Indeed, In Tax, as in Most Everything Else, Precision Matters

Readers of MauledAgain know that I am a fan of using correct terminology and that I dislike careless misuse of words with specific meanings. For example, in The Precision of Tax Language, I wrote, reacting to a claim that the IRS enacted tax laws:

Similar misusages of precision terminology abound in articles, discussion board postings, student exam responses, newspapers, and all other sorts of communication media. Too often, one sees sentences such as "The IRS held that . . . "

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One of the things that might contribute to the imprecise transposition of terminology that has negative effects is the message that I received years ago in an English literature class. It is a message that I think is being repeated throughout the years and throughout education systems. I was told, “Aside from common words such as articles and prepositions, don’t use the same word more than once, especially on the same page. Buy a thesaurus.” That might be good advice for a novelist or poet, but it is atrocious advice for those who write in technical areas. Lawyers, engineers, physicians, scientists, actuaries, accountants, and those in other technically-focused professions can create confusing and even dangerous if not fatal errors when they use different words to mean the same thing. * * * * *

My rejection of imprecision, by students and by others, at times has been derided as picky or worse. But I usually quiet the complaints by asking if people want neurosurgeons operating on them, their children, or their parents to be imprecise. I wonder if people want engineers building bridges to be imprecise. I ask whether the folks making pet food, medicines, and other products should be imprecise. * * * * *

So it was no surprise to me when reader Morris directed my attention to a recent article titled, “Tax Deductions: Is College Tuition Tax Deductible?”, and pointed out a serious error. In the article, Amanda Dixon correctly noted that “The deduction for tuition and fees is not available for the 2019 tax year.” She then repeated that observation, stating, “The deduction for college tuition and fees is no longer available.” She followed that sentence with this one: “However, you can still help yourself with college expenses through other deductions, such as the American Opportunity Tax Credit and the Lifetime Learning Credit.” Whoa! As reader Morris commented to me, “The AOTC and LLC are tax credits not deductions.” He gets an A. Dixon does not. Credits reduce tax liability, whereas deductions reduce taxable income.

In Credit? Deduction? Federal? State? Precision MattersI wrote:

One of the core principles that students need to learn in a basic federal income tax course is the difference between a deduction and a credit. Deductions are subtracting in computing taxable income. Credits are subtracted in computing tax. A one-dollar credit reduces tax by one dollar. A one-dollar deduction reduces taxable income by one dollar, ignoring limitations, floors, ceilings, and other complexities, and a one-dollar reduction in taxable income reduces tax by something between a penny and perhaps 40 cents. In other words, in most cases, credits are more valuable than deductions.

* * * * *

Precision matters. Lack of precision causes misunderstandings in communication, which can lead to all sorts of problems. Lack of precision causes engineering defects, which can lead to all sorts of problems. Lack of precision causes medical misdiagnoses, which can lead to all sorts of problems. In other words, to the chagrin of those who detest details and want to live in the world of sound bites and 140-character tweets, lack of precision leads to all sorts of problems.

Indeed.

Note: The Dixon article on which I commented was written before Pub. L. 116-94 extended the termination date of the deduction of tuition and fees. Pub. L. 116-94 became law in late December 2019. So the statement, "The deduction for tuition and fees is not available for the 2019 tax year" now is incorrect. The Dixon article now carries a date of 23 Jan 2020, almost two weeks *after* the preceding commentary was published. It still contains the statement, "The deduction for tuition and fees is not available for the 2019 tax year." The description of the American Opportunity Tax Credit and the Lifetime Learning Credit as "other deductions" also remains in the 23 Jan 2020 version of the article.

The “Tax or Fee” Discussion Gets a New Twist

We’re back to the “tax” versus “fee” discussion, one that has captured my attention more than a few times. I have written about these issues in Please, It’s Not a Tax, So Is It a Tax or a Fee?, Tax versus Fee: Barely a Difference?, Tax versus Fee: The Difference Can Matter, When is a “Tax” Not a Tax?, When Use of the Word “Tax” Gets Even More Confusing, Sometimes It Doesn’t Matter If It Is a Fee or a Tax, It’s Not Necessarily a “Tax” Just Because It’s an Economic Charge You Don’t Like, and Court of Appeals for the First Circuit: Tolls Are Fees, Not Taxes.

Reader Morris is keenly aware of my efforts to encourage people to use the two terms, tax and fee, correctly, so when he spotted this article he sent me a link with a question. As soon as I looked at the headline, “Myrtle Beach rejects near-deal with Horry Co. on tax fees over attorney costs,” and read the article, I understood why reader Morris had posed his inquiry to me. In addition to “tax fee” in the headline, the term appeared in the article three times, along with two uses of “hospitality tax.”

Reader Morris had asked, “Is 'tax fees' a proper description in this article?” My answer is, “No.”

To answer the question presented to me by reader Morris, I did a bit of research. According to the City of Myrtle Beach web site, the city imposes a “hospitality tax” of 2 percent on food and beverages prepared or modified before consumption, a “hospitality tax” of 3 percent on accommodations for transients, and a “hospitality fee” of 1 percent on paid admissions to amusements. The website refers to these three exactions as “The Hospitality Tax/Fee” and describes it as “a city tax or fee that everyone who eats in a restaurant, rents a room for a week or two, goes to a show or plays golf in North Myrtle Beach will pay.”

It's not a “tax or fee.” It’s not a “tax fee.” It’s not a tax/fee.” It consists of three separate exactions, two of which are taxes and one of which is a fee. Understandably, when wanting to mention all three in as few words as possible, the temptation is to use tax/fee, which is somewhat acceptable, or “tax fee,” which is beyond oxymoronic. A better term would be “hospitality exaction.”

Of course, another question quickly pops up. Why are the exactions on food and lodging called a “tax” but the exaction on amusements called a “fee”? As best as I can figure out, it reflects what the state of South Carolina permits localities to tax and what they are permitted to subject to a fee. Why the state makes that distinction and how it has decided which items or activities localities are permitted to subject to one or the other is something I haven’t been able to determine. My guess is that it involves politics and public relations.

“One Size Fits All” Zero-Emission Vehicle Fees a Poor Substitute for the Mileage-Based Road Fee

One of the topics on which I have written extensively is the mileage-based road fee. That’s because there are many issues to consider, many arguments from opponents to refute, and my sense that it is inevitably going to be the foundation for future highway infrastructure funding. I have written about the mileage-based road fee in posts such as Tax Meets Technology on the Road, Mileage-Based Road Fees, Again, Mileage-Based Road Fees, Yet Again, Change, Tax, Mileage-Based Road Fees, and Secrecy, Pennsylvania State Gasoline Tax Increase: The Last Hurrah?, Making Progress with Mileage-Based Road Fees, Mileage-Based Road Fees Gain More Traction, Looking More Closely at Mileage-Based Road Fees, The Mileage-Based Road Fee Lives On, Is the Mileage-Based Road Fee So Terrible?, Defending the Mileage-Based Road Fee, Liquid Fuels Tax Increases on the Table, Searching For What Already Has Been Found, Tax Style, Highways Are Not Free, Mileage-Based Road Fees: Privatization and Privacy, Is the Mileage-Based Road Fee a Threat to Privacy?, So Who Should Pay for Roads?, Between Theory and Reality is the (Tax) Test, Mileage-Based Road Fee Inching Ahead, Rebutting Arguments Against Mileage-Based Road Fees, On the Mileage-Based Road Fee Highway: Young at (Tax) Heart?, To Test The Mileage-Based Road Fee, There Needs to Be a Test, What Sort of Tax or Fee Will Hawaii Use to Fix Its Highways?, And Now It’s California Facing the Road Funding Tax Issues, If Users Don’t Pay, Who Should?, Taking Responsibility for Funding Highways, Should Tax Increases Reflect Populist Sentiment?, When It Comes to the Mileage-Based Road Fee, Try It, You’ll Like It, Mileage-Based Road Fees: A Positive Trend?, Understanding the Mileage-Based Road Fee, Tax Opposition: A Costly Road to Follow, Progress on the Mileage-Based Road Fee Front?, Mileage-Based Road Fee Enters Illinois Gubernatorial Campaign, Is a User-Fee-Based System Incompatible With Progressive Income Taxation?. Will Private Ownership of Public Necessities Work?, Revenue Problems With A User Fee Solution Crying for Attention, Plans for Mileage-Based Road Fees Continue to Grow, Getting Technical With the Mileage-Based Road Fee, How Not to Raise Money to Fix Roads, and The Scope of a Mileage-Based Road Fee.

