A Sales Tax Question: What Is “Prepared Food” And Who Should Define It?

Some states that impose sales taxes require those taxes to be collected on the sale of “prepared foods.” Effective administration of a sales tax requires a definition of “prepared food.” Many states follow the model definition offered by the Streamlined Sales Tax Governing Board, with and without variations. See, for example, the definition in the Streamlined Sales and Use Tax Agreement. Some states make tweaks to the suggested definition. Thus, for example, New Jersey provides this definition:

Sales of prepared food are subject to Sales Tax. Prepared food, which includes beverages,
means:
• Food sold in a heated state or heated by the seller; or
• Two or more food ingredients combined by the seller and sold as a single item; or
• Food sold with eating utensils provided by the seller.
Food that is only cut, repackaged, or pasteurized by the seller, as well as eggs, fish, meat, poultry, and foods that contain these raw animal foods that require cooking by the consumer are not treated as prepared food. The following are not treated as prepared food, unless the seller provides eating utensils with the items:
• Food sold by a seller that is a manufacturer;
• Food sold in an unheated state by weight or volume as a single item; and
• Bakery items sold as such, including bread, rolls, buns, bagels, donuts, cookies, muffins, etc.

West Virginia provides this definition:

Prepared food is defined in any one of the following ways:
A. Food sold in a heated state or heated by the seller.
B. Food items that are combined by the seller for sale as a single item except:
1. Food that is only cut, repackaged or pasteurized by the seller.
2. Eggs, fish, meat, poultry and foods containing these raw animal foods requiring cooking by the consumer as recommended by the Food and Drug Administration.
3. Foods sold in an unheated state by weight or volume as a single item unless sold by the seller with utensils.
4. Bakery items, including bread, rolls, buns, biscuits, bagels, croissants, pastries, donuts, Danish, cakes, tortes, pies, tarts, bars, cookies and tortillas unless sold by the seller with utensils.
5. Food sold by a seller that is primarily a manufacturer (NAICS section 311), except Bakeries (section 3118) unless sold by the seller with utensils.

Maine provides this definition:

The definition of “prepared food” contains three categories:
(1) All meals served on or off the premises of the retailer. This category includes sandwiches (whether prepared by the retailer or by someone else) and heated food. However, fully-cooked frozen sandwiches are not considered “prepared food” and are therefore subject to the general sales tax rate. See Instructional Bulletin No. 12 (“Retailers of Food Products”) for more information.
(2) All food and drink prepared by the retailer and ready for consumption without further preparation. This category includes:
a. Food products that are not individually prepackaged for resale and that are served from self-serve areas (such as salad bars and “coffee nooks”) designed to offer customers food for immediate consumption;
b. Food prepared for sale in a heated state regardless of cooling that may have occurred, such as pizza, pieces of chicken, convenience meals, or rotisserie chicken;
c. Bakery items such as cookies, donuts, bagels, etc., that are prepared by the retailer;
d. Deli and bakery platters, such as cold cuts, cheeses, appetizers, finger rolls, bakery products, crackers, and fruits or vegetables.
“Without further preparation” means that the product does not require boiling, frying, grilling, baking or cooking. “Further preparation” does not include toasting, microwaving, or otherwise heating a product for palatability (rather than for the purpose of cooking the product).
(3) All food and drink sold by a retailer at a particular retail location when the sales of food and drinks at that location that are prepared by the retailer account for more than 75% of the gross receipts reported with respect to that location by the retailer. See Paragraph C(2) below for details on how to calculate the “75% rule.”
The definition of “prepared food” excludes “bulk sales of grocery staples.” See Section 4 below. Other than deli and bakery platters, “prepared food” does not include cutting and repackaging a grocery staple. For example, a pound of ham sliced from the deli case as requested by the customer, or fruits/vegetables that are cut and repackaged in cups or bowls, are exempt “grocery staples.”

Similar definitions are provided by many other states.

It is against this background that a dispute has arisen in Connecticut over the meaning of “prepared food,” as reported in this Hartford Courant story. Essentially, legislators claim that the executive branch has included more items in the definition that the legislature intended. The statute in question imposes an additional one percent sales tax on restaurant food and “prepared meals.” The Department of Revenue Services included within the scope of the additional sales tax items such as “popsicles and other frozen treats, doughnuts and bagels, pizza slices, hot dogs, smoothies, power bars, a hot bag of popcorn, and even pre-packaged bags of lettuce and spinach,” as well as “beer, fruit juices, milkshakes, hot chocolate, wine and distilled alcohol like brandy or rum, . . . coffee and tea if purchased prepared to drink, rather than as coffee grounds or in tea bags.”

It seems to me that if the legislature wanted the additional one percent sales tax to apply to specific items but not other items, it could have, and should have, incorporated into the statute a definition of “prepared foods.” The concern isn’t so much which items are included, but the lack of guidance provided by a legislature some of whose members are complaining about failure to follow legislative intent but who could have provided specific legislative intent by drafting a precise statute. Some of the items included in the list prepared by the Department of Revenue Services would be treated as prepared foods in other states and some would not. It is the legislature that needs to make the determination. If there are items that legislators are “shocked” to see included in the list of “prepared foods” they could have avoided the situation by inserting into the statute the items that they do not consider deserving of being subjected to the additional one percent sales tax. Alternatively, they could have taken the definition used in another state and adopted it or adapted it. Legislators need to understand that imprecise and ambiguous legislation invites executive branches of government to finish the legislative tasks the legislature did not complete.

The Cost of Creating 27 Jobs? $8,000,000,000 in Tax Break Giveaways

I am not a fan of the New Jersey tax break giveaway that promised substantial numbers of jobs for unemployed residents of Camden. Readers of MauledAgain know that I reject the idea of jobs being created by giving tax breaks to wealthy individuals and corporations that do not need more employees. I have written about the flaws of this approach, particularly the New Jersey tax break giveaway, in posts such as The Tax Break Parade Continues and We’re Not Invited, and previously in When the Poor Need Help, Give Tax Dollars to the Rich, Fighting Over Pie or Baking Pie?, Why Do Those Who Dislike Government Spending Continue to Support Government Spenders?, When Those Who Hate Takers Take Tax Revenue, Where Do the Poor and Middle Class Line Up for This Tax Break Parade?, Another Flaw in the New Jersey Tax Break Giveaway, and No Tax Break Until Taxpayer Promises Are Fulfilled.

In that last post I commented on the news that the New Jersey tax break giveaway lacked oversight, and that New Jersey had “failed to hold companies accountable for the jobs and investments they promised.” The news followed an audit by the state’s comptroller, whose office was unable to verify the 3,000 jobs that the tax break recipients claimed to have created or kept.

Now comes more news, and it isn’t good for the folks who engineer tax breaks for their friends by making claims that those giveaways are for the benefit of the unemployed in Camden who seek jobs. This time, the state’s Economic Development Authority examined 25 construction projects undertaken in Camden by companies receiving the tax breaks. Aside from the fact those jobs are temporary, it is unclear whether those 1,098 jobs involved hiring 1,098 individuals or included jobs held in succession by one individual. In any event, the report refers to individuals, and reveals that of the 1,098 construction jobs, only 27, or 2 percent, went to residents of Camden. Almost one-fourth went to individuals not resident in New Jersey, and three-fourths went to individuals living beyond the boundaries of Camden County, in which Camden is located. So much for bringing jobs to Camden. It would have been cheaper for the state to have sent checks to those 27 Camden residents.

