Illinois Increased Taxes But Is Still Broke

Posted on July 18, 2011 by Russ

You are insolvent when the money you owe (your liabilities) are more than the money you have (your assets). Illinois has been in desperate financial trouble for some time; this won’t be news to readers of this blog.

Earlier this year on a party-line vote Democrats forced through a major tax increase: corporate income tax went up from 4.8% to 7% and personal income tax went from 3% to 5%. So would increasing revenue end the problems for Illinois?

No. Illinois pensions remain underfunded in the billions. The optimistic forecast is $54 billion; the pessimistic forecast is $80 billion. I think we can all agree it’s a lot.

This past week Senator Mark Kirk (R-IL) asked Federal Reserve Chairman Ben Bernanke if the Fed was watching Illinois and California; Mr. Bernanke said they are being watched.

Meanwhile, President Obama is demanding higher taxes for a debt ceiling deal. I’ll be as blunt as I can: The cause of the problem is government spending; the solution is cutting government spending. If spending is not cut, there is no long-term solution.

Of course, we’re dealing with Washington, so we’ll see what happens. Since Democrats control Springfield (Illinois), they chose the tax increase route. So far, Illinois remains in deep trouble.

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I Hope You Enjoyed that $2.4 Million

Posted on July 18, 2011 by Russ

I’ve said this before, and I’m certain I’ll say it again: If you want to get in trouble with the IRS, the fastest way to do so is to not remit your federal employment taxes. These are called trust fund taxes, as employers remit money held in trust for the federal government. It’s the government’s money, and they want it.

That lesson has now been learned by Frank Bivings and his wife, Isabelle Blanco. The Washington D.C. residents own the Bivings Group, an Internet communications firm. With 30 employees (according to their web site), they certainly have employment taxes. However, the husband and wife felt that paying themselves larger salaries was more important than remitting those taxes. According to the Department of Justice, $1.8 million of the $2.4 million that wasn’t remitted were federal trust fund taxes. It’s probable the rest were local (District of Columbia) taxes, and that’s nearly as bad: The District is federal land.

Mr. Bivings pleaded guilty to one count of failing to pay employment taxes; Ms. Blanco pleaded guilty to one count of failure to pay a tax. Mr. Bivings’ charge is by far the more serious; he’s looking at a stay in ClubFed of 30 – 37 months. Ms. Blanco is likely to receive probation. The husband and wife have agreed to make restitution of the unpaid employment taxes.

I’ll repeat this again: Make sure that when you collect federal trust fund taxes that you remit them.

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New York $1.2 Million, Indians 0

Posted on July 18, 2011 by Russ

I may be a baseball fan, but this post has nothing to do with the Cleveland Indians. Rather, here’s the latest chapter in New York’s war against Indian tribes selling cigarettes. In June, a New York Appellate Court lifted an injunction that prevented New York from collecting cigarette taxes on cigarettes sold on Indian reservations in the Empire State. The Indian tribes vow an appeal, but unless this ruling is reversed, Indian tribes must collect tax on cigarettes imported onto their reservations.

So the tribes plan on emphasizing their own manufactured cigarettes. Because those are made on Indian lands, they are exempt from New York sales tax.

Meanwhile, New York has begun seizing tobacco products heading to Indian reservations that lack appropriate tax stamps. The total value of tobacco products seized was $1.2 million; this would have resulted in just under $300,000 of tobacco taxes collected by New York.

I doubt we’ve heard the last of this battle.

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IRS Philadelpia Service Center Has Moved

Posted on July 14, 2011 by Russ

In a phone call today with the Taxpayer Advocate in Philadelphia, I learned that the IRS Service Center in Philadelphia moved, with the final personnel moving into the “new” office in January. The new address is:

Internal Revenue Service
2970 Market St.
Philadelphia, PA 19104

Note that this address should be used only for overnight delivery, courier service, etc.; all other mail to the Philadelphia Service Center should go to the normal address (typically specified in the communication from the IRS).

The Philadelphia Service Center does not process returns; however, they do handle numerous “back-office” tasks including correspondence audits, international adjustments, and many others.

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Only in California: $440.5 Million in Extra Revenue Is $350 Million Short

Posted on July 13, 2011 by Russ

Here in the Bronze Golden State, the state income numbers for June have just come in. Collections came in better than forecast by $440.5 Million. That seems good, but it’s not quite good enough to meet California’s budget. That budget projected that revenues would exceed the projection by $790.5 Million, so California’s golden revenues in June now look like pyrite.

The problem for California is, there really is no driver for continued revenue growth. The new Amazon Tax will lead to less revenues in future months (it won’t be a huge loss, but it will be a loss) rather than the $200 Million increase that was written into the budget. Unemployment is increasing, and California businesses continue to face regulatory hell. I’m not seeing any improvement in the national economy.

California policymakers are hoping, of course, that I’m wrong. But for business to expand there must be reasons to do so. The administration in Washington is giving no one a reason to expand. Sacramento is following suit. Unless something drastic changes, California is looking at another year of malaise.

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Two Baltimore Bail Bondsmen Found Taxes to be the Least of Their Problems

Posted on July 11, 2011 by Russ

Many businesses require licenses. In Maryland, you need a license to be a bail bondsmen (I suspect you do in most states). One of the rules in Maryland is that you can’t be a convicted felon if you’re a bail bondsmen.

Milton Tillman Jr. and his son, Milton Tillman III, had a problem. The elder Tillman had a felony conviction, and they were the owners of Four Aces Bail Bonds in Baltimore. The business was doing quite well, but the elder Tillman couldn’t legally run the business. Now, you and I probably would have never gone into the business given that issue. Alternatively, we’d sell the business so that we could be in compliance with the law.

