Taxes in the Back

A few months ago I received an e-mail from someone claiming to hold a Powerball ticket good for a seven figure sum. This someone, however, was seeking to claim the ticket anonymously, and wanted to know if I had any ideas.

I suspect this someone came across my post about an unclaimed winning lottery ticket in Iowa. In that case, the Iowa Lottery refused to honor the ticket unless the recipient came forward. In both situations, state law required the winner’s name and location to be made public information.

So I wrote back and said it could be considered fraud if someone other than the actual winner claims the prize. I added that I don’t have any viable courses of action to present, and thanked the person for the inquiry.

There are countless reasons why anyone would want to claim a lottery ticket anonymously. The primary reason, of course, is to avoid the public spotlight. Unfortunately, far too many times lottery winners have fallen victim to scam artists or physical harm.

New Jersey Assemblyman John Burzichelli believes lottery winners shouldn’t have to face the fame with their fortune. He recently introduced bill A2982, which would give New Jersey lottery winners the option of remaining anonymous for one year.

The NJ Lottery is likely to lobby against the bill as is. The State Lottery claims that “transparency gives taxpayers increased confidence that lottery games are fair and honest.” But I see a far more significant reason for its opposition: Lost publicity. No one is going to care about a press conference for a lottery winner a year after the fact.

Expect some sort of compromise, such as a prize amount threshold.

I don’t think we should preserve the publicity at the expense of continuing to expose lottery winners to evil. The states generate plenty of revenue from their lotteries and almost certainly could afford to take a small hit, if any. Plus, there are other ways to accomplish transparency.

The battle between New York and its federally recognized tribes over the taxation of cigarettes continues.

In the most recent development, other players involved were on the losing end of a recent ruling in federal court. The judge held that wholesalers failed to collect New York City cigarette tax on the sale of millions of cigarette cartons to tribal retailers located on reservations in New York. The New York Times estimates the wholesalers could have to pay penalties up to $15 million to New York City.

New York City brought this action alleging that the wholesalers violated federal law. The Contraband Cigarette Trafficking Act prohibits persons from selling “contraband cigarettes,” which are defined as “a quantity in excess of 10,000 cigarettes, which bear no evidence of the payment of applicable State or local cigarette taxes in the State or locality where such cigarettes are found, if the State or local government requires a stamp, impression, or other indication to be placed on packages or other containers of cigarettes to evidence payment of cigarette taxes.”

Defendant wholesalers Mauro Pennisi and Gutlove & Shirvint each sold from May 2008 to January 2011 more than 10 million cartons to Indian retailers mostly on the Poospatuck Reservation, where fewer than 500 people live. Although cigarette packs sold to tribal members on reservation are exempt from NY cigarette tax, packs sold off-reservation in NYS are taxable.

New York City asserted that the cartons sold by the wholesalers were trafficked into New York City without payment of the New York City cigarette tax and re-sold. The judge ruled that New York City met its burden of proof to establish that the wholesalers should have known the vast majority of the untaxed cigarettes sold to the tribes were re-sold to non-tribal members.

This case will only further encourage tribes located in New York to manufacture their own cigarettes. Whether or not NYS will again seek to stop such activity remains to seen.

Last October I wrote about operators of the Napa Valley Casino refusing to pay a $2 card room admissions tax. The city of American Canyon, CA, approved the measure in 2010, yet it has delivered exactly $0 in tax dollars to date, as Napa Valley Casino is the only entity subject to the tax.

The parties ended up in court after the city filed a criminal complaint against the casino’s operators, and the operators countered with a civil suit of their own.

Earlier this month a Napa County Superior Court panel decided in favor of the city, according to the Times-Herald. The operators are seeking review of the decision by the state Supreme Court, but the court is not obligated to hear the case.

The Superior Court panel upheld the constitutionality of the tax, noting that local governments have broad powers to regulate gaming establishments located within their jurisdictions.

I don’t see a reversal here. The operators are asserting that the tax is on private citizens entering into a private business. Problem is, it’s not that straightforward.

I give a thumbs up for the HBO series Boardwalk Empire. The title refers to the longest boardwalk in the world, located in Atlantic City, NJ.

But the series hasn’t been filmed in New Jersey. $5 million was spent to build a 300 foot long boardwalk in Brooklyn in order to shoot scenes there. In March, filming for the upcoming Season 3 began at Historic Richmond Town on Staten Island. Season 3 is set to air this fall.

New York is a popular place to television and film producers because of the State’s post-production tax credit. Post-production refers to editing activity after filming is complete, such as visual effects, color correction, sound editing and mixing.

