Cook County (Chicago) Sales Tax to Drop

Posted on December 2, 2009 by Russ

It’s rare these days to read about any tax rate dropping. County Commissioners in Cook County, Illinois, home of Chicago and some of the metropolis’ suburbs, voted earlier this year to cut the county’s sales tax rate by 0.5%. Cook County Board President Todd Stroger vetoed the rollback. Yesterday, the veto was overridden. On July 1, 2010, the sales tax rate will fall. For Chicago, this means that the sales tax rate will fall from 10.25% to 9.75%.

“Some people will die needlessly for lack of access to the health care our system provides today,” Stroger said to the Chicago Sun-Times.

Two other politicians have clearer heads about the matter. Republican County Commissioner Timothy Schneider called it “…a $195 million rebate to the people of this county.” Democratic County Commissioner Forrest Claypool noted that it was part of a voter revolt. He told the Sun-Times, “What people see … is a county government that is too often a friends and family plan, a jobs machine for the politically connected.”

Politicians everywhere need to realize that there’s no such thing as government’s money. All of the money to fund government comes from the people. Commissioner Claypool noted that there’s no reason why government can’t be run more efficiently. He’s right. When times are tough government needs to cut back. Finally, Mr. Stroger’s comments about lives being lost is fatuous. Union employees will have to make do with either a smaller raise or perhaps the same salaries or even cuts. After all, that’s what we the people are having to do during the recession.

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A Lesson for California from South Dakota

Posted on December 2, 2009 by Russ

California politicians seem to think that they can raise tax rates higher and higher and higher and businesses won’t react. Bluntly, that’s wrong.

From the Leonard Letter and the South Dakota Department of Tourism and Economic Development comes word of a small firearms manufacturer named Bar-Sto Precision Machine. Located in Twentynine Palms (near Palm Springs), Bar-Sto makes auto-pistol barrels primarily for law enforcement. The company employs about 18 individuals.

But the continued increases in state taxes along with California’s high regulatory burden have impacted the privately held firm. Irv Stone, the owner of Bar-Sto, had enough. Instead of continuing in business at a lower profit margin he’s taking action. The business will be relocating to Sturgis, South Dakota.

“South Dakota is really a great place to do business,” said Irv Stone, second-generation owner of Bar-Sto. “The differences in the tax climates between California and South Dakota are night and day, and we have been treated real well by the GOED (Governor’s Office of Economic Development) and the Sturgis Area Economic Development.”

If I were to ask any of the Democratic leaders of the California legislature about Bar-Sto, I’m certain their reaction would be something like, “It’s a shame. But it’s not that relevant; after all, it’s only 18 jobs and they make guns!” Unfortunately, that’s the wrong reaction.

Yes, 18 jobs isn’t that many in California. But those 18 individuals support other wage earners through their purchases at local retailers. The loss of these 18 jobs will cascade through the work force in Twentynine Palms.

And it’s not one firm leaving the Bronze Golden State. One of my clients relocated three years ago from Laguna Hills to Jacksonville, Florida. It was just 15 jobs. Yet you need to multiply the 15 jobs lost then by a large number as more and more businesses realize that there’s a better business climate elsewhere.

There’s a solution, but it’s not one that California’s legislative leaders will like to hear. Regulations need to be cut drastically. Tax rates need to come down. Implement these actions and businesses will want to be in California and employment rates will increase. Continue down the current path—this includes such misguided actions as the current state CO2 regulations—and more and more businesses will leave.

South Dakota has a good business climate but a rather poor actual climate (weather). Yet a second generation business owner is willing to uproot his family and move there just to avoid the high taxes and regulatory burden of California. Many other business owners will likely make similar decisions in the future, choosing nearby states with warmer climates like Arizona, Nevada, and Colorado.

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Thanksgiving Evasion

Posted on November 29, 2009 by Russ

While I had a great Thanksgiving, the individuals I’m highlighting below had a bit less to be thankful for. The first story highlights an indirect result of a traffic ticket while the second spotlights recurrent attempts at defrauding the IRS through identity theft.