Supporters of the giveaway called the report “meaningless.” Why? They claim that jobs other than construction jobs were unreported. The report was limited to construction jobs because the only information available to the Economic Development Authority was construction payroll reports. The authority’s failure to obtain information demonstrating the promised job creation was one of the reasons for the audit of its operations, and the political turmoil that ended with the non-renewal of the tax break giveaway program, an outcome for which I advocated. Supporters also claimed there were construction projects not included in the authority’s report. Even if several hundred additional jobs were created in Camden, as the tax break supporters argue, it still would have been cheaper for the state to write a check than to shell out the $8 billion in tax breaks it handed to the politically privileged enterprises that grabbed those tax cuts.

I continue also to advocate for a different approach to the “tax cuts and promised jobs” snake oil sales pitch offered by the wealthy who are starving. The process should be reversed, and companies that want to claim a job creation tax break should be required first to produce iron-clad evidence that jobs have been created and maintained for a specified period of time. This approach would spare tax breaks from becoming victims of broken promises. Broken promises have no place in a tax system.

Who Should Be Fixing the Ignorance Problem?

Too often, I have observed the menace that ignorance presents to civilization. I have written many times about ignorance, usually focusing on tax ignorance but also expressing my concern about ignorance generally and how it is ripping apart the threads that hold civilized society together. A probably incomplete list of my commentaries about ignorance and its dangers includes Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, A Peek at the Production of Tax Ignorance, When Tax Ignorance Meets Political Ignorance, Tax Ignorance and Its Siblings, Looking Again at Tax and Political Ignorance, Tax Ignorance As Persistent as Death and Taxes, Is All Tax Ignorance Avoidable?, Tax Ignorance in the Comics, Tax Meets Constitutional Law Ignorance, Ignorance in the Face of Facts, Ignorance of Any Kind, Aside from Tax, Reaching New Lows With Tax Ignorance, Rampant Ignorance About Taxes, and Everything Else, Becoming An Even Bigger Threat, The Dangers of Ignorance, Present and Eternal, Defeating Ignorance, and Not Just in the Tax World, Tax Ignorance or Tax Deception?, and The Institutionalization of Ignorance.

Now comes a survey from the American Council of Trustees and Alumni (ACTA) that explored the state of “civics education at the postsecondary level.” The results are frightening:

26% of respondents believe Brett Kavanaugh is the chief justice of the U.S. Supreme Court, and 14% of respondents selected Antonin Scalia, who died in 2016. 15% of the college graduates surveyed selected Brett Kavanaugh. Fewer than half correctly identified John Roberts.

18% of respondents identified Congresswoman Alexandria Ocasio-Cortez (D-NY), a freshman member of the current Congress, as the author of The New Deal, a suite of public programs enacted by President Franklin D. Roosevelt in the 1930s. 12% of the college graduates surveyed selected Alexandria Ocasio-Cortez.

63% did not know the term lengths of U.S. Senators and Representatives. Fewer than half of the college graduates surveyed knew the correct answer.

12% of respondents understand the relationship between the Emancipation Proclamation and the 13th Amendment, and correctly answered that the 13th Amendment freed all the slaves in the United States. 19% of the college graduates surveyed selected the correct answer.

It’s one thing to be ignorant of the nuances of quantum physics, or the computation of stress loads on bridges, but it’s a totally different matter when people are ignorant of the core principles that hold together civilized society.

In its description of the survey, ACTA says this about the civic knowledge crisis:

Colleges and universities contribute significantly to the problem by chipping away at their core requirements in essential areas of knowledge: students graduate unprepared for informed citizenship and the workforce. U.S. history is often first on the chopping block: Only 18% of colleges require students to take foundational courses in U.S. government or history.

Its president explained:

Colleges have the responsibility to prepare students for a lifetime of informed citizenship. Our annual What Will They Learn? report illustrates the steady deterioration of the core curriculum. When American history and government courses are removed, you begin to see disheartening survey responses like these, and America’s experiment in self-government begins to slip from our grasp/

Though there certainly is a role for institutions of higher learning to assist students in learning civics, too often colleges and universities are tasked with remedial education to offset the damage caused by the failure of K-12 educators to teach these core principles to their students. Parents also must share in responsibility for this failure, because the opportunity to explain basic principles to their children pop up daily. Of course, part of the problem is that so many of the parents are themselves ignorant about too many things.

If every high school graduate heading for college was properly educated and prepared, there would be no need for institutions of higher learning to offer courses that cover material and issues that ought to be in the K-12 curriculum. That’s not a proposal to eliminate advanced courses that offer opportunities to do deeper analyses of the core principles. For example, at the K-12 level, students need to learn that there are three branches of the federal government, that there are two chambers in Congress, that Senators are elected to a six-year term, and similar basic information. When students reach college, those who are interested can enroll in courses that explore whether there should be term limits, or what the consequences of eliminating the electoral college might be. Every remedial course that a college student needs to take makes it almost certain that the student will lose the opportunity to take a course that pushes analytical skills and knowledge to a higher level. That’s why it is essential for K-12 education systems to deal with this problem.

If I were to run for President – and fear not, I have no plans to do so – my slogan would be “Make America Well Informed Again.” That pretty much would solve many existing and future problems.

Is Tax Ignorance Eternal?

It’s been a while since I have written about the absurd claims tossed about concerning the size of the Internal Revenue Code. If I were to write every time someone published misinformation about that issue, I would be spending most of my time writing blog posts. As it is, I have dealt with these ignorant claims 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?, Reaching New Lows With Tax Ignorance, and Incorrectly Breaking Down the Internal Revenue Code.

Reader Morris recently directed my attention to an online discussion initiated by someone asking, “Is the US tax code only 2,600 pages long?” This person was reacting to a report questioning the erroneous claim that the Code contains 70,000 pages, pointing out that numerous web sites and other sources repeat this error, concluding that the Code is not 70,000 pages long, and suggesting that it is “about 2,600 pages long.” The person starting the discussion reacted to this report by asking “Is 2,600 really a more accurate number when it comes to speaking about the size of the US tax code?”

Responses ranged from sensible to frightening. One person suggested that “you have to read 70,000 pages to understand the tax code.” Perhaps that is true, perhaps it isn’t, but reading pages that are not part of the Code does not make those pages part of the Code.

After another person pointed to a web site making the 2,600 page claim, yet another person pointed out how that number was computed by quoting that site: "In the 2013 edition, the last page is numbered 4,037. Now, that’s not exactly right either, for two reasons: The book starts at page 100, and then skips 500 pages in its numbering...," and then pointed out that the author of that site subtracted another 800 pages to get to the estimate of 2600. That person then explained that the quote “claims an actual book, apparently available to tax preparers (the author seems to claim to be one).” The actual “book” would be title 26 of the United States Code, available to anyone. That title also has been published by commercial companies, and those books also are available to anyone. There is no “secret Code” floating about available only to tax preparers. To this, another respondent argued, “I wouldn't consider the tax code a book either.” Sorry, it’s a book. Yes, it also has been published in digital format, but it is a book.

One person commented that the Code contains 3,700,000 words, requiring 10,000 pages because there are 250 to 300 words per page. Another respondent disputed the words-per-page number, arguing that it should be 500, whereas someone else claimed it should be between 700 and 1500. The actual number depends on font and margin, but using the font and margin used in most publications of the Code, the number is roughly 700.

One person pointed out that word counts make more sense than page counts, and I agree. Without an agreed-upon font and margin parameter, changes in the number of words per page change the number of pages.

One person, replying to another, stated, “There are three levels that could reasonably be referred to as tax code: the U.S.C., the CFR, and official IRS guidance that does not arise to level of rule-making. Unless people use specific terms like "United States Code" and "Code of Federal Regulations", they are not being precise. Saying the tax code is only 2,600 pages, by ignoring the CFR and only considering the USC is misleading.” What nonsense. The term “Internal Revenue Code,” or “Code” when used in that context, refers to the CODE, which is title 26 of the United States Code. Regulations in the Code of Federal Regulations (CFR) are NOT part of the Internal Revenue Code and are not part of title 26, or any other title for that matter, of the United States Code. The same is true of IRS guidance.