Recently, a reader pointed out to me that during 2019, more states enacted special fees for vehicles that do not use liquid fuels, in an attempt to make up for the revenue loss caused by the fact that owners of these vehicles do not pay gasoline or diesel fuel taxes. Even though I consider these fees to be stop-gap measures that buy time for legislators to buckle down and deal with the entire infrastructure funding problem, I do have concerns about these fees despite their temporary nature. At least, I hope that these fees are temporary.

The fees vary widely, and in some instances take into account the attributes of the vehicle and in other instances don’t. A list of the fees in the states that have enacted them has been provided by the National Conference of State Legislatures. Fees range from as low as $10 to as high as $300, though most of the fees are under $100. Some states assess different fees depending on whether the vehicle is a plug-in, a hybrid, or battery-only, and at least one state differentiates between commercial and non-commercial vehicles. Only one state adjusts the fee to reflect weight differences, but only in terms of vehicles over or under one set weight.

One concern I have about these fees is the lack of differentiation in terms of weight. At least theoretically, when dealing with liquid fuel taxes, heavier vehicles that do more damage to roads also use more fuel and thus their owners pay more in fuel taxes. That outcome is missing with these zero-emission vehicle fees, and even the state that separates vehicles into two weight classes for purposes of the fee doesn’t come close to the sort of granularity that is justifiable. The easy solution is to set the fee equal to a specified dollar (or cent) amount multiplied by the vehicle’s weight, which the state knows because it is included as part of the general vehicle registration process.

Another concern I have about these fees is that they pretty much fail to make up for the lost fuel tax revenue. According to the latest Department of Transportation information I can find, the average American driver drives roughly 13,500 miles per year. As of 2016, according to Department of Transportation information, the average passenger vehicle had a fuel efficiency of 16 kmpl, or 37 miles per gallon. The average driver, therefore, driving the average passenger vehicle, purchases 365 gallons of fuel each year. According to the latest information I could find, fuel taxes average 29 cents per gallon, with a wide variation among states and some variation between gasoline and diesel. Thus, on average, a driver who drives the average 13,500 miles annually while getting 37 miles per gallon would pay, on average, $106 in fuel taxes. Are states making up the lost revenue? It depends on the numbers. Colorado, for example, with a 22 cents per gallon gasoline tax, loses $80 when that average driver switches to a zero-emission vehicle, but its fee for that vehicle is only $50. On the other hand, Georgia, with a 31.59 cents per gallon gasoline tax, loses $115 when that average driver switches to a zero-emission vehicle, yet is fee for that vehicle is $200. Perhaps drivers of these vehicles in Georgia aren’t too happy with this situation, though I suppose those who drive more miles than average are less unhappy than those who drive far fewer miles.

One of the blessings of the mileage-based road fee is that it does not try to impose a “one size fits all” fee, but adjusts the fee based on actual mileage and weight of the vehicle, both of which are factors in determining the extent to which the vehicle puts a burden on highway infrastructure. Perhaps as more people shift to vehicles that do not use liquid fuels, they will become increasingly dissatisfied with these “one size fits all” fees, and press for something far more rational. One reason I write so extensively about the mileage-based road fee is to help people understand why it makes more sense than the alternatives, and to help them dispel the doubts nurtured by the opponents of the mileage-based road fee.

Substance over Form Matters in Tax Law

Reader Morris posed an interesting question about a transaction described in a racer.com article. The article is about desert racer Peter Lang of California, who also is an animal conservation expert. Two years ago he became famous beyond racing and conservation circles by fighting a wildfire with 6 garden hoses, saving all 1,000 of his animals though losing his house and race shop.

Now, Lang has decided to retire from racing and has put up for sale a completely restored Mini Mac Chevy. His asking price is what raises the tax question. Someone who wants to acquire the Chevy can do so by paying $1.00 to Lang and making a $49,999 donation to Lang’s Safari West Foundation. The Foundation is a qualified section 501(c)(3) organization. If someone does this, what are the tax consequences?

When a person sells property, gain or loss is computed by comparing the person’s adjusted basis in the property with the amount realized. The amount realized is the selling price, with adjustments not relevant to this transaction. What is the selling price? It’s not just what the person receives, it is also what is paid on behalf of the person. Suppose X sells an item to Y, asking not that Y pay $100 to X but that Y pay $100 to X’s child C. X is treated as having received $100, and X’s gain or loss realized is computed using $100. X also is treated as having transferred $100 to C, which probably would be a gift. Had X directed Y to pay the $100 to B, a bank to which X owed money, the X’s amount realized still would be $100, and X would be treated as having paid $100 to the bank to repay the loan.

So in this instance, Lang would be treated as having sold the Chevy for $50,000, and using the $50,000 amount realized would compute gain or loss realized. I cannot compute that because I do not know Lang’s adjusted basis in the Chevy. Lang also would be treated as having made a $49,999 contribution to the Safari West Foundation, and whether it would be deductible would depend on other information, such as Lang’s adjusted gross income and other charitable contributions, that I do not have.

This process of taking what appears to be a direct transfer from the purchaser to the Foundation, or from Y to C, and splitting it into two transfers, purchaser to Lang to Foundation, or Y to X to C, is an example of substance over form. It is a basic federal income tax law doctrine. When I taught the basic federal income tax course, I brought this to the attention of the students early in the course, using an example in the textbook where an employer transfers a car to an employee’s spouse, along with other transfers direct to the employee, to persuade the employee not to leave for another employer. The value of the car is included in the employee’s compensation gross income, and the employee is treated as having made a gift of the car to the spouse.

This principle of substance over form is important. People unfamiliar with tax law think that if they “leave themselves out of the picture” they can avoid tax consequences. It doesn’t work that way, and sometimes hindsight would demonstrate that it would have been better to make the two transfers in actuality than to bypass the taxpayer. When planning, forgetting about the substance over form doctrine can be a big mistake.

Tax Socialism

A recent story about a Missouri Supreme Court decision interpreting the state’s constitution caught my eye because it involved taxes. The facts are fairly simple, the analysis a bit more complicated.

The town of Chesterfield, in Saint Louis County, enacted a local sales tax. It did so because it is home to very large retail complexes. People shopping in Chesterfield include town residents, but most of the shoppers live elsewhere. In 1977, the Missouri legislature enacted a law requiring Chesterfield to share its local sales tax revenues with other municipalities and townships in St. Louis County. The formula for sharing the revenues is based on population. Chesterfield was incorporated as a town in 1988 and almost immediately challenged the law.

Defenders of the law point out that the municipalities getting a piece of the Chesterfield tax revenue generally lack space for large shopping centers, but “supply more shoppers” to Chesterfield. Opponents of the law argued that it violates the Missouri Constitution ban on “special laws.” The revenue sharing law, when first enacted, applied only to first class counties with populations of 400,000 or more. At the time, St. Louis County was the only county that fell within that definition. In 1991, as the population of St. Charles County approached 400,000, the legislature amended the law so that it applies to first class counties with populations of 900,000 or more. Supporters of the law argued that Chesterfield should have made that argument when it first challenged the law in the late 1980s.

The Missouri Supreme Court, upholding the decision of a Cole County judge, held that the law was not an impermissible special law. The court explained that the law was presumptively constitutional and was not a special law because its classification was supported by a rational basis. The court wrote, “Under rational basis review, this Court will uphold a statute if it finds a reasonably conceivable state of facts that provide a rational basis for the classifications.” The court determined that the “classification was supported by a rational basis because St. Louis County, unlike other counties in the state, has a large population, lacks a central city, has 90 separate municipalities within its borders, and has a large, unincorporated area.”

