps lawmakers should have been writing. What should they be reading? This, from How To Use Tax Breaks to Properly Stimulate an Economy:

The worst way to use the tax law to encourage behavior is to hand out tax breaks without requiring anything in return other than promises. Promises too often are made to be broken. This is why the legislation enacted in December is proving to be a long-term failure. It came with promises of increased pay and increased production, but it did nothing to require those things. So a few bonus crumbs of several hundred dollars were handed to a small fraction of the work force, an even smaller group picked up a $1,000 bonus, and tens of thousands of individuals lost their jobs.

A good example of why strings-free tax cuts is a bad approach to stimulating the economy is provided by another in the ever-growing list of large corporations that, having been the beneficiaries of huge tax reductions, do the opposite of stimulating the economy. As reported in many stories, including this one, Pfizer has announced that it is terminating its research into cures or treatments for Alzheimer’s and Parkinson’s disease. It also is terminating the jobs of 300 workers. Surely if someone said, “Gee, we expected you would use that huge tax cut, amounting to at least $5,000,000,000, to increase research and hire people,” the response would be either, “We promised no such thing,” or “What we’re doing is better for everyone than expanding research and hiring people,” the translation being, “What we’re doing is better for our highly compensated executives and our shareholders.” The key to that translation is Pfizer’s planned $10 billion share buyback. Do the decision makers in the Congress and at these corporations not understand that the key to increased sales in the future is a consumer class with money to spend, something that doesn’t happen when inflation outpaces raises, when one-time bonus payments fail to reappear, when workers are laid off, and when income and wealth inequality grow rather than diminish?

Of course, this is not earth-shaking news. In 2004, a similar tax break, permitting companies to repatriate foreign earnings without the otherwise applicable tax consequences generated layoffs, share buybacks, and increases in the compensation of the executives. The beneficiaries of this tax break had promised to hire more employees and increase business investment. It’s just so easy to make a promise when there are no adverse consequences to breaking it. The corporations can break their promises and their tax cuts are not rescinded. The Congress breaks its promises and Americans let it get away with its failures, time and again.

Though I dislike using the tax law to encourage behavior, Congress should at least have the good sense to tie the tax break to the promised hiring, the promised research, the promised price cuts, the promised pay raises, and everything else the tax cut advocates dished out during their slick marketing campaign. But, I suppose, after enough workers are fired, after enough people realize they are worse off than they were two years ago, let alone ten years ago, perhaps Americans will shut the door on these tax cut sales pitches and demand accountability, including accountability in the form of tax cuts tied to performance rather than to promises.

They also could learn from the plan I have proposed multiple times, as described most recently in How To Use the Tax Law to Create Jobs and Raise Wages:

Though I detest using the tax law to encourage or discourage behavior, it isn’t enough simply to criticize. So, although I would prefer other avenues, if I were to craft tax law provisions to create jobs and raise wages, I would do something very different. Whether anything needs to be done is problematic, because we’re being told that the labor market is tight, unemployment is down, and wages in a handful of economic sectors are rising because of shortages of skilled workers. Of course, we also are being told that skilled people in their fifties and sixties are finding it difficult to find jobs.

The best way to encourage employers to hire workers is, of course, to put money into the hands of consumers, because the American economy, when at its best, is demand-driven. Supply-side economics is nonsense, and most people are coming to understand that. Many advocates of demand-side economic theory also support tax rate reductions, but aimed at the 99 percent rather than the top one percent. There are flaws, though, in tax rate reductions, because there is no guarantee that the tax cuts will find their way into the economic sectors most in need of revitalization, and because getting money into the hands of those with no tax liabilities requires something more than rate reductions, namely, refundable credits. Refundable credits are problematic.

