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Closing Tax Gap

Cecille Isidro — Thu, 14 Aug 2008 16:26:00 -0400

Since the early 1980s, there has been a plethora of recommendations about how to reduce the tax gap. Many changes have been enacted, yet the gap grows. Proposals requiring additional information reporting or withholding are usually overlooked despite evidence that these techniques result in a low tax gap for wage earners. However, a significant information reporting rule was enacted in 2008. Its enactment though, seems to be more a result of its revenue potential than its role in a comprehensive tax gap reduction strategy.

Below, we'll review the tax gap and the recently enacted credit card information reporting provision, and explain reasons for the slow approach.

Tax Gap History

According to a 1994 GAO study, Tax Gap — Many Actions Taken, But a Cohesive Compliance Strategy Needed (GGD-94-123 (PDF)), the gross income tax gap for 1981 was $76 billion and $127 billion for 1992. By 2001, the tax gap had grown to $345 billion (IR-2006-28).

The 1994 GAO report noted: "Information returns are a proven way to promote compliance and help IRS find noncompliance." The GAO observed that Congress could do more to help improve compliance such as requiring: withholding on payments to independent contractors, 1099s for payments made to corporations, and basis reporting on 1099s for stock sales.

Many proposals have been made to reduce the tax gap. The 1994 GAO study lists 61 reports it issued from 1982 through 1993 on various aspects of the tax gap and compliance (Appendix II (PDF)). Proposals have also been made by the IRS, Treasury (PDF), the National Taxpayer Advocate, legislators, the AICPA and others.

The growing tax gap and need for revenue have led to greater focus on effective ways to reduce it. These activities include:

A conference by the AICPA, ABA, TEI, American Tax Policy Institute and American College of Tax Counsel held in June 2007 to discuss ideas to reduce the tax gap.

A tax compliance forum (PDF) held by the CBO, GAO and Joint Committee on Taxation in September 2007.

Sixteen tax compliance proposals are included in the President's 2009 revenue proposals (PDF). These measures include:

Proposal	10-Year Revenue Projection (millions)
1099s on payments to corporations	18.9
Basis reporting for security sales	16.9
Merchant payment card information reporting	13.8
Increase information return penalties	18.3

We have seen tax gap proposals included as revenue offsets to various tax bills. For example, Congressman Rangel's tax reform bill, HR 3970 (110th Congress) included basis reporting on 1099s for stock sales. This proposal was also included in a housing bill HR 5720 as well as a stand-alone bill, HR 878.

New Information Reporting Requirement

When a merchant allows a customer to pay with a credit or debit card, an entity, such as a bank, must process the transaction to enable the merchant to receive the funds. According to Treasury, the failure of some merchants to "accurately report their gross income, including income derived from payment card transactions, represents a significant part of the tax gap." (General Explanations of the Administration's Fiscal Year 2007 Revenue Proposals (PDF))

President Bush's budget proposals starting with FY2007 have included calling for regulations on information reporting of reimbursements made to merchants on credit cards, plus backup withholding. This information reporting idea finally made it into law via a statutory change. The Housing and Economic Recovery Act of 2008 (PL 110-289; July 2008) created IRC §6050W, Returns Relating to Payments Made in Settlement of Payment Card and Third Party Network Transactions. This rule requires payment settlement entities to file information returns with the IRS and the merchant. These returns are to include the merchant's name, address, taxpayer identification number (TIN), and the gross amount of the transactions the entity processed for the merchant. The provision covers credit and debit cards and third party payment networks, such as online payment systems.

As described in the Administration's FY2007 report (PDF), requiring the payment card issuers to file information returns should pose only a minimal burden because these issuers already provide the information to merchants. Backup withholding is viewed as leading to "material improvements in the compliance rates" of the merchants "without imposing a significant burden on the card issuers."

A de minimis exception provides that third party settlement organizations are only required to file returns regarding third party network transactions if the aggregate value of a merchant's transactions exceed $20,000 and the aggregate number of transactions exceeds 200.

Penalties are imposed for failure to file (IRC §6724). Backup withholding is required if a merchant does not provide a TIN (IRC §3406); effective for amounts paid after December 31, 2011. IRC §6050W is effective for calendar years beginning after December 31, 2010. For further details, see §6050W and the Joint Committee explanation (JCX-63-08 (PDF)).

Observations

Revenue reality: The Administration's FY2007 report (PDF) estimated that regulations calling for information reporting on payment cards would generate $225 million over 10 years. In the FY 2008 report (PDF), the estimate was up to $10.7 billion and for FY 2009 (PDF), $18.7 billion. The Joint Committee on Taxation (JCX-64-08 (PDF)) estimate for §6050W is $9.5 billion. This range of estimates likely reflects the challenges of measuring the tax gap, as well as the effect of a measure on compliance and enforcement.

Additional benefits: In testimony on the Administration's tax gap proposals, Treasury Assistant Secretary Eric Solomon made the following observations on additional benefits of credit card reporting (April 2007 testimony):

"[T]he proposed information reporting would assist the IRS by providing the merchant's overall volume of payment card sales in relation to expenses claimed and cash transactions reported. The reporting would also assist the IRS in analyzing the accuracy of reporting for payment card sales."

Complexities: In his 2007 testimony, Mr. Solomon also noted complexities in the credit card system due to the number of parties that can be involved in the reimbursement cycle. Refunds and cash back arrangements also pose problems. These issues should be addressed in regulations.

Small business concerns: In June 2008, the House Committee on Small Business held a hearing on electronic payment information reporting. Issues raised by those testifying included privacy, security, cost, the need for some entities to obtain new computer programming to comply, transaction complexity that will lead to inaccurate reporting or information that is not useful to verify gross receipts and not addressing unreported cash receipts instead.

Picking Up the Pace

Despite what appears to be increased concern over the tax gap, a comprehensive strategy for addressing it remains elusive. PAYGO (PDF) rules are the likely driver of piecemeal remedies. The information reporting provision that made it into the Housing Act had only weeks before being included as a revenue offset in an AMT relief bill (HR 6275).

A comprehensive approach to addressing the tax gap should yield a better result than the piecemeal, revenue targeting approach. Congress and Treasury could identify which measures would best address the most serious non-compliance problems. This approach likely would have led to enactment of measures to address non-reporting of cash transactions rather than credit card ones that already have audit trails. A comprehensive, strategic approach would likely have addressed causes of underreporting of payment card transactions. Many small businesses, particularly those that sometimes arise from online transactions, need guidance on recordkeeping and business reporting.

The piecemeal approach will likely remain for the 110th Congress as it works on AMT relief and extenders. The strategic approach will likely have to await tax reform activities in the 111th Congress.

Grabbing Remote Vendors

Cecille Isidro — Thu, 31 Jul 2008 10:56:00 -0400

As far back as 1872, when Montgomery Ward issued its first mail-order catalog, vendors have sold to customers without being physically present in the customer’s state. Although sales taxes have existed since the 1920s, we have no effective system for collecting sales-and-use tax on sales by remote sellers.

Today we’ll look closer at the history of the remote sales tax issue, clarify New York’s law change and note possible solutions.

Interstate Sales Tax History

As a 1965 congressional report noted: “The present system of State taxation as it affects interstate commerce works badly for both businesses and the States.” (State Taxation of Interstate Commerce Report No. 952, 9/2/65, Vol. 4, (the “Willis Commission” report))

While the 1965 congressional report made recommendations for administering state sales tax for interstate commerce, no action was taken. Litigation eventually led to our current sales tax nexus standard set by the U.S. Supreme Court in 1992 in Quill, 504 US 298. The Court ruled that physical presence was necessary for substantial nexus that would allow a state to impose sales tax collection obligations upon a vendor. A continuing issue is the amount and degree of physical presence needed. Many states provide some guidance on this question.

The Court also noted that per the Commerce Clause, Congress has the authority to “decide whether, when and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.”

E-Commerce Challenges

The e-commerce model makes it easy for a vendor to operate in one state and have customers in many other states. This increases the number of transactions in which states must look to their resident consumers to self-assess their use tax because remote sellers have no collection obligation.

Certainly, it is easier for states to have thousands of vendors collect and remit sales tax than to get millions of individuals to remit use tax. Auditing vendors is also more efficient than auditing individual buyers.

However, for a state to collect sales tax from a remote vendor, it must either convince the vendor to do so voluntarily or find a way for the vendor to have a physical presence in that state.

New York’s 2008 Legislative Change

Chapter 57 (April 08) broadens the definition of “vendor” at NY Tax Law §1101(b)(8). Under the new provision, sellers are presumed to be soliciting business and thus required to collect tax if, per an agreement, they compensate New York residents for directly or indirectly referring potential customers. Referrals may be made through a Web site or other means. The presumption only applies to sellers with over $10,000 of sales to New York customers made via the referrals in the prior four quarters. Sellers may rebut the presumption by showing that the residents did not solicit sales in New York for them (Bill Summary (PDF)).

The Governor’s budget estimated that this change would generate $47 million in 2008/2009 and $73 million in 2009/2010 — an indication that use tax compliance by New Yorkers is a problem. The New York State Department of Taxation and Finance has issued guidance on the vendor presumption (TSB-M-08(3)S (PDF)) and how to rebut it (TSB-M-08(3.1)S (PDF)). FAQs interpreting the new law also exist.

Vendor Reaction

In April 2008, Amazon filed a complaint challenging the constitutionality of the new provision. Amazon argues it has no physical presence in New York as required for sales tax collection. Per Amazon, the independent third-parties in its “Associates Program” perform advertising rather than solicit sales. Per Tyler Pipe, 483 US 232 (1987), such activity is not sufficient to find nexus. Amazon states that the associates are not its agents. Also, because membership in the program does not depend on residence, Amazon does not know which associates are legal residents of New York.

Amazon started collecting sales tax from its New York customers. As noted in its complaint, the new presumption “is effectively irrebuttable, even though it is not true.”

In contrast, Overstock.com, which also filed suit, terminated its relationships with its approximately 3,400 New York affiliate advertisers. (press releases of May 30, 2008 and May 15, 2008)

Counterpoint

A private ruling in Missouri issued in April 2008, found that a remote seller had no nexus in the state because goods were shipped by mail. The ruling also notes that under Missouri law, “advertising in the state through media” is not enough to establish nexus (LR 4702).

In a California Board of Equalization memo (PDF) (June 2008) on the New York law change, staff conclude that a link on an affiliate’s Web site does not by itself make the affiliate an authorized salesperson for the remote vendor.

Other Approaches

Arkansas (PDF), Minnesota (PDF), Idaho, and a few other states modified their sales tax laws to provide that a related party can create substantial nexus. For example, under Idaho’s rule (HB 320, Chapter 49), if a vendor and in-state business are related and use an identical or substantially similar name, trademark or goodwill to “develop, promote or maintain sales, or the in-state business provides services to, or that inure to the benefit of, the out-of-state business related to developing, promoting or maintaining the in-state market,” the vendor has substantial nexus.

These approaches also face constitutional challenges. Similar names or advertising alone is unlikely to meet the Quill nexus standard as it does not make the in-state entity an agent of the remote vendor and therefore does not create a physical presence for the seller. Several cases failed to find nexus in similar circumstances (for example, SFA Folio Collections, Inc., 585 A.2d 666 (Conn. 1991)).

In 2003, South Dakota enacted a rule prohibiting public corporations from doing business with vendors that do not collect sales and use tax (HB 1261, Chapter 34).

Solutions

As suggested in the 1960s, uniform rules would help both vendors and states. However, uniformity is difficult to achieve in the real world.

The closest recent attempt at uniformity is the Streamlined Sales and Use Tax Agreement (SSUTA) that at least 20 states have enacted. The SSUTA, offers simplification through uniform definitions, paperwork and registration. Adopting states must also offer amnesty to sellers who register to collect. It is unlikely that all states will adopt the SSUTA unless Congress provides an incentive or mandate. The SSUTA does not include rate simplification because local jurisdictions may set their own rates.

S. 34 and H.R. 3396 (110th Congress) propose that to the extent the SSUTA meets specified simplification standards, adopting states may collect sales tax from remote sellers. There is an exemption for small sellers with less than $5 million of remote taxable sales in the prior year.

The small seller exemption challenges the touted simplification. Also, unless states exempt purchases from small businesses from use tax, buyers still need to self-assess use tax.

Another solution to explore is better use of technology, such as at the time of sale having the buyer’s credit card charged sales tax by the state tax agency. This approach results in no filing obligations for vendors or buyers.