Another commenter pointed to the Government Printing Office web site, claiming that the Code is 3,998 pages. But the books being sold to which the commenter refers contain annotations, which are not part of the Internal Revenue Code. Those annotations contain references to amendments, and show what the Code looked like before each amendment. In many instances the annotations to a Code section are multiple times the size (in words and pages) of the Code section in its current form.

Still another person suggested that the 70,000 page total reflects a total of federal and state tax codes. That’s possible, but it answers a different question.

Even though the number of pages in the Internal Revenue Code can be debated because of font and margin issues, it hasn’t yet reached 2.600. The number of words has not yet reached 3,700,000. To those who want to write about this issue, go ahead and count the words in the Internal Revenue Code. As of a particular date, there is one answer.

Unfortunately, the 70,000-page claim, the ten-million-words claim, and the conflating of statute with regulations and guidance won’t go away. The degree to which people attach themselves to these positions and refuse to let go both bewilders me and frightens me. The inability to learn and grow is dangerous.

In Incorrectly Breaking Down the Internal Revenue Code, I wrote, “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.” Someone needs to convince me that ignorance can be discredited. I now doubt that ignorance can be eliminated.

Fighting Over Tax Dependents When There Is No Evidence

The list of television court show episodes that have inspired MauledAgain commentary is getting longer. That’s not a surprise, because the list of television court show episodes is getting longer. The portion that involve tax issues is very small, but a very small percentage of a very large number is a large number. Yet, I suppose I haven’t seen every television court show that involves a tax issue, so my long list could be even longer. Those who are curious or otherwise interested can check out my previous commentaries arising from television court shows by looking at Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, and When Tax Return Preparation Just Isn’t Enough.

This time, I actually observed a first-time airing of a Judge Judy episode (episode 260 of season 23), in contrast to my usual pattern of watching reruns. I never know what will pop up when I turn on the television to a channel with a court show. This time, I was surprised, because the description of the episode did not give a hint that a tax issue was involved. That happens from time to time.

The plaintiff sued her daughter, claiming that her daughter went to the plaintiff’s storage unit while the plaintiff was in jail, and stole items. The defendant daughter claimed that she went to the storage unit at her mother’s request, found items that the plaintiff had stolen from other people, and gave the items back to those people.

The defendant counterclaimed that the plaintiff claimed the defendant’s children as dependents on the plaintiff’s income tax return. When Judge Judy asked the defendant how much she earned that year, The defendant replied that she had earned about $3,000.

The plaintiff tossed aside the defendant’s counterclaim by explaining that she got “nothing back” from the IRS. But when asked by Judge Judy to prove she did not get “anything back,” the plaintiff offered a document that turned out simply to be a letter from the IRS telling the plaintiff that it was auditing her return and not paying a refund at that time.

Judge Judy asked the defendant to prove that the plaintiff claimed the defendant’s children as dependents. The defendant replied that she had no proof. So Judge Judy dismissed the defendant’s counterclaim. She then dismissed the plaintiff’s claims because the plaintiff had no proof that she owned the items that she claimed had been taken from her storage unit.

What interested me was the plaintiff’s position that not getting a refund somehow could justify dismissal of the defendant’s counterclaim. Suppose that the defendant somehow could prove that the plaintiff did claim the defendant’s children as dependents.

First, if the impact on the plaintiff’s tax situation was relevant, and I doubt that it would be other than to show motive, the issue would not be whether she received a refund. The issue would be whether claiming the children as dependents reduced her tax liability. For example, it could reduce the amount due, which is just as much a benefit as a refund.

Second, if the defendant did prove that the plaintiff claimed the defendant’s children as dependents, and did so improperly, and caused the defendant to not claim the children as dependents, the issue would be whether and if so, how much, of an adverse impact the plaintiff’s action had on the defendant. With such a low income, the value of the dependency exemption deductions to the defendant probably would have been zero, but it is possible the defendant would have qualified for a refundable earned income credit or a more favorable filing status, or both. There were insufficient facts to make this determination, because the defendant’s lack of evidence that the plaintiff claimed the defendant’s children as dependents removed the need to discover those facts. On top of this, iIt is also possible that the defendant would have been told to file an amended return, the statute of limitations not having yet passed, claiming the children, in light of the fact that the plaintiff’s returns were being audited and any possible refund being delayed. In other words, the defendant’s counterclaim might not have been ripe for review.

Soda Taxes: So It’s Not So Much the Soda, Is It?

I have been writing about the flaws of the soda tax for more than a decade, beginning with What Sort of Tax?, and continuing with The Return of the Soda Tax Proposal, Tax As a Hate Crime?, Yes for The Proposed User Fee, No for the Proposed Tax, Philadelphia Soda Tax Proposal Shelved, But Will It Return?, Taxing Symptoms Rather Than Problems, It’s Back! The Philadelphia Soda Tax Proposal Returns, The Broccoli and Brussel Sprouts of Taxation, The Realities of the Soda Tax Policy Debate, Soda Sales Shifting?, Taxes, Consumption, Soda, and Obesity, Is the Soda Tax a Revenue Grab or a Worthwhile Health Benefit?, Philadelphia’s Latest Soda Tax Proposal: Health or Revenue?, What Gets Taxed If the Goal Is Health Improvement?, The Russian Sugar and Fat Tax Proposal: Smarter, More Sensible, or Just a Need for More Revenue, Soda Tax Debate Bubbles Up, Can Mischaracterizing an Undesired Tax Backfire?, The Soda Tax Flaw in Automotive Terms, Taxing the Container Instead of the Sugary Beverage: Looking for Revenue in All the Wrong Places, Bait-and-Switch “Sugary Beverage Tax” Tactics, How Unsweet a Tax, When Tax Is Bizarre: Milk Becomes Soda, Gambling With Tax Revenue, Updating Two Tax Cases, When Tax Revenues Are Better Than Expected But Less Than Required, The Imperfections of the Philadelphia Soda Tax, When Tax Revenues Continue to Be Less Than Required, How Much of a Victory for Philadelphia is Its Soda Tax Win in Commonwealth Court?, Is the Soda Tax and Ice Tax?, Putting Funding Burdens on Those Who Pay the Soda Tax, Imagine a Soda Tax Turned into a Health Tax, Another Weak Defense of the Soda Tax, Unintended Consequences in the Soda Tax World, Was the Philadelphia Soda Tax the Product of Revenge?, Did a Revenge Mistake Alter Tax History?, What’s More Effective? Taxing and Restricting Soda or Educating People About Healthy Lifestyles?, If Sugar Is Bad And Is Going To Be Taxed, Tax Everything That Contains Sugar, Time for a Salt Tax to Replace a Soda Tax?, and So the Soda Tax Really Was About the Revenue and Not So Much About Health. One of my criticisms is that the soda tax misses the mark if the goal of its supporters is truly to reduce sugar intake, because not only does the soda tax apply to some liquids that are not unhealthy, it also fails to reach most items that contain sugar. As I wrote in So the Soda Tax Really Was About the Revenue and Not So Much About Health:

One of my several criticisms of the soda tax is that it singles out certain liquids that contain sugar, and ignores other sugary substances. . . .

Another, related, concern that I have about the soda tax is that it is premised on the claim that it is designed to improve people’s health, yet it is not applied to any food or beverage that is unhealthy other than sugar. So is sugar the prime cause of bad health? According to a recent study, reported in this article, the answer is no. I wrote about that flaw of the soda tax in Time for a Salt Tax to Replace a Soda Tax?

Another concern, to which I’ve not given much attention, is the inequity of taxing sweetened beverages based on the number of ounces in the beverage rather than the amount of sugar. If the primary goal of the soda tax is to reduce sugar consumption, then even aside from the failure to tax solid forms of sugar, the tax should reflect the amount of sugar in the drink. Some sugary beverages contain twice or three times the sugar in a given number of ounces than do other sugary beverages.