The Tillmans decided that one felony deserved another: They decided not to pay income tax on their business. With the business being profitable, that’s another problem…especially when you owe the IRS somewhere between $400,000 and $1 million. Things only got worse when the government listened in on a conversation where the father described how he was going to hide his running of the business, and how he would transfer money out of the business.

Oops.

Both Tillmans pleaded guilty earlier this year. The elder Tillman pleaded guilty to three counts (filing a false tax return, wire fraud, and working as a bail bondsman as a felon); the younger Tillman faced solely a tax charge and will be able to remain in the bail bond business. The elder Tillman will enjoy 51 months at ClubFed. Both Tillmans will need to make restitution to the IRS of the tax due to the government.

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Denver Madam Pleads Guilty

Posted on July 11, 2011 by Russ

Late last year, I reported on Brenda Stewart. Ms. Stewart owned Denver Sugar and Denver Players, a prostitution ring that, per the Denver Post, catered to the high-end of Denver society.

The problem for Ms. Stewart wasn’t the call-girl ring; rather, it was what she did not do with the profits. She forgot that you do need to pay taxes on all income, even income from being a call girl.

This past week Ms. Stewart changed her plea. In a plea bargain, she pleaded guilty to one count of tax evasion; in return, the government dropped 69 other charges (racketeering, money laundering, and witness tampering). She also agreed to make restitution of $45,000 in back taxes and penalties.While Ms. Stewart could receive up to five years at ClubFed, it’s far more likely she’s looking at one year at ClubFed.

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Hawaii Tries for #1

Posted on July 11, 2011 by Russ

What state has the highest individual income tax rate in the United States? No, it’s not California. Sorry, New York isn’t the place either. Oregon just misses out on the top spot.

It’s Hawaii.

And Hawaii is adding to the high taxation of high income individuals in the Aloha State. Forbes is reporting that Hawaii is limiting itemized deductions to $25,000 for individuals who earn over $100,000 ($50,000 for married residents who earn over $200,000). This limitation will be in effect from 2011 through 2015.

It may be time for some individuals to bid aloha to the Aloha State.

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When Your Computer Takes the Day Off

Posted on July 11, 2011 by Russ

Last Sunday, my computer decided that it wanted to take a vacation. Now, I believe there’s a religion where mechanical devices have souls (Shintoism?), but I don’t believe that. But try as I might my computer had enough of me.

It crashed.

Luckily, I learned the lesson of backing up data years ago. Not only did I have backups (in multiple places), but I’ve restored files off of them. That’s an important part of backing up your work–making sure you can restore your files. Otherwise, what’s the point of backing up your data?

As it turns out, my computer’s “illness” lasted about three days. That wasn’t the end of the world (thank goodness this isn’t early April or October), but it was an annoyance.

The reason I bring this up is that I’ve seen many clients who do not back up their computer’s data, and who have never tried to restore from their backups. My corollary to Murphy’s Law is that your computer will die at the least opportune moment. Thankfully for me, that didn’t happen this time. I hope that will also be the case for you.

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California Passes Amazon Tax; California to Lose Tax Revenue

Posted on June 30, 2011 by Russ

As part of the recent budget, California implemented an Amazon tax. There were two components of the tax. First, any business with affiliates in the Bronze Golden State must collect sales tax on Internet sales. Second, any business with subsidiaries in California even if they have separate administrative arms must collect sales tax.

Amazon did what everyone thought they’d do: They immediately dropped all affiliates in California. Here’s the notice I received:

Unfortunately, Governor Brown has signed into law the bill that we emailed you about earlier today. As a result of this, contracts with all California residents participating in the Amazon Associates Program are terminated effective today, June 29, 2011. Those California residents will no longer receive advertising fees for sales referred to Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com. Please be assured that all qualifying advertising fees earned before today will be processed and paid in full in accordance with the regular payment schedule.

You are receiving this email because our records indicate that you are a resident of California. If you are not currently a resident of California, or if you are relocating to another state in the near future, you can manage the details of your Associates account here. And if you relocate to another state in the near future please contact us for reinstatement into the Amazon Associates Program.

To avoid confusion, we would like to clarify that this development will only impact our ability to offer the Associates Program to California residents and will not affect your ability to purchase from Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com.

We have enjoyed working with you and other California-based participants in the Amazon Associates Program and, if this situation is rectified, would very much welcome the opportunity to re-open our Associates Program to California residents. As mentioned before, we are continuing to work on alternative ways to help California residents monetize their websites and we will be sure to contact you when these become available.

But what about the second part of the tax, the corporate subsidiary? Well, that will also almost certainly be a non-starter. As this article from CNET notes, a California court has already rejected this tax. In Current, Inc. vs. State Board of Equalization, the court ruled that this tax was not legal because the company in that case had separate management, did not have integrated operations, and were separate and distinct corporate entities.

Amazon does have two such subsidiaries in California, but both are run as separate, distinct corporate entities. Amazon has good lawyers, so I’d expect that they will be following this decision exactly.

But I expect the Board of Equalization (California’s sales tax agency) to try to collect the tax. Amazon will fight it and very likely win. The fight will cost California, so the state will be out the legal fees.

Additionally, California will be out the income tax collected on the money received by affiliates. I didn’t make a fortune out of being an Amazon affiliate. However, all the income I received from Amazon was reported on my tax return. If we make a guesstimate of $1 million of income received by Californians from Amazon, that means that the state will lose about $93,000 a year in tax collections. Not much, but it all adds up.

Additionally, it’s likely that large affiliates may relocate out of California to another state so that they can maintain their status. That will exacerbate the hit to California.

In summary, all the Amazon tax does is cost California legal fees, decrease California tax revenues, and cause some California businesses to relocate to another state. That doesn’t sound like a formula for increasing tax collections to me.

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