Chapter 01 - Taxes and Taxing Jurisdictions
Chapter 1 Taxes and Taxing Jurisdictions Questions and Problems for Discussion
1.
Tax Tax payments payments differ differ from from governme government nt fines fines and penaltie penalties s because because they are are not intended intended to deter deter or punish unacceptable u nacceptable behavior. Tax Tax payments differ from fees or user charges because they do not entitle the payer to a specific government good or service, such as a postage stamp or a driver’s license. Tax Tax payments also differ from fees or user charges because they are a re compulsory.
2.
This paymen paymentt has charact characterist eristics ics of a tax, a penalty penalty,, and and a user fee. fee. The The compuls compulsory ory payment payment is is not specifically punitive but does apply selectively to those companies most likely responsible for the polluted condition of Green River. o!ever, these same companies may be the entities that benefit most from the environmental clean"up.
#.
This paymen paymentt more close closely ly resemble resembles s a fee for for a governme government nt service service than than a transac transaction" tion"based based tax because the transaction occurs bet!een a private party and the $urisdiction itself, rather than bet!een private parties engaging in a market transaction. The payment also entitles the payer to a specific benefit %the right to marry under la!&.
'.
To the extent extent that that the decline decline in in exterior exterior maintena maintenance nce reduces reduces the value value of (r. (r. )’s )’s apartme apartment nt complex, he bears the incidence of the increased property tax. To the extent that the decline reduces the value of ad$oining properties or makes the neighborhood less attractive, the o!ners of the ad$oining properties and the neighborhood residents share the incidence of the tax increase.
*.
)eople )eople !ho don’t don’t direct directly ly use publi public c schools schools %such %such as (r. (r. and and (rs. + or people people !ho !ho do not have children& indirectly benefit from a public education system for the general population. rguably, public education contributes to a skilled !orkforce and improves the cultural and social environment in !hich (r. and (rs. + live. -ased on this argument, (r. and (rs. + should not be exempt from the local property tax.
.
The consum consumers ers !ho !ho pay the same same price price for for a small smaller er bar of soap soap of lesser lesser /uality /uality bear bear the the incidence of the ne! gross receipts tax.
0.
Real propert property y cannot cannot be hidden hidden or moved, moved, and its its o!nershi o!nership p %legal %legal title& title& is is a matter matter of public public record. n contrast, personal property is mobile and may be easily concealed. (oreover, $urisdictions may not have an effective effective means to discover discover or trace o!nership o!nership of personal property.
.
rguably rguably,, private private golf golf courses courses beautify beautify the the locality locality and and are environme environmentall ntally y more desirabl desirable e than other commercial activities. They also may re/uire more acreage than other businesses and, therefore, !ould be at a competitive disadvantage !ithout a preferential real property tax rate.
3.
(any $uris $urisdicti dictions ons that that levy levy property property taxes taxes provid provide e an exemption exemption for public public instit institutio utions, ns, such such as state universities or private colleges. f 4niversity + is entitled to such an exemption, every commercial building or residence ac/uired by the 4niversity reduces the local $urisdiction’s property tax base.
15. 6xcise 6xcise taxes are are imposed imposed on a much narro!er narro!er range range of consumer consumer goods and and services services than sales taxes. 7onse/uently, people people can more readily avoid purchasing the specific good or service sub$ect to excise tax.
1-1 © 2013 by McGraw-Hi !ducation" This is proprietary #ateria soey $or authori%ed instructor use" &ot a uthori%ed $or sae or distribution in any #anner" This docu#ent #ay not be copied' scanned' dupicated' $orwarded' distributed' or posted on a website' in whoe or part"
Chapter 01 - Taxes and Taxing Jurisdictions
11. The nternal Revenue 7ode is federal statutory la!, enacted by 7ongress and signed by the )resident. Technically, Treasury regulations only interpret and explain the statute and are not la!s in their o!n right. Thus, regulations are less authoritative than the 7ode itself. o!ever, because 7ongress authori8ed the Treasury to !rite regulations, they are the government’s official interpretation of statutory la!. )ractically, the regulations carry considerable authoritative !eight. 12. The tax increase may have reduced the aggregate demand for consumer goods and, conse/uently, municipal residents are buying fe!er goods. second possibility is that municipal residents are traveling to other $urisdictions !ith lo!er tax rates or making more purchases through mail order catalogs or on"line. 1#. 9rom a political perspective, li/uor and cigarettes sales make an excellent tax base because consumption of the t!o products is purely discretionary, and any decline in consumption because of the tax is socially desirable. 9rom an economic perspective, these sales are a good tax base because the demand for li/uor and cigarettes is relatively price inelastic. n other !ords, people !ho drink and smoke on a regular basis buy these p roducts regardless of a heavy excise tax. 1'. The federal income has the broader base. The federal payroll tax is imposed on !ages, salaries, and other forms of compensation earned by employees. The federal income tax is imposed on all types of compensation as !ell as net business profit, investment income, and any other income item from !hatever source derived. 1*. property tax is a periodic %usually annual& tax levied on the ownership of property and based on the value of the property on a particular assessment date. transfer tax is a transaction" based tax levied on the transfer of property from one party to another. transfer tax is based on the value of the property at date of transfer. 1. f the federal government could :piggy back; a national sales tax on existing state sales tax collection systems, the federal government could avoid creating a ne! federal agency for collecting the tax. n contrast, the federal government !ould have to create a ne! collection system for a national <T. o!ever, a national <T !ould be less likely to cause $urisdictional conflict bet!een the federal government and the states because states do not depend on <Ts as a source of revenue. Application Problems
1.
