Spitzer Abandons Internet Tax

It hasn’t been a good year for Governor Eliot Spitzer (D-NY).

First, he’s been accused of using state troopers to spy on political opponents. Next, he proposes to give illegal aliens drivers licenses—a measure that’s overwhelmingly not supported by New York residents. Eventually he abandons the idea. Then he supports a stretching of the definition of “nexus” for state sales taxes to include affiliate programs. Yesterday, he dropped the idea—at least for the time being.

Republicans were going to paint Spitzer as the “Grinch who stole Christmas.” Spitzer won’t have to deal with that, for now.

However, New Yorkers should still watch what happens in Albany. The State Department of Taxation and Finance still believes they’re right in their expansive view of nexus. This plan will likely reappear sometime in 2008.

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New York Tries to Tax the Internet

Governor Eliot Spitzer (D-NY) is leading the way. But it’s a taxing way. The New York Department of Taxation and Finance says that any company that has an affiliate program that has any affiliates in New York must charge sales tax on sales shipped to New York.

Currently, companies must charge sales tax when a business has a “nexus” in the state. That’s usually caused by having a physical presence (an office) or employees in that state. Amazon.com doesn’t have an office or employees in New York. Thus, they haven’t charged New Yorkers sales tax.

However, New York now says that having an affiliate in the state is enough to give a company a nexus in New York. This is an interesting theory, but it could run into difficulties. Glenn Reynolds, the Instanpundit, thinks it wouldn’t stand up in court.

In any case, Governor Spitzer is looking at a $4 billion deficit for next year and has pledged not to increase taxes. The Department of Taxation and Finance calls this a policy clarification. I hope they have a big budget for legal fees as that’s likely where this is headed.

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California Red Ink

“A billion here, a billion there, and pretty soon you’re talking about real money.”—Senator Everett McKinley Dirksen

And that’s the situation in the Bronze Golden State. The Legislative Analyst released her report, and the news is grim. California is looking at a $1.9 billion shortfall for the current fiscal year, and an $8 billion shortfall for 2008-2009. That’s about $10 billion, and that’s quite a bit more than a billion here and a billion there.

Of course, conditions could change. Perhaps the real estate market will have a miraculous comeback in the next few weeks. Perhaps consumers will overspend during the holiday season, leading to increased tax revenues. Perhaps there will be a federal capital gains tax cut, leading to increased state tax revenues. Perhaps there will be more stock options exercised in Silicon Valley than anyone expects. Perhaps the Cubs will win the World Series….

I think you get the idea. If anything, I think the LAO is too conservative about the shortfall. She discounts the possibility of a recession. I think there’s a real possibility of one caused by the housing crisis and energy costs.

In any case, California’s legislators will find themselves between a rock and a hard place soon. They are mandated to have a balanced budget. As the systemic deficit grows, they will be forced to make real reforms: either increasing revenues (taxes) or cutting programs. There aren’t the votes to increase taxes. There haven’t been the votes to cut programs. Soon, there may not be a choice.

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You Can’t Opt Out

Many years ago I remember seeing a Peanuts cartoon where Snoopy wrote to the IRS, “Please remove me from your mailing list.” As much as you and I would like to not have to deal with the IRS, if you don’t file when you should you’re guilty of tax evasion. You can’t opt out from your responsiblities. Yet for the Bozo wing of tax fraudsters opting out is fine…until they get caught.

Take David Struckman of Renton, Washington. Mr. Struckman co-founded Global Prosperity. Global Prosperity claimed that you could elect to not follow the Tax Code by just renouncing the US government’s sovereignty. Global Prosperity sold lots of audiotapes for their purported scheme. Among other things that Global Prosperity suggested was to move your income to offshore accounts, and to hide funds in foreign trusts. Mr. Struckman followed his own advice.

The Seattle Times reported that Mr. Struckman attempted to renounce his Washington state citizenship in 1997, and filed papers in King County (Washington) stating that he was no longer going to follow US laws.

Unfortunately for Mr. Struckman and his other co-founders, the IRS and the Department of Justice wasn’t pleased with the scheme. Indeed, all of the co-founders were indicted in May 2004 on multiple charges of tax evasion. And they were all either found guilty or pleaded guilty to various charges. Mr. Struckman fled to Panama to escape prosecution. He was extradidted in 2006 back to the US. He was found guilty of tax evasion and conspiracy to defraud the US government on Friday.

Mr. Struckman faces up to 20 years at ClubFed plus a possible fine of up to $1 million when he’s sentenced next March. Mr. Struckman’s claim that he acted in good faith and thought he wasn’t violating the law doesn’t hold water. If he asked any competent accountant he would have been laughed out of the room. Yet he and his other co-founders built a $40 million business selling these phony trusts and bad advice to individuals. The reality is that we all have to pay our taxes. As Richard Morrison, Acting Assitant Attorney General for Tax, said, “People who sell or use these scams can expect serious trouble.”