Looking Forward

The realities of e-commerce will continue to challenge states’ use tax collection efforts. Also, many buyers remain unaware of their use tax obligations. States will need to do more to improve their use tax self-assessment and must work together to convince Congress that sales tax can be collected from sellers without impeding interstate commerce. That’s more easily said than done.

A Tax Commission for California? How It Can Be Made to Work

Cecille Isidro — Mon, 28 Jul 2008 13:32:00 -0400

Both Governor Schwarzenegger and Assembly Speaker Bass have stated that they would like to form a bipartisan commission to find ways to improve California’s tax system. They seek to modernize our tax system, make the state more economically competitive, and have a system that produces stable revenues.

These are great goals. California’s tax system was designed decades ago in a manufacturing era when borders were important and tangible goods ruled. Our tax system was not designed for the current information age with its mobile capital, worldwide-based workforce, and goods and services transferable over the Internet. Serious work is needed to bring our tax system into the 21st century.

A tax study commission is not a new idea. We’ve had several in the past and recommendations were made. California’s last tax review group was called the Commission on Tax Policy in the New Economy. Formed in 2000 by the legislators and governor, it held 17 public hearings and issued its report, with recommendations, in 2003. There is also a 2000 report by then Assembly Speaker Villaraigosa’s Commission on State and Local Government Finance. We also have a 1999 report from then State Controller Connell’s SMART task force.

Very few of the numerous recommendations of these commissions were seriously considered by the legislature or enacted. What would be different if yet one more commission studied our tax system?

Well, taxes are complicated and thoughtful consideration of the strengths and weaknesses of our current system is needed to bring it into the 21st century ways of living and doing business. However, elected officials and the public must have a strong willingness to accept change for a commission’s work to be worthwhile. Otherwise, we’ll end up with yet one more unused report.

Here are six suggestions that should increase the chances that the commission approach will help improve our tax system.

First – serious commitment. There must be serious buy-in from the legislature and Governor. The commission should be established by legislation with the Governor and legislature selecting the members. Legislative hearings on the final report should be required within two months of its issuance. The tax-writing committees and governor must also be required to propose tax law changes in response to the report and hold legislative hearings by a specified date. If they find the recommendations unacceptable, they should be required to issue a statement explaining why.

Second – able, willing and non-partisan commissioners. Commission members should have a strong technical and practical understanding of our tax system and the economic impacts of taxes. They should understand today’s global economy and how it affects business decisions and how a tax system can support economic growth. Commissioners should be willing to propose changes even if they would result in tax increases for themselves or their employers.

Also, while the Governor and Assembly Speaker have called for a bi-partisan commission, they should consider a non-partisan one as it may get more support from the public. Governor Pawlenty of Minnesota recently formed the 21st Century Tax Reform Commission and noted that he only knew the party affiliation of two of its 15 members.

Third – principles and goals. A set of principles should be adopted and followed that support good tax policy, such as equity, efficiency, transparency and simplicity. The National Conference of State Legislatures has a set of these principles, as does the AICPA. Also, several states have useful sets of guiding principles for reform, such as Washington and Arizona. In addition clear goals for reform should be established that harmonize with California’s goals for economic growth, social welfare and the environment.

Fourth – reality. Taxes must make sense for the system to be respected such that compliance is high. An approach that might make great economic sense but is too difficult to comply with won’t be a lasting change. Also, change can’t happen overnight so transition rules must be considered.

Our current system was not designed with any thought of how technology can help compliance; today it must be considered.

Labor and capital are more mobile today than decades ago. Demographics have also changed. Consideration must be given to what has changed and that the economy, society and technology will continue to change. Mobility and state competition to attract businesses also makes consideration of how other states tax relevant in the design of California’s tax system.

In addition, state taxes affect other levels of government. Commissioners must be mindful of local government tax concerns and how tax system design can benefit both California and local governments.

Fifth – time-saving background work. There are numerous reports from other states, think tanks, business and government organizations, and academics that can help the commission with its work. Also, lessons can be learned from other states that have recently studied and reformed their tax systems, such as Ohio and New Jersey.

Finally – public education. Concurrent work is needed by the legislature and tax agencies to help the public understand current tax problems and their direct and indirect effects on their lives and the state. This will help ensure that the commission’s recommendations get the careful consideration they’ll need in order for tax system modernization to become a reality.

Tax commissions typically spend hundreds of hours on their task. Staff and individuals who present testimony to these commissions also devote numerous hours to the cause. California’s tax system is in need of improvement and a commission can accomplish a lot in making thoughtful recommendations towards that goal. The six suggestions outlined above should help ensure that the commission’s time is well-spent so that California’s tax system can indeed get a strong opportunity to join the 21st century.

Rethinking IRAs

Cecille Isidro — Thu, 17 Jul 2008 06:33:00 -0400

A Department of Labor retirement guide notes: “For many Americans, retiring in this new century is a mystery.” They’re living longer, they’re more personally responsible for their own retirement savings and they have many more savings options than previous generations did, which exacerbate the confusion. In June 2008, a House Ways and Means Subcommittee hearing explored options for expanding IRA participation. This article presents data about the mystery and IRA participation, highlights of the hearing and considerations for reform.

For general information about IRAs see IRS Publication 590 (PDF) and IRS FAQs.

Data

In 1974 when IRAs were created, life expectancy was 71.9 years (PDF) while in 2006 it was 78.1 years (Centers for Disease Control and Prevention).
People are working longer. About 70 percent of baby boomers (born 1946 to 1964) expect to keep working during normal retirement years (AARP, Reimagining America, 2005). From 1995 to 2006, the employment rate of individuals ages 55 to 64 increased 7.4 percentage points (California Budget Project, More Californians Are Working Later in Life (PDF), April 2007). Reasons for the change include greater longevity, insufficient retirement assets and personal desire.
In 2004, $3.5 trillion in assets was held in IRAs while defined contribution (DC) plans held $2.6 trillion and defined benefit plans (DB) held $1.9 trillion (GAO (PDF), June 2008).
Plan participation: (Labor Secretary Elaine L. Chao, June 2007)

Period	DB (private)	DC
1980	30 million	19 million
2005	22 million	57 million
Change	26.7% decrease	200% increase

In the same speech in which she provided this data, Secretary Chao noted:

Every year about one-third of workers change jobs.
Today’s workers are highly mobile.
From 1998 to 2004, less than 20 percent of IRA contributions were new retirement savings; over 80 percent of contributions were rollovers from other retirement accounts (GAO (PDF)).
From 1999 to 2002, 1.4 million individuals contributed to their traditional IRA each year while about 16 million individuals made annual contributions to their 401(k) plan (GAO (PDF)).
For 2004, 79 percent of all taxpayers were eligible to make an IRA contribution (about 145 million taxpayers), but only 10 percent (14.7 million taxpayers) actually did. Participation was highest among taxpayers with $200,000 or more of AGI and that group also made the largest average contribution. For eligible taxpayers with positive AGI, participation was greater among higher income taxpayers.

AGI	Number taxpayers	%	% of eligible	Contribution (000)	%	Avg.
$0	105,045	0.7	13.4	$339,361	0.7	$3,231
< $10,000	457,638	3.1	2.2	$878,336	1.8	$1,919
< $20,000	752,288	5.1	3.8	$1,286,603	2.6	$1,710
< $30,000	1,250,381	8.5	7.1	$2,498,356	5.1	$1,998
< $40,000	1,310,584	8.9	8.9	$3,052,654	6.3	$2,329
< $50,000	1,401,947	9.6	11.4	$3,677,978	7.5	$2,623
< $75,000	2,977,444	20.2	12.3	$7,932,144	16.3	$2,664
< $100,000	2,370,275	16.1	15.3	$7,503,213	15.4	$3,166
< $200,000	3,005,607	20.5	19.8	$12,982,307	26.7	$4,319
> $200,000	1,074,851	7.3	28.9	$8,577,702	17.6	$7,980
Total	14,706,060	100.0	10.1	$48,728,654	100.0	$3,314

Participation and contributions were also greater for older taxpayers. In 2004, 4.5 percent of eligible taxpayers under age 30 contributed an average of $1,875 while 16.8 percent of eligible taxpayers ages 60 to 69 contributed an average of $3,849 (Bryant, Accumulation and Distribution of IRAs (PDF), IRS, 2004).

A 2007 Department of Labor (DOL) compensation survey found variances in retirement benefits available to private industry workers based on the type of work and employer:

Category	Access	Participation	Take-up*
Full-time	70	60	85
Part-time	31	23	73
Goods producer	70	61	86
Service provider	58	48	83
< 100 workers	45	37	82
> 100 workers	78	66	85
Avg. wage < $15/hour	47	36	75
Avg. wage > $15/hour	76	69	90
All	61	51	84

* Percent of workers with access who participate.

Looking from the provider perspective, 46 percent of employers in the private sector offer retirement benefits. Just 44 percent of employers with less than 100 workers offer retirement benefits compared to 85 percent for those with 100 or more workers (DOL, National Compensation Survey (PDF)).

In 2005, only about one in four (27%) individuals with IRAs contributed the maximum allowable amount (Employee Benefit Research Institute, Notes (PDF), May 2008).
In 2001, 60 percent of taxpayers either had assets in, or income from an IRA or employer-sponsored plan. Thus, 40 percent of taxpayers have no retirement accounts although they may have other assets for retirement (Sailer & Holden, IRS, 2004 (PDF)).

Hearing

The June 2008 congressional hearing focused on a GAO (PDF) report on IRAs, the role IRAs play in the retirement system and proposals for improvements to employer-provided IRAs. One such proposal, H.R. 5160 (110th Congress), calls for various simplifications to employer-established IRAs as well as reduced restrictions and allowance of automatic enrollment.

The GAO report explains some of the barriers that prevent small employers from providing IRA options to employees — either ones that are employer-sponsored (Simplified Employee Pension plan (SEP) or Savings Incentive Match Plan for Employees (SIMPLE)) or a payroll-deduction IRA. These barriers include:

Costs
Confusion about the employer’s role in encouraging IRA contributions
Insufficient incentive for employers
Lack of awareness

The DOL (PDF) and Treasury (PDF) pointed out that they provide publications, seminars and model plans. The DOL’s Interpretive Bulletin 99-1 (PDF) provides guidance on the actions an employer can take with a payroll deduction IRA so as to avoid becoming subject to ERISA rules. Also, the employer may be reimbursed by the IRA sponsor for the reasonable costs of managing the program.

While those testifying tended to agree that automatic enrollment would help increase participation, additional problems were noted with the current system. These included complexity due to varying types of IRA plans, some contribution limits being too restrictive, tax benefits skewed to higher income individuals, high account management fees for individual accounts and risk.

Retirement Considerations for the 21^st Century

The 21^st century workforce will challenge traditional notions of retirement savings arrangements. Employer costs, business competition and employee turnover will continue to make DC plans the preferred retirement benefit. Worker mobility and turnover though will continue to challenge access and effective participation in employer-sponsored plans. Increased options and desire to work past the traditional retirement age will challenge individuals to know how much to save.

New thinking is needed given the number of workers without employer-provided access to retirement savings opportunities, low participation by those eligible to contribute to IRAs and greater retirement savings needs caused by greater longevity. The old models are not working effectively today. Minor changes may not be enough to adequately serve either employers or workers.

Consideration must be given to how existing tax breaks for retirement savings can be utilized to lead to broader coverage in a more equitable and simple manner. Individuals will need greater understanding of investments, savings strategies and budgeting as they take on greater responsibility for managing their own retirement assets.

The American workforce’s dearth or retirement saving knowledge and participation presents many opportunities for CPAs. Policymakers need help understanding where existing rules fail to generate adequate retirement savings and cause challenges for employers. The growing number of individuals managing their own retirement plan and savings decisions will require a higher level of financial literacy than most workers needed years ago. More individuals may turn to the CPA profession for help in creating and maintaining their retirement plans. Yet, the data indicate that many individuals may not know they need to take charge of their retirement planning or how to do it.

California's Tax Loopholes That Aren't

Cecille Isidro — Fri, 11 Jul 2008 07:25:00 -0400

The package of six tax increases that passed in the Budget Conference Committee this week includes two described as loophole closers. Who can argue against closing a loophole? Unfortunately, the two provisions proposed to be changed aren't loopholes.

A loophole is the ability to use a rule in an unintended way. It may be due to poor wording or an incomplete definition in the law. For example, assume a state has a lower property tax rate for agricultural land to help farmers. However, the definition of agricultural land is so broad that the owner of a residence on 10 acres just needs to plant 20 fruit trees to qualify for the tax break. That's a loophole because a flaw in the law enables the rule to be used in unintended ways.