First, let’s head to Hartford where Willie McKay was apparently speeding along or, in some other manner, violating Connecticut’s traffic laws. He was pulled over for a routine traffic stop. Well, it was routine until the officers checked to see if Mr. McKay had any warrants outstanding. He had thirty: 21 for filing false state tax returns, seven for failing to file state withholding returns for his church (Mr. McKay is a pastor), one for larceny, and one for computer crimes. Mr. McKay is accused of attempting to bilk Connecticut out of $150,000 in phony income tax returns. Clearly, if you’re wanted on thirty felony counts it pays to obey the traffic laws.

Next, from New Jersey comes word of four Nigerians who succeeded in obtaining $3.2 million in tax refunds they allegedly shouldn’t have. Adeyemisi Toyusini, Adebowale Sheba, Taiwo Daisi, and Adedeni Adenni were arrested and charged with conspiracy to defraud the United States. The defendants allegedly used names garnered from identity theft to file tax returns claiming $11.5 million in refunds. They allegedly used 41 addresses they controlled, and had received $3.2 million in refunds (of which, $2.7 million were deposited). Two of the defendants are allegedly in the United States illegally. All of the defendants are being held without bail and are looking at lengthy terms at ClubFed and large fines if found guilty.

If you are a victim of identity theft you should contact the IRS. The IRS has an information page on identity theft, a form (Form 14039), and a telephone hotline (1-800-908-4490; Note: This number is solely for identity theft). Notifying the IRS may not be on top of your list if this happens to you, but it’s important.

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Another List To Avoid

Posted on November 29, 2009 by Russ

Every six months theBoard of Equalization, California’s sales and excise tax agency, publishes its list of the top 250 debtors to the BOE. The list was updated this past week with 28 new entrants.

Unlike the list of the top 250 income tax debtors, this list mainly consists of businesses; indeed, I was struck by how many automobile dealerships and related businesses are on the list. The largest new lien is against Mastermind Group, Inc. dba Bay Auto Brokers, Inc. in Richmond (in the San Francisco Bay Area). That business has a $1,241,847 lien. The largest lien is for $7,976,634 to De Won Motors Group, Inc. in Los Angeles.

The listings have caused some entities to pay their tax. All told, 23 taxpayers owing a total of $25 million have made some payments on their debt with $3.4 million collected to date. Unfortunately, that’s a drop in the bucket; the total owed on the list is a staggering $288 million.

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At Least She’s Honest…

Posted on November 24, 2009 by Russ

California has economic troubles, but it’s not alone. Another state facing serious economic issues is Michigan. Not only is there the recession, but they also have the problems with the automobile industry. So what should politicians propose to help Michiganders facing economic troubles? Cutting regulations, lowering taxes, and improving the business climate all quickly come to my mind. However, I’m not running for governor of Michigan.

On the other hand, Alma Wheeler Smith (D-Salem Township) plans on running for governor next year. Her platform appears to differ just a bit from my ideas. She proposes:

  • $3 Billion of tax increases on businesses by “closing loopholes”;
  • $1.5 Billion from expanding the sales tax to include services;
  • $2 Billion in higher personal income taxes by adding a 9.75% rate starting at incomes of $60,000 (single)

Luckily for Michiganders, Democrats control only the lower state House and not the state Senate. Republicans in the state Senate don’t like the idea of any tax increases and they do control the state Senate.

If Ms. Smith wins nomination the Democratic nomination for governor next year Michiganders will be faced with a stark choice. Vote for an individual who wants to drive out even more business from Michigan, or vote for Ms. Smith’s opponent. At least you know where Ms. Smith stands on this issue.

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Didn’t You Know that Wages Aren’t Taxable?

Posted on November 23, 2009 by Russ

Well, I didn’t know that, but one group on individuals made that argument. Joseph Saladino, Marcel Bendshadler, and Michael Mungovan tried that dubious stance. They offered what the Portland Oregonian called a “tax evasion service” as they prepared over 1000 returns where they noted that compensation for personal labor isn’t taxable. One defendant, Richard Ortt, was acquitted; earlier, Richard Fuselier pleaded guilty.

