Taxable Talk

Every so often the turf monster trips a player in a football or baseball game. Here’s one example:

This post deals with a very different kind of turf monster. Back in September I wrote about Southern California’s Metropolitan Water District issuing “rebates” to homeowners for replacing lawns (turf) with xeriscapes. It’s clear that such “rebates” are taxable for federal tax purposes. (California law specifically exempts such “rebates” for California tax purposes.)

Apparently, the Electric and Gas Industries Association (EGIA), which ran the program for the MWD, just discovered this. A correspondent sent me an email he received:

Dear Soon to be Taxed Homeowner:
Our records indicate that you received a rebate that exceeded $600 from SoCal Water$mart in 2015. In order to comply with Internal Revenue Service requirements you must complete and sign a W-9 form with your Social Security number or Tax ID. This form is available within the online application, and may be accessed by logging into your online account at https://mwdturf.conservationrebates.com/ and editing the application with the required tax information changes. The name on the W-9 form submitted for review must match the name that was on the rebate check…

Please log back into your online account at https://mwdturf.conservationrebates.com/, download and complete the W-9 form and upload the completed form back into the application. The W-9 will be reviewed, and a 1099 will be issued to you for tax and accounting purposes. If you have any concerns regarding whether your rebate is considered taxable income, please contact a qualified tax professional.

There are two obvious implications of this. First, the EGIA realizes that they must issue 1099s to any impacted taxpayers. It’s another case of substance over form: These may be called “rebates” but they’re really an economic incentive to remove turf and replace it with something else. And that results in what is clearly taxable income.

Second, there will probably be an issue with some taxpayers ignoring the email. The email notes that you’re going to be issued tax paperwork; how many taxpayers will want that? Of course, whether or not the 1099 is received does not change that the income is taxable (it is). Still, I suspect EGIA will have quite a bit of work on their hands to obtain all the taxpayer identification numbers.

UPDATE: My correspondent told me that the EGIA is requesting that impacted taxpayers email their taxpayer identification numbers to the agency. If you are an impacted taxpayer, do not do this. Email is fast but it is not secure. EGIA is allowing you to mail the Form W-9 to the agency; that is a far more secure means of transmitting your social security number.

To the EGIA, what were you thinking in these days of identity theft?

I had never heard of Woof & Poof. The company makes handcrafted baby products, but apparently not for long in their home of Chico, California. According to this news story, the company is stopping production.

Why? The CEO, Roger Hart, said, “The high cost of doing business in California coupled with ridiculous regulatory environment makes it virtually impossible to do business.” The news story contains the following:

A recent visit by an inspector with the Department of Consumer Affairs set the company back. The inspector from Sacramento cited him for having the wrong size font on the decorative pillow labels. He was told to take the labels out, or they would have his inventory seized.

My next story (above) notes California’s low standing on the 2016 State Business Tax Climate Index. California’s standing in the regulatory realm is even lower.

Yesterday a friend sent me a link to Joseph Vranich’s report on businesses leaving California. I should know: I’m one of the 9,000 businesses that did so.

Mr. Vranich analyzed business relocations from 2008-2014. He identified 1,510 “disinvestment events”–companies leaving the Bronze Golden State for brighter horizons. Mr. Vranich notes that for every one company that publicly leaves, at least five others have left. Mr. Vranich also excluded all but primary employers,

…[W]hose customers are nationwide or worldwide (such employers bring wealth into a community.) All “secondary employers” (which exchange wealth already in a community) such as retail stores, restaurants, dry cleaners, beauty salons, nurseries – an inexhaustible list of enterprises – are excluded.

While some of these business closings and relocations are local businesses that just service locally, today with the Internet a business in Nevada and elsewhere can service clients anywhere in the world. Yes, you can only go to a restaurant locally or get your hair done where you are, but many other service businesses are no longer geographically constrained. This, too, likely causes an understatement of the impact of business relocations.

And things aren’t likely to get better for California:

Finally, California is considering imposing a broad set of new taxes, tax extensions and fees on businesses in 2016 and 2017 – a “tsunami” that may trigger the worst demands on private-sector finances ever organized by the state’s politicians. It is highly likely that one result will be an increasing number of disinvestments in California in favor of greener domestic or international pastures.

A factor that Mr. Vranich didn’t consider is what will happen during the next economic downturn? California today relies largely on capital gains taxes from very wealthy individuals (and individuals receiving stock options) for state revenues. The next time there’s an economic downturn, that source of income will decline, almost certainly very substantially. Given the mindset in Sacramento, that’s likely to result in even higher taxes and regulations rather than starting to actually make California a place that businesses want to locate in.

When you purchase a car in California, you owe sales tax based on where the car is registered. The California DMV uses a table based on ZIP Codes to determine what that should be. For 90% or more of California, it works fine; the sales tax rate in a ZIP Code is uniform.

However, California has numerous sales tax rates based on cities, counties, and special districts. Two individuals living in the same ZIP Code might have two different sales tax rates. The DMV has apparently programmed its computer to charge the higher of the two sales tax rates when registering a car purchase. An impacted consumer has to then apply for a refund (if he becomes aware of the issue).

Yet California’s Board of Equalization, the agency responsible for sales tax collection in California, developed an online tool to accurately show the sales tax rate for a location. Unfortunately, the DMV refuses to use it and told George Runner, a member of the BOE, that it would be several years before the problem is fixed.

Mr. Runner expresses surprise at the situation. I am anything but surprised. I suspect the DMV likes the current procedure because they show higher revenue generation (which will presumably increase their budget) and because of pride of ownership. ‘We can’t use a tool developed by the BOE,’ the DMV may be thinking. ‘It’s not ours, so how can we trust it? And it doesn’t directly interface with our computer system. We don’t want our clerks overriding a sales tax rate (even when it’s wrong). Let the consumer just apply for a refund.’

This is yet another reason why trust has fallen in government and regulators.