All of these concerns, along with the silliness of taxing some items that are healthy despite having some sugar content, have contributed to my conclusion that the soda tax is designed for revenue production rather than health benefits. Taxing beverages is much easier than taxing all sugar-containing substances based on the number of grams of sugar in a particular substance. In a number of my commentaries on the soda tax I have suggested that it was designed as a revenue raiser. And now we have the proof.

According to this Philadelphia Inquirer story, “Mike Dunn, a spokesperson for Mayor Jim Kenney, said the health benefits of Philadelphia’s tax ‘have always been secondary to the primary goal’ of funding important city programs.” Wow. For quite some time, Kenney and other advocates of the soda tax have claimed that they proposed the tax in order to improve the health of people living in Philadelphia. As I, and others, have repeatedly emphasized, if reducing sugar consumption was the primary motivation for the tax, it would have been, should have been, and could have been, applied to all foodstuffs and beverages containing sugar. That approach, of course, would permit reduction of the tax to a level that would not have the adverse financial impact on businesses and consumers that the existing soda tax has caused.

And now comes news of a a study that suggests a better way to combat obesity and its attendant health problems: put a tax on “high sugar snacks” rather than simply on sugar-sweetened drinks. The study was conducted in the United Kingdom but surely the results would be the same if conducted in the United States. The researchers discovered that “high sugar snacks . . . make up more free sugar . . . intake than sugary drinks.” So I was on the right track with my suggestion that the “soda tax” should have been, and should be, a “sugar tax.” There’s a difference. As the researchers concluded, “Reducing purchases of high sugar snacks therefore has the potential to make a greater impact on population health than reducing the purchase of sugary drinks.”

The researchers determined that a tax on “high sugar snacks” would reduce a person’s weight by an average of 1.3 kilograms (almost 3 pounds) over a year. In contrast, the soda tax reduces a person’s weight by an average of just 203 grams over one year (less than half a pound). That’s a six-fold difference.

The researchers suggest that taxing “high sugar snacks” is something "worthy of further research and consideration as part of an integrated approach to tackling obesity." They point to the fact that their study lasted only one year, though they are confident that running a similar study over a longer period of time would not generate different outcomes.

What is particularly annoying about the soda tax is that its advocate fail to address the questions I, and others, have raised about its scope and effectiveness with respect to obesity. Now that a study confirms that obesity involves more than sugar-sweetened beverages, perhaps the advocates of soda taxes can refine their thinking and legislators at every level can go back to the drawing board.

Dollar Amount Marijuana Taxes Versus Percentage Marijuana Taxes

From time to time I have addressed the intersection of marijuana sales and taxation, principally the issues of how Internal Revenue Code section 280E applies to medical marijuana businesses and whether sales of medical marijuana in New Jersey are subject to the New Jersey sales tax. These posts included No Deductions for Medical Marijuana Distribution Expenses, A Not So Dopey Tax Question, Why Not Read the Entire Sales Tax Statute?, God’s Blessing Can’t Save Prohibited Deductions, and State Income Tax Deductions for the Marijuana Industry: Do They Exist and Do They Violate Federal Law?

Now another tax issue involving marijuana has popped up. According to this Philadelphia Inquirer article, marijuana growers in Alaska are caught between a per-ounce marijuana tax and declining marijuana prices. Alaska imposes a $50-per-ounce tax on marijuana. So it’s easy to understand that as the price of marijuana drops, the $50-per-ounce tax becomes an increasingly higher percentage of sale price.

Each time a legislature considers enacting, or amending, a tax, it must decide whether the tax is a percentage or a fixed dollar amount. There is a tendency to categorize fixed dollar amount taxes as user fees, but if there is no direct connection between the tax and the activity or object being taxed, it’s not a user fee. Those interested in the “user fee versus tax” discussion can look at my discussion in User Fee Accountability and my other commentaries cited therein.

When a legislature decides to measure a tax based on a fixed dollar amount rather than a percentage, it needs to consider how that tax would apply under different future economic scenarios. Assuming that the conditions existing at the time the tax is being debated will continue unchanged is a flawed approach. Good lawyers, for example, know that documents are not drafted simply for the present but also for the future, and a great example of that approach is the drafting of wills. The same approach is necessary when drafting legislation, including tax legislation.

Perhaps the per-ounce fixed dollar amount tax could have been scheduled, that is, set to be a different amount if the per-ounce price of marijuana fell into a different bracket. Or, it could have been set as a percentage, similar to how sales taxes are designed. According to the article, only a few states use a fixed dollar amount tax. The others rely on a percentage approach.

A related concern is the impact of state government actions on marijuana prices. Some in the industry argue that the price of marijuana in Alaska has declined because there is no limit on the number of grower and retailer licenses issued by the state. This concern raises a different issue, which is the intersection of tax revenue and government regulation of the activity or object being taxed. I leave that issue for another day.

Taxes and Tree Houses

More than three years ago, in Section 280A and the Tree House, I considered whether a tree house, equipped with heater, shower, and outhouse, was a dwelling unit for purposes of Internal Revenue Code section 280A. In other words, would section 280A apply if the owner used a portion as a home office or rented it out? I concluded that the answer would be “yes.”

The story about that tree house implied that the owner lived in it and was not renting it out or using a portion as a home office. Recently, reader Morris directed my attention to several stories from three and four years ago that makes the section 280A question more than a hypothetical. According to several articles, including a Patch story from Illinois, and a Chicago Tribune story, several tax issues popped up when the owner of a different tree house started to rent it out through AirBnB.

One question was whether the owner should pay property taxes on the tree house. Why would the answer be anything other than “yes”? Whether a property owner builds an addition to a home, a detached garage, or a swimming pool, property tax statutes and ordinances require that in valuing the overall property for purposes of the property tax, the value of improvements should be taken into account. The tree house, for these purposes, is no different from the cottage or addition constructed on the property.

Another question was whether the rental activity should be taxed. The town in which this tree house was built enacted an ordinance that subjects short-term rentals, such as those implemented through AirBnB, to the same tax applicable to rentals by hotels and motels. The owner’s reaction was, essentially, “not a problem provided everyone renting out properties on a short-term basis is subject to the tax.” That is understandable and sensible. A practical problem is collection of the tax, because the rent is handled by the online brokers such as AirBnB, and so the easiest collection procedure would be to have the broker add the tax to the rent paid by the tenant to the brokerage.

The town also enacted regulations limiting the size and height of new tree houses, and requiring owners to apply for a $15 permit. The regulations are designed to prevent construction of tree houses such as the one in question. It contained a bed, a kitchen, an RV-type toilet, WiFi, cable television, air conditioning, and a fireplace. Hopefully it isn’t fueled by branches cut from the tree. And where does one go during a thunderstorm? Well, those aren’t tax questions, so I’ll let others consider them.

Philadelphia’s Prohibition on Refusing Cash Payments Would Not Apply to the City of Philadelphia

Six months ago, in When Paying Taxes in Cash is Prohibited, I described legislation pending in Philadelphia that would prohibit stores from refusing to accept payments in cash. I pointed out that Philadelphia itself prohibits cash payments for certain transactions. That legislation was enacted, but does not get implemented until regulations are promulgated. According to this Philadelphia Inquirer report, the city has now released proposed regulations to interpret the legislation.

Under the proposed regulations, the city would be exempt from the prohibition against refusing cash payments, provided there is a “convenient location” that accepts cash. According to a city spokesperson,. the convenient location would be the Municipal Services Building in center city, and even so, the revenue, water, and licensing and inspections departments would refuse payments not made by check or money order. The spokesperson explained that these “government offices aren’t capable of accepting cash.” The spokesperson also explained that people without credit cards or other forms of cashless payment could purchase money orders, which would be accepted. Because money orders require payment of a fee, this avenue of payment imposes an additional burden on people who cannot make cashless payments.