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Traveling

I will be traveling over the next few days. Posts will be minimal to nonexistent until next Wednesday.

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Another “Fun” Tax Year Shaping Up

November 10th is Saturday. That’s normally the day the IRS sends all of the forms and schedules to the printer. There’s a problem, though: Will Congress enact an AMT patch for 2007?

The House is scheduled to vote on a patch tomorrow. The Senate will likely take up the bill next week. However, President Bush is threatening to veto the legislation. Besides the AMT relief the measure extends 38 expiring tax provisions.

There are reasons why the President is threatening a veto. First, the bill has revenue offsets that the President doesn’t like. The measure would increase taxes on carried interest paid to financial managers and deferred compensation paid to some foreign hedge fund managers. Second, the bill would repeal the private debt collection efforts used by the IRS. President Bush is also upset that Congress has waited to the last minute to address AMT and other issues.

Remember how this year some deductions weren’t noted on the tax forms (e.g. the sales tax deduction), and that the IRS sent out a supplemental mailing? This also delayed refunds to those impacted by these tax breaks because the IRS had to reprogram their computers. Expect a similar situation this year.

I expect that eventually we’ll see an AMT patch that both Congress and the President can live with. The AMT impacts individuals in “Blue” states more than “Red” states. However, I expect some of the 38 tax breaks that need to be extended won’t be and will expire. And I won’t be shocked if President Bush does veto the initial legislation, and that Congress will then pass something the President would (and will) sign.

Hat Tip: TaxProf Blog

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Snipes Moves for a Change of Venue…Again

Back in September, Wesley Snipes, accused of filing a false claim for an income tax refund, asked for a change of venue for his trial. He preferred Manhattan to Ocala, Florida. He asked for the change because of travel time from nearby airports to Ocala and because he has a home in New York. Judge William Terrell Hodges denied the motion. Snipes had also earlier charged that his prosecution was racially motivated; the judge denied that and told snipes that it wasn’t racial. Rather, he’s being prosecuted because he’s famous.

Since then, Snipes has gotten a new attorney. But it’s back to the same old arguments; Snipes’ new attorney, Robert Bernhoft has asked for a change of venue (or alternatively, dismissal of the charges). Mr. Bernhoft complains that Ocala was selected because “…[prosecutors] deliberately chose the most racially discriminatory venue available to the government with the best possibility of an all-white southern jury where Snipes has never resided.”

Mr. Bernhoft’s charge of inherent racism in Ocala was met by skepticism by both a local prosecutor and a public defender. “That’s perhaps the most outrageous claim I’ve ever heard made in open court,” said Chief Assistant State Attorney Ric Ridgway. Chief Assistant Public Defender Bill Miller echoed Mr. Ridgway’s views, telling the Associated Press, “I’ve never filed such a motion in any of my cases. If I felt I needed to, I would have.”

Mr. Bernhoft hired a public relations firm to survey citizens in New York and Ocala. The AP noted that one of the questions asked was the views on the confederate flag. Not surprisingly, people in Ocala viewed the flag with more pride than people in New York. Given that Florida was part of the Confederacy, that shouldn’t be a shock.

Judge Hodges will eventually rule on the motion. Based on his previous decisions, I expect that the trial will open as scheduled early next year in Ocala.

AP story here

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Tax Professors: Kentucky Will Win

As I noted, yesterday the Supreme Court heard oral arguments in Kentucky Department of Revenue v. Davis. Today, the TaxProf Blog has the views of Professors Gregory Germain of Syracuse University and Bradley Joondeph of the University of Santa Clara. They both believe that Kentucky will prevail.

You can read their opinions here.

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Haas Formally Sentenced

Back in August, I told you the sorry tale of Gene Haas, former CEO of Haas Automation, Inc. Mr. Haas lost a court case and decided to get back at the judge by committing tax fraud. He became a two-time loser when his tax fraud scheme collapsed. In the end, he had agreed to pay the taxes, interest, penalties, and a $5 million fine (the total is about $75 million). Today he was officially sentenced to two years at ClubFed.

Had he just paid the judgment he lost (roughly $30 million) he would still be the CEO of a successful machine tool company. Instead, he’s out an additional $75 million and will serve two years at ClubFed.

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Two Weeks = California Taxes Owed

Suppose you’re an employee of a business in New York, and you reside in New York. You come to California on business for a convention and stay for ten days. Later, you visit relatives in California for a week. Did you realize that you owe California taxes?

Yes, that’s the law. If you’re not paying, you’re not alone. Most employers ignore out-of-state tax issues, and it’s very difficult for the Franchise Tax Board to go after employers in Nebraska (for example).

California’s rule is 14 days. Other states have different rules. There’s a bill in Congress to make the rule uniform throughout the United States and only allow states to tax out-of-state employees at 60 days. The AICPA has endorsed the bill; I like it, too. Unfortunately, the bill has only three co-sponsors and is unlikely to emerge from Congress quickly.

Hat tip: Tick Marks and Roth Tax Update

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