The two “loopholes” proposed to be corrected in the Budget Committee proposal are the net operating loss carryover for corporations and the $294 dependent credit for individuals. Neither are loopholes because each is being correctly used as intended.

A business has a net operating loss (usually called “NOL”) in any tax year in which its deductible expenses are greater than its revenue. A business may have a NOL due to a bad year, a business cycle that is longer than a tax year, or it could be a sign that the business is failing. It is not unusual for an income tax law to provide some relief by allowing the business owner to use the NOL against positive taxable income in prior or future years.

Does an income tax law have to allow for a NOL to be used to reduce income in a good year? No. Typically the rule is provided for equitable reasons because tax laws require annual tax returns. If tax returns were instead filed every two years, some businesses would not have a NOL.

The NOL carryover rules in California are being used as intended. Thus, changing the rule to suspend the use of NOLs for three years is not closing a loophole.

The other “loophole” closer is to reduce the $294 dependent credit for individuals with adjusted gross income above $150,000. The dependent credit is greater than the personal credit of $94. It was raised a few years back to provide a greater benefit to families. The Budget Committee hasn't stated that high-income individuals have found a way to claim the credit without actually having a dependent. Thus, it is not closing a loophole, it is just cutting back on this tax break.

So, why might the loophole language have been used?

Arguably, if you're going to get rid of a tax break, calling it a loophole should make it easier. But this approach distracts from the real changes that are needed to our tax system. There are many special deductions, credits and exclusions in our income tax law. Some of these serve an important purpose such as measuring ability to pay or encouraging charitable contributions. But some have outlived their usefulness, are overly generous or are poorly targeted such that they benefit taxpayers who don't need assistance.

Periodic review of these tax provisions would be useful in improving our tax system and state budget. Such a review would uncover tax breaks that could appropriately be cut back. It might even uncover some true loopholes.

Taxing Some Services Could Help if It's Fair and Simple

Ron Tang — Sun, 29 Jun 2008 06:39:00 -0400

California State Board of Equalization Chair Judy Chu believes it is time to address our deficit and modernize our sales tax by applying it to services. Her call to modernize our sales tax would be a good start in addressing an underlying cause of our budget problems.

Taxing services is not an outlandish idea. Most states already tax more types of services than does California.

Taxing services is also not a bad idea. Lifestyle changes have led us to spend less on goods subject to California sales tax and more on non-taxable services. For example, two-earner households have greater needs for laundry and child care services. They also have more money to pay for non-taxable entertainment and high-end personal services. This change has eroded our tax base and is one reason for our budget problems.

We must be thoughtful in making this major change though. We don't want a rerun of the snack tax fiasco of the early 1990s. That tax was so complicated that voters not only repealed it, but also changed our constitution so we'd never again tax food.

Being thoughtful means considering three factors: fairness, simplicity and the realities of business taxation.

First is fairness. Expansion of the tax base should be accompanied by a rate reduction. Besides making the change more tolerable and the state more business friendly, it makes the sales tax fairer.

California's 7.25 percent state sales tax rate is the highest among states (and even higher in many counties). Imposed at a flat rate regardless of one's income, a sales tax is a more significant cost to low-income individuals relative to higher-income individuals. This inequity can be reduced by lowering the tax rate.

Services, particularly high-end ones like personal trainers and gardening, are purchased by high-
income individuals. A fairer system would not exempt this consumption while taxing consumption of tangible goods by lower-income individuals.

Fairness also means helping service businesses that must start collecting and remitting sales tax. The Board of Equalization should be allotted funds to help businesses get ready. These businesses should also get refundable tax credits to help cover costs of getting ready to collect the tax for the state.

Second, simplicity should be considered, particularly for small service businesses. For example, rather than monthly reporting, there should be quarterly or annual reporting. Reporting forms should also be as simple as possible.

Finally, we should avoid taxing services that are primarily used by businesses. This may seem too generous, but making businesses pay sales tax creates many problems. Any sales tax paid by a business will be factored into prices they charge for goods and services. Since those goods and services are subject to sales tax, consumers end up paying a tax on a tax. This is called pyramiding.

Pyramiding hides the true tax amount consumers pay, making the tax system less transparent. Think about it -- while food is tax-exempt in California, prices include sales tax paid by the food producers, wholesalers and retailers. We just don't see it in the price we pay.

Imposing sales tax on businesses can affect operational decisions. For example, taxing services may lead larger businesses to provide more services in-house rather than hiring service businesses. This also raises a fairness issue for small businesses that must continue to rely on taxable outsourcing.

To avoid pyramiding, services primarily used by businesses, such as consulting, should remain non-taxable. This also simplifies the system. For example, if a California business hires an advertising firm with employees in California and Nevada to prepare ads to run in 10 different states, how much of the fee should be subject to California sales tax? In 1987, this type of issue led to the repeal of a services tax in Florida after only six months.

So, let's address budget problems caused by an eroding sales tax base by taxing personal services. Accompanied by a rate reduction and simplification efforts, we'll also improve our overall tax system and help bring it into the 21st century.

Not Flat

Ron Tang — Thu, 26 Jun 2008 08:04:00 -0400

PL 86-272 provides that if the only in-state activities a business has is the solicitation of orders for tangible personal property that is approved and filled from outside the state, the state may not impose a net income tax on the business. States set the rules, within due process and commerce clause constraints of the U.S. Constitution, for businesses that sell services or intangibles.

States tend to take broad approaches. A 2007 Illinois Department of Revenue ruling notes that "as a general rule, the Department interprets the concept of nexus as broadly as possible (No. IT 07-0033 (PDF), September 2007)."

Below, we'll review recent income tax nexus rulings and proposals for improving guidance.

Selected Developments

In May 2008, the Oregon Department of Revenue (DOR) adopted Rule 151-317.010 (PDF) to clarify that a corporation can have substantial nexus in the state for corporate excise and income tax purposes without having a physical presence there. "Substantial nexus exists where a taxpayer regularly takes advantage of Oregon's economy to produce income for the taxpayer and may be established through the significant economic presence of a taxpayer in the state."

To determine if substantial nexus exists, the DOR may look at the regularity of contacts in the state, deliberateness of marketing to Oregon customers, and significant gross receipts from Oregon customers or from the use of intangible property in Oregon. Also relevant is whether the business is protected by Oregon laws, has court access, uses state roads, benefits from Oregon's educated workforce, or receives "police and fire protection for property in Oregon that displays taxpayer's intellectual or intangible property."

In Florida Technical Assistance Advisement 07C1-007 (October 2007), the DOR held that a financial services firm providing various services to retailers in Florida had substantial nexus for income tax purposes despite lack of a physical presence. For example, T, licensed with the Florida Department of Financial Services, has a number of authorized retailers in the state.

The DOR relied on Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444 (1940): the "simple but controlling question is whether the state has given anything for which it can ask return." Florida had provided T a license, access to Florida laws and courts, and "an orderly and regulated marketplace." T would not be able to operate in Florida without its retailers and made "purposeful direction towards the Florida market."

The DOR applied the tests of Complete Auto Transit, Inc., 430 U.S. 274 (1977) to determine that the commerce clause posed no problem.

The DOR relied on cases from other states that held that the physical presence standard of Quill (504 U.S. 298 (1992)) does not apply for income tax purposes. It also noted that the U.S. Supreme Court had declined to hear a state case on this issue. The DOR found these cases to be "persuasive, especially given the fact that the U.S. Supreme Court declined to hear the cases." While not mentioning the cases, the DOR was likely referring to MBNA, 640 SE2d 226 (2006) and Lanco, 188 NJ 380 (2006), cert. denied (June 2007). In these cases, the courts held that for commerce clause purposes, a "significant economic presence test" was appropriate to determine if a business had a substantial nexus in a state for income tax purposes (MBNA).

A 2008 ruling by the Virginia Department of Taxation (DOT) reminds us that nexus may not be a concern if the business has no income apportioned to the state. In Ruling No. 08-63 (May 2008), a credit card company headquartered outside of Virginia sought guidance on whether it had nexus for income tax purposes. The company had no property or employees in the state. From outside of the state, the company used mail, telephone and Internet ads to solicit credit card customers in Virginia.

Per the ruling, a corporation can have Virginia source income if it has sufficient business activity in-state such that the apportionment factor is positive. The ruling avoided the nexus issue by noting that even if the company has nexus, it is unlikely to have income apportioned to Virginia. With over 70 percent of the company's income derived from interest and credit card processing fees, it is a financial corporation which, under Virginia law, must apportion income using a cost of performance measure. Without property or employees in the state, the costs of performance occur elsewhere.

Similarly, a 2008 Nebraska ruling (24-08-1) stated that trucking companies without a business location in the state that use Nebraska roads are subject to income tax. However, if a company's Nebraska activities are de minimis, it need not apportion any income to the state and thus owes no income tax.

In Nebraska a trucking company must apportion income to the state if the company "owns or rents any real or personal property in this state, other than mobile property; makes any pick-ups or deliveries within this state; travels more than 25,000 mobile miles within this state or the total mobile miles within this state exceed three percent (3%) of the total mobile miles traveled in all states; or, makes more than 12 trips into this state."

Concerns

These rulings illustrate challenges some companies face in determining where they owe income taxes. Businesses not covered by PL 86-272 must review the law in every state in which they have customers, employees, agents or any activity. Where it has any physical presence, it must review the law to determine if it is enough (for example, how many miles its trucks drove in the state). Even without physical presence, it must determine if it derived some benefit in the state (for example, a sign displaying a trademark) or generated more than de minimis receipts.

If the company determines it has nexus, it must review the state's apportionment rules to determine if any income is taxable.

Lack of uniformity among states generates uncertainty and costs for businesses.

Solutions

S 1726 and HR 5267 (110th Congress) would expand PL 86-272 to apply also to services and intangibles. They require a physical presence for a business to be subject to income tax. The bills generally define physical presence as including employees, an exclusive agent or tangible property. Presence of less than 15 days or to conduct limited or transient business activity is ignored.

Congressman Rick Boucher (D-Va), a co-sponsor, suggests that this approach will "not diminish the ability of states and localities to collect tax revenue... [but instead] rationalizes and makes more predictable the process of doing so. (Cong. Rec. February 2008, E137 (PDF))" In February 2008, the House Small Business Committee held a hearing on tax and nexus issues small businesses face that "significantly inhibit their ability to engage in commerce."

On another front, National Conference of Commissioners on Uniform State Laws (NCCUSL) appointed a drafting committee to review the Uniform Division of Income for Tax Purposes Act (UDITPA). The committee's rewrite work could include nexus.

Uniformity among states will not be guaranteed through a UDITPA revision because states are not required to adopt the act, although Congress could provide some incentive for doing so. Federal legislation would provide uniformity, but agreement among legislators, states and businesses on what that uniformity should be remains elusive (see links).

Conclusion

Reaching a flat world in U.S. commerce depends on reaching appropriate nexus rules that enable businesses to easily engage in domestic commerce and for states to have the resources to serve the needs of citizens and businesses.

Gross Receipts Taxes

Ron Tang — Thu, 22 May 2008 10:34:00 -0400

In recent years, concern over declining corporate tax collections, aggressive tax planning and state revenue needs have led a few states to consider and even enact a gross receipts tax (GRT) on companies that do businesses within its borders. On the surface, a GRT is simple since it allows no deductions. The broad base allows for a very low rate that can make the tax more palatable. Further, all businesses are typically subject to the GRT, with the result that all businesses contribute something to state coffers.

Yet, many oppose the GRT because of its inherent flaws, one being that it is not tied to a business's ability to pay. Below, we'll look at reasons why some state tax reform discussions include the GRT and how the GRT stacks up against the principles of good tax policy. For more information see Gross Receipts Taxes (April 2008).

Rationale

The Multistate Tax Commission reports that in 1962 and 1980, corporate income taxes represented 6.4 percent and 9.7 percent of state tax receipts, respectively. In 2002, that percentage dropped to 4.9 percent (Federalism at Risk (PDF), 2003).

States have also seen corporations increasingly using a mix of tax provisions to optimize planning through the use of "nowhere income," holding companies, beneficial apportionment factors and state tax incentives. Budget deficits have led many states to reconsider their tax systems. The Center on Budget and Policy Priorities reports that a majority of states face budget problems for fiscal year 2009.

These concerns led to GRTs in Ohio (2006) and Michigan (2007). Ohio's GRT was part of a reform measure that also reduced the top personal income and sales tax rates and eliminated the corporate franchise and tangible personal property tax. Michigan's GRT arose from budget concerns and a desire to improve the business climate by encouraging jobs, investment and R&D (Michigan Dept. of Treasury and Governor's statement (PDF)).