What is bizarre is that the arguments in favor of prohibiting stores from refusing cash payments are just as strong for city offices. Concerns about people who do not have credit cards and bank accounts, usually people who are living in poverty, apply no less to people making payments to city offices than to the same people making payments to stores. Of course, objections have been raised by consumer advocacy groups, organizations helping those in poverty, and others. In Philadelphia, almost one-fourth of the population is “underbanked,” and almost 6 percent are “unbanked.” Interestingly, the primary sponsor of the legislation takes the position that the city should not be exempt.

Making it worse is the fact that some state government offices are refusing to accept cash. Of course, the city’s prohibition on refusing to accept cash cannot be enforced against the state government.

The law was supposed to take effect July 1 after Mayor Jim Kenney signed the ordinance in February, but the city delayed implementation until October as the commission hadn’t finished drafting the regulations.

The proposed regulations not only exempt the city from the prohibition on refusing to accept cash, it also exempts “Uber, vending machines, massage chairs, . . . purchases made by phone, mail, or online, parking lots and garages, wholesale clubs, rental companies, and goods sold directly to employees.” It also exempts “retailers that exclusively accept mobile payments through membership programs are also exempt,” a provision designed for Amazon even though Amazon doesn’t think the language is sufficient to give it an exemption.

Another provision permits merchants to install machines that convert cash into prepayment cards, but prohibits them from charging a fee for the service. It is unlikely very many stores will invest in those machines because they cannot pay for themselves.

To paraphrase what I wrote six months ago, refusing to take cash payments for taxes, other amounts owed to governments, and even for retail purchases is inconsistent with prohibiting some businesses from refusing to take cash payments. I wrote, “a well-written statute would clear up this issue, though it would need to be a coherent statute that treated people without credit cards, debit cards, and iPhone apps in the same way no matter what it is they are trying to pay.” Neither the Philadelphia statute or its proposed regulations qualify as coherent.

Taxing Robots?

Reader Morris alerted me to this New York Post article. The first thing I noticed was the headline: “Brave New World: Uncle Sam is taxing robots as companies invest in advanced tech.” As far as I know, the IRS is not, as of this moment, requiring robots to file tax returns. In fact, the article begins with these two inconsistent statements: “It’s a brave new world for the IRS: taxing robots. Uncle Sam is padding the Treasury with millions of dollars to assess bots at the same time that corporations invest more in advanced technology and labor-saving machinery, according to experts.” So which is it? Is the IRS taxing robots? Or is the IRS, and Treasury, spending money to “assess,” that is, to study, the question of whether, and if so, how, robots should be taxed? The answer, of course, is the latter.

The article quotes economist and author Mark Thornton, who explains, “Yes, governments already tax robots because they tax virtually everything that goes into developing and making robots. In a few cases, there are subsidies such as government grants for robot development. But that still means they are taxing you and me to provide the subsidies.” Parsing that explanation, perhaps what Thornton means to say is that there are state and local sales taxes that apply to at least some sales of robots or their components. That, of course, is true of any product not exempt from sales taxes, including assembly lines and their components, forklifts, cranes, whatever. There are subsidies, but I’d not use the word “few” to describe them. Robots, like other property, generate a variety of federal and state depreciation and expensing deductions, and qualify for a variety of credits.

The article then addresses Bill Gates’ proposal of two years ago to tax robots that replace workers by imposing an income tax on the salary that the displaced worker would have earned. Aside from the question of who is liable to file that return, a question that might go away if something like Turbotax and an internet connection is programmed into robots, the more challenging question is determining what the displaced worker would have been paid. Who’s to say whether the worker would have received a bonus or raise? Who’s to say that the worker would have retired early and been replaced by a worker not earning as much salary? And what is a robot? Is a piece of equipment that permits an employer to reduce the workforce necessarily a robot? Is time-keeping software that eliminates the need to hire a replacement for someone retiring from the HR department a robot?

This isn’t the first time I’ve commented on robots and taxation. More than three years ago, in Taxation of Androids and Robots, and Similar Pressing Issues, I described a discussion of the issue at a science fiction conference, but left it at that, because the focus was on the sort of robot that isn’t the sort raising the questions in the New York Post article. The New York Post article focuses on a different aspect of the question.

The problem with taxing robots on the basis of taxing the income that would have been earned by a person is that it opens the door to taxing people who do work for themselves instead of hiring someone. Should a person who retires and finds herself with time to tend to the lawn and garden be taxed on the income that would have been earned by the landscaper who she no longer retains? Should a person who enjoys do-it-yourself home improvement and who paints the living room be taxed on the income that would have been earned by the painter not hired by the homeowner? Should people who cook their own meals and eat at home be taxed on the income that would have been earned by a restaurant or take-out establishment?

The rise of robots poses all sorts of challenging questions, deep concerns, and troubling issues. Rarely, if ever, is the answer some sort of taxation. The biggest concern about the rise of robots is the loss of jobs. The answer, of course, is education. Teach and train people how to do the jobs that robots cannot do and probably will not ever be able to do, at least in the next several decades. Robots, like artificial “intelligence” programs, lack judgment. They lack wisdom. They lack empathy. They lack soul. Yes, adjustments in the economic, social, and legal fabric of civilization are, and will continue to be, needed, but taxation doesn’t provide what robots lack.

Are These Financial Literacy Survey Results Reasons to Rejoice or Worry?

Readers of MauledAgain know that I abhor ignorance. Unlike some diseases, we know the cure for ignorance. Sometimes, though, patients refuse to take the medicine. Though I usually focus on tax ignorance, I have also focused on other types of ignorance, such as financial and literary ignorance. When I used google search to find my blog posts that mention ignorance, the resulting list numbered in triple digits. Just some of my commentaries on this national affliction include Tax Ignorance, Is Tax Ignorance Contagious?, Fighting Tax Ignorance, Why the Nation Needs Tax Education, Tax Ignorance: Legislators and Lobbyists, Tax Education is Not Just For Tax Professionals, The Consequences of Tax Education Deficiency, The Value of Tax Education, More Tax Ignorance, With a Gift, Tax Ignorance of the Historical Kind, A Peek at the Production of Tax Ignorance, When Tax Ignorance Meets Political Ignorance, Tax Ignorance and Its Siblings, Looking Again at Tax and Political Ignorance, Tax Ignorance As Persistent as Death and Taxes, Is All Tax Ignorance Avoidable?, Tax Ignorance in the Comics, Tax Meets Constitutional Law Ignorance, Ignorance in the Face of Facts, Ignorance of Any Kind, Aside from Tax, Reaching New Lows With Tax Ignorance, Rampant Ignorance About Taxes, and Everything Else, Becoming An Even Bigger Threat, The Dangers of Ignorance, Present and Eternal, Defeating Ignorance, and Not Just in the Tax World, Tax Ignorance or Tax Deception?, and The Institutionalization of Ignorance.

The scope of ignorance varies by issue. Whether a certain amount of ignorance is a problem depends on the matter under consideration. For example, very few Americans could name the signers of the Declaration of Independence without looking up the answer, but I doubt ignorance on this point threatens civilization. There surely is a long list of topics that fit this description. On the other hand, every American over the age of, say, fourteen should be able to name the three branches of the Federal government, and yet an Annenberg Constitution Day Civics Survey revealed that only 26 percent could name all three branches, and 33 percent could not name any of them. That is appalling, and presents an invitation to those who want to undermine democracy.

