tax news

President Obama and the First Lady today expressed high praise for a congressional proposal that would legalize marijuana while at the same time imposing a 60 percent excise tax on junk food, candy, and soda.

“It’s time that we recognize personal freedom to put what we want into our bodies,” said Mr. Obama, referring to the marijuana proposal. “At the same time, we should take action to address Americans’ poor nutrition choices, which the citizens of this country are inflicting on themselves.”

The bill, the Making the US Newly Capable by Halting Imprisonment of Errant Smokers (or MUNCHIES) Act, is projected to raise nearly $1 trillion in new federal revenue over the next decade. The funds would be earmarked for the creation and upkeep of a new White House “herb” garden, with language suggesting that Vice President Joe Biden has “dibs” on the first harvest.

Some Republicans have voiced their disapproval of the bill. Former presidential contender Rick Santorum was especially vocal on condemning the marijuana legalization: “The bill is completely wrong: marijuana is dangerous and should stay illegal. But also, big government Democrats should not control Americans’ grocery store choices.”

In related tax news, the Congressional Research Service released two new studies: one finding that even a modest carbon tax would reduce carbon emissions significantly, while the other found that even a large income tax increase would have no impact on hours Americans work.

Click here for more blogs like this one.

Cyprus’s outrage about a proposed tax on all bank accounts helped turn the proposal into a tax primarily on foreign deposit holders’ accounts—a lesson not lost on U.S. policymakers.

“This would be a win-win for America,” said U.S. Senator Peter Papershill. “Tax bank accounts held by foreigners and use the revenue to reduce Americans’ taxes.”

A recent poll asked Americans who should bear the burden of taxes. 11 percent replied “you,” 4 percent replied “me,” and 85 percent replied “neither you nor me but that guy behind the tree.”

Click here for more blogs like this one.

NEW YORK (Reuters) - Amazon.com Inc and other out-of-state online retailers must collect state tax on New York state customers, the state's highest court ruled on Thursday, a decision at odds with other courts that could set the stage for a showdown in the U.S. Supreme Court. The case, combining two brought by Amazon and Overstock.com Inc, was decided by the New York State Court of Appeals by a vote of 4-1. "It's unfortunate and the (U.S.) Supreme Court ought to look at this," Overstock acting Chief Executive Jonathan Johnson told Reuters by phone. ...

After five years of litigation and appeals, New York's highest court today upheld the state's "Amazon tax" in a 4 to 1 decision (PDF). The law, nicknamed after its most visible target, deems an out-of-state company to be an in-state taxpayer if the company receives commissioned referrals from in-state resident "affiliates." The out-of-state company then must collect sales tax for the state. Generally, just as state services are only provided within their borders, state tax authority (or "nexus") ends at its border, with it only able to require sales tax collection from in-state companies.

On the central question of whether Amazon.com and other online retailers are "physically present" due to their affiliate contracts, despite not being physically present themselves, the Court of Appeals today found it was so:

[E]ven in the Internet world, many websites are geared toward predominantly local audiences -- including, for instance, radio stations, religious institutions and schools -– such that the physical presence of the website owner becomes relevant to Commerce Clause analysis. Indeed, the Appellate Division record in this case contains examples of such websites urging their local constituents to support them by making purchases through their Amazon links. Essentially, through these types of affiliation agreements, a vendor is deemed to have established an in-state sales force.

Viewed in this manner the statute plainly satisfies the substantial nexus requirement. Active, in-state solicitation that produces a significant amount of revenue qualifies as “demonstrably more than a ‘slightest presence’” under Orvis. Although it is not a dispositive factor, it also merits notice that vendors are not required to pay these taxes out-of-pocket. Rather, they are collecting taxes that are unquestionably due, which are exceedingly difficult to collect from the individual purchasers themselves, and as to which there is no risk of multiple taxation.

(p. 9-10.) In short, physical presence means not just having your property or your employees in a state, but now also targeted advertising through others that resembles an in-state local sales force. The Court quickly notes in its next paragraph that "no one disputes" that "passive" advertising does not create phyiscal presence. (p. 10). Consequently, the line the Court draws is between passive advertising (no nexus with the state) and active advertising (nexus with the state).

Judge Robert Smith dissented, saying that the statute unconstitutionally expands the physical presence rule, and rejecting the majority's apparent constitutional distinction between advertising paid per result (tax nexus) and advertising paid as a flat fee (no tax nexus).

This is obviously not the decision we wanted, having filed briefs in the case urging that the statute be struck down as unconstitutional. The parties may yet appeal the case to the U.S. Supreme Court and we'd say the same thing. 

However, three thoughts to keep in mind nevertheless.

​Check out everything we've ever done on nexus (including my most recent congressional testimony on the topic) here.

This morning we released an extensive new state-by-state resource guide, How Is the Money Used? Federal and State Cases Distinguishing Taxes and Fees (download PDF version here). This report examines what a tax is, what a fee is, and how public understanding of the difference between the two can strengthen taxpayer protection provisions, minimize distortions caused by hidden or mislabeled taxes, and help increase transparency of the cost of government programs. Hundreds of relevant legal cases, from each state, are summarized.

A tax has the primary purpose of raising revenue. By contrast, a fee recoups the cost of providing a service from a beneficiary.

This is not just a matter of semantics. In order to protect taxpayers, many state constitutions contain additional procedural steps and limitations that apply only to tax increases. These protective measures can be undermined if the legislature can circumvent them by merely relabeling what would otherwise be a tax, so a workable definition of "tax" is necessary to give them meaning.

The report finds that all but two states (North Carolina and Oregon) have adopted these definitions, with Ohio as the most recent addition. The report also reviews which states rule in favor of taxpayers when tax laws are ambiguously worded, which states have rejected the discredited notion that taxes are “mandatory” charges while fees are “voluntary” charges, and the impacts of the Supreme Court's decision finding the health care individual mandate to be a tax.

With April 15th arriving soon, taxes will be on the collective minds of our nation. As taxpayers sign over checks to the government, an understanding of what the word tax means is of upmost importance.

Tax Foundation Background Paper No. 63, “How Is the Money Used? Federal and State Cases Distinguishing Taxes and Fees” by Joseph Henchman is available online.