a. The statement of facts identifies three taxpayers= (r. >+, >+ ?ervices, and >+ Realty. b. The government of the locality in !hich (r. >+ resides, the state government of
+. The local governments of the four counties in !hich >+ ?ervices conducts business, the state government of + ?ervices. The city of -oston, the state government of (assachusetts, and the 4.?. government have $urisdiction to tax >+ Realty.
2.
a. The 4nited ?tates has $urisdiction to tax (rs. 7( because she is a permanent resident. b. The 4nited ?tates has $urisdiction to tax (rs. 7( only on the 4.?. source income generated by the (anhattan real estate. c.
The 4nited ?tates does not have $urisdiction to tax (rs. 7(.
d. The 4nited ?tates has $urisdiction to tax (rs. 7( because she is a citi8en.
1-2 © 2013 by McGraw-Hi !ducation" This is proprietary #ateria soey $or authori%ed instructor use" &ot a uthori%ed $or sae or distribution in any #anner" This docu#ent #ay not be copied' scanned' dupicated' $orwarded' distributed' or posted on a website' in whoe or part"
Chapter 01 - Taxes and Taxing Jurisdictions
#.
a. The tax is @,#55 %@'1*,555 A 2B&. b. The tax is @13,555 %C@*55,555 A 2BD E C@22*,555 A 'BD&.
'.
ncrease in 7ounty G’s aggregate assessed property tax value ssessed value of 7ompany F’s ne! facility et increase in 7ounty G’s tax base Tax rate et effect on 7ounty G’s current year revenue
*.
>urisdiction =
@2#,555,555 %25,555,555& @#,555,555 .5' @125,555
@55,555,555 .5* @'5,555,555
@015,555,555 .5 @'2,55,555
dditional revenue %@'2,55,555 − @'5,555,555&
@2,55,555
>urisdiction I=
0.
@*5,555,555 .5* @2,*55,555
a. urisdiction + 4se tax rate in >urisdiction )re credit use tax ?ales tax paid to >urisdiction + 4se tax o!ed to >urisdiction
@55,555 .5 @#,555 %1,555& @1,555
b. urisdiction F 4se tax rate in >urisdiction )re credit use tax ?ales tax paid to >urisdiction F 4se tax o!ed to >urisdiction
@0*5,555 .5 @'*,555 %',0*5& "5"
a. (rs. J+ o!es @* )ennsylvania use tax %@3,'55 A 0B&. b. (rs. J+ o!es no )ennsylvania use tax because her @2# e! Kork sales tax %@3,'55 A .0*B& exceeds @*. c.
.
(rs. J+ o!es @1 )ennsylvania use tax %@* L @'05 credit for
a. ?tate R residents !ho purchase property out"of"state %i.e., through the mail& but use and consume the property in ?tate R o!e the percent use tax. b. The fact that 9irm F must collect the ?tate R use tax does not affect the legal liability of ?tate R residents to pay the tax. o!ever, very fe! people actually pay a self-assessed use tax. Thus, ?tate R might collect as much as @1,55,555 additional revenue % percent of @1 million sales to ?tate R customers& if 9irm F !as re/uired to collect use tax at point of sale and remit the tax to ?tate R.
1-3 © 2013 by McGraw-Hi !ducation" This is proprietary #ateria soey $or authori%ed instructor use" &ot a uthori%ed $or sae or distribution in any #anner" This docu#ent #ay not be copied' scanned' dupicated' $orwarded' distributed' or posted on a website' in whoe or part"
Chapter 01 - Taxes and Taxing Jurisdictions
3.
a. (r. and (rs. 7? are not re/uired to pay sales tax on the purchase of inventory goods because they are not the final consumers of the goods. The hard!are store’s retail customers must pay the sales tax !hen they purchase goods. (r. and (rs. 7? are re/uired to collect this tax at point of sale. b. (r. and (rs. 7? should time their purchases to minimi8e their inventory on hand as of Jecember #1 of each year, thereby minimi8ing the book value on !hich the personal property tax is based.