One area in which ignorance is dangerous both at a national and individual level is financial ignorance. Financial ignorance is fertile ground for spammers and scammers and other malevolent actors. I have written about this problem in posts such as Is Basic Math Enough? and Making Headway on Financial Literacy Education?

So when I saw the results of a WalletHub survey on college students and credit cards (scroll down the page to find the survey), I had to consider the results in the context of the importance of the issue. Were these issues in the world of naming all the signers of the Declaration of Independence or in the world of naming all three branches of the Federal government?

The survey revealed that 10 percent of college students think “credit cards are free money.” Should we rejoice that 90 percent know this is not the case? Or be worried that 10 percent lack understanding about credit cards even though they are enrolled in college? To me, this is an essential issue, and even if only one percent or one-tenth of one percent of college students perceived credit cards as free money, there is a problem.

Here’s another troubling revelation. When asked if they would rather miss a credit card payment or a party, 14 percent of the respondents would choose missing a credit card payment. Yes, we can be happy that 86 percent are demonstrating some sort of maturity mixed with responsibility, but one in seven lack the sort of approach to life that hopefully is developed by the time someone graduates from high school. Granted, this isn’t as much as issue of financial literacy as it is one of financial and social maturity, but literacy and maturity do tie together in many instances.

The survey also asked college students to evaluate their financial knowledge. Of those questioned, 30 percent gave themselves a grade of C or worse. It isn’t clear whether they were asked what they were planning to do to ameliorate the situation. Nor was there any benchmarks to determine whether the respondents, whether giving themselves low or high grades, were properly evaluating their financial knowledge. But the results of a 2018 Brookings survey, one of the few of its kind, suggests that financial illiteracy among college undergraduates is appalling. According to that survey, 72 percent should be giving themselves very low grades, and counting themselves lucky to earn something as high as a C.

Financial literacy is essential. Financial ignorance is dangerous. The time to make certain today’s youngsters don’t become tomorrow’s victims of scammers and businesses with shady practices is when they are in middle and high school. Accomplishing this goal requires education both in the school and at home and by teachers and parents.

The Menace of Impetuous or Maniplative Tax Policy Announcements

Recently, the President expressed support for two major tax cuts. His statements generated quite a bit of reaction not only throughout the tax world but also in the political, economic, and social worlds.

First, the President suggested he would make a unilateral decision to index capital gains, as reported by many sources, including this Bloomberg report. Readers of MauledAgain know that I am opposed to indexing capital gains unless there is a concomitant repeal of the special low tax rates for capital gains, as I described in When Lower Tax Rates Aren’t Enough.

Second, again as described by many sources, including this The Hill story, the President announced that he was considering imposing a temporary reduction in payroll taxes. It was unclear whether he thought he could make this change acting unilaterally.

Then, within a day, the President reversed course. As reported in various sources, including this Politco story, he announced he was not “looking at a tax cut now.” He said this even though a day earlier he had said, “We’re looking at various tax reductions. But I’m looking at that all the time anyway.”

There is a big difference between studying the possibilities of a change in tax law and the consequences it would generate for consumers, investors, and businesses, and announcing that unilateral actions are imminent. Impetuous off-the-cuff comments, soon followed by 180 degree reversals, something that has happened far too many times during the past 31 months, are troubling, dangerous, and unwise. Imagine the position of a person holding a capital asset, not necessarily or only hedge fund or private equity investors, but someone selling a house generating gain exceeding the exclusion limitation, or selling a small portfolio. Imagine what they were thinking several days ago. “Should I sell now, or wait until the amount of the gain, and thus the tax, is reduced though indexing of basis?” To what extent should impetuous comments, which might suddenly be reversed, be given serious consideration? Impetuous comments reflect the foolishness of not researching facts and thinking things through to a conclusion before turning a nation upside down with uncertainty.

Perhaps they are not impetuous comments. Perhaps they are carefully constructed bits of political manipulation, as described by this Vox article, which describes not only the multiple reversals with respect to the supposed payroll cut idea but also a tantalizing promise of a ten percent tax cut last year as the mid-term elections loomed. If this is the case, it’s even worse.

More than seven years ago, in The Disadvantages of Tax Incentives, I wrote, “The well-being of the national economy demands stability, continuity, predictability, and reliability in the tax system. By putting personal electoral goals ahead of the nation’s well-being, Congress is selling the nation short and ultimately risks selling it out.” Rather than taking my advice, Congress continued on a path that in some ways encourages the same sort of behavior by the Executive Branch. Again, I warn, “By putting personal electoral goals ahead of the nation’s well-being, the Administration is selling the nation short and ultimately risks selling it out.”

What Is a Tax Loophole?

The other day, I noticed a question on Quora that, unlike almost all of the questions I’ve read, focused on tax. The person posing the question asked, “Is it illegal to exploit legal loopholes in the U.S. tax system to avoid paying taxes? What are some examples?” I’ll get to the answer later.

To answer the question, it is necessary to know what a loophole is. Beverly Bird, at the balance, makes an important point. She writes, “Ask five people what a tax loophole is and you’ll probably get five different answers.” To prove her point, consider the definitions that are provided by various sources.

Beverly Bird provides this explanation: “Is it a tax break? Well…sort of, but not necessarily in an obvious way. Does a loophole save taxpayers money? Almost always when they can use them and if they qualify. . . Technically, a tax loophole is a provision that drains money from the government.” I disagree. A tax break is not necessarily a loophole, and most tax breaks are not loopholes. Tax breaks reduce tax revenue, even if they are not loopholes.

Over at smartasset, the same definition pops up: “The basic definition of a tax loophole is a provision in the tax code that allows taxpayers to reduce their tax liability.” The writer adds, “Lots of benign deductions and credits do just that,” and suggests there are “bad loophole[s]” and “good loophole[s].” Again, I disagree, for the same reason.

The folks at Dictionary.com provide a similar definition but then add an important proviso: “A provision in the laws governing taxation that allows people to reduce their taxes. The term has the connotation of an unintentional omission or obscurity in the law that allows the reduction of tax liability to a point below that intended by the framers of the law.” I agree with the sense of this articulation, but the focus isn’t the impact on tax liability in and of itself.

At InvestingAnswers, a different definition is provided: “A loophole is an exception that allows a system to be circumvented or avoided. It usually refers to legal, taxation, or security strategies that are exploited for personal gain.” An example is provided which I think misses the point: “Loopholes are failures of a system to account for all conditions, variables, or exceptions. To illustrate a legal loophole, consider a local development law that requires even an unoccupied building to pay real estate taxes so long as it receives a certificate of completion. In order to avoid paying taxes, a builder may exploit this loophole and choose not to "complete" the building.” Usually, the imposition of real estate tax liability based on a certificate of completion reflects the fact that a certificate of completion opens the door, literally and figuratively, for people or businesses to occupy the building, thus adding to the public burdens, such as sewage treatment, that require public expenditures the real estate tax is designed to fund. By failing to obtain a certificate of completion, the builder shuts to door on occupancy, and thus postpones the need for the government in question to incur costs. Put another way, the provision is intended to apply as it is written, that is, the certificate of completion is the benchmark for application of the tax. Note that as a practical matter, the property is still subject to the tax to the extent of the value of the land.

Those responsible for the definition at USLegal get it right: “A tax loophole is an exploitation of a tax law which can reduce or eliminate the tax liabilities of the filer. It’s a technicality that makes it possible for the filer to circumvent a law's intent without violating its letter.”

So however one defines tax loophole, agreement exists that tax loopholes exist. Thus, I was surprised to read this response given to the question asked on Quora:

According to the IRS, there is no such thing as a loophole. I learned that from an IRS Agent who was on a talk show years ago. Laws are made to address certain items and not others. That is the law.

The IRS knows what is and what is not legal. Taking a personal exemption is not a loophole. Taking a business deduction is not a loophole.