Assistant US Attorney Allan Garten told the Oregonian, “So let’s assume for a moment that you would get a W2 that said $40,000. (The guilty men) would list as income $40,000, and then they would deduct the value of your labor of $40,000 … so that you paid no taxes…That’s illegal.”

Given that the tax fraud involved $9 million, the guilty individuals are looking at lengthy terms at ClubFed. If a tax preparer tries to tell you wages aren’t taxable, run, don’t walk, out of the office.

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When You’re Not Really Disabled, National TV Should be Avoided

Posted on November 23, 2009 by Russ

Suppose you’re disabled, and collecting disability from your insurance company. If your disability is supposedly keeping you from work, appearing on a nationally televised show where you are demonstrating your skills—skills you supposedly can’t do while disabled—could lead to problems.

Ronald Hunt of Sunland, California was an interior designer. He went on disability sometime around 2003. There was only one minor problem: He continued to work. He also decided to help his business by appearing on HGTV, a home improvement and decorating cable television channel.

Mr. Hunt knew that lots of people try to improve their homes, and appearing on television might help sales. But Mr. Hunt forgot that even employees of insurance companies, including his insurance company, watch HGTV. Yes, an employee familiar with his claim saw the supposedly disabled Mr. Hunt show his skills on national television. The California Department of Insurance investigated and found that Mr. Hunt wasn’t as disabled as he said in his claims; he managed to work from 2003 – 2006. Additionally, the investigation disclosed that Mr. Hunt earned $400,500 of income while on disability…income that somehow forgot to be included on his California tax return.

Mr. Hunt pleaded guilty to insurance fraud and state income tax fraud. He must make restitution of $151,000 to his insurance company and $31,000 to the Franchise Tax Board. Sometimes free advertising should be passed up.

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Taxing Strip Clubs: OK; Taxing Escort Services: No

Posted on November 23, 2009 by Russ

Somehow, strip clubs and taxes seem to follow each other. Usually I report on strip club owners who somehow forget that cash income is just as taxable as any other income. Today, however, it’s time to head to Utah and look at the application of taxes on strip clubs and escort services.

Back in 2004 the Utah legislature voted to impose a 10% tax on strip clubs and escort services; the tax would fund sex offender treatment for some incarcerated sex offenders and fund the Utah Attorney General’s task force looking at crimes against children. The tax is imposed on businesses where there’s nudity for more than 30 days, and impact admissions, user fees, food and beverages, and Utah-produced merchandise that is sold in the businesses.

The tax was upheld on the strip clubs:

In this case, the tax is triggered by nudity, which the (U.S.) Supreme Court has specifically declared ‘is not an inherently expressive condition. We find nothing in the record before us — either (in) the tax’s legislative history or in the text of the tax itself — establishing that the tax was enacted with the predominant purpose of suppressing protected expression.

However, the tax was ruled unconstitutional as far as escort services. The statute doesn’t relate escort to nudity, and so it was ruled too broad:

The tax defines an ‘escort’ as anyone who accompanies another for compensated companionship…Therefore, according to the plain terms of the statute, individuals who are paid for providing care for the elderly as well as those who are paid as tour guides would fall within the definition of an ‘escort,’ and any person or business who employs them would be subject to the tax.

So good news for escort services, for now, but bad news for strip clubs. Unless the nudity vanishes—and that would, one assumes, defeat the purpose—Utah’s strip club tax is constitutional.

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18 Tax Changes in Senate Healthcare Bill

Posted on November 20, 2009 by Russ

Senator Harry Reid’s (D-NV) healthcare legislation has 18 tax changes according to Americans for Tax Reform. Here’s a list of the taxes and their impacts (note: Dollar figures are single/single 2+ (S2) or MFJ):

1. Individual Mandate Tax. For those who don’t purchase health insurance, this will start at $95/$285 (S2) in 2014 and rise in 2016 and future years to $750/$2250.