These concerns also led Illinois Governor Blagojevich to propose a GRT in March 2007. He noted (PDF) that the average Illinois taxpayer paid $1,500 of state income taxes. However, an average of only $151 of corporate income tax was paid by 12,521 of the largest corporations in the state. He proposed (PDF) a "historic Tax Fairness Plan" to "replace the loophole riddled corporate income tax with a simple, fair" GRT.

However, his proposal had strong opposition. The Illinois Association of Realtors issued a report noting that the GRT would increase housing costs and result in a loss of about 14,000 construction jobs due to pyramiding (where tax is paid on a tax). In May 2007, the Illinois General Assembly voted unanimously to oppose the GRT (HR 402, May 2007).

An understanding of the pros and cons of a GRT helps explain how it can be so loved and hated.

Advantages and Disadvantages

Evaluation of a GRT within the context of the principles of good tax policy (PDF) follows.

Equity: A GRT is not based on a taxpayer's ability to pay and does not tie well to benefits received by the state. Profit margins vary by business and industry. A GRT is more favorable to a high-margin business than a low-margin one. A GRT can tend to favor a larger business that is (or can become) vertically integrated relative to a small business that must buy from other companies with GRT included in the prices.

A GRT often applies to all forms of businesses that can improve equity compared to having different tax systems for sole proprietors and corporations. A GRT can also be viewed as equitable in that every business pays something.

Certainty: While a GRT may be certain for an in-state business, it can be less certain for multistate businesses. For example, the guidance and protection of P.L. 86-272 does not apply since a GRT is not a net income tax, leaving taxpayers with less certainty as to where they may be subject to GRT.

Simplicity: Lack of deductions makes a GRT simpler to compute and audit relative to an income tax. However, GRTs tend to vary among jurisdictions as to the base, sourcing, nexus and apportionment rules, which increases complexity. Some states also address GRT problems, such as pyramiding, by allowing certain deductions or having different tax rates for different industries, which can also create complexities.

Neutrality: With no deductions or credits, a GRT is less likely to affect business decisions than a typical income tax. However, some GRTs do include deductions and credits.

The significant neutrality concern is pyramiding in which tax is paid on a tax. Because GRT is owed by each company providing services or goods along a production and distribution chain, it is built into prices charged, with GRT again paid by the purchaser. A 2002 study of Washington's Business & Occupation tax (a GRT) found that it pyramided an average of 2.5 times ranging from about 1.5 times for service businesses and over six times for some manufacturers. Pyramiding can affect business operational decisions such as encouraging provision of goods and services in-house or purchasing from firms not subject to the GRT (that might be out-of-state firms).

Michigan partially addresses pyramiding by allowing companies to deduct purchases from other firms from the GRT base. Some states use multiple rates. However, pyramiding is inherent in a GRT. States eager to reduce pyramiding should consider a value-added tax since it is structured to eliminate pyramiding.

Economic growth: A GRT can be harmful to start-ups that tend to operate at a loss. The pyramiding effect and any unintended consequence of a GRT encouraging firms to purchase from out-of-state firms can also harm economic growth.

Transparency: A GRT is not visible because typically businesses may not separately state it on sales invoices. Also, it is not obvious how much GRT is included in prices due to pyramiding.

Appropriate government revenues: A state may find that a GRT helps it achieve its revenue and economic development goals. However, if that result is achieved with a modified GRT with multiple rates and special deductions and credits, a net income tax could probably have been used instead. A GRT may increase sales tax revenues because the GRT is factored into prices charged. A state may prefer a GRT over an income tax because there is no need to consider whether it should conform to federal income tax changes. Finally, states may find that a tax based on gross receipts rather than net income is more stable.

Is It Worthwhile?

Despite the strong negative reaction to a GRT in Illinois, Ohio, Michigan and Texas enacted GRTs in the same time frame.

As states consider tax reform, they should start first by looking at their income taxes, since such levies can be modified to have a broader base and lower rates. States must also consider whether a GRT comports with their economic development goals and is consistent with what comparable states are doing.

If a GRT is created, it will certainly be more acceptable if it replaces other business taxes and addresses some of the concerns we discussed earlier in this article. States have a tremendous opportunity to learn from the states that recently enacted GRTs.

As states struggle to deal with budget problems, we are likely to see more consideration of GRTs despite the criticism against them. However, the exercise might lead states to more effectively consider how existing taxes can be improved.

Goodbye State Tax Deduction

Ron Tang — Thu, 08 May 2008 00:52:00 -0400

The 1984 Treasury Department report (PDF) that laid the foundation for the base broadening and rate reductions of the Tax Reform Act of 1986, called for complete repeal of the itemized deduction for state and local taxes. Citing similar reasons, the 2005 final report of the President’s Advisory Panel on Federal Tax Reform also called for repeal. Yet, there are also proposals to make permanent the ability to deduct either state income or sales tax (for example, HR 3592, 110th Congress).

Below we’ll get some background on the state and local tax deduction and then look closer at arguments both for and against the deduction to understand why it will be part of broader tax reform discussions in years to come.

Brief History

The deduction for state and local taxes dates back to 1913 when the federal income tax was introduced. The Tax Reform Act of 1986 repealed the deduction for sales tax. The American Jobs Creation Act of 2004 allowed individuals to deduct either state income tax or sales tax starting in 2004; this provision expired after 2007 (Congressional Research Service, Federal Deductibility of State and Local Taxes (PDF), November 2007).

Data

The following data are from a 2008 Congressional Budget Office (CBO) report on the deduction.

About 35 percent of individuals itemize deductions.
For 2004, the average tax deduction per return that claimed the deduction was $6,767. The range was a high of $13,109 in New York to a low of $3,508 in Alaska.
For 2007, the deduction reduced federal tax collections by about $50 billion.
Distribution of the benefit of the tax deduction for 2004:

Adjusted Gross Income (AGI) Range ($) Percentage of tax benefits

0 - 40,000 3.7

40,000 - 75,000 15.7

75,000 - 100,000 14.2

100,000 - 200,000 29.5

200,000 - 500,000 13.6

500,000+ 23.3

Adjusted Gross Income (AGI) Range ($)	Percentage of tax benefits
0 - 40,000	3.7
40,000 - 75,000	15.7
75,000 - 100,000	14.2
100,000 - 200,000	29.5
200,000 - 500,000	13.6
500,000+	23.3

The Arguments

Strong arguments can be made to repeal, retain or expand the tax deduction. A summary of key arguments follows:

Ability to pay: Under an ability to pay perspective, mandatory tax payments represent funds not available for paying other taxes. Thus, a tax deduction is justified in order to measure ability to pay.

The counter-argument is that taxpayers derive both direct and indirect benefits from sub-national taxes. Direct benefits might include tree trimming while indirect benefits include a safer community due to police protection. These benefits are not included in income and thus, expenditures to produce the benefits should not be deductible.

Tax on a tax: When a portion of one’s income is used to pay taxes, inclusion of that income in the tax base results in a tax paid on a tax. Yet this concern appears to be somewhat unimportant because most states do not allow a deduction for federal taxes paid and the federal government does not allow a deduction for all taxes paid.

Spillover: While taxpayers benefit from taxes paid, others benefit as well, including sometimes, taxpayers in other jurisdictions. To the extent there are spillover benefits, a federal deduction is warranted.

The counter-argument is that taxpayers have control over their sub-national taxes through voting and decisions on where to live. Thus, if the taxes yield spillover benefits, the taxpayers should not be compensated by higher taxes on others.

President Bush’s Advisory Panel noted that the tax deduction provides a subsidy for public services that should be “treated like any other nondeductible personal expense, such as food or clothing” with the cost “borne by those who want them -- not by every taxpayer in the country.”

Lack of control/insufficient subsidy: Since the federal government does not control state and local tax systems, the tax deduction reduces the federal government’s control over its own revenues and what it chooses to subsidize.

The deduction can affect state and local tax system design. For example, criteria suggested by the California Legislative Analyst’s Office to evaluate tax proposals includes whether any new taxes are deductible for federal income tax purposes so that the state can “shift” tax burden to the federal government.

The burden is really shifted to other taxpayers. Also, the tax deduction yields greater benefits to itemizers in high tax states. The federal government is unable to shield taxpayers in low tax states from subsidizing taxpayers in high tax states. Some might argue that direct federal subsidies would be preferable over the indirect subsidies that result from the tax deduction.

Cost: The tax deduction is one of the largest federal “tax expenditures” in terms of revenues not collected due to the deduction. The 1984 Treasury report justified repeal by describing the deduction as “one of the most serious omissions from the Federal income tax base (PDF).” A counterargument ties back to ability to pay and the proper measure of the income tax base. Some would argue that a focus on “tax expenditures” leads to the view that all income belongs to the government (for example, see Joint Economic Committee, Tax Expenditures (PDF), 1999).

Fairness: Deductions provide a greater benefit to individuals in higher tax brackets relative to those in lower brackets. Also, the benefit of the tax deduction is greater for itemizers in high tax states (although reduced by the AMT). Some individuals pay higher federal taxes to offset the reduced revenues from the deduction.

Considering that taxpayers do get benefits from sub-national taxes, the 1984 Treasury report noted the following fairness concern (PDF): “Allowing a deduction for State and local taxes simply permits taxpayers to finance consumption expenditures with pre-tax dollars.”

On the other hand, fairness was the argument used to support the return of the sales tax deduction in 2004. Some would argue that the fairness of the deduction would be improved by broadening it to cover more types of taxes, rather than curtailing it. This approach might also lessen the importance of federal tax rules on decisions of sub-national governments over the types of taxes they impose (although taxes would still be favored over user fees).

Relevance in tax system reform: Due to the size of the tax deduction in terms of reduced federal revenues, repeal is often suggested in order to allow broadening of the income tax base and lowering of rates. Repeal would also reduce the number of itemizers, providing additional simplification. Federal reform proposals also include replacing the income tax with a consumption tax, which has no deduction for sub-national taxes.

Proposals

In addition to the proposals noted earlier, the 2008 CBO report on the deduction, prepared at the request of the Senate Budget Committee, analyzed five proposals for the tax deduction:

repeal
a two percent of AGI limit
a $5,000 cap, adjusted annually for inflation
replacement with a 15 percent non-refundable credit
repeal except for real estate taxes

Looking Forward

Itemizing and AMT have already eliminated the state and local tax deduction for many individuals. Will policymakers continue to chip away at it further?

The state and local tax deduction mostly survived the 1984 call for its repeal, yet its imperfections have once again been noted and it will be on the table in upcoming tax reform discussions. These discussions have begun as evidenced by Congressman Rangel’s reform proposal (H.R. 3970, 110th Congress) and a Senate Finance Committee hearing on April 15, 2008. Proposals will include base broadening with rate reductions, as well as a consumption tax to replace the income tax. These discussions, along with AMT reform considerations, will involve examination of the state and local tax deduction, as well as other tax preferences.

Gross Receipts Taxes

Ron Tang — Thu, 24 Apr 2008 06:21:00 -0400

Recent tax reform efforts in Ohio, Texas and Michigan have led to an increase in the number of states imposing gross receipts taxes (GRT). Let's take a closer look at GRT and some important legal issues surrounding it.

Overview

The Multistate Tax Compact defines a GRT as "a tax, other than a sales tax, which is imposed on or measured by the gross volume of business, in terms of gross receipts or in other terms, and in the determination of which no deduction is allowed which would constitute the tax an income tax" (Article II (PDF)).

In 2005, Ohio enacted a GRT called the Commercial Activity Tax (CAT) that is now imposed on all types of business entities. The legislature described the CAT as a tax on the "privilege" of doing business in Ohio -- not specifically a sales tax. The rate is 0.26 percent of the business's annual receipts over $1 million. Businesses with receipts of $1 million or less pay a flat fee of $150 and business with receipts of $150,000 or less owe no tax at all. The rate can be adjusted based on tax collections. The Ohio CAT replaced the state's corporate franchise tax.

In contrast, the recently enacted Michigan GRT is a modified GRT imposed at a rate of 0.8 percent of gross receipts less purchases from other firms. Some jurisdictions with a GRT apply different rates to different industries.

Design and Legal Constraints

Is a GRT an income tax, a sales tax, a privilege tax or something else?

The Ohio CAT cannot be passed directly through to customers or shown separately on a customer invoice. Per a Q&A from Ohio's Department of Revenue, the CAT is not considered a sales tax, but is instead a tax on business activity. However, the CAT can be included in the overall costs of doing business and factored into the prices the business can charge.