The mayor of one town supporting the law, because it receives a portion of Chesterfield’s tax revenues, explained that she was “delighted” by the decision, because “It’s support for sharing and regionalism. It just means that the cities that have more can share with the cities that don’t. We all shop regionally.”

I chose the title for this commentary after reading the story. I then decided to browse the comments. It is interesting to see how people, especially those not proficient in legal analysis, react to legal decisions. Most approach the issue from an economic or political perspective. Yes, the word “socialism” popped up. So did the words “greed” and “envy.”

What if, instead of permitting municipalities within the county impose sales taxes, the country enacted a sales tax and used the revenue to fund services within the country presently funded by the municipalities? Would that be just as offensive to those who oppose the revenue sharing law? Probably. It seems that the concept of sharing has become equated with the concept of socialism if the sharing is done at any level other than by an individual.

Interestingly, most taxes collected on a wide basis, such as federal and state income taxes, are shared disproportionally to the collection, in a manner similar to how the Chesterfield local sales tax revenue is shared. Yet the loudest complaints about this sort of tax revenue sharing seem to come from states and counties that end up receiving more than their populations contribute.

Ultimately, a non-sharing society ceases to be cohesive and degenerates into a free-for-all. There’s a reason the words society and socialism share the same etymological roots. They are derived from the Latin word societas, which means community, alliance, fellowship. Interestingly, the word society came into the English lexicon at about the time the oligarchic feudal system faded away under the illumination of the Enlightenment. People learned that cooperation in pursuit of the common good was more beneficial in the long run for individuals that was the free-for-all that too often characterized the Dark Ages. Sometimes lessons need to be relearned. Perhaps enough of that will happen before the end of this new year. That would make for a Happy New Year.

Plan to Pay Property Taxes with Rolls of Nickels Thwarted Before It Happens

Roughly four and a half years ago, in Does It Make Tax Cents?, I commented on a story about a Pennsylvania taxpayer who paid a tax by dumping 50,000 pennies and some dollar bills and higher denomination coins. Sixteen months later, in It Still Doesn’t Make Tax Cents, I commented on someone’s attempt to pay a parking ticket with loose coins. Two days later, in Trying to Make Cents of Two More Coin Payment Stories, I shared my thoughts on someone’s attempt to pay a $4,000 fine with coins, a tale told in two stories. Almost two years later, in When Paying Taxes in Cash is Prohibited, I wrote about legislative efforts in Philadelphia to prohibit stores from adopting “no cash payment” policies. A few days later, in California’s No-Cash-Payment-of-Taxes Policy: Is It Getting Away With Something?, I concluded that the California Franchise Tax Board’s “no cash payment” policy wasn’t quite what it appeared to be.

Knowing my interest in government reactions to people’s attempts to pay taxes with coins, when reader Morris spotted this story, he forwarded the link to me. He knows I’m going to write something about this one.

The story begins when Cynthia Lockett, who lives in Jackson Country, Missouri, received her 2019 real property tax assessment. The value of her land was increased by 135 percent, her house by somewhat less, so that her overall assessment rose 45 percent. It’s not clear whether that is a one-year change, though I think not, or an adjustment to reflect years of unadjusted assessments. It’s probably the latter, and probably similar to what is happening in many counties in Pennsylvania.

Lockett, though, considered the increase to be “unfair and illegal” as well as “egregious and ridiculous,” and made “multiple phone calls to multiple people at the country.” She filed an appeal. As of the time the story was written, her appeal had not yet been processed. Locket was frustrated at being ignored.

So Lockett decided to pay her real property taxes with nickels. She chose to submit nickels rolled in coin wrappers rather than merely in piles, because she wasn’t “trying to be a complete jerk.” To pay her bill she needed 1,419 rolls of nickels. How much do 1,419 rolls of nickels weigh? According to the article, 625 pounds. Wow.

Lockett’s plans made the news and came to the attention of the county’s Collections Department. Its director sent Lockett a letter. The director explained that country policy, as authorized by state law, is to refuse “large payments made using coins.” The reason? “Payments of this type would require a significant amount of staff time to process, which would result in substantial increases to wait times for other taxpayers. Accepting payments of this type would prevent us from providing adequate customer service to the many other taxpayers seeking assistance in making their payments.”

Lockett’s response to reporters was simple. She said, “I think it's interesting that they can find the time to respond to this, but they can't respond to the egregious bills and ridiculous assessments that they are sending us.”

But the catch is that the county’s Collections Department is separate from its Assessment Department. The employees of the Collections Department are powerless to deal with Lockett’s objections to the increased assessment, and they have no authority to deal with her assessment appeal.

According to the story, there may be a reason Lockett did not get responses from the Assessment Department. The county – though it is unclear what is meant by “the county” – requested access to the email account of the Board of Equalization staff, which does the assessments. The Assessment Department, in complying with that request, discovered 8,600 unread emails. Whether Lockett’s email was in that batch is unclear.

So what happened? Was the account password known to only one employee who died or became seriously ill? Were the employees newly hired and unaware of the email account? Who was in charge? What was happening in the office? These sorts of situations do nothing but supply fuel to the anti-tax and anti-government movements. It’s counterproductive.

As for Lockett, she has backed off her plans to pay with nickels, pans to pay the property tax by the deadline, but has no intention of paying by check. Will she use quarters? Half-dollars? Bitcoin? Gold bars? Time will tell.

When It Comes to Taxation, Details Matter

Readers of MauledAgain know that I am a stickler for details. Details matter. They matter in taxation, just as they matter in engineering, health care, driving, and just about everything else people do. Granted, mistakes get made. I know, because I make them. Sometimes they’re minor and inconsequential, such as misspelling the word happiness with three p’s, but other times the mistakes can be catastrophic, such as using the wrong size bolts in bridge construction, or adding too many digits to a number. Reader Morris, who is aware of my focus on details, pointed me in the direction of a whopper of a tax mistake.

According to this Deseret News article, somehow the valuation of a property for real estate tax purposes was entered incorrectly. The value of a property worth roughly $300,000 was entered into the valuation roles in excess of $1 billion. Yes, that’s $1,000,000,000. Not $300,000. They’re calling it a clerical error.

Once that amount was entered, the county, school district, and other taxing entities in the county computed estimated revenues and set real property tax rates. The error increased county property values by 21 percent over the previous year. That change did not raise eyebrows because the county is in a period of rapid growth, coming in as the third-fastest-growing county in the state.

Months later, the county assessor, Maureen Griffiths, noticed the error. Apparently she doesn’t know how the error happened, and suggested that it could be “something like they dropped their phone on the keyboard and it kicked out all these numbers without verifying.” She called the mistake “horrific,” “bizarre,” and “crazy.” She caught the error when looking at a list of “top 25” real estate tax taxpayers and saw a number totally out of line with the usual amounts.

Oddly, the property owner, who lives in another state, was unaware of the error. They learned of the error after the assessor contacted them, and told them about the error and that it had been fixed.

But, as the article mentions, by then it was too late for the correction to make a difference for the county. Budgets had already been adopted, and real estate tax bills had already been sent. Because of the correction, the school district cannot collect $4.4 million in revenues that it expected to be collected from the property owner. When adding in amounts that the other taxing entities cannot collect, the revenue shortfall is more than $6 million. The director of Utah’s State Tax Commission Property Tax Division says that the scope of this error has no precedent in the state.

County officials “ ‘deeply regret’ the error, and are reviewing policies and procedures to ensure it never happens again.” They also are warning that rates almost certainly will increase in future years to make up the revenue that was budgeted but uncollectible yet already committed to expenditures. The county manager, though, stated, “An abnormality of almost $1 billion is a big deal, and it should have been caught. There are checks in place that it should have been looked at. We will modify those in the future and do a better job.” So is the issue a matter of policies and procedures or a matter of noncompliance, carelessness, or inattentiveness?

If nothing else, perhaps this story will encourage property owners to check valuation notices when they arrive in the mail. If I received a valuation notice pegging my property at $1 billion, I’d be on the phone within seconds. And I’d be following up until it was corrected.