A somewhat middle position is to provide employers with an additional deduction based on wage and job growth. For example, employers could be allowed to deduct not only compensation paid, but, in addition, a percentage, perhaps 25 or 30 percent, of the excess of the compensation paid during the taxable year and the compensation paid during the previous taxable year, perhaps leaving out of the computation increases in compensation paid to individuals earning more than a specific amount, such as $150,000, $200,000 or some similar figure in that range. This incentive would, or at least should, encourage employers to raise the pay of their low compensation employees rather than CEOs and other highly compensated employees. As for employers that would have no use for these deductions, encouraging failing businesses or successful businesses that use tax shelters to mask taxable income, they ought not be encouraged to continue on those paths. In this way, tax breaks would be tied to performance. People who don’t create jobs ought not get to share in tax breaks held out as job-creation inducements.

The danger in advocating a “somewhat middle position” is that it invites criticism and attacks from all sides. In the current political climate, where compromise is disdained, cooperation avoided, and extremism rampant, the best that can be said about advocating a middle position is that it provides a framework on which to rebuild the nation when, or if, its citizens realize that political climate change is necessary.

If members of Congress gave closer attention to recent economic news and commentary, and applied critical thinking and careful analysis, they might realize how close the economy has crept to the edge of the cliff. It is best to avoid keeping one’s visual focus on the blue sky when a cliff looms underfoot.

State Income Tax Deductions for the Marijuana Industry: Do They Exist and Do They Violate Federal Law?

Last week I attended a continuing legal education program at the law school which focused on the ethical and practical problems faced by attorneys whose clients are engaged in growing or selling medical or legally approved recreational marijuana or who do business with anyone so engaged. Among the issues addressed were several dealing with the section 280E Internal Revenue Code restriction on the deduction of business expenses by those engaged in growing or selling marijuana. Those activities technically remain illegal under federal law.

The program touched on some of the tax issues I have addressed from time to time, but not all of them. See, for example, No Deductions for Medical Marijuana Distribution Expenses, A Not So Dopey Tax Question, Why Not Read the Entire Sales Tax Statute?, and God’s Blessing Can’t Save Prohibited Deductions. In these commentaries I have described two cases involving the application of section 280E to medical marijuana businesses and the question of whether sales of medical marijuana in New Jersey are subject to the New Jersey sales tax.

As I listened to the discussion, another issue popped into my head. It was inspired by the discussion of how state law permitting the sale of medical marijuana collides with federal law that treats the sale of marijuana as a crime. Leaving to others more expert in questions of federalism, states’ rights, comity, and politics, I wondered how many of the states permitting the sale of marijuana continue, perhaps unintentionally, to penalize growers and sellers of medical or legally approved recreational marijuana. Most states require taxpayers to compute state taxable income by starting with federal taxable income, or perhaps in a few instances federal adjusted gross income, and then adding and subtracting adjustments designed to reflect differences between how the state tax law treats a receipt or expenditure and how the federal tax law treats those items. For example, if a state’s tax law provides for a different standard deduction than does the federal tax law, an adjustment is provided to account for that difference.

So do any of the states that have legalized medical or recreational marijuana and that require computation of state taxable income by using federal taxable or adjusted gross income as a starting point provide for a subtraction to permit deduction of the expenses denied by section 280E? If not, why not? The answer to the first question is simple. Some states have, and some states have not. A bit of quick research, not designed to examine every state, indicates that an adjustment exists, for example, in Colorado, and Hawaii, but not yet, for example, in California or Massachusetts. The answer to the second question probably is a simple matter of a state legislature not being aware of the need to provide for an adjustment, or of not getting around to it because of other, perhaps unrelated, issues.

Finally, I again leave for the experts in constitutional an criminal law the question of whether state legislators and other officials, by enacting legislation that permits behavior contrary to federal law, and that provides economic support in the form of state income tax deductions, are aiding and abetting violation of federal criminal law. It will be interesting to see how these issues play out, especially as those opposed to federal interference with state law when it’s a matter of civil rights, environmental protection, abortion, or gun control suddenly becomes fans of Washington, D.C. when it comes to marijuana control. As a neutral observer with no stake in the matter, being neither an advocate or opponent of marijuana use, it will be enlightening to watch what happens when the “keep D.C. out of our state” crowd starts doing what its adherents claim to hate and start trying to prohibit state income tax deductions for the medical marijuana industry.