Taxable Talk

Kiplinger released its list of the tax friendly and least tax-friendly states in the US. There really aren’t any surprises:

Here are the bottom ten:

1. California
2. Hawaii
3. Connecticut
4. New York
5. New Jersey
6. Minnesota
7. Maine
8. Vermont
9. Illinois
10. Rhode Island

And the top ten:

1. Wyoming
2. Alaska
3. Florida
4. Nevada
5. Arizona
6. Louisiana
7. South Carolina
8. South Dakota
9. Mississippi
10. Delaware

Let’s look at my former state (California) and my current state (Nevada) as to the differences. “The Golden State is home to movie stars, beautiful beaches and the highest income tax rates in the U.S., putting it at the top of our list of Kiplinger’s top ten least tax-friendly states. Californians pay lower property taxes than residents of other high-tax states, but, in a state with some of the highest real estate prices in the U.S., they’re no bargain.” There’s not much to add: California is a very high-tax, high-regulation state.

Now let’s look at Nevada. “Another no-income-tax haven, Nevada is one of Kiplinger’s top ten most tax-friendly states. Where does it get its money? Sales tax: the average combined state and local tax rate is 7.98%.” Kiplinger missed another huge source of funding for Nevada: casinos. No matter, Nevada is a low-tax, low-regulation, business friendly environment. I’m happy I’m here.

The Los Angeles Times has an article asking this question. Because of the drought in California, the Metropolitan Water District had a $340 million incentive program so that homeowners would replace grass (which takes a lot of water) with bark, rocks, and other drought tolerant (xeriscape) landscapes. (The Southern Nevada Water Authority has a similar program.) The MWD has no idea if they have to issue 1099s to rebate recipients under federal law. (It is exempt from California taxation, though.) The article notes that the MWD suggests talking to a tax professional, so I’ll helpfully give an answer.

Any accession to wealth is taxable unless Congress has exempted that from taxation. One such exception are rebates on purchases. If you buy, say, a new car for $25,000 and receive a $1,000 rebate, you really bought the car for $24,000. A car rebate isn’t taxable income. Is the MWD (or SNWA) program a rebate?

No, it’s not. There’s nothing being purchased from the water agency. Instead, you’re tearing out grass, and replacing it with something else. The agency paying the “rebate” isn’t the same agency that’s doing the work. You might do it yourself, or you might higher a landscaping firm to do the work. The landscaping firm isn’t giving you a rebate.

If this isn’t a rebate (for tax purposes), then what is it? Well, the IRS could rule it’s not taxable since it is a lowering of the cost of doing the grass replacement and this is good for the environment. However, that’s not likely. There’s nothing in the Tax Code that says if something is done that’s good for the environment it’s not taxable. Instead, this looks like income–“Other Income” that would be reported on line 21 of Form 1040. You’re receiving a reward (income) for doing something. It’s not a rebate of a purchase. It’s not exempt from taxation under any other of the exemptions under the Tax Code. Thus, it’s taxable income.

As we continue with our Bozo Tax Tips–things you absolutely, positively shouldn’t do but somewhere someone will try anyway–it’s time for an old favorite. Given the business and regulatory climate in California, lots of businesses are trying to escape taxes by becoming a Nevada business entity. While I’m focusing on California and Nevada, the principle applies to any pair of states.

Nevada is doing everything it can to draw businesses from California. Frankly, California is doing a lot to draw businesses away from the Bronze Golden State. But just like last year you need to beware if you’re going to incorporate in Nevada.

If the corporation operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation is a California corporation, a Delaware corporation, or a Nevada corporation.

Now, if you’re planning on moving to Nevada forming a business entity in the Silver State can be a very good idea (as I know). But thinking you’re going to avoid California taxes just because you’re a Nevada entity is, well, bozo.

While I was on vacation, the Small Business & Entrepreneurship Council released its 19th annual “Small Business Policy Index 2014: Ranking the States on Policy Measures and Costs Impacting Small Business and Entrepreneurship.” (Hat Tip: Joe Kristan) The listing measures the costs, both in taxes and regulations, on small businesses. As noted in the report,

Some elected officials, policymakers and special interests believe that taxes, regulations and other governmental costs can be increased with impunity. Economic reality tells a different story. Ever-mounting burdens placed on entrepreneurs and small businesses by government negatively affect economic opportunity. People go where economic opportunity is, in turn, bringing more opportunity with them. The “Small Business Policy Index” tries to make clear the relative governmental burdens placed on entrepreneurship among the states, so that business owners and their employees, elected officials and citizens in general can better grasp the competitive position of their respective states.

Here’s the listing of the best states:

1. South Dakota
2. Nevada
3. Texas
4. Wyoming
5. Florida
6. Washington
7. Alabama
8. Indiana
9. Colorado
10. North Dakota

And here are the bottom ten:

41. Connecticut
42. Maine
43. Iowa
44. Oregon
45. Vermont
46. Minnesota
47. Hawaii
48. New York
49. New Jersey
50. California

In looking at the actual factors, California is near the bottom on most tax and regulation rankings. (interestingly, California had the best score on unemployment tax.) Contrast that with Nevada, which doesn’t have a state personal income tax, doesn’t have a corporate income tax, and doesn’t have the regulatory burden of California. It’s no wonder that Nevada ranks higher than California.