Generally, the "true economic impact of a tax is what ultimately determines its nature" (In re: Advisory Opinion To The Governor, 509 So. 2d 292 (S. Ct. Fl 1987)). If a business has all of its sales subject to sales tax and is subject to a GRT on those sales receipts, its sales tax and GRT base would be the same. However, the GRT operates differently from a sales tax. Generally, a sales tax exempts sales made for resale while a GRT does not. Also, a sales tax is separately shown on sales invoices, while typically a GRT is not. In addition, when, for example, Taxpayer in State Y purchases from an out-of-state vendor, Taxpayer owes use tax to State Y. However, State Y won't necessarily collect GRT on the transaction.

The nature of a GRT is relevant in at least three situations.

State law prohibits or requires special treatment of a particular type of tax. In Ohio Grocers Association v. Wilkins (06CVH02-2278 (PDF), 8/24/07), the Ohio CAT was challenged as unconstitutionally imposed on food sales. The CAT was upheld as an excise tax on the privilege of doing business in Ohio rather than imposed on food sale transactions. In Volusia County Kennel Club v. Haggard, 73 So.2d 884 (S Ct. Fl 1954), cert denied 348 US 865 (1954), the court held that a GRT on gambling was a privilege tax rather than an income tax and therefore was not prohibited under Florida law.
Treatment of the tax by other states. For example, Wisconsin law does not allow a deduction for a GRT, but GRT paid might generate a credit for income taxes paid to another state.
Determining the appropriate nexus standard. Nexus guidance under P.L. 86-272 only applies to net income taxes and so does not apply to a GRT. Thus, businesses with customers, employees or property in a GRT state must review the state's law to determine if they owe GRT. Such laws pose constitutional issues if too broad in their reach.

Controversial Features

Some GRT features have generated or likely will generate legal challenges for some taxpayers and jurisdictions.

Nexus: The CAT nexus standard is modeled on the Multistate Tax Commission's factor presence standard (PDF). An out-of-state business is treated as having substantial nexus in Ohio and thus subject to the CAT if it meets any of the following criteria: (1) at least $500,000 in taxable gross receipts in Ohio, (2) at least $50,000 of property in Ohio, (3) at least $50,000 of payroll for work done in Ohio, or (4) at least 25 percent of its total property, payroll or sales in Ohio. This standard is different from what Ohio uses for its sales and franchise taxes.

In contrast, a business has nexus in Michigan if it has a physical presence there for more than one day during the tax year or it "actively solicits" (PDF) sales in Michigan and has unapportioned gross receipts of $350,000 or more sourced there.

Challenges are likely with new nexus standards and issues as to the nature of a GRT. Is a physical presence required? Can a modified GRT be considered a net income tax such that PL 86-272 applies?

Sourcing: Determining whether a business is subject to tax and if so, how much of its receipts are taxable, can raise apportionment issues and commerce clause issues.

Differences in sourcing rules stem from varying purposes that states have for their GRTs. Ohio does not tax export sales, indicating that the state is encouraging businesses to locate in state and have customers out of state. In contrast, Washington's GRT (called the Business & Occupations (B&O) tax) is imposed on businesses for engaging in commercial activities within the state (RCW 82.04.220). This design ties the tax to benefits received in the state (for doing business there). For a contrast of sourcing and apportionment approaches, compare Ohio (PDF) and Washington. For an example of a commerce clause concern on apportionment, see the amicus brief (PDF) of the Council on State Taxation and the National Association of Manufacturers in Ford Motor v. Seattle, 156 P3d 185 (2007), cert denied U.S. S. Ct Dkt. No. 07-623 (2/19/08).

Free speech: Kentucky's GRT prohibits sellers from directly collecting the tax from customers or stating the GRT separately on invoices. Despite this, at least one telecom service provider separately listed the GRT on customer bills. The provider did not want to factor the GRT into its basic charge because its national advertising indicated a fixed price for all customers. The provider challenged the requirement under the commerce clause and First Amendment of the US Constitution. The First Amendment challenge was upheld because the court found that the prohibition on separately listing the GRT prohibited more speech than was necessary to advance the government's interest in protecting its citizens from misleading information (AT&T v. Robbie Rudolph, 2007 U.S. Dist. LEXIS 13962 (ED KY 2007)).

Conclusion

No question, Gross Receipts Taxes are getting a great deal of attention today as policy makers wrestle with exactly what kind of a tax a GRT is -- or should be. In addition, issues exist for each individual state as lawmakers debate whether or not a GRT is a desirable way to tax businesses that operate within their jurisdictions.

New Taxes And Tax Policy

Ron Tang — Thu, 10 Apr 2008 10:54:00 -0400

In recent years, there have been enactments and proposals for a variety of new taxes at both the U.S. state and local levels. A key impetus for these changes is the need for more revenue to fund state and local governments. While existing taxes could be increased to generate revenue, other sources have been considered for a variety of reasons. This article looks at a few recent examples and how they stack up under the principles of good tax policy.

Examples

Sources of new tax revenue are sometimes tied to activities that lawmakers believe may have some type of adverse social policy aspect. In 2005, Detroit's mayor considered a two percent tax on fast food restaurant purchases to help address a budget shortfall (CNNMoney.com, May 2005).

In 2007, Chicago enacted a bottled water tax of five cents per bottle starting January 1, 2008 (2008 tax ordinance (PDF)). Wholesalers collect the tax from retailers with the tax passed along to customers. The tax was originally proposed at 25 cents per bottle with the revenue to address a shortfall in water and sewer funds believed to be partially due to people drinking less tap water (CBS2, August 2007).

In 2008, a one percent excise tax on the sales price of televisions, video games and video game equipment was proposed in New Mexico. The revenues would go into the "leave no child inside fund" to be used for outdoor curriculum programs, "outdoor nature-oriented physical activity programs" for children and similar purposes. The bill, HB 583 (PDF), was estimated to raise about $1.85 million (PDF) annually. Beyond raising revenue, a goal of the proposal was to get children outside and away from TV and video games. The bill died in committee in March 2008.

Analysis

Both existing and proposed taxes can be evaluated using principles of good tax policy. The AICPA (PDF) has a set of principles for such purposes as does the National Conference of State Legislatures (NCSL). A new tax also raises some legal issues as well as the question of why policymakers need a new tax rather than using an existing one.

Rationale for a new tax: A new tax might be warranted if it eliminates flaws in an existing tax or addresses externalities. For example, as the fuel efficiency of passenger cars improves and some cars don't use gasoline, our existing gasoline excise tax which provides funds for highway maintenance and transit can be perceived as a "flawed" tax. A new tax would likely be warranted to replace (or supplement) the gasoline excise tax.

An example of a new tax that addresses externalities could include a carbon tax to enable prices to better reflect the true cost of activities that generate CO2 emissions. The funds could be used to address CO2 emissions or to reduce other taxes to improve overall efficiency of the tax system.

Principles	Bottled water tax	TV/ video game tax
Equity (similarly situated taxpayers treated similarly)	Bad: Consumers of bottled water are taxed while consumers of other bottled beverages are not (even if they include water).	*Bad:* Consumers of TV and video games are taxed while other indoor-type activities, such as bowling and sewing, are not taxed.
Equity (similarly situated taxpayers treated similarly)	Bad: Tax is regressive (greater impact to lower income individuals).
Certainty -- clear rules	Good: All size bottles taxed at same rate. Possible uncertainty if not pure water (for example, vitamins added).	*Bad:* Definitional issues likely.
Simplicity Economy in collection	*Bad:* New forms, procedures and rules needed.
Neutrality	*Bad:* Flat rate per bottle may lead to larger water bottles. Consumers may purchase water outside of city.	*Bad:* Consumers may enjoy TV and video games online or engage in other indoor activities.
Economic growth and efficiency	*Bad:* FLikely to make some Chicago businesses uncompetitive with those in other cities.	*Bad:* Earmarking generally not appropriate if there is a weak connection between the taxed activity and its use. Also, park funding becomes vulnerable to TV and video game sales.
Transparency	*Good & Bad:* Consumers will know of the tax when taxed item purchased. However, they may not be aware of whether alternatives to a tax were possible.
Minimum tax gap	Good: Likely difficult to evade assuming purchases from outside the jurisdiction are exempt.
Appropriate government revenues	Were alternatives explored? Could the city produce less tap water to meet reduced demand, thereby reducing its costs? Given the likely high fixed costs of producing clean water, this may not have been an option. Also, while the city might be able to increase the cost of tap water, that would put the cost on those who did not cause the problem and perhaps make the problem worse (more people may start buying bottled water).	Were alternatives explored? Parks and education are typical government functions and general fund revenues should be considered. In addition, what non-tax alternatives would help meet goal of getting children to spend more time outdoors? See earmarking issue noted earlier.
Appropriate government revenues	Good: A mix of taxes tends to provide better stability; however, these taxes are not significant revenue sources. These taxes likely produce revenues that are easy to estimate.

Legal issues of a new tax: A state's constitution and statute must be examined along with the proposed tax to be sure it is a legal tax. For example, if state law prohibits a sales tax on food, a tax on fast food or bottled water would have to be examined closely to determine if it is the equivalent of a sales tax on food. Similarly, if a state constitution prohibits local jurisdictions from imposing income taxes, any local tax based on gross receipts may be problematic.

Challenges to new taxes are not uncommon. For example, in 2007 the Ohio Grocers Association challenged Ohio's Commercial Activity Tax (a gross receipts tax) as an unconstitutional excise tax on food. It lost the case at the trial level, but an appeal is likely.

A lawsuit has been filed challenging Chicago's bottled water tax. Opponents to the tax argue that it violates state law because it is a tax on food and is not uniform because it does not tax other bottled beverages including ones consisting primarily of water. (See press release of International Bottled Water Association and complaint of four merchant associations.)

U.S. constitutional issues might also be relevant particularly where a tax applies to a subset of businesses, products or transactions. The First Amendment might also be a possible basis for a legal challenge to a tax on video games.

Policy analysis: The following chart applies relevant tax principles suggested by the AICPA and NCSL to the bottled water tax and proposed video game tax.

Conclusion

Chronic budget shortfalls and the unpopularity of rate hikes for existing taxes can lead state and local governments to consider new revenue sources. These sources may target activities potentially viewed as harmful or "easy targets," such as fast food, video games and adult entertainment. Regardless of the problem or revenue need, it is helpful to consider the principles of good tax policy to determine whether a new tax is appropriate and if so, that it is well-designed and fair.

The 50th Anniversary Of Public Law 86-272

Ron Tang — Thu, 27 Mar 2008 07:29:00 -0400

Public Law 86-272, addressing circumstances under which a multistate business may owe state income taxes, was enacted as a stopgap measure on September 14, 1959. For the past several years, efforts to reform this law have raised issues similar to those of 1959. This article provides a brief history and the issues surrounding PL 86-272 and poses the question -- when the 50th anniversary milestone is reached, will PL 86-272 be in its historic form or a new form (and what might that be)?

1959 Supreme Court Decision

In February 1959, the U.S. Supreme Court issued its opinion in Northwestern Cement v. Minn., 358 US 450 (1959). The Court upheld a state's power to tax income generated from interstate activities. Such a tax is valid if it does not discriminate against interstate commerce and is properly apportioned to activities within the state that create nexus. The Court ruled that such a tax was within the Due Process clause of the U.S. Constitution because fair apportionment led to only taxing income arising in the taxing state.

The Court referred to its earlier decision, Wisconsin v. J.C. Penney Co., 311 US 435, 444 (1940). The "'controlling question is whether the state has given anything for which it can ask return.' Since by 'the practical operation of [the] tax the state has exerted its power in relation to opportunities which it has given, to protection which it has afforded, to benefits which it has conferred.' it 'is free to pursue its own fiscal policies, unembarrassed by the Constitution.'"

Concerns

The decision raised many concerns for businesses and Congress. Most troubling was what the Senate described as the Court's "broad language" (Senate Rpt. No. 658 (8/11/59) to S. 2524).

Key concerns for businesses included:

Determining the quantity and nature of activities in a state that could cause a business to have sufficient nexus to be subject to income tax there.
How income of a multistate business should be fairly apportioned among states in which it has nexus.
The possibility that non-uniform rules among the states could cause a sale to be attributed to more than one state.
Dealing with the compliance burden and costs of computing taxable income under the differing rules of each state in which a business is subject to tax and applying the different apportionment rules of each state. Some businesses noted that the costs to comply might exceed the tax owed in some cases.