Some deductions are made available to get investments from individuals to go into certain areas where the U.S. Government wants more investment funds. Those are not loopholes.

There are several problems with this response. First, something said by an IRS agent on a talk show is not necessarily, and almost certainly is not, official IRS position, even aside from the possibility that what the IRS agent said or intended to say wasn’t what the listener heard or understood. If the IRS does not think loopholes exist, then how does one explain its use of the word in this IRS News Release? Second, to state that laws are “made to address certain items and not others” begs the question, as is indicated by the following tautological statement, “That is the law.” Third, the IRS knows nothing. It is an organization without a brain. True, I’m being picky with articulation. What probably was intended was “The people at the IRS know what is and what is not legal.” And my reaction is to laugh, because I, and many others, can provide examples of instances when a particular IRS employee, or several or more, were flat out wrong on a matter of tax law. Fourth, to claim that taking a personal exemption of business deduction is not a loophole is to avoid the issue. The issues isn’t whether a business deduction is a loophole. The issue is whether a business deduction intended or designed to encourage particular behavior becomes a loophole in the hands of someone who finds a way to use the flawed language of the deduction statute or regulation to bring within the deduction behavior that is beyond the scope of what is intended. Personal exemptions and business deductions are tax breaks. That alone is insufficient to make them tax loopholes.

Loopholes exist. They are, simply, unintended tax breaks. They are the result of rushed or careless legislative drafting, fertilized by the inability of legislatures to know, understand, and predict every possible looming attempt to twist the tax break into something more than what was intended. And to answer the original question, “Is it illegal to exploit legal loopholes in the U.S. tax system to avoid paying taxes?” the answer is no. If a legislature doesn’t want people to benefit from a particular tax break, it needs to improve the initial drafting and to respond quickly and effectively when a loophole pops up. Note that the question contains its own answer. Is it illegal to do something that is legal? Of course not.

New Jersey Rental Fees and Taxes: When Exemptions and Exceptions to Exemptions Make the Law Complicated

Three months ago, in Making Sense of the New Jersey Rental Fees and Taxes, I described a tax issue afflicting owners of properties along the New Jersey shore. I described the problem as follows:

New Jersey imposes its sales tax and an occupancy fee on short-term rentals. Well, on some short-term rentals. If the rental is arranged through a licensed real estate broker, are exempt. Owners who rent their properties through home-sharing markets, such as Airbnb and Vrbo, are not exempt. Nor are owners who rent directly to their tenants. The issue is particularly contentious for owners of properties along the New Jersey shore, where short-term rentals are ubiquitous. Now, according to this story, the New Jersey legislature is considering a bill that exempts owners who deal directly with a tenant.

A little more than a week ago, as described in this Philadelphia Inquirer article, New Jersey changed the law.

Under the revised New Jersey law, exemptions to the tax on short-term rentals have been expanded. In addition to the rentals arranged through licensed real estate brokers, rentals that are arranged directly between the owner and the tenant are exempt. The exemption applies to rentals advertised through “newspaper ads, signs, and word of mouth,” and even if the property is advertised for rent on a website, provided payment is not processed by the website. But the exemption does not apply to property owners who own and rent three or more separate units in one year, no matter how they are booked.

The changes mean that rentals arranged and processed through websites such as Airbnb, Vrbo, and booking.com remain subject to the tax. So, too, are rentals arranged through travel agencies. Also taxed are those rentals that are part of a “three or more units rented” exception to the exemption.

The author of the the recent Philadelphia Inquirer article suggests that property owners might advertise on websites such as Airbnb and then arrange for processing of the rent independently. The New Jersey Division of Taxation has yet to issue regulations providing more specific definitions of what constitutes “arranged directly,” and I would not be surprised to see that term defined in such a way to close the suggested work-around.

One of the interesting aspects of this tax is the opportunity it presents to help people understand why tax laws are so complicated. The theory behind the tax is simple. It was designed to eliminate any tax-driven disparity between commercial landlords, such as hotels and motels, and independent property rentals. But the backlash compelled the legislature to carve out exceptions, and then to provide at least one exception to those exceptions. And thus the practical reality, as almost always is the case, clobbered the theory. That is a pattern familiar to any student or practitioner who studies tax statutes, or, for that matter, any statute.

Of course, as I pointed out in Making Sense of the New Jersey Rental Fees and Taxes, the tax is “aimed at home-sharing marketplace Airbnb.” I reacted to that proposition as follows:

It seems to me that a tax imposed on a particular individual or company, whether by name or narrow definition, is wrong. In a sense, it can be characterized as confiscatory. Whether such a tax gets enacted against one company and not another would seem to depend on how much money each company spends fighting the tax or contributing to the campaign coffers of legislators.

Justifying the tax on other grounds is possible, but doing so makes it difficult to justify exemptions, as I also explained in Making Sense of the New Jersey Rental Fees and Taxes:

Though I think user fees are an appropriate way to raise revenue, I also think they need to be applied to a specific concern. So the analysis would begin with this question: Why impose a tax on short-term rentals? The answer, I am guessing, is that short-term rentals can bring into the community people who have no sense of belonging, do not have as much civic pride in the area as do permanent residents, and are more likely to cause damage, require public safety services, and otherwise burden the community. That’s not to say all or even most short-term tenants lack civic pride, as many return summer after summer to the same property.

So if these taxes and fees on short-term rentals are being justified on account of extra costs incurred by the community because of short-term tenancies, then those taxes and fees should be imposed on all short-term rentals. To impose them on some, but to exempt others, is discriminatory. What is the justification for exempting certain types of short-term rentals? There is no connection between the channel through which the rental is arranged and the burdens that the tenants impose on the community that require funding in order to ameliorate.

The inconsistency between exempting some rental marketplaces, such as newspapers, but not others, such as websites that advertise the rental and process the payment, is difficult to justify if the tax is designed to fund the costs created by short-term rentals. This too, I explained in Making Sense of the New Jersey Rental Fees and Taxes:

Airbnb, which understandably opposes the exemptions, notes that rentals arranged through newspaper classifieds and magazine advertisements should not fall within an exemption because newspapers and magazines provide rental marketplaces. Airbnb suggests that piling exemption on exemption confuses would-be renters and makes the rental price change depending on the channel used to enter a lease. Airbnb has a point. When an exemption is created, it opens up the door to additional issues that involve defining who and what fit within the exemption, and who and what does not. Exemptions create complexity. Sometimes exemptions make sense and can be justified. In other instances they do not, and in those cases the complexity is a price not worth paying. Add to that the fact that when exemptions are reduced or eliminated, the overall rate of taxation can be decreased.

It remains to be seen if Airbnb and similar businesses challenge the exemptions, or try to restructure their operations to fall within an exemption.

Courtroom Standing Ovation: “I Promised to Pay When I Got My Tax Refund, and I Did”

It is not uncommon for people who borrow money or who otherwise owe money to promise that they will make the required payment when they receive an expected tax refund. It also is not uncommon for most people who make that promise to fail to keep it, sometimes because there is no tax refund and usually because they had no intention to make the payment, or changed their minds. I discussed one example of this behavior in “I’ll Pay You (Back) When I Get My Tax Refund.”

So what a surprise it is when someone makes that promise and keeps it. Reader Morris directed my attention to a recent Judge Mathis case, in which both the plaintiff and defendant agreed not only that the plaintiff had promised to pay the defendant $3,500 when she received her tax refund, but that she had, in fact, made that payment to the defendant when she received her tax refund. Judge Mathis was shocked. The linked video, showing roughly two minutes of the case, is well worth watching. Imagine a judge giving one of the parties a standing ovation and inviting everyone in the courtroom to do the same.

