Understanding Taxes and Taxing Jurisdictions: Definitions, Jurisdiction, and Tax Formulas , Study notes of Business Taxation and Tax Management

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Chapter 01

Taxes and Taxing Jurisdictions

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Definitions

Tax

= compulsory payment to support

the cost of government

• contrast with fine/penalty or user fee

Taxpayer

= any person or organization that pays

tax (includes individuals and corporations)

Incidence

= ultimate economic burden of a tax

• May not fall on the person or organization who pays tax

Jurisdiction

= right of a government to tax

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2. a. The United States has jurisdiction to taxMrs. CM because she is a permanentresident.b. The United States has jurisdiction to taxMrs. CM only on the U.S. source incomegenerated by the Manhattan real estate.c. The United States does not havejurisdiction to tax Mrs. CM.d. The United States has jurisdiction to taxMrs. CM because she is a citizen.

Issue Recognition Problem

Does State A have jurisdiction to taxthe retirement income that Mrs. Oearned while she was a resident ofState A but that she receives while sheis a resident of State K?

4. Increase in County G’s aggregate assessed property tax value

$23,000,

Assessed value of Company LI’s new facility

(20,000,000)

Net increase in County G’s tax base

$3,000,

Tax rate

.

Net effect on County G’s current year revenue

$120,

California waived sales tax onTesla’s purchases of manufacturingequipment for the Milpitas Plant

Two Ways to Characterize Taxes

• Frequency with which tax occurs
  • Transaction (event) based taxes, such as:
    • Sales or excise tax• Estate or gift tax
      • Activity based tax, such as:
        • Income tax
          • Link to specific government expenditures
            • Earmarked to finance designated projects, such as:
              • Social Security and Medicare• EPA’s environment excise taxes

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State and Local Taxes

• Sales/use
  • Broad-based but typically excludes necessities (food,

drugs)

• Personal responsibility for use tax
  • Excise tax
    • Imposed on retail sale of specific goods or services
      • Cigarettes and gasoline• Hotel and motel accommodations
        • Income tax
          • Personal• Corporate

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a.

Value of property purchased in Jurisdiction K

$600,

Use tax rate in Jurisdiction H

.

Pre credit use tax

$36,

Sales tax paid to Jurisdiction K

(18,000)

Use tax owed to Jurisdiction H

$18,

b.

Value of property purchased in Jurisdiction L

$750,

Use tax rate in Jurisdiction H

.

Pre credit use tax

$45,

Sales tax paid to Jurisdiction L

(48,750)

Use tax owed to Jurisdiction H

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a. State R residents who purchaseproperty out-of-state (i.e., through themail) but use and consume the propertyin State R owe the 6 percent use tax.b.

Very few people actually pay a self-

assessed use tax. Thus, State R mightcollect as much as $1,080,000 additionalrevenue (6 percent of $18 million salesto State R customers) if Firm L wasrequired to collect use tax at point ofsale and remit the tax to State R.

a.

Mr. and Mrs. CS are not required to pay sales

tax on the purchase of inventory goods becausethey are not the final consumers of the goods. Thehardware store’s retail customers must pay thesales tax when they purchase goods. Mr. and Mrs.CS are required to collect this tax at point of sale.b.

Mr. and Mrs. CS should time their purchases

to minimize their inventory on hand as ofDecember 31 of each year, thereby minimizing thebook value on which the personal property tax isbased.

History of Federal Income Tax

• Pre-1861: tariffs, excise and property taxes• First

income

tax enacted to pay for Civil War in

1861, expired in 1871

• First permanent income tax passed in 1894, but

struck down by Supreme Court as unconstitutional

• Sixteenth Amendment ratified in 1913 made the

income tax constitutional

• Internal Revenue Code was enacted in 1939 and

subsequently revised in 1954 and 1986

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Foreign Taxes

• Income taxes similar to U.S.• Value added tax (VAT)
  • Similar to a sales tax on the incremental value added by a

business at each stage of the production process

• Business can claim a credit for VAT paid to a supplier with

proof of payment

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9. Issue Recognition Problem

Does the fact that DempseyCorporation sells goods to U.S.customers give the United Statesjurisdiction to tax the Canadiancorporation?Is the income generated byDempsey’s sales to U.S. customersconsidered U.S. source incomesubject to federal income tax?

Jurisdictional Competition

• Increasing the tax rate or expanding the definition of

the tax base can cause taxpayers to flee the taxjurisdiction Ex: Tax evasion in Greece is estimated at 25 to35% of Greek GDP.

One proposal is to lower the

rates to encourage compliance. • Current trends in increasing the tax base

• Annexation to expand city property• Gambling/lotteries• Sales tax expansion

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