Some members of Congress observed that nexus uncertainty and compliance burdens could lead some businesses to limit their interstate activities. They noted that the situation was worse for small businesses for which the compliance costs were more problematic. Concerns were also expressed over the possibility that states would use the 1959 Court decision to assess taxes for past years.

PL 86-272

PL 86-272 was enacted within seven months of the Court's decision. Its aim was a more certain rule for when a multistate business is subject to income tax in any particular state. The Senate Report (Senate Rpt. No. 658 (8/11/59)) noted that the legislation "is not a permanent solution to the problem." Instead it was intended to "serve as an effective stopgap or temporary solution while further studies are made of the problem."

Senator Byrd of Virginia expressed the Senate's rationale for the rush in passing a law prior to further study of the issues. "Unless immediate action is taken at this time, it is feared that the States will amend their laws to further encroach upon interstate commerce." (Cong. Rec. 8/19/59, p. 16354).

Basically, PL 86-272 prohibits a state from imposing a net income tax if a company's only state activities are solicitation of orders for sales of tangible personal property which are sent outside the state for approval or rejection and are filled from outside the state. It also called for a study and report on state taxation by a congressional subcommittee.

Visit the author's website on PL 86-272 and its reform with links to proposals and analysis.

Current Issues

The "current" issue since 1959 is when temporary PL 86-272 will be replaced with permanent legislation. Prior to enactment, Senator Gore, who preferred further study before changing the law, noted that the legislation was permanent because no termination date was provided (Cong. Rec. 8/19/69, p. 16357).

While time has, in effect, made PL 86-272 permanent, in the past few years, there have been several proposals and hearings about its reform (for example, S. 1726 (110th Cong.), Senate Finance Committee hearing 7/25/06 and the Multistate Tax Commission's factor presence proposal (PDF)). These changes call for updating the law to cover more than net income taxes and tangible personal property.

Much of today's debate on PL 86-272 reform echoes the pro and con positions expressed in 1959 and the matters addressed in the post-1959 congressional study (often referred to as the "Willis report" (6/30/65) for the Congressman who headed up the project). These positions dealt with the tension between protecting businesses from uncertainty and multiple taxation and preserving state tax authority and revenues.

Today, many businesses sell services and intangibles, rather than tangible personal property. Also, some states have business taxes that are not income taxes, such as gross receipts taxes. When a business is not covered by the "protection" of PL 86-272, due process and commerce clause guidance governs whether a state may tax the income of a multistate business. Most states have provided nexus guidance either legislatively or administratively, but as was the situation decades ago, such guidance is not uniform among the states and rarely provides certainty to taxpayers.

When PL 86-272 does not apply, many businesses have relied on the physical presence nexus standard laid out by the Supreme Court in Quill (504 U.S. 298 (1992)). This case involved a state imposing sales tax collection responsibilities on a remote vendor. The Court held that the Commerce Clause required a physical presence for substantial nexus.

However, several court decisions have ruled that physical presence is only relevant for sales and use tax nexus (for example, Tax Comm'r. of the State of West Virginia v. MBNA, 640 SE2d 226 (2006), cert. denied, U.S. S.Ct., Dkt. No. 06-1228, 06/18/2007). Some of these cases have held that "economic presence" (such as customers and intangibles) can create nexus. The current state of affairs involving nexus determinations is reminiscent of 1959.

PL 86-272 Reform Considerations

Ways of doing business have changed dramatically since 1959. Businesses can operate with fewer physical locations, borders are not always important and many products and services are digitized. Congress, state governments and businesses must evaluate what nexus standards are appropriate today that also provide certainty and fairness to taxpayers and state governments. PL 86-272 focused on nexus rather than also apportionment. Reform efforts should consider how much guidance Congress should provide under its commerce clause authority to regulate interstate commerce. Congress must find the balance between the exercise of its authority and states' authority to define their tax systems.

As evidenced by a temporary law approaching its 50th anniversary, reform efforts will not be easy, but are clearly needed. The discussions are likely to continue right through PL 86-272's 50th anniversary.

Don't Link School Spending To Oil Companies' Profits

Ron Tang — Fri, 21 Mar 2008 08:33:00 -0400

Last week, a bill was proposed by a majority of Assemly Democrats to impose extra taxes on oil companies to help prevent pink slips for teachers. A March 12 vote, mostly along party lines, failed to garner the required two-thirds majority for passage of a tax increase.

But Assembly Speaker Fabian Núñez has said he does not plan to give up on the idea.

Despite the importance of not laying off teachers, failure to pass was a good result. The bill, ABX3 9, is not the solution for keeping teachers employed or solving California's budget problems.

Budget problems cannot be solved with taxes that are earmarked and unfair. More importantly, budget problems cannot be solved by ignoring budget and tax system weaknesses and how best to remedy them.

The bill proposed to create an oil severance tax of 6 percent on the value of each barrel of oil removed from the ground or water in California. It would also impose an extra tax on oil companies. This 2 percent tax would apply to taxable income in excess of $10 million. Finally, the bill directed that all revenue generated be appropriated to the superintendent of public instruction to alleviate the budget cuts leading to layoffs of school employees.

Three key problems plagued ABX3 9. First, it was designed more as an effort to highlight K-12 education cuts in light of oil company profits, rather than to address the underlying causes of California's budget problems. The bill attempted to draw a connection between oil company profits and education spending cuts, when no connection exists.

Second, the bill would not really help teachers or K-12 education funding. Education is a key function of state governments. Its funding should come from general tax revenues, not narrow, special taxes. What happens when oil company profits drop? Education should not take a hit. Funding for education should not be at the mercy of continued high profits of oil companies. Because there is no connection between oil profits and funds needed for education, it is not wise to earmark oil taxes for education.

Finally, the proposed taxes would create new problems. Equity calls for treating similarly situated taxpayers similarly. Singling out companies in one industry to pay an extra tax that other profitable companies do not have to pay is not equitable. Also, singling out an industry to pay a special tax makes the tax law more complex because special rules are needed to define that industry and the base the special tax applies to.

In changing tax rules, consideration should be given to where weaknesses exist and how best to address them. Should legislators find that corporate income tax rates are too low, they should address that. Should legislators find that a new source of revenue is needed, debate should focus on finding a new tax that would be equitable, simple, efficient and support other state policy goals. For example, given efforts to reduce carbon emissions, perhaps an oil severance tax that would increase the price of gas is appropriate. However, evaluation of several approaches should be considered rather than focusing on just one possibility.

No doubt, cuts to education funding in California call for intervention. Such intervention though should not single out one industry as the solution and should not earmark tax revenue. Such approaches will not lead to better tax and budget systems.

We need to find solutions that genuinely solve budget problems while not harming the tax system or education funding.

Annette Nellen in Orange County Register | California Lawmakers Want to Tax Downloads

Communications — Sun, 16 Mar 2008 11:01:00 -0400

California Lawmakers Want to Tax Downloads (Orange County Register)

Democrats would revise the definition of what's taxable instead of proposing a new tax that requires GOP support. . .

So what do you think will happen with downloads?

"You're just going to have a bigger use tax problem," admits Annette Nellen, a San Jose State tax professor who nonetheless supports taxing downloads.

Nellen likes the tax, in part, because increasing revenues isn't her biggest concern – rationale tax policy is. A fellow at the New America Foundation, Nellen has been urging the state to broaden its sales tax because she says a "consumption tax" should tax all the things we consume – goods and services, products and downloads.

"Our tax base hasn't kept up with how we do business and how we live," she said, and that means state revenues will naturally dwindle unless something is done.

"The way we consume things have changed, but we still have a 1930s tax base," she said. . .

What's Your Tax System IQ?

Ron Tang — Wed, 12 Mar 2008 02:00:00 -0400

While tax season tests our technical tax knowledge daily, here is an opportunity to take a break and test your knowledge about our federal tax system.

Answers to this quiz can be found at the bottom of this article.

Questions

IRS tax revenue collections for fiscal year 2006 were approximately $______ trillion.

The individual income tax was the largest portion of these tax collections, representing ___% of the total.

For 2005, _____ million individual tax returns were filed showing combined taxable income of $_____ trillion.
1. 108; 2.8
2. 124; 3.5
3. 134; 5.1
4. 149; 6.8

For 2005, ___% of individual returns claimed itemized deductions.

For 2005, ____% of individual returns reported AGI of $1 million or more.

For the 2004 tax return year, identify the following entity data as belonging to (i) corporations (non-S), (ii) S corporations, (iii) partnerships, and (iv) non-farm sole proprietorships:
1. 2,039,631 businesses; $18.0 trillion of total receipts
2. 2,546,877 businesses; $3.0 trillion of total receipts
3. 3,518,334 businesses; $4.7 trillion of total receipts
4. 20,590,691 businesses; $1.1 trillion of total receipts

For the 2005 tax return year, LLCs represented ___% of partnership returns filed.

Gas guzzler excise tax collections for fiscal year 2006 were:
1. $1 million
2. $50 million
3. $120 million
4. $200 million
5. $300 million

In fiscal year 2006, which category of Form 1040s had the highest IRS audit rate?
1. Non-business returns with total positive income (TPI) under $25,000
2. Non-business returns with TPI of $100,000 or more
3. Non-farm business returns with total gross receipts (TGR) under $25,000
4. Non-farm business returns with TGR of $100,000 or more
5. Farm business returns with TGR of $100,000 or more

Which category of tax return had the higher examination rate for fiscal year 2006?
1. Individuals (Form 1040)
2. Large corporations with assets of $250 million or more
3. Estates of $5 million or more

For fiscal year 2002 through 2004, corporations with assets of $250 million or more were more likely to be audited by the IRS if they were in which of the following industry sectors?
1. Financial services
2. Communications, technology and media
3. Retail
4. Heavy manufacturing
5. Natural resources

The largest federal "tax expenditure"* for fiscal year 2007 as estimated by the Joint Committee on Taxation was:
1. Mortgage interest deduction
2. Earned income tax credit (EITC)
3. Reduced tax rate on dividends and long-term capital gains
4. Tax credit for children under age 17
5. Exclusion for employer-provided health care benefits
6. Exclusion for employer pension contributions
  * Federal budget law defines "tax expenditures" as "revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability." Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2007-2011 (PDF), JCS-3-07 (9/07), p. 2.

For 2006, the percentage of the tax expenditure for mortgage interest deduction attributed to individuals with $100,000 or more of income was: (income for this purpose includes some non-taxable income)
1. 22%
2. 34%
3. 47%
4. 64%
5. 73%

For tax year 2005, how many taxpayers received assistance from the IRS via telephone?
1. 35 million
2. 42 million
3. 57 million
4. 63 million

For tax year 2005, how many returns were prepared at Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) sites?
1. 1.2 million
2. 1.9 million
3. 2.3 million
4. 3.2 million

Answers

Per the IRS, gross collections for fiscal 2006 were $2,518,680,230,000.

Per the IRS, individual income tax collections for fiscal 2006 were $1,236,259,371,000 (49%). Corporate income taxes represented 15.1 percent of IRS collections, employment taxes 32.4 percent, excise taxes 2.3 percent and estate and gift taxes 1.1 percent.

C. Per the IRS (PDF) (p. 5), 134.4 million individual returns were filed in the 2005 tax year (2.2 million more than for 2004). These returns reported a total of $5.1 trillion of taxable income (10% increase from 2004).

Per the IRS (PDF) (p. 8), 35.5 percent of individual returns claimed itemized deductions.

Per the IRS (PDF) (p. 11), 0.23 percent of 2005 returns reported AGI of $1 million or more. The breakdown:

	    	 AGI	   	% of total returns
	Under $10,000                   18.9
	$10,000 to $19,999              16.9
	$20,000 to $29,999              13.8
	$30,000 to $49,999              18.3
	$50,000 to $99,999              21.4
	$100,000 to $199,999             8.0
	$200,000 to $499,999             2.0
	$500,000 - $999,999              0.4
	$1,000,000 and greater           0.2

Per IRS (PDF) data (pgs. 286, 289), A -- (i) corporations; B -- (iii) partnerships; C -- (ii) S corporations; and D -- (iv) non-farm sole proprietorships.

53 percent. Per IRS (PDF) data (p. 75), LLCs have represented the greatest percentage of partnership returns filed since 2002. Prior to 2002, general partnerships were predominant.

D. Per IRS data, $201,649,000 of gas guzzler excise tax (IRC §4064) was collected in fiscal year 2006, up from $79.7 million in 2002.

D. Per IRS data, 3.9 percent of Form 1040 business returns with TGR of $100,000 were examined. The percent examined for the other categories was 1.5 percent for nonbusiness returns with TPI under $25,000, 1.3 percent for non-business returns with TPI of $100,000 or more, 3.8 percent for non-farm business returns with TGR under $25,000, and 0.6 percent for farm business returns with TGR of $100,000 or more.