A Christmas Tax Gift Tease

Today is Christmas, which for many people is an important religious feast, and for even more, a day of giving and receiving. Sometimes, though, what someone expects to receive often turns out to be nothing more than a wish. Though dashed expectations at this time are more common among children and youngsters, they also can afflict adults. I’ve heard enough stories about people being promised a Christmas gift – a toy, a bicycle, an engagement ring – only to discover that for some reason no such gift appears.

This year, it is the Congress of the United States that is playing the Christmas gift tease game. The House of Representatives, as reported in many stories, including this one from the Philadelphia Inquirer has voted to repeal the $10,000 cap on the deduction of state and local taxes.

The $10,000 cap, of course, was marketed as a token offset to the massive tax cuts enacted two years ago in favor of large corporations and the wealthy. Yet because large corporations don’t itemize deductions, and because the wealthy find ways of shifting their expenditures into a variety of tax-saving structures, the $10,000 cap has fallen mostly on the middle-class, particularly the middle and upper middle class. In many instances the loss of tax benefits from the state and local tax deduction was not offset by the miniscule tax cuts afforded to the same groups, particularly when other middle class tax deprivations enacted in 2017 are taken into account.

But the other half of the Congress, the Senate, has no intention whatsoever of letting the House bill become law. Hopefully no one who reads the news about the House action gets too excited about Christmas-time tax relief. Unlike what happened in A Christmas Carol, no ghosts of tax law past or tax law future will show up in the dreams of those who are indebted to, enamored of, or subservient to, the tax policy nonsense that has given us repeated enactments of tax cut gifts for a few while everyone else is expected to believe that those drowning in gifts will share their largesse. Put another way, Tax Santa Claus isn’t bringing a state and local tax deduction cap repeal down anyone’s chimney this year. Despite that, if today is a special day that matters to you, Merry Christmas!

Can IRS Audits Be Avoided?

The headline caught my eye. It simply stated, ”How to Avoid a Tax Audit in 2020.” Curious, I took a look at the Lifehacker article. It explains that because the IRS is getting additional funds in 2020, it will be able to hire more employees to answer taxpayer questions and upgrade its technology. The article then points out that the risk of getting audited will increase, citing a Motley Fool article claiming that the IRS “may get more aggressive in its audit practices.” After sharing some statistics about IRS audits, including the fact that only one-half of one percent of returns were audited in 2017, the article points out that “it’s highly unlikely you will get picked to be audited unless your income is very high.” The article then provides advice “to prevent being audited,” such as checking returns for “typos or extremely large or small amounts that may signal a sudden change.”

I had several reactions. First, it is doubtful that the increased IRS funding will make much of a change in the audit statistics, and surely those funds will not cause the audit rate, for example, to double. Second, the benchmarks for selecting returns for audit include a long list of things in addition to high income and typos. Certain types of transactions, such as vacation home deductions, are of more interest to the IRS. Third, the notion that an audit can be avoided or prevented makes no sense. The best that taxpayers can do is to reduce the chances of an audit. True, those chances can be reduced to almost zero, but they cannot be reduced to zero.

So the answer to my question is clear and easy. No, IRS audits cannot be avoided, and the best that a taxpayer can do is to follow advice to reduce the risk of an audit to as low as possible.

Double Trouble, Tax Advice Style

Reader Morris pointed me to an June Investopedia article and asked, “Are they miscalculating the amount of the deduction by using the effective tax rate instead of the marginal tax rate?” To put his question in context, I read the article.

The basic point of the article is that sometimes, perhaps often, it makes more sense to donate unwanted household and other items to a qualified charity rather than trying to sell these things at a garage or yard sale. The tax savings from the deduction for donating property to charity can, in many instances, exceed the amount of cash one receives from a buyer at the garage or yard sale. Another advantage from donating the items to a charity is that it is easier to box up the items and deliver them, or have them picked up, rather than advertising, setting out items on tables, pricing them, tagging them, dealing with potential customers, making change, safeguarding cash, and then cleaning up when the sale is finished, with unsold items still needing to be handled.

The article claims that to determine the reduction in tax liability attributable to the charitable contribution, a taxpayer should multiply the amount of the deduction by the taxpayers’ “effective tax rate.” This is wrong, as reader Morris suggested. The value of the charitable contribution deduction is determined by multiplying it by the marginal rate, keeping in mind that the marginal rate can be a split rate if the deduction causes the taxpayer’s taxable income to slip out of one bracket into a lower one. Technically, because of other interactions in computing taxes (such as the charitable contribution deduction making itemized deductions a better choice than the standard deduction), the best way to calculate the tax savings is to compute tax liability without the deduction and then to compute tax liability with the deduction. The difference is the tax savings attributable to the deduction.

When I read the article, I also spotted another claim. The article asserts that, “On the plus side, the proceeds from a garage sale are not taxable,” and quotes a CPA as saying, “Garage sales are considered the sale of personal property, and you do not have to claim the money you received from the sale.” That is so not true. Though most items sold at a garage or yard sale generate a loss, because they bring in less, and often much less, than what the seller paid for the item, there are times when an item fetches a price greater than what the seller paid. Though the losses are usually not deductible because the item is not a business or investment property, the gains are included in gross income. The notion that sales of personal property are not taxed is not one for which there is statutory authority in the Internal Revenue Code.

From scanning more than a few websites that make similar claims, though with different articulations, it appears that the true statement, “You generally are not required to report sales of items at garage or yard sales” gets smooshed into the misleading statement, “You are not required to report sales of items at garage or yard sales.” The loss of the word “generally” is critical. Why does it disappear? Twitter-type character limits? Preferences for short sound bites? Unwillingness to follow through with questions prompted by the word “generally”? Misunderstanding? Whatever the cause, it creates a misleading claim that can be dangerous when it causes someone to fail to report gain from selling an item at a garage or yard sale.

How Not to Handle a Tax Refund

Once again, a television court show slipped past me but reader Morris came to the rescue. There’s now a Judge Jerry court show, and so a few of his opinions will show up, if they involve tax, in that long list of television court show episodes on which I have commented in the past, including 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, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, and When the Tax Software Goes Awry.

So in this Judge Jerry episode, the plaintiff and defendant were in a relationship but broke up. The plaintiff arranged to have her tax refund deposited into the defendant’s bank account because the plaintiff did not have a bank account. The plaintiff was no longer in touch with the defendant except when she contacted the defendant after getting a notice, presumably from the IRS, that her tax refund had been deposited into the defendant’s bank account.

In response, the defendant paid the plaintiff an amount equal to a portion of the refund. The defendant explained that she used the rest of the refund to buy clothing for her daughter, arguing that the daughter is the daughter of both the plaintiff and the defendant. Putting that issues aside, Judge Jerry stated, “It is the plaintiff’s money.” The defendant replied to the judge, “I don’t care.” Judge Jerry held that the defendant owed the balance of the refund to the plaintiff.

It is unclear how the plaintiff managed to have the tax refund deposited into the defendant’s bank account. The instructions to Form 1040 have, since 2015, made it clear that the name on the bank account must match the name of the taxpayer. Perhaps the plaintiff or defendant did something to circumvent that rule. The exception, that the refund is from a joint tax return and is being deposited into a joint account had no relevance in the case because the plaintiff and defendant had never been married to each other.

The instructions to Form 1040 also refer to refunds deposited to prepaid debit cards. She also could have received a paper check, though perhaps cashing it would have presented a challenge because she did not have a bank account. But as difficult as that might have been, surely it would have been less inconvenient that having to sue the defendant. There is a lesson here, namely, don’t try to deposit a tax refund in someone else’s account, though in theory an attempt to do so should be rejected by the IRS. I suspect there was more happening between the plaintiff and defendant than was revealed in Judge Jerry’s courtroom.

Court of Appeals for the First Circuit: Tolls Are Fees, Not Taxes

Whether a charge is a tax or a fee, and the misuse of those terms, has been the subject of more than a few MauledAgain commentaries. I have written about these issues in Please, It’s Not a Tax, So Is It a Tax or a Fee?, Tax versus Fee: Barely a Difference?, Tax versus Fee: The Difference Can Matter, When is a “Tax” Not a Tax?, When Use of the Word “Tax” Gets Even More Confusing, Sometimes It Doesn’t Matter If It Is a Fee or a Tax, and It’s Not Necessarily a “Tax” Just Because It’s an Economic Charge You Don’t Like.