2. Employer Mandate Tax. On businesses with 50+ employees that do not offer health care, and at least one employee qualifies for a tax credit, $750/employee. This will cause many small businesses to stop growing once they reach 49 employees.

3. Excise Tax on Health Insurance Plans. Beginning in 2013, 40% tax on plans costing $8500/$23,000. Is indexed to CPI. In high premium states such as California, many plans would pay this tax. My health insurance would likely pay this tax…and it’s not a Cadillac plan.

4. Health Insurance would be reported on W-2s. Another mandate that increases costs for business.

5. “Medicine Cabinet Tax.” Limitation on HSAs, FSAs, and MSAs to purchase non-prescription medication except insulin. Note that this is also in the House healthcare bill.

6. HSA Withdrawal Tax Increased. The tax would increase to 20% from 10%. This is also in the House legislation.

7. FSAs capped at a maximum of $2500. They are now uncapped.

8. 1099 Reporting for corporations. Requires businesses to send 1099-MISCs to corporations. This is another cost for businesses.

9. Tax on Charitable Hospitals. This excise tax of $50,000 per hospital impacts hospitals that don’t meet new Department of Health and Human Services regulations.

10. Tax on Drug Companies. The tax would be $2.3 billion based on sales percentage.

11. Tax on Medical Device Manufacturers. The $2 billion tax is also based on sales percentage.

12. Tax on Health Insurers. A $6.7 billion tax based on percentage of health insurance premiums collected.

13. Elimination of tax deduction for employer provided retirement prescription drug coverage.

14. Increase of percentage of AGI required to deduct medical expenses from 7.5% to 10%. Few can deduct medical expenses today; fewer will be able to deduct them tomorrow.

15. Compensation Limitation for Health Insurance Executives. If you work in that industry, you will be limited to a salary of $500,000.

16. Medicare Payroll Tax Hikes. Once your income exceeds $200,000/$250,000 (MFJ), you will pay an additonal 0.5% tax. Note that the employer will only collect (and be responsible for this tax) if you earn $200,000/$250,000 or more. This also impacts the self-employed. And the law is written so that the self-employed cannot deduct half of the new tax as a deduction to income tax.

17. Blue Cross Tax. There is a tax deduction available today for Blue Cross and Blue Shield companies; this tax deduction will vanish if they don’t spend 85% (or more) of premiums on clinical services.

18. Excise Tax on Cosmetic Medical Procedures. A new 5% excise tax on these procedures.

Remember, all tax increases are passed to consumers. There is no free lunch. If this legislation passes, you and I will be paying more for less.

Additionally, when government takes more, businesses either have to increase prices, cut wages, or do something else to still make a profit. If this legislation passes businesses will cut staffing. That’s basic economics, something sorely lacking in Washington.

Businesses will increase prices, but the law of supply and demand dictates that their revenues will likely decrease because of the higher prices.

I haven’t seen a tax professional speak in favor of this legislation. And I doubt I will; this measure will increase costs for businesses, lead to higher cots for consumers, and will almost certainly lead to a single-payer system. Peversely, this measure would likely lead to more business for me…for all the wrong reasons. As Joe Kristan says, “It’s unpopular, unworkable, and insane, so naturally they’re in a hurry to pass it.” Truer words have never been spoken.

Other coverage:
Roth Tax Updates
Don’t Mess With Taxes
Tax Lawyer’s Blog

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Snipes Appeal Heard Today

Posted on November 20, 2009 by Russ

Wesley Snipes had another day in court today. Oral arguments were heard in his appeal of his conviction on three misdemeanor tax evasion charges. Mr. Snipes’ attorneys argued that the trial should have been moved from Ocala, Florida to protect Mr. Snipes’ rights and that the sentence was harsh. The government argued that the trial was held in the proper venue and that Mr. Snipes received an appropriate sentence.

Mr. Snipes is free on bail while his appeal is being heard. It will likely be the Spring before the 11th Circuit Court of Appeals rules on Mr. Snipes’ appeal.

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