B. Per IRS data, 35.2 percent of large corporate returns with assets of $250 million or more were examined in fiscal year 2006. For these returns, the average recommended additional tax per return from a field audit was $6,151,813 and 11 percent of field audits resulted in no change. The percentage of returns examined in fiscal year 2006 was 1.0 percent for individuals, 23.4 percent for estates of $5 million or more, and 0.4 percent for partnerships and S corporations.

D and E. Per Transactional Records Access Clearinghouse (TRAC) data, large corporations in natural resources, construction, heavy manufacturing and transportation industries faced a 100 percent audit rate while large corporations in the financial services sector had a 15 percent audit rate, communications, technology and media a 64 percent audit rate, and retail, food, health care and pharmaceuticals businesses an 81 percent audit rate.

C. Per Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2007-2011 (PDF), JCS-3-07 (9/07). The estimated "cost" of each of the listed items for 2007:
- Reduced tax rate on dividends and long-term capital gains $127.1 billion
- Exclusion for employer pension contributions $108.6 billion
- Exclusion for employer-provided health care benefits $105.7
- Mortgage interest deduction $73.7 billion
- Tax credit for children under age 17 $45.0 billion
- Earned income tax credit $44.7 billion

E. Per Joint Committee on Taxation, JCS-3-07 (PDF) (p. 43); 10.4 percent of the benefit was attributable to individuals in the $50,000 to $75,000 income class and 12.8 percent to those in the $75,000 to $100,000 income class.

C. Per IRS data, 56,993,000 individuals received telephone support from the IRS, including recorded information.

C. Per IRS data, 2,268,000 returns were prepared at VITA and TCE sites, up from 2,111,000 for tax year 2004.

Obstacles To Taxing Services -- Are They Insurmountable?

Ron Tang — Thu, 28 Feb 2008 14:40:00 -0500

State sales tax bases have traditionally included only tangible personal property. Often services are either ignored completely in describing the tax base, or a small number of services are specifically targeted as legally taxable. One reason for exclusion is historical. Tangible personal property was the main consumption item back in the 1930s when many states started imposing a sales tax. However, in the past two decades, consumption of services has become significant.

Since 1990, the Federation of Tax Administrators (FTA) has tracked the number and types of services taxed in each state. Of the 168 services tracked, Hawaii, New Mexico and South Dakota tax the greatest number (over 140 each), while most states tax less than 60 services.

To preserve or expand revenues, many states have pursued broadening their sales tax base to include more types of services. These efforts have not always been successful. States’ need to preserve their tax bases in light of changing consumption patterns, combined with their inherent need for revenue, makes it inevitable that states will continue to pursue expansion.

Below, we’ll look closer at reasons for taxing services, obstacles to doing so and possible solutions.

Famous Failures

Protests generated nationwide attention when two states attempted to expand their sales tax to services in the late 1980s. In 1987, Florida expanded its sales tax to include specified services, only to repeal it six months later. The legislature replaced the tax with a rate increase (New York Times). In 1990, Massachusetts expanded its sales tax to services only to repeal it before the effective date.

More recently, to generate needed revenue, Michigan enacted a use tax on 23 specified services including landscaping, party planning and packaging (HB 5198, October 2007 (PDF)). On the day the new tax went into effect, December 1, 2007, it was repealed and replaced with a business tax surcharge (HB 5408, December 2007).

Reasons for Including Services in the Sales Tax Base

Consumption Trends: Changes in lifestyles and technology have led to changes in consumption patterns. Busy families might hire a house cleaner, gardener and nanny. And it is not uncommon to hear of people hiring personal trainers and pet sitters.

From 1970 to 2001, consumption of tangible personal property minus groceries dropped from 39 percent of household consumption to 33 percent. From 1970 to 2001, consumption of services increased from 31 percent of household consumption to 44 percent (Mazerov, Expanding Sales Taxation of Services: Options and Issues, Center on Budget and Policy Priorities; also see Minnesota House Research).

Consumption trends also include greater consumption of digital goods. Reasons for expanding tax bases to include services also apply to digital goods, such as music and software downloads.

Tax policy and structure: Economically, there is no rationale for taxing some forms of consumption while exempting others. There is no reason to tax laundry detergent, but not dry cleaning services, or a lawn mower, but not gardening services.

Broadening the sales tax base to include more services can make the sales tax more equitable and can allow for a rate reduction (making the tax even more equitable). If needed, base broadening and a rate reduction can be combined to generate new revenues. States facing reduced sales tax collections due to a diminishing tax base might find it simpler to increase the tax rate, rather than expand the base. This approach though, ignores the underlying problem and creates others. Many services are more likely to be purchased by higher income individuals. Exempting that consumption while increasing the tax on tangible personal property makes the sales tax more regressive. Also, many states already have high sales tax rates and further increases may lead to competitive problems for businesses and greater tax evasion.

A broader base can also reduce volatility that can improve government budgeting. Base broadening can also help improve economic development decisions. For example, in some states, such as California, local governments are very dependent on sales tax revenues. Thus, they are “incentivized” to get retailers to locate within their jurisdiction rather than trying to attract businesses that offer nontaxable goods or services. A broader base enables governments to make better economic development decisions.

Issues and Analysis

Listed below are some of the reasons for the famous failures noted earlier, and suggestions for improvement.

Education: Predictably, adding a tax to something previously untaxed is not popular. A state should pursue education efforts to help consumers understand the sales tax and the benefits of base broadening. Once in place, taxpayers will also need information on when they owe use tax on services obtained from out-of-state.
Avoid pyramiding: Base broadening should be allocated to services that are not typically used by businesses so as to not worsen a state’s pyramiding problems. Pyramiding is the imposition of a tax on a tax. For example, if a business pays sales tax on its purchases, it will factor that cost into what it charges customers. When customers pay sales tax on purchases from that business, they pay a tax on a tax. Not taxing services primarily consumed by businesses should also be good for the state’s business climate. A sales tax on hair cuts won’t cause hair salons to leave the state, but a tax on information technology services may cause businesses to leave or to avoid locating in the state.
Legality: A state should review federal and state rulings for help in properly defining the expanded tax base. A 1987 Florida ruling provides insights on reducing the likelihood of legal challenges. Among other findings, the court noted that imposition of sales tax on legal services was permissible. Per the court, states have flexibility and discretion in selecting items to be taxed “provided that the classification is reasonable, non-arbitrary and rests on some ground of difference having a fair and substantial relation to the object of the legislation (In re Advisory Opinion to the Governor, 509 So 2d 292, 303 (FL 1987)).”

Case law should also be reviewed to aid in drafting rules on nexus and determining the tax on services performed and/or delivered to more than one state.
Transition: Implement the expansion gradually. The enacting statute should specify the items added to the base with effective dates spanning a future time period. This allows more time for the tax agency to help businesses that become subject to tax collection, and for consumers to adapt to the changes.
Compensation: Base expansion will cause more businesses to be subject to sales tax compliance. A state should provide a refundable tax credit to alleviate start-up costs for these businesses and ideally, provide compensation for all businesses that collect sales tax.
Rate reduction: The base should be expanded along with a rate reduction. This helps consumers to see justification for the base broadening beyond just generating revenue. A rate reduction might also alleviate other sales tax issues, particularly in states that already have a high rate.

Reality

Tax policy and revenue needs make it inevitable that states will continue to explore sales tax base broadening to include more services, as well as digital goods. Whether states will learn from the failed attempts remains to be seen. Working to avoid the obstacles though, such as in the ways noted above, should lead to improved tax systems and a manageable change process.

CA Event: How Do/Should We Tax?

Communications — Fri, 15 Feb 2008 13:34:00 -0500

A New America Event
02/27/2008 - 8:30am

California has a tax system largely fixed in place during the Great Depression, in an industrial economy-setting unconcerned with environmental sustainability. Two questions about this tax system are posed here: First, can California find ways to raise the revenue it needs in the 21st century that are a better fit with our high-tech, service-based economy than is the current system? Second, can California's tax/fee structure be used to meet the state's greenhouse gas emissions under its AB 32 guidelines?

Tough Tax Questions for Presidential Candidates

Ron Tang — Thu, 14 Feb 2008 00:00:00 -0500

The current crop of Presidential candidates sound a lot like they did in prior years with promises of new targeted tax breaks, loophole closures, increased taxes on the rich and new spending programs. Have the candidates not read the doom and gloom budget reports from the Government Accountability Office (GAO), Congressional Budget Office (CBO) and others?

The fiscal agenda for the next President and Congress must include some very difficult decisions that go beyond just tweaking the tax system. Below, we’ll look closer at some key fiscal issues that have tax implications. Questions are posed that could help gauge how well candidates understand the fiscal quagmire the country is heading into and the remedies they would pursue.

What’s in Store

David M. Walker, head of the GAO, describes the current federal budget as being “on an imprudent and unsustainable path” (January 2008 testimony, GAO-08-411T (PDF)). CBO Director Peter L. Orszag observes that economic growth will not solve the impending budget problems. “A substantial reduction in the growth of spending, a significant increase in tax revenues relative to the size of the economy or some combination of the two will be necessary to maintain the nation’s long-term fiscal stability” (January 2008 testimony (PDF)).

The dire outlook stems from imploding healthcare costs and a population bulge of retiring baby boomers (born between 1946 and 1964). The likelihood of extending tax cuts that expire after 2010 and alleviating the alternative minimum tax (AMT) hit that millions will face, further aggravates the problems. The nagging tax gap dampens the outlook even more.

Healthcare Spending

Healthcare costs are a significant cause of impending budget problems.

In 2006, total healthcare spending represented 16 percent of GDP, almost double what it represented in 1976. And it is expected to represent almost 20 percent of GDP by 2016 (GAO testimony (PDF)).
Medicare and Medicaid costs represented one percent of GDP in 1970, four percent in 2007 and will continue to grow. Cost increases are not due solely to our aging population, but to increasing costs per beneficiary due to improved diagnosis and treatment techniques (CBO, The Long-Term Budget Outlook (PDF), December 2007).

Per Walker (GAO testimony (PDF) January 2008), increasing healthcare spending is “eroding the ability of employers to provide coverage to their workers and undercutting their ability to compete internationally.” Growing healthcare costs also impact the national debt, savings rates and economic growth adversely (for more information, see CBO, Growth in Health Care Costs (PDF)).

There are various tax implications of healthcare spending. The Hospital Insurance (HI) tax of 2.9 percent helps fund Medicare. One of the largest federal income tax expenditures is the exclusion for employer-provided health insurance that the Joint Committee on Taxation estimates as $628.5 billion from 2007 -- 2011 (JCS-3-07 (PDF)), not counting payroll taxes. This tax break can increase healthcare spending by reducing the relevance of cost in making healthcare decisions, which also leads to higher insurance costs for employers and others.

Question -- What are your plans for controlling rising healthcare costs and how will the HI tax and the income and payroll tax exclusions for employer-provided health insurance factor into solutions?

Baby Boomers Retiring

Retirement of baby boomers starting in 2008 as well as increasing longevity of the U.S. population will strain our Social Security system. Without changes, Social Security will grow from 4.3 percent of GDP in 2007 to 6.1 percent in 2030. Today there are 3.2 workers per Social Security beneficiary, but that ratio is expected to drop to 2.1 per beneficiary by 2030. (CBO, The Long-Term Budget Outlook, (PDF) December 2007)

Question -- What changes do you propose for Social Security taxes, retirement age, benefits and/or structure of the system to address the problems stemming from the decline in the ratio of workers to beneficiaries?

The Tax Gap

The annual federal tax gap is estimated at $345 billion. Congress and the IRS have increased their attention to this problem and possible solutions. Yet, little change has occurred. Numerous reports from the GAO (PDF), IRS and others offer specific suggestions for reducing the tax gap.

Questions -- What is your timeframe for implementing techniques to reduce the tax gap and will new information reporting be part of your plan? How do you think existing enforcement tools can address the problem?

AMT, Expiring Tax Cuts and Related Matters

Adjusting the alternative minimum tax for inflation and extending the 2001 and 2003 tax cuts would lead to a $617 billion deficit in 2018 rather than a $223 billion surplus (CBO, The Budget and Economic Outlook: Fiscal Years 2008 to 2018 (PDF), January 2008). The deficit scenario also increases the national debt and interest expense.