The State has become even more attractive to producers after Governor Cuomo earlier this week signed legislation expanding the post-production tax credit. From the Governor’s press release:

Under the new law, the qualified film and television post production credit increases from 10 percent to 30 percent in the New York metropolitan commuter region, including New York City and Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk and Westchester counties. An additional five percent (for a total of 35 percent) in tax credits would be available for post-production expenditures in locations elsewhere in the state.

In contrast, California does not offer a specific post-production tax credit. Although the cost of visual effects may qualify for the credit in the Golden State, the movie also must be filmed in the state. New York’s post-production credit does not have that requirement.

Whether a film tax credit program is good policy is another story. The folks at the Tax Foundation released this report in April, and made these key findings:

• Film tax credits cost states revenue and require either higher taxes or lower government spending elsewhere.
• At best, film tax incentives largely shift production from one sector to another without producing a net increase in economic activity or employment.
• However, the program is unlikely to produce a self-sustaining state film industry.
• Content restrictions raise concerns about censorship.

Film tax credits are also known to invite tax fraud. For example, Dennis Brouse was convicted in March for claiming improper tax credits exceeding $9 million from the Iowa Film Program.

These points must not have carried significant weight to New York lawmakers, as the new legislation received strong support. Only time will tell whether the initiative generates a net positive to the State.

Free agency periods in professional sports often elicit discussions about the jock tax. The jock tax is imposed by state and local governments on income earned by athletes when they perform in cities with such taxes.

States and cities have different tax rates. The more games played in a higher tax jurisdiction should result in more total tax paid. I covered the topic after Albert Pujols decided to sign with the Los Angeles Angels of Anaheim this past offseason.

So, do state and local tax rates impact the decisions of free agents?

California State Assemblyman Martin Garrick believes so. In a piece for the San Diego Union-Tribune, he claims the State’s jock tax creates a disincentive for professional athletes who consider whether to join a California team. He then states that the state legislature should take action to reduce or eliminate the disincentive.

I believe his analysis comes up short. There are a few key points Mr. Garrick does not mention.

via Wikipedia

First, he uses the example of baseball slugger Carlos Lee vetoing a trade to the Los Angeles Dodgers. He simply assumes a higher tax burden was the reason of the veto.

How come Albert Pujols decided to sign with the Angels when he could have re-signed with the Cardinals? Pujols is paying more taxes as a result of the decision.

Second, Garrick does not describe the difference in the effective tax rates by playing for different teams. Merely saying that one state’s income tax rate exceeds another’s is an oversimplification.

Sure, Garrick is correct to say that in general professional athletes on Californian teams pay more taxes than athletes on teams in most other states. Asserting that the increased tax burden is the primary reason players turn down the opportunity without offering a quantiative analysis, however, seems unconvincing.

Furthermore, it is at least arguable that moving to a team in a larger market provides athletes more oportunities for endorsement deals, possibly offsetting to an extent the increased tax burden.

Taxes may play a role in athletes’ decisions. It just appears some politicians may be exaggerating the significance of that role.

Last February Cook County Commissioner William Beavers was indicted for three separate counts of filing false income tax returns. Beavers has adamantly denied any wrongdoing.

Last week, Beavers held a press conference to further emphasize his innocence as a December trial date looms, the Chicago Sun-Times reports.

Referencing former U.S. Attorney Patrick Fitzgerald, who pushed to bring the charges, Beavers said, “He’s a rooster without nuts, a capon. OK? That’s what he is, a capon.”

I’ll let you look up what a capon is.

Beavers shed some light regarding his defense. In the indictment, Beavers allegedly used more than $68,000 from a campaign account in 2006 to boost his city pensions without paying income tax on the funds. At the press conference, Beavers shared bank statements reflecting that the campaign funds received was in fact a loan he repaid in 2009.

Beavers is a fighter. I wouldn’t be surprised if he takes this matter to trial just for the satisfaction of victory.

Last January the Nevada Tax Commission upheld a decision requiring a major casino company (Boyd Gaming) to collect and remit sales tax on the value of complementary meals provided to its gamblers. Boyd apparently plans to take the case to the Nevada Supreme Court.

In the meantime, the Nevada Tax Commission passed regulations on Monday requiring the state’s casinos and restaurants to pay sales tax on complementary meals provided to its employees and its patrons, reports the Las Vegas Review-Journal.

The Nevada Tax Department issued the regulations last February; casinos and restaurants must remit to the state, by July 15, taxes on meals comped as of February 15, 2012.

The tax base for comped employee meals is the cost of the food when purchased by the employer. The tax base for comped patron meals is the menu price.

Some implicated businesses may stop offering comped meals. Others may refuse to pay up awaiting a court decision and could face a possible 25 percent penalty, plus interest.

In the ongoing war over cigarette taxes between the State of New York and its federally recognized tribes, the latter scored a victory in the most recent battle.