Though most people would consider a toll to be a fee, some people call it a tax. Though sometimes whether it is a fee or a tax doesn’t matter, such as when a business is adding up expenses, in other instances it matters very much. An example is the recent case of American Trucking Associations, Inc. v. Alviti, decided by the United States Court of Appeals for the First Circuit on December 5, 2019. The court put it succinctly: “This appeal poses the question whether bridge and highway tolls authorized by a Rhode Island statute are taxes within the meaning of the Tax Injunction Act ("TIA").” Rhode Island enacted a bridge toll, and the plaintiffs, mostly trucking companies and trucking associations, sued to enjoin implementation of the toll, arguing that it violated the Commerce Clause of the United States Constitution.

Under the Tax Injunction Act, “district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State." Thus, if the toll is not a tax, the Tax Injunction Act does not prevent the district court from hearing and deciding the plaintiffs’ challenge.

The Court of Appeals relied on a definition provided in Thomas Cooley’s treatise, The Law of Taxation, which has been cited multiple times by courts as authoritative on the question of whether a toll is a tax. The Court of Appeals quoted from the edition of the treatise extant in 1937 when the Tax Injunction Act was enacted:

A toll is a sum of money for the use of something, generally applied to the consideration which is paid for the use of a road, bridge or the like, of a public nature. The term toll, in its application to the law of taxation, is nearly obsolete. It was formerly applied to duties on imports and exports; but tolls, as now understood, are applied most exclusively to charges for permission to pass over a bridge, road or ferry owned by the person imposing them. Tolls are not taxes. A tax is a demand of sovereignty; a toll is a demand of proprietorship.

Thus, the Court concluded that the Rhode Island toll is not a tax. Relying principally on an early Supreme Court decision involving tolls on river locks owned by Illinois, it also rejected Rhode Island’s argument that a toll is a tax if the infrastructure for which the toll is charged is owned by the state rather than by a private enterprise on whose behalf the state collects the toll.

Based on its conclusion, the Court of Appeals reversed the district court’s decision that it lacked jurisdiction to hear and decide the case. It remanded the case for further proceedings. Those proceedings will focus on the Commerce Clause issue and not on whether the toll is a tax. The lesson from this decision is that calling something a tax that is not a tax is not a pathway to success, a point I have repeatedly made in my commentaries about fees and taxes.

A Difficult Tax to Defend

Reader Morris directed my attention to a BCRNews article describing the unhappiness of a restaurant-owning couple caused by the enactment of a parking tax that applies to the monies they collect when they charge people to park in their parking lot. According to Scott Reeder, John and Sandy Fulgenzi close their restaurant in Springfield, Illinois, for part of each August because the traffic generated by the state fair discourages people from patronizing their restaurant. To make up for some of the revenue loss, they charge fair visitors $5 per day to use a space in the parking lot. The Fulgenzis have learned that beginning in 2020 they will be liable for a state parking tax on the parking lot revenue that they collect. The tax also will apply to homeowners who rent out driveways or yards for parking during the state fair.

John Fulgenzi asks why they are being subjected to a parking tax even though they pay an income tax and a property tax. That, I think, is not a question that focuses on the problem. As Reeder puts it, “The state is taxing parking to pay for non-transportation related infrastructure.” To me, the question should be, “Why are the revenues from a parking tax being used for expenditures that have nothing to do with parking?” If the parking tax revenues were used to inspect parking spaces for safety, to maintain parking spaces, or otherwise to benefit parking, or even related transportation infrastructure such as curbs and streets, John Fulgenzi’s question could easily be answered. But the answer to the actual question, “Why are the revenues from a parking tax being used for expenditures that have nothing to do with parking?” is, according to Reeder is simple. “The reason is straightforward. They are counting on your ignorance. Their sincere hope is that you will blame the parking lot owners for your higher rates, rather than the lawmakers who imposed the tax on them.” Indeed.

Tim Butler, one of the state legislators who supported enactment of the tax, and who represents the Fulgenzi’s town, claims that “it never was the intent of lawmakers to tax people like the Fulgenzis.” He adds, “The idea behind this was to tax those big parking garages in downtown Chicago. I wanted to make sure it didn’t tax municipal parking garages in Springfield, but it never occurred to anyone that it might affect parking near the state fair.” Sorry, Tim Butler, if that’s what the legislature intended, then it should have drafted language to that effect. But it didn’t.

There are two problems with this tax. One, as just noted, is the inconsistency between the alleged legislative intent and the language of the statute. That problem is widespread among legislatures. The other is the enactment of a tax on an activity that is not used to benefit that activity.

It is difficult to defend this tax. What is worse is that the enactment of this sort of tax encourages a backlash against taxes in general, including taxes that are easily defended. Legislatures need to do better. Much better.

It’s Not Necessarily a “Tax” Just Because It’s an Economic Charge You Don’t Like

Reader Morris directed my attention to an opinion piece by Curt Schroder, and asked, “Is this another misuse of the word ‘tax’?” Clearly reader Morris has been reading my posts dealing with the difference between a tax and some other charge, such as Please, It’s Not a Tax, So Is It a Tax or a Fee?, Tax versus Fee: Barely a Difference?, Tax versus Fee: The Difference Can Matter, When is a “Tax” Not a Tax?, When Use of the Word “Tax” Gets Even More Confusing, and Sometimes It Doesn’t Matter If It Is a Fee or a Tax. To answer his question, I needed to read Schroder’s commentary, and I did.

The gist of Schroder’s position is that non-residents of Philadelphia, whether living elsewhere in Pennsylvania or in another state, bring their lawsuits in Philadelphia because Philadelphia juries, he explains, provide higher awards than juries do elsewhere. Whether this is true doesn’t matter for purposes of the question raised by reader Morris. Schroder relies on findings by the U.S. Chamber Institute for Legal Reform, which concluded, as Schroder tells it, “the total cost of the ‘tort’ or personal injury side of the court systems in the U.S. is $429 billion, representing 2.3% of the gross national product,” and “Pennsylvania’s tort system equates to $18.374 billion or 2.5% of Pennsylvania’s gross domestic product.” For the average Pennsylvanian, Schroder states, the “cost of Pennsylvania’s tort system amounts to $3,721 per household in the state.” Again, whether this is true doesn’t matter for purposes of the question raised by reader Morris. It simply sets the stage for Schroder’s next claim.

Schroder claims that the burden imposed on Pennsylvania households by its tort systems “is essentially an extra ‘tort tax’ paid by every household in the state to prop up an inefficient system of civil justice.” No, it is not a tax.

So why does Schroder use the word “tax” in making his argument? He does so for the same reason many other people use the word “tax” to describe something that is not a tax. Schroder’s target is the civil justice system, specifically, tort cases and high jury awards for plaintiffs. Some will agree and some will disagree with his position, reflecting a debate that is decades old. But in order to win over the uncommitted, Schroder adopts a tactic that has become increasingly used by others who advocate against a particular policy, system, charge, or plan. Find a way to call something a “tax.” Knowing that many people will immediately join in the opposition, because the word ignites their limbic systems, opponents of a charge are becoming ever more eager to call it a tax. Telling people they are being overtaxed generates a much more significant and intense reaction than telling them they are being overcharged.

The problem with dividing tort judgments by households and calling the result a tax is that the same approach could be taken with respect to any charge. This is why so many “fees” get tagged as “taxes” by their opponents, and I suppose there are people who would pin the word “tax” on alimony, doctors’ bills, and invoices for computer software.

Perhaps some of those who toss the word “tax” around indiscriminately would argue that they use the term, not for every charge, but for every involuntary charge. Yet that argument omits the critical aspect of what constitutes a “tax.” An involuntary charge imposed by a government is a tax or fee, but an involuntary charge imposed by a private sector actor is not a tax. It might be a fee, or a charge, or a cost, or a price, or an expense, but it’s not a tax.