If the tax cuts are allowed to expire after 2010, AMT liabilities would drop by about two-thirds in 2011 (due to higher regular tax liabilities), but would continue to increase due to the lack of inflation adjustments in the AMT brackets. Over 31 million individuals would be subject to AMT in 2018 compared to less than seven million who were subject to it in 1987. Individuals subject to AMT are predominately in the $75,000 to $1 million adjusted gross income range (Joint Committee on Taxation, JCX-38-07 (PDF), June 2007).

In February 2007, the Center on Budget and Policy Priorities (CBPP) estimated that factoring in increased borrowing, extension of the tax cuts and indexing AMT for inflation would cost $4.3 trillion over 10 years (2009 through 2018).

A 2007 report of The Brookings Institute (Achieving Progressive Tax Reform in an Increasingly Global Economy (PDF)) notes that to alleviate budget problems including those arising from extension of tax cuts and adjusting AMT for inflation, would necessitate a 34 percent reduction of all government spending in order to attain “long-run fiscal balance.”

The GAO uses the following graph to emphasize the need to address fiscal issues earlier rather than later. The revenue line is based on extending the tax cuts, maintaining the 2006 AMT exemption amounts and keeping revenues at a historic level of 18.3 percent of GDP after 2017 (GAO-07-1261R (PDF)).

Dealing with expiring tax cuts and growing AMT will also involve consideration of the distribution of taxes, tax breaks and benefits. While Treasury (PDF) reminds us that expiration of the tax cuts will result in tax increases for millions of individuals, the distribution of the benefits varies among different income categories and filing units. For example, repeal of the estate tax skews the benefits to individuals in higher income groups. The CBPP and others note that the tax cuts made the tax law more regressive. These topics will surface in discussions on extending the tax cuts. For more information on distribution of the tax cuts, see reports by the Tax Policy Center (PDF), Congressional Research Service (PDF), and others.

Questions -- What are your plans for addressing the AMT and expiring tax cuts? Why? How will extension of the tax cuts, AMT relief or any new tax breaks be paid for? How progressive should the tax system be and how would you achieve that level?

There’s More

The next President and Congress also have various structural issues, such as complexity, as well as reform issues, such as ensuring that the tax system does not impede international competitiveness for U.S. businesses, to deal with. These tax reform matters cannot be addressed in isolation from the budget and distribution issues. These are all challenging issues that call for asking tough questions of candidates.

'Spending Problem?' Some of it's Hidden in our Tax Laws

Ron Tang — Sun, 10 Feb 2008 00:00:00 -0500

Gov. Arnold Schwarzenegger's diagnosis of California's $14.5 billion budget shortfall: a "spending problem." His remedy: 10 percent across-the-board spending cuts. What about a second opinion?

A spending problem is a chronic condition that warrants more than unfocused across-the-board cuts. Eliminating unnecessary spending would be a more reasonable and lasting treatment. The first step is identifying that wasteful spending -- not always an easy task. The task is made even trickier when some of it is hidden in our tax laws. Removing the spending waste in our tax laws can provide partial relief for our spending problem, reduce the chance of recurrence and make our tax system stronger.

There is more than one way for a government to spend money. The most obvious is a line item in the budget and writing checks to cover it. A less conspicuous technique, but with the same effect, is to provide a tax break -- an exemption, a special deduction or credit. Tax breaks are a form of spending because the effect is reduced revenues. This spending is hidden because it is not part of annual budget reviews. Taxpayers tend to view these tax breaks as appropriate elements of the tax law, rather than as government-provided benefits.

For example, if your employer pays for all or part of your health insurance, the employer claims an income tax deduction. However, you are not required to include the benefit in either your California or federal income tax. This is equivalent to the government writing you a check to subsidize your health plan, with the benefit skewed in favor of high tax bracket employees. Employees getting this subsidy typically do not even know how much it is or that they are receiving a benefit from the federal and California governments.

The tax break for employer-provided health plans costs the state more than $4 billion each year according to the Franchise Tax Board. While this tax break leads to more people with health insurance, it is quite generous. Reducing this tax break, such as by targeting the benefit to low to middle-income taxpayers and reducing it for others would help California address its spending problem.

A more costly tax break is the home mortgage interest deduction with an annual price tag for California that exceeds $5 billion. This benefit, which is part of both the federal and California income tax, allows a mortgage interest deduction for two homes and on up to $1.1 million of debt. The debt limit breaks down to $1 million to acquire the home and $100,000 of home equity debt where the funds can be used for any purpose. While there are reasons why the government might want to encourage home ownership, this tax break goes well beyond that purpose.

According to the California Association of Realtors, the median home price in California is just under $500,000. Elimination of unnecessary spending should include bringing fairness and logic to the home mortgage interest deduction. For example, the rule could be changed to only allow interest on debt used to acquire a principal residence with the debt limited to 80 percent of an area's median home price. Fairness and state tax revenues could be further enhanced by converting this benefit from a tax deduction (worth more to high bracket individuals) to a tax credit (worth the same to everyone). A $100 credit provides $100 of tax relief to every taxpayer, but a $100 deduction provides $2 of benefit to a taxpayer in a 2 percent tax bracket and $10 to one in a 10 percent tax bracket.

Other tax breaks have also lost sight of an appropriate purpose and consequently, contribute to our spending problem. The California income tax credit for senior citizens is based on age rather than income, thereby reducing taxes for some individuals who do not need financial assistance. Also, while a portion of a retiree's Social Security income (based on income) may be taxed for federal income tax purposes, it is not taxed in California, but should be.

Some tax breaks benefit more than the taxpayer. For example, California and local governments benefit from the low-income housing tax credit because it encourages the building of such housing. Also, some tax breaks, such as for home mortgages, help shape real estate market conditions and reductions in the benefits can affect such conditions. These factors should be considered in cutting back on overly generous tax benefits. Transitional rules, where, for example, the mortgage interest deduction is reduced over a 5-year period, must be considered.

Reviewing all tax breaks for appropriateness will uncover additional areas where the rules are too generous, indicating unnecessary spending that can be cut. This approach will not only help cure California's spending problem, but will improve the fairness of our tax system and the long-term health of our budget.

Corporate Tax Under the Microscope

Ron Tang — Thu, 24 Jan 2008 00:00:00 -0500

S corporations now account for two-thirds of U.S. corporate tax returns (see NTA report) and while designed for simplicity, they’ve become increasingly complex and harder for regulators to standardize and monitor.

As the number of small businesses has exploded, the number of S corporations formed has more than quadrupled since the last review (of 1984 returns) while the number with assets exceeding $10 million has increased 10-fold. Today’s S corporations are not necessarily small, and not necessarily easy to classify for tax reporting purposes.

In fact, the National Taxpayer Advocate’s (NTA) 2007 Annual Report to Congress (January 2008) identifies many problem areas for S corporations today and makes several strong recommendations for streamlining tax reporting and compliance in the future. Preceding this report, the IRS launched a review of 5,000 randomly selected S corporation returns in 2005 as part of its National Research Program (NRP).

The NTA report notes three problem areas for S corporations:

Insufficient data to aid the audit process. Despite the number and size of S corporations, the IRS classifies them into only three asset size groups, compared to 13 groups for C corporations. This limits the ability of the IRS to identify returns with the highest compliance risk. IRS audit techniques also make it difficult to find issues involving multiple levels of pass-through entities. The number of no-change audits in 2006 was 41 percent for field audits and 58 percent for correspondence audits indicating that current audit selection criteria are deficient.
Undue taxpayer burden caused by problems with the election process (Form 2553) and incorrect K-1 matching notices. In 2005 and 2006, about 15 percent of S corporation returns could not be posted because the Form 2553 had not been approved due to taxpayer or IRS errors. In 2004, the NTA suggested that the Form 2553 due date be the same as for the first Form 1120S (including extensions). The NTA notes that while Rev. Proc. 2007-63, allowing for late elections in certain circumstances will help alleviate some burden, the due date for Form 2553 should still be extended. The report suggests that better training of IRS employees could improve the K-1 matching program.
S corporations contributed almost $6 billion to the 2000 tax gap in the form of employment taxes from treating shareholder wages as distributions. Failure to pay compensation to S corporation shareholders who are officers or otherwise work for the corporation continues to be a problem. In 2005, almost 1 million S corporations with a sole shareholder failed to pay officer compensation. This longstanding issue is a time-consuming one for IRS examiners. The NTA suggests that the IRS send a “soft contact letter” to S corporations that report no officer compensation to get a sense of awareness of the issue and then check for future compliance.

Tax Gap

In its August 2007 report, Reducing the Federal Tax Gap (PDF), the IRS recommends electronic filing for all businesses required to file Schedule M-3. The IRS also recommends information reporting on payments made to corporations.

Corporate Tax Rate and Reforms

Several reports brought attention to the high federal and state U.S. corporate income tax rate of 39 percent relative to the 31 percent average for OECD (Organisation for Economic Co-operation and Development) countries, as well as some of the differences between U.S. business taxation and that of other countries.

Treasury Report of July 2007: A U.S. Treasury Department report noted problem areas in our corporate tax system including preferences that distort economic activity and add complexity. Treasury observed that elimination of tax preferences, such as the manufacturing deduction, research credit and others could allow the corporate rate to be reduced from 35 percent to 27 percent.

The report points out that relative to other countries, the U.S. derives a large percentage of its total business income from flow-through entities (about 27 million sole proprietors, S corporations and partnerships). In 1980, 83 percent of businesses were flow-through entities, rising to 93 percent by 2004. This makes the individual tax system important in considering business tax reforms. Treasury also highlighted distortions in the U.S. tax system such as rules favoring investment in owner-occupied housing, debt over equity, and investment in human capital over physical capital.

While the Treasury report made no recommendations, House Ways & Means Committee Chairman Charles Rangel introduced a tax reform bill (H.R. 3970) in October that eliminates or reduces several business tax preferences and drops the corporate rate from 35 percent to 30.5 percent. Arguably, this bill is an indication that business tax reform will also be discussed in Congress.

CRS Report of October 2007: A Congressional Research Service (CRS) report -- Corporate Tax Reform: Issues for Congress (PDF), questioned the validity of some of the claims about the benefits of reducing the corporate tax rate. According to this report, there is no evidence that a rate cut will lead to an increase in revenues. Also high U.S. rates will not necessarily create competition problems in the global economy. Competitiveness issues go beyond the statutory tax rate and can be affected by the mobility of capital, the interaction of individual and corporate rules, differing tax rules among countries and effective tax rates (taxes as a percentage of income). The report observes that the corporate rules do lead to some economic distortions, which if corrected, could support a lower rate and make the system more efficient.

Treasury Report of December 2007: As a follow-up to its July report, Treasury released Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century. This report also focuses on the need for a tax system that does not hinder the ability of U.S. businesses to compete in the global economy. Treasury lays out three possible reforms for further discussion, but makes no recommendation:

Replace business income taxes with a consumption tax.
Eliminate various tax preferences to allow for either a rate reduction or accelerated asset write-offs, along with adopting a territorial system for international taxation.
Address structural problems in the current income tax.

OECD Study: In November 2007, the Organization for Economic Co-operation and Development issued a study on fundamental corporate income tax reform in OECD countries. It covers trends, the reasons for a corporate income tax, types of reforms and policy considerations.

Revenue Projections

The Budget and Economic Outlook: An Update (PDF), issued by the Congressional Budget Office (CBO) in August 2007 reports that individual tax revenues are projected to increase from 2006 to 2017 at a much greater rate than corporate tax revenues, which are expected to decline as a percentage of GDP.

			2006 	2017 	Percentage change
Tax revenues (billions): 
Individual income tax 	$1,044 	$2,306 	120.8 percent 
Corporate income tax 	$354 	$415 	7.2 percent 
Social insurance taxes 	$838	$1,362 	62.5 percent 
As a  percent of GDP: 
Individual income tax 	8.0 	10.7   
Corporate income tax 	2.7 	1.9 
Social insurance taxes	6.4 	6.3

The growth in individual tax revenues is explained by expiring tax cuts, AMT, and an increase in the number of retired individuals.

Looking Ahead

The examination of corporate taxes in 2007 identified several topics needing further study before any decision can be made as to the best reforms for the U.S. business system. Efforts to enact changes will be complicated by the urgency of some individual tax issues, such as AMT and expiring tax breaks. The cost of individual reforms may require pursuing corporate and individual reforms as a package of reforms to the overall system. Congressman Rangel’s H.R. 3970 may be the vehicle for these discussions as it also calls for repeal of the individual AMT.

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Don't Link School Spending To Oil Companies' Profits

Annette Nellen in Orange County Register | California Lawmakers Want to Tax Downloads

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