Supreme Court Justice David Demarest issued an order last week requiring the State to return cigarettes seized last January by state police. The 26,160 cigarette cartons and 72 bags of tobacco were sold by the St. Regis Mohawk Tribe to HCI Distribution, Inc., a political division of the Winnebago Tribe of Nebraska.

Some of the State’s tribes began to manufacture and sell their own cigarettes after losing a court case requiring them to pay the $4.35 per pack cigarette tax on their purchase of name-brand cigarettes from wholesalers located off reservation.

NY Tax Law imposes a cigarette tax on on-reservation sales of cigarettes to non-members of an Indian tribe. The consumer bears the responsibility to pay the tax.

In this case, however, the cigarettes were sold to out-of-state purchasers, which, according to Justice Demarest, are not subject to the State’s cigarette tax. Therefore, the State had no authority to seize the cigarettes and loose tobacco en route to Nebraska.

A spokeswoman for NY Attorney General Eric T. Schneiderman confirmed the AG will appeal the decision.

The Indian Country Today Media Network has more.

Last Wednesday I wrote a brief “State of the Amazon.” Between then and now, the piece became incomplete. It’s already time for an update.

Illinois:

In March 2011, the Main Street Fairness Act was passed. The law expanded the definition of “physical presence.” A seller is required to collect and remit sales tax only if it is deemed to have a physical presence within the state. The new law implicated affiliate companies, many of which earn commissions for directing web surfers to an online store.

The Chicago Tribune is reporting the Main Street Fairness Act was declared unconstitutional by Cook County Circuit Judge Robert Lopez Cepero last week. The interstate commerce clause of the U.S. Constitution limits who a state can tax, and the judge took the position the State of Illinois overstepped its authority.

I suspect the defendant, the Illinois Department of Revenue, will file an appeal if it hasn’t already.

Texas:

The Houston Chronicle is reporting the Lone Star State reached an agreement with Amazon on Friday for the online retail giant to begin collecting sales tax in the state on July 1. In addition, Amazon agreed “to create at least 2,500 new jobs in Texas over the next four years and make at least $200 million in capital investments in the state.”

All parties seem to be in support of some federal solution, but that doesn’t mean anything will get done. We’ll see.

Amazon.com is currently the world’s largest online retailer. Many of Amazon’s products, if sold in brick and mortar locations, would be subject to sales tax in the state of sale. And it’s at least an arguable—if not compelling—case that those same products sold on the internet would be subject to sales tax in the state where the consumer sits.

Currently, Amazon.com collects sales tax in only five of 45 states that impose a sales tax. The five states: Kansas, Kentucky, New York, North Dakota, and Washington.

Many if not all of the other 40 states also want their share. Amazon has responded to such demands by threatening to end or actually ending relationships with local affiliates or by simply leaving a state.

Most recently, however, Amazon appears to be backing down. Within the past year Amazon has reached agreements with California, Indiana, South Carolina, and Tennessee to collect sales tax at a later date.

The Citizens for Tax Justice is reporting the latest developments, including an agreement with The Silver State:

• In Nevada, Amazon.com will begin collecting sales taxes in 2014 under a new agreement announced on Monday. The company already has major warehouses and distribution centers in the state. Amazon’s agreement with Nevada is similar to deals struck in California, Indiana, South Carolina, Tennessee, and Virginia.
• As in Nevada, Amazon’s deal to begin collecting sales taxes in Tennessee won’t take effect until 2014, but a lesser known part of that agreement has already taken effect. Amazon is mailing notices to all its Tennessee customers from throughout the past year letting them know that they may owe sales tax on the items they bought from the company, even though Amazon didn’t collect those taxes for them. Similar annual notices will be sent by February 1st in both 2013 and 2014.
• The Massachusetts Main Street Fairness Coalition is continuing its calls for the state to require that Amazon collect sales taxes, and The Boston Globe just chimed in to support the idea as well. As the Globe explains, the company’s new offices in Massachusetts should be enough to bring the company within reach of the state’s sales tax collection laws.

This piecemeal process is far from ideal, but it’s progress. As far as a possible national solution, federal lawmakers are making efforts. But as everyone knows, controversial pieces of legislation on Capitol Hill are unlikely to gain significant traction during an election year.

The federal versus state debate in this context in some ways draws similarities to the debate on the legalization and regulation of internet gambling. Under both the sales tax and gambling tax regimes, the generated revenues end up in state coffers. Each state should reserve some significant powers to regulate these areas in the internet space to meet its own needs.

A federal bill that sets minimum standards and offers each state the flexibility for how to structure its own tax system sounds like a win-win to me. But again, that requires Congress to get something done. I’m not holding my breath.