At least Schroder put the term “tort tax” inside quotation marks, but nonetheless using the word “tax” in this manner will go viral, particularly among the unschooled, who will conclude, probably beyond persuasion to the contrary, that their taxes have been raised, and government needs to be dismantled. Unfortunately, as we edge closer to the dismantling of government, a process well underway in certain capitals, we move closer to rule by oligarchy, which does not impose taxes but fees, charges, costs, prices, and expenses, at least as involuntary as those dreaded taxes. Whereas the ballot box, though also under attack by those preferring rule by oligarchs, provides an arena to push back against taxes, there is no avenue to push back against fees and other impositions charged by the private sector. That is why misuse of the word “tax” helps batter down the protections government offers against rapacious privateers.

The Tax Laws Don’t Work That Way

Reader Morris directed my attention to a story about a life coach who took an unwise approach to dealing with her desire to help others. According to the story, the life coach, retired from running one business, set up a life coaching business. She decided she did no want to invest time “keeping books, filing tax forms and otherwise preoccupying herself with the details of running a business.” Her solution was to have her clients pay the class fee directly to a charity.

Unfortunately for the life coach, this approach does not spare her the obligation of filing tax forms. Reader Morris commented, “I believe the life coach would need to report the course fees as gross income on her tax return and report the donations to the organization as charitable deductions. She would still need to spend time keeping the books, filing tax forms and the details of running a business.” Reader Morris is correct. The life coach has constructive receipt of the fees. There are many tax cases involving taxpayers who directed someone to pay a third party rather than the taxpayer. The courts consistently conclude that a transfer from A to C directed by B, who wants to benefit C in some way or who owes money to C is treated as a transfer from A to B, and then from B to C. In this instance, B is the life coach, A is her client, and C is the charity.

Sometimes It Doesn’t Matter If It Is a Fee or a Tax

The difference between a “fee” and a “tax” matters for different reasons. One, of course, are the prohibitions against raising taxes that don’t apply to fees. Another is the attempt to call something a fee so that it makes things more difficult for the anti-tax crowd to claim that taxes are being enacted or raised. I have written about the difference between a fee and a tax in posts such as Please, It’s Not a Tax, So Is It a Tax or a Fee?, Tax versus Fee: Barely a Difference?, Tax versus Fee: The Difference Can Matter, and When is a “Tax” Not a Tax?.

In Tax versus Fee: The Difference Can Matter, I wrote about Oklahoma legislators who were arguing about a “fee” on cigarettes. Opponents claimed it was invalid because it originated in the Senate. This is what I wrote:

Oklahoma has enacted a new $1.50 per-pack “fee” on cigarettes. This action comes on the heels of four previous failures to increase the state per-pack cigarette tax by $1.50. Opponents have sued, asking the Oklahoma Supreme Court to invalidate the legislation. They argue that the fee originated in the state Senate, thus violating the requirement in the state Constitution that revenue-raising legislation originate in the state House. The opponents also argue that enactment of the legislation during the last week of the legislative session violated the state Constitution’s requirement that revenue-raising legislation not be enacted during the last five days of a legislative session. The opponents also argue that proponents of the $1.50 charge were trying to characterize the legislation as not revenue-raising by labeling it a fee. The opponents explain that the fee “simply reincarnated the earlier cigarette tax bills under a new name.”

Though I’m no expert in Oklahoma constitutional law, it seems to me that the fee raises revenue, and thus has been enacted in revenue-raising legislation. Accordingly, the process by which it was enacted appears to have violated the Oklahoma Constitution. If, for some reason, the Oklahoma Supreme Court determines that the provisions in the constitution applies to taxes but not fees, then deciding whether the $1.50 charge is a tax or fee would be determinative. The label alone should not resolve the question. The state is not selling cigarettes to people, nor is it selling licenses to use tobacco, and thus it is difficult to characterize the charge as a fee. It would not be surprising if the Oklahoma Supreme Court, if it were to limit the requirements in the state Constitution to taxes, decided that this particular charge was a tax. It will be interesting to see what the court decides, probably sometime later this year.

That court decision did appear later that year. According to this article, the Oklahoma Supreme Court struck down the fee for the reasons put forth by the opponents of the fee.

Now the issue has arisen again, this time in Massachusetts. In this editorial column, Howie Carr objects to a “transportation climate initiative fee,” also called a “carbon fee,” for a variety of reasons. He asserts that the fee is, in fact, a tax. He dislikes the idea of a tax being disguised as a fee. He claims that the supporters of the fee are trying to avoid a requirement in the Massachusetts Constitution that new state taxes must originate in the House of Representatives. Though he has other objections to the proposal, I think that on this point he can relax. Under the Massachusetts Constitution, “All money bills shall originate in the house of representatives; but the senate may propose or concur with amendments, as on other bills.” In 1878, in Opinion of the Justices to the Senate and House of Representatives, the Massachusetts Supreme Court, addressing whether bills proposing the spending of money must originate in the House of Representatives, stated, “[W]e are of opinion that the exclusive constitutional privilege of the House of Representatives to originate money bills is limited to bills that transfer money or property from the people to the State, and does not include bills that appropriate money from the Treasury of the Commonwealth to particular uses of the government, or bestow it upon individuals or corporations.” So it seems to me, even though I’m not and expert in Massachusetts constitutional law, that whether the amount charged by the state is called a tax, a fee, or something else, if it causes money or property to be transferred from people to the state, it must originate in the House of Representatives. In other words, calling it a fee does not eliminate that requirement, and if that is what the proponents of the fee think they would accomplish, as Howie Carr suggests they are thinking, they are wrong, and Howie can relax on this point. He might want to take a look at what happened in Oklahoma with respect to the cigarette fee. He should find it encouraging.

Playing With Taxes? Taxes in Play? Taxes in a Play?

Three years ago, in Deferring Death as a Tax Planning Tool, I explored the questions that popped into my head when I read Phil DeMuth’s suggestion in Four Post-Election Tax Moves To Make Today that if a decrease in death taxes is on the horizon, individuals subject to a death tax should find ways to defer death. One of the questions I considered was whether people aware of looming increases in death taxes take steps to accelerate death. I am not the first person to ask that question. For example, in Fixing Everything: Government Spending, Taxes, Entitlements, Healthcare, Pensions, Immigration, Tort Reform, Crime...(2010), Nedland P. Williams, in discussing the transition from 2010, for which the federal estate tax did not apply, to 2011, when it would, asks, “Should the person in failing health or their relatives be forced into a decision to accelerate death before the January 1, 2011 deadline?”

Last week, reader Morris emailed me with an observation. He directed my attention to the review of a play, Death Tax, put on last month at Midwestern State University in Wichita Falls, Texas. The review outlines the plot as follows:

Maxine, an elderly patient in a nursing home is convinced that her daughter is trying to kill her. She claims that if a new tax law passes in the new year, Maxine’s daughter will get substantially less money from her mother’s death. Maxine is convinced that her nurse Tina is getting bribed to slowly kill her.

Tina, a Haitian nurse who is struggling to fight a custody battle back home, is not trying to kill Maxine, but when Maxine offers a huge sum of money under the table to keep her alive it’s too good to pass up and she quickly becomes tangled in a web of deceptions.

Tina goes to her supervisor and one-time fling, Todd, for help. Trying to win Tina back, he’s forced to bribe other nurses and pay for expensive treatments out-of-pocket to keep Maxine ticking. He hopes that once Tina gets her son back, they can start a new life together.

Reader Morris noted, “This play and book seems to be based on an idea from your blog.”

Well, maybe. It could be based on Nedland Williams’ commentary. It could be based on similar commentary from someone else that I haven’t seen. Perhaps the author of the book overheard someone discussing my or Williams’ commentary. In any event, isn’t it fun that a tax issue finds attention in a theater? It depends, I suppose, on how a person defines fun.

So Are They Taxes? Fees? Both?

Too often, the words “tax” and “fee” are misused. Sometimes a tax is called a fee even though it is a tax. Much more frequently, a fee is tagged as a tax, principally by opponents of the fee who are trying to resonate with the emotional tuning of those who have a say in whether a proposed fee should be enacted or an existing fee should be increased. I have written about this imprecision, and have explained the difference between a tax and some other charge appears in posts such as Please, It’s Not a Tax, So Is It a Tax or a Fee?, Tax versus Fee: Barely a Difference?, Tax versus Fee: The Difference Can Matter, When is a “Tax” Not a Tax?, and When Use of the Word “Tax” Gets Even More Confusing.