Indeed, it was a surprise. As Judge Mathis noted, at least once a week he handles a case in which one party promises to make a payment when a tax refund is received, and that until hearing this case, those promises were “lies.” Of course, it is a sad reflection on present-day values when the keeping of a promise is so rare that it warrants a standing ovation.

As I pointed out in “I’ll Pay You (Back) When I Get My Tax Refund.”, there are ways to avoid being on the wrong end of a broken promise to make payments from a tax refund. I explained:

[T]he question from the problem prevention angle is how to deal with people who promise to make payments from anticipated tax refunds. As several television court show judges have mentioned, it’s rather common for people to ask for money or purchase something from a private individual and to promise payment or repayment from an anticipated tax refund. What should the seller or lender do?

In a commercial setting, when a person wants to borrow money or to make a purchase on credit, the lender or seller undertakes due diligence. The scope of the due diligence depends on the amount of money, but usually includes, among other things, a credit check, income verification, asset confirmation, and background checks. When someone in a private transaction encounters the promise of payment or repayment from an anticipated tax refund, what should the person do? I suggest that the person ask for a copy of the return showing the anticipated refund, proof that the return has been filed, proof, if any, that an electronically filed return has been accepted by the relevant tax agency, and a signed promissory note for the amount in question, with the amount, due date, interest rate, and other terms clearly specified.

I know, I know, people will react by exclaiming, “You sound like a lawyer,” or “You’re being such a nitpicker.” Indeed. In the long run, a few minutes or even an hour, and perhaps a few dollars, are an investment well worth making when the alternative is frustration, desperation, litigation, and friendship termination.

As much fun as a standing ovation from a judge and everyone in a courtroom might be, it is far better to arrange a transaction so that a courtroom appearance isn’t necessary.

Makers, Takers, Givers, Moochers, Taxes, Social Welfare Payments, and Measurement

Reader Morris reacted to Monday’s post, The Definition of A Taxpayer, by asking

If there is a word for someone who pays more in taxes than is received in kind, it isn’t “taxpayer.”

Could the word for someone who pays more in taxes than is received in kind be called a giver.

Could the word for someone who pays less in taxes than is received is kind be called a taker or words with a negative connotation such as parasite, moocher,etc.

I responded by explaining that “giver” and “moocher” might work as appropriate words only if giving and taking is measured by tax payments and social welfare payments.

Four years ago, in When Those Who Hate Takers Take Tax Revenue, I explained:

One of the arguments put forth by the anti-government-spending folks is that it is bad morally, socially, and politically to collect taxes from one group and to disburse the receipts to another group. These folks like to brand the first group as “makers” and the second group as “takers.” Yet when the takers are their friends and allies in the movement to feudalize America, not a peep is heard from them.

A year earlier, in More Tax Colors, I had written:

Those who are anti-tax seem quite happy to be among the takers even though their mantra in being anti-tax rests principally on a distaste for takers among whom, of course, they don’t count themselves.

The problem with measuring “makers” and “takers” (or “givers” and “moochers”) solely by the amount of taxes paid and social benefit payments received, aside from questions about how to identify and measure those amounts, is that making and taking involves much more than those amounts.

In the tax environment, ought not the fuel taxes that the anti-tax crowd wants to credit as having been “given” or “made” by the person paying it be adjusted by the amount of damage to the transportation infrastructure caused by the vehicle driven by that person? There is no doubt that fuel taxes are insufficient to pay for the cost of building and maintaining transportation infrastructure. Should people using the interstate highway system, funded with the taxes paid by their parents and grandparents, be treated as takers? Ought the same people not be treated as “makers” if they fund additions to that system? Under current circumstances, it is clear that there is more taking happening now than making when it comes to the interstate highway system. On the flip side, ought not the first responder who saves a life be treated as a maker or giver to the extent the value of that heroic deed exceeds the pay the first responder receives for that hour or two in which the first responder acted bravely? Ought not the resident of an inner city neighborhood who volunteers weekly to clean up the nearby park be treated as a maker to the extent of the value of the services provided by that person?

Moving beyond taxation and social welfare payments, ought not amounts taken by theft, fraud, embezzlement, and similar crimes be counted as having been taken by the perpetrators? Ought not the reduction of clean air caused by those who smoke or vape be stated in dollar amounts and treated as having been taken? Ought not the cost imposed on the nation to clean up water and air pollution be treated as having been taken by those who caused the pollution? Should those flying on airplanes be treated as takers to the extent the economic cost of the pollution caused by the airplane exceeds whatever portion, if any, of the ticket cost is used to limit that pollution? Though there are challenges in computing a dollar equivalent, ought those who prey on children be treated as being takers to that extent?

It’s so easy to see the speck in another person’s eye, and yet so difficult to see the log in one’s own. As I have repeatedly pointed out, the advocates of the “maker versus taker” argument used to defend reduction and elimination of taxes and government restrict their definitions in ways that cause them to appear to be net makers, even though in truth many, or even more, of them are net takers. Similarly, at least some of those who the anti-tax crowd so eagerly tags as takers are, in fact, net makers.

It’s Not Just Divorces That Require Agreements With Respect to Tax Issues

It’s been a while since I’ve seen a television court show that inspired me to write a blog post. One reason is that for almost two months I did not watch any television court shows, other than several episodes, all reruns, of a British television court show. Another reason is that many of the shows were ones I had already seen. Yet another reason is that tax just didn’t show up, and if it had showed up on one of those British reruns I would have needed to do some deep research.

It’s all a matter of timing. After all, it’s not as though television court shows involving tax issues are rare. The list of television court show cases that have become the subjects of my commentaries is quite long, and include Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, and When Tax Return Preparation Just Isn’t Enough.

Late last week, tax issues surfaced in an episode of Hot Bench I had not previously seen. The episode illustrated why it’s not just when people divorce that they need professional tax advice. Even the breakup of a long-term relationship often requires some tax guidance. And the breakup of a short-term relationship can benefit from professional advice particularly if children are part of the equation.

The plaintiff had loaned almost $8,000 to his daughter and her then companion. The plaintiff borrowed the money from his line of credit. Because the plaintiff had not been fully repaid, he sued his daughter’s companion, who by this point had become his daughter’s ex-companion. The defendant had paid back $2,400, and testified he planned to repay the rest of what he considered to be his share from a tax refund he expected. However, when he filed his income tax return, he discovered that he would not be getting that tax refund because his ex-companion had claimed their children as dependents on her tax return, and this caused him to lose both the deductions for those dependency exemptions and eligibility to file as head of household.

The first issue that the judges needed to decide was whether defendant was responsible for all or half of the loan. The court, by a two-to-one decision, concluded that the defendant was responsible for only half of the loan. The reasoning of the majority was that the loan had been made to both the plaintiff’s daughter and her then companion, and there was insufficient proof that the loan had been made only to the defendant.

The second issue that the judges needed to decide was whether the defendant should be given credit for the amount of the tax refund he was planning to use to repay his share of the loan, but that he did not receive because his ex-companion, by claiming the children as dependents, prevented him from getting that refund. The judges unanimously concluded that the plaintiff was not responsible for his daughter’s actions and should not have his judgment reduced because of what she did. Thus, the judges ordered the defendant to pay the plaintiff $1,500.

What the judges did not discuss was an issue that was not presented to them, because the daughter was not a party to the case. Does the defendant have a $1,500 cause of action against his ex-companion because she claimed the children on her tax return? That question cannot be answered without knowing more facts. Was there an agreement between the two of them? The defendant’s position suggests that he thought there was, but his thoughts don’t mean much without documentation. Did he satisfy the legal requirements for claiming them as dependents? Did he satisfy the legal requirements for filing as head of household if he did properly claim them? Again, without facts, the answer cannot be provided. But what can be provided is the suggestion, already made, that couples going through what the plaintiff’s daughter and her ex-companion experienced should think carefully about getting professional tax (and other) advice before parting ways.