15. 9irm M= ?ales revenue %@3 × 12.' million units& 7ost of sales %@ × 12.' million units&
@111,55,555 %0','55,555& @#0,255,555 .5# @1,11,555
9irm R= ?ales revenue %@15 × 12.' million units& 7ost of sales %@3 × 12.' million units&
@12',555,555 %111,55,555& @12,'55,555 .5# @#02,555
Issue Recognition Problems
1.
re (r. and (rs. > re/uired to pay the property tax for a full year even though they lived in the home for only three months of the yearN s there any mechanism for allocating the property tax attributable to the period >anuary 1 through Hctober * to the former o!nersN
2.
Jo the fences and lighting represent permanent improvements to real property %corporate head/uarters& so that their value adds to the real property tax base, or can they /ualify as personalty that is exempt from real property taxN
#.
o! does each $urisdiction in !hich the plane is temporarily stored define or identify business tangibles sub$ect to taxN s $urisdiction based on a minimum number of days of physical presence in the stateN s the annual personal property tax pro rated to reflect the number of days that property is used or stored in the stateN
'.
Joes ?tate have $urisdiction to tax the retirement income that (rs. H earned !hile she !as a resident of ?tate but that she receives !hile she is a resident of ?tate +N
*.
Jid the sale of the furniture from
.
Jo cme 7orporation’s activities in ?tates O, K, and I give all three states $urisdiction to tax cme’s business incomeN o! much of cme’s net profit can be taxed by each state !ith $urisdictionN
0.
Phich of the 1' states has $urisdiction to tax (r. P’s professional incomeN o! much of this total pri8e money is sub$ect to each state’s personal income taxN
.
Joes the abatement agreement re/uire --- 7ompany to repay any of the foregone property taxes or incur any penalty if it terminates its business activity in 7ounty + before the end of the abatement periodN
1-( © 2013 by McGraw-Hi !ducation" This is proprietary #ateria soey $or authori%ed instructor use" &ot a uthori%ed $or sae or distribution in any #anner" This docu#ent #ay not be copied' scanned' dupicated' $orwarded' distributed' or posted on a website' in whoe or part"
Chapter 01 - Taxes and Taxing Jurisdictions
3.
Joes the fact that Jempsey 7orporation sells goods to 4.?. customers give the 4nited ?tates $urisdiction to tax the 7anadian corporationN s the income generated by Jempsey’s sales to 4.?. customers considered 4.?. source income sub$ect to federal income taxN
15. Phen (r. +P dies, can the 4nited ?tates government claim $urisdiction to impose the federal estate tax on his net !orthN 7an an individual !ho has been a 4.?. citi8en escape federal taxation by renouncing his citi8enship and moving to a foreign countryN Research Problems
The first three research problems for 7hapter 1 are designed to encourage students to explore internet !ebsites that contain a !ealth of information on local, state, and federal taxes. )roblem ' is an exercise to increase students’ a!areness of their state’s sales tax and the items on !hich the tax is imposed. Tax Planning Cases
1.
P)’s management must compare the tax costs of operating in each $urisdiction. urisdiction 9’s property tax rate
@15,555,555 .5' @'55,555
nnual gross receipts >urisdiction 9’s gross receipts tax rate
@2,555,555 .1* @#55,555
Tax cost of operating in Jurisdiction F
@055,555
nnual gross receipts >urisdiction G’s gross receipts tax rate
@2,555,555 .#5 @55,555
Tax cost of operating in Jurisdiction G
-ased solely on the comparative tax costs, P) should locate its ne! branch in >urisdiction G. 2. -efore the tax increase, +TR’s taxable income !as @255 million %@15 profit per unit × 25 million units&, its income tax cost !as @'5 million, and its after"tax profit !as @15 million. f +TR’s taxable income does not change, the rate increase from 25 percent to 22 percent !ould increase the income tax cost to @'' million and decrease after"tax profit to @1* million. f +TR increases its profit per unit to @15.25, but sells only 13 million units, its taxable income !ill decrease to @13#. million. ts tax on this income !ill be @'2.# million, and its after"tax profit !ill be @1*1.1' million. Thus, +TR’s o!ners !ill maximi8e after"tax profit if they do not raise the price of their product.
1-) © 2013 by McGraw-Hi !ducation" This is proprietary #ateria soey $or authori%ed instructor use" &ot a uthori%ed $or sae or distribution in any #anner" This docu#ent #ay not be copied' scanned' dupicated' $orwarded' distributed' or posted on a website' in whoe or part"