The confusion becomes extremely precise when both the word “tax” and the word “fee” is used to describe the same charge. Reader Morris shared with me his bewilderment at the use of both terms in this article, describing issues arising from the passage of Initiative 976. The headline refers to “car-tab taxes.” The body of the article uses the same term but also refers to the charge as “car-tab fees.” So what are they?

It turns out that the confusion is attributable to the scope of Initiative 976. As described in this overview, that initiative was intended to reduce both taxes and fees. Washington imposed license fees on vehicles, base vehicle taxes, local Transportation Benefit District fees, electric vehicle fees, certain motor vehicle excise taxes, and other “taxes and fees” related to transportation. Car tab fees, as in effect before the initiative was adopted, included standard vehicle fees, which included a renewal fee, a county filing fee, a license service fee, and a service fee, along with a vehicle weight fee and transportation benefit district fees. They also paid motor vehicle excise taxes and an electric vehicle tax.

Apparently, with this bundling of fees and taxes leaves some people referring to them as car-tab fees, other referring to them as car-tab taxes, and still others referring to them by both terms, as seen in the article. Technically, the bundle should be called “car-tab fees and taxes,” but perhaps that’s too long for some people’s comfort.

If there is anything to be learned from this, perhaps it is the need to do away with multiple fees and taxes and to consolidate them into a much shorter list. The chances of that happening are about the same as the chances of cable companies and telephone companies consolidating the plethora of fees that they include in their invoices.

The Price for Anti-Tax Success Can Be Catastrophic

Readers of MauledAgain know that I am not one of those people who object to taxation as a matter of principle and who oppose every attempt to enact or increase a tax even if paying a tax is a more efficient and cheaper way to deal with the issues the tax is designed to address. One excellent example of this narrow-minded approach to citizenship and government is the never-ending opposition to increases in fuel taxes or enactment of an alternatives such as a mileage-based road fee. As I wrote in Paying the Price for Anti-Tax Damage with respect to opposition to increasing taxes to fix transportation infrastructure, “Hit a pothole, incur hundreds of dollars or more of repair costs, and those tax cuts or avoided tax increases pale in comparison.”

Reader Morris has alerted me to another example of how refusing to increase taxes can be catastrophic. According to this Sacramento Bee article, voters in El Dorado County rejected a proposal to enact a tax to fund the county’s rural firefighting efforts. The situation is a bit more complicated than it appears. As wildfires erupted throughout California, causing loss of life and horrific property damage, the state legislature allocated $918 million for fire protection, but most of that money went to urban and suburban areas, with just a pittance reaching rural fire departments. Of course, rural areas are more at risk for wildfires and those wildfires tend to spread rapidly in those areas. It’s unclear why the funds appropriated by the state were allocated in a manner disadvantageous to rural fire districts, but it might be the consequence of a statute enacted in the late 1970s setting the allocation each rural government received from property taxes, which for rural communities was low because in the 1970s their firefighters were volunteers and costs were much lower. As is the case nationwide, the number of volunteer firefighters has plummeted, for a variety or reasons, including the requirement they be trained as professionals, demographics, and a declining sense in many communities of civic engagement.

The bigger question is why voters in a rural area, though perhaps justified in thinking that they pay sufficient taxes to the state and ought not pay even more, would risk the underfunding of their fire protection. Even if they lobby and protest to get a bigger share of the state appropriation, that process will take time. And if it succeeds, the taxes that would have been raised at the local level could be refunded to the taxpayers, and future taxes suspended.

As a result of the failure to enact the local tax, firefighter jobs are being terminated. Some, perhaps most or all of these firefighters, were battling wildfires while the proposed tax was being turned down at the ballot box. So it wasn’t a matter of people arguing that taxes should not be enacted to deal with something that hasn’t happened and almost certainly would not happen. It’s not as though the proposal was for a tax to deal with an invasion from the inhabitants of the planet Jupiter. Yet, according to the article, voters in California’s rural areas remain devoted to conservative anti-tax principles and are “convinced that higher taxes won’t solve their problems.” Perhaps when a wildfire tears through their community and there are no firefighters or not enough of them, and a lack of sufficient equipment, they can consider contemplating what happens when the theory of tax hatred meets the practical reality of life.

The outcome in El Dorado County is not unusual. According to the article, roughly half of proposals in rural areas to enact taxes to support local fire departments are rejected. The mayor of another town explained, “People don’t like to vote a tax upon themselves. There’s a reluctance. You’ve got to have a pressing need.” The rejection vote in this mayor’s town took place three months after a wildfire destroyed more than a thousand homes in a nearby town. So perhaps when the wildfire is 100 yards from the town and moving fast, rather than evacuating, the anti-tax folks will conclude that there is a “pressing need” and hold a referendum to enact a tax that can be used to hire firefighters and purchase equipment. How’s that going to work out? According to the mayor, having more firefighters would not necessarily change the outcome of a wildfire, claiming that additional firefighters would not have stopped the 2018 Carr Fire that killed 85 people. Yet that’s not the benchmark. How many people would have died if the number of firefighters and the number of firefighting apparatus being used to fight that fire had been less?

What makes things worse in California are two anti-tax propositions. Proposition 13, enacted more than 40 years ago, limits property taxes to one percent of property value. Proposition 218, enacted more than 20 years ago, requires a two-thirds majority of voters to enact the sort of tax that has failed in the rural counties. One opponent of the tax, not revealing whether he was an expert in fighting firefighters, claimed that the firefighters are “already overpaid” and that “they’re burning their fire trucks parking too close to fires.” Of course, he disappeared before providing any evidence or analysis of firefighting techniques.

And how much would the tax have cost voters? According to the article, it would require another $71 to $182 per year for a property. With the firefighting department being downgraded, I wonder how much the insurance companies are going to increase the homeowner insurance premiums in rural areas. Would it be surprising if these voters, who objected to paying another $71 to $182 faced annual premium increases of $150 to $250. Perhaps they don’t have insurance. I wonder if they have any hesitation in asking for federal relief provided from funds paid by taxpayers in other states.

Fortunately for some communities, attempts to raise taxes to maintain firefighting capacity have succeeded. Why? In one county, the fire district director explained, “[T]hey love their fire department [and its fire protection and medical services.]” He added, “I don’t like taxes either. I’m just like the next guy. But we don’t mind paying taxes, so long as they see what their money’s going to. So long as it’s guaranteed to go to that.“ Of course, taxpayers have a right to expect that taxes enacted for a specific purpose are used for that purpose.

At this rate, firefighting will eventually be privatized. That’s nothing new. That’s the way it was in Philadelphia when Benjamin Franklin introduced the idea of community firefighting. His logic was magnificent. When the house or wooded area of a neighbor who hasn’t purchased private fire protection, and there no longer is a taxpayer-funded public fire service, the firefighting service purchased by the anti-tax homeowner isn’t going to be of much help. Especially in a rural area consistently threatened by wildfires.

Quest'anno è il Ringraziamento

For as long as I’ve been writing this blog, I’ve been sharing a Thanksgiving post to express my gratitude for a variety of people, events, and things. Aside from 2008, when I did not post and I don’t have any recollection of why or how that happened, I’ve dedicated a post on or around Thanksgiving. I started in 2004, with Giving Thanks, and continued in 2005 with A Tax Thanksgiving, in 2006 with Giving Thanks, Again, in 2007 with Actio Gratiarum, in 2009 with Gratias Vectigalibus, in 2010 with Being Thankful for User Fees and Taxes, in 2011 with Two Short Words, Thank You, in 2012 with A Thanksgiving Litany, in 2013 with “Don’t Forget to Say Thank-You”, in 2014 with Giving Thanks: “No, Thank YOU!” , in 2015 with Thanks Again!, in 2016 with Thankfully Repetitive, in 2017 with Never-Ending Thanks, and in 2018 with Particularly Thankful This Time Around.

As I stated the past six years, “I have presented litanies, bursts of Latin, descriptions of events and experiences for which I have been thankful, names of people and groups for whom I have appreciation, and situations for which I have offered gratitude. Together, these separate lists become a long catalog, and as I have done in previous years, I will do a lawyerly thing and incorporate them by reference. Why? Because I continue to be thankful for past blessings, and because some of those appreciated things continue even to this day.” When I re-read those lists, I realized that the people, events, and things for which I am appreciative are far from obsolete.

So once again I will look back at the past twelve months, and remember the people, events, and things for whom and for which I give thanks. If some of these seem repetitive, they are, for there are gifts in life that keep on giving:

• I am thankful for a wonderful son, daughter, daughter-in-law, grandson, and granddaughter.
  
• I am thankful for the wonderful people in my maternal grandparents’ hometowns in Italy who welcomed me this past summer with open arms, enjoyable company, great food, and a fantastic experience.
  
• I am thankful that I had a few hours to go through some of the church records in my maternal grandmother’s home church, which helped me put together more pieces of the town’s family tree.
  
• I am thankful for my cousins in England who were most helpful when the rental car blew out a tire on an open, unseen storm drain.
  
• I am thankful for my congregation’s choir continuing to tolerate me as its president, and for our Director of Music Ministries, who continues to teach me and the others much more about music and singing than I realized I needed to learn.
  
• I am thankful that they continue to let me ring the narthex bell.
  
• I am thankful for having had the opportunity to continue teaching law courses.
  
• I am thankful for all the people in the world who continue to fight ignorance, crime, terror, evil, and corruption.
  
• I am thankful that I found the Windows 10 disks that came with the two desktop computers, because it saved me from paying again for something I had already purchased.
  
• I am thankful for people being willing to read the things I write.

Thirteen years ago, in Giving Thanks, Again, I shared my Thanksgiving advice. I liked it so much that I repeated it again, in 2009 in Gratias Vectigalibus, yet again in 2013 in “Don’t Forget to Say Thank-You”, still again in 2014 in Giving Thanks: “No, Thank YOU!” , even yet again in 2015 in Thanks Again!, even still again in Thankfully Repetitive, yet once more in Never-Ending Thanks, and last year in . Particularly Thankful This Time Around. For me, it does not lose its impact:

Have a Happy Thanksgiving. Set aside the hustle and bustle of life. Meet up with people who matter to you. Share your stories. Enjoy a good meal. Tell jokes. Sing. Laugh. Watch a parade or a football game, or both, or many. Pitch in. Carve the turkey. Wash some dishes. Help a little kid cut a piece of pie. Go outside and take a deep breath. Stare at the sky for a minute. Listen for the birds. Count the stars. Then go back inside and have seconds or thirds. Record the day in memory, so that you can retrieve it in several months when you need some strength.

I am thankful to have the opportunity to share those words yet again.

When the Tax Software Goes Awry

One never knows when, if at all, a tax issue will pop up in a television court show, and if one does pop up, what it will involve. Usually, the description of the episode does not mention tax, and the tax issue comes up collaterally. The other day, however, I knew there was going to be a tax issue because the description in the channel guide told me so. Of course I watched, because it would add to the ever-lengthening list of television court show episodes on which I have commented, including 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, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, and Admitting to Tax Fraud When Litigating Something Else.

This time, it was episode 63 in season six of Hot Bench. The case as well as a tax-focused television court show episode could begin. One of the judges opened with this description of the case: “The thing Americans fear most, being audited by the government.”

The plaintiffs, a married couple, sued the accountant who prepared their federal and state tax returns. The Commonwealth of Virginia Department of Revenue, after noticing larger than usual deductions and credits, contacted taxpayers, asking for an explanation. In turn, the plaintiffs contacted the defendant, who examined the returns and concluded there had been a software error.

The defendant explained to the court that when he examined the returns, he figured out that the software pulled amounts from the federal return onto the state return, generating erroneous deductions and credits. He also explained that when he spoke to someone at the Department of Revenue, that person informed him that thousands of Virginia taxpayers had been affected by this software glitch. Accordingly, the Department of Revenue waived all penalties but did not have the authority to waive interest.

The plaintiffs argued that the defendant should have noticed the error before filing the returns, and wanted him to pay the entire amount demanded by the Department of Revenue. The defendant replied that it was an error by the software and not his fault. He also pointed out that he was willing to pay the interest owed by the plaintiffs, but that during negotiations the plaintiffs refused that offer because they wanted him to pay the entire amount due, including the tax.

The court concluded that the defendant had not acted intentionally or maliciously and that the tax that was due was an obligation of the taxpayers that they would have paid on time had the software error not occurred. Accordingly, the court held that the defendant was liable for the interest.

No one mentioned the maker or seller of the tax software in question, and I have not made more than a cursory attempt to identify it because my search terms did not generate anything helpful. Errors in tax software do happen, as do errors in all sorts of software. That is a risk of using tax software. Yet when tax returns are prepared manually, errors also occur, and at a higher rate. Sometimes risk cannot be avoided, and the best course is to take steps that reduce risk even if it cannot be eliminated.

When Use of the Word “Tax” Gets Even More Confusing

On several occasions I have written about the misuse of the word “tax.” My explanation of the difference between a tax and some other charge appears in posts such as Please, It’s Not a Tax, So Is It a Tax or a Fee?, Tax versus Fee: Barely a Difference?, Tax versus Fee: The Difference Can Matter, and When is a “Tax” Not a Tax?. All but the last of those posts focused on the difference between different types of charges imposed by governments. In the last of those posts, I described why a fee or charge imposed by a person or entity that is not a government is not a tax and ought not be called a tax.

Now my attention turns to an interestingly named “google tax.” As described in this article, several countries have enacted taxes to deter “multinational corporations from shifting income to low-tax jurisdictions.” The taxes have formal names, such as Multinational Anti-Avoidance Law in Australia and Diverted Profits Tax in the United Kingdom, but these tax end up being called a “google tax” because they have been enacted in response to tax planning techniques used extensively by Google.

Recently, I discovered that the term “google tax” is being used to describe charges that are not taxes. According to Seth’s Blog, there is “The Google tax. Actually, there are two.”

The first of the two “taxes” described in the blog is the amount companies pay to push their google search results to more prominent positions. The second is the presumably increased cost of starting up businesses because new businesses are more difficult to find using google search.

It appears, though the Seth’s Blog commentary doesn’t say so, that Google’s monopoly or near-monopoly market position forces businesses to pay an amount they don’t want to pay and that they cannot avoid. That, however, does not make amounts paid to Google, or amounts paid to position a new business so that it shows up more often in Google searches, a tax.

There are many instances in which a person has no choice but to pay, even though the theorists claim that a person can always choose not to make a payment and suffer the consequences. Consider a person who arrives late at night at an airport after a long flight delay, is hungry, and discovers that not only are all but one of the food establishments closed but also that the open one has only hot dogs and apple juice in stock. The person might feel as though they have no choice but to pay for a hot dog and apple juice. Yes, in theory, the person can choose not to purchase the hot dog and apple juice, and suffer the consequences, such as hypoglycemia and dehydration. But as a matter of practical reality, the person has no choice. That does not make the cost of the hot dog and apple juice a tax.

From this perspective alone, the use of the word “tax” by Seth’s Blog to describe a charge imposed by a private enterprise is no different from the use of the word “tax” to describe the fee or charge imposed by Major League Baseball on high-spending clubs. That’s bad enough, but Seth’s Blog uses the phrase “google tax” when, in fact, that phrase has already been put to use as a shorthand to describe actual taxes that go by a variety of names.

So there is double confusion. Something that is not a tax is being labeled a tax, and it is being labeled with a phrase that already is in use to describe what are, in fact, taxes.

The term that would better, and far more accurately describe the costs criticized by Seth’s Blog is “monopolistic charge.” Note that I am not critiquing the substance of the concern raised by Seth’s Blog, as I think monopolistic charges pose a variety of concerns, dangers, and inequalities. My complaint is that by using the word “tax” the criticism of a private enterprise comes across to many people as another reason to criticize government, when in fact the problem is not one of government but of the private sector that survives beyond the voting booth. Once again, the misuse of the word “tax” is confusing and counterproductive.