Chapter One: Taxes and Taxing Jurisdiction

Tax

a payment to support the cost of government (governments takes this money as rev and uses it for schools and rads and salaries and parks and wars)

-differs from a fine (penalty for someone doing something wrong) or penalty imposed by a government because a tax is not intended to deter or punish unacceptable behavior and everyone has to pay a tax, not just people who do something wrong

-not everyone owes taxes, but everyone has to be aware of taxes

-compulsory rather than voluntary on the part of the player

-differs from a users fee because the payment of a tax doesnt entitle the payer to a specific good or service in return

1. dynamic and always changing and evolving

2. taxes are everywhere: persistent and persevere

taxpayer

any person or organization required by law to pay a tax to a governmental authority

--> natural persons (individuals) and corporations

-corporations are entities organized under the laws of one of the 50 states or DC and enjoy the same legal rights, privileges, and protections as individuals; entities separate and distinct from their shareholders and are taxpayers in their own right

incidence

the incidence of a tax refers to the ultimate economic burden represented by the tax

-sometimes the person or org that makes a direct tax payment to the government bears the incidence of such a tax, but in other cases the payer can shift the incidence to a third party

income tax incidence

the economic burden of the tax falls on the corporations customers who indirectly pay the tax in the form of a higher price for the same product

Property tax incidence

Although the taxpayer must remit the property tax to the government, the incidence of the tax increase is on the tenants who indirectly pay the tax through higher rent

Jurisdiction

the right of a government to levy tax on a specific person or organization is referred to as jurisdiction

-exists because of some rational linkage between the government and the tax payer

U.S. Jurisdiction over citizens

Someone born in the US and is a US citizen lives in a different country; the US claims jurisdiction to tax her entire income

-CR all or some tax that you pay to a foreign government to amt you pay to the US

U.S. jurisdiction over permanent residents

if someone is born somewhere else but was issued a Green Card authorizing her to reside and work in the US, the US claims jurisdiction to tax her entire income

US Jurisdiction over nonresident aliens

The government claims jurisdiction to tax individuals who are neither US citizens nor residents (nonresident aliens) but who earn income form a source within the US

Tax base

-taxes are usually characterized by reference to their base

-a tax base is an item, occurrence, transaction, or activity with respect to which a tax is levied

-usually expressed in monetary terms

-ex: real property taxes are levied on the ownership of land and buildings, and the dollar value of the property is the tax base

-governments try to identify tax bases that taxpayers cant easily avoid or conceal

Calculation of the dollar amount of a tax

Tax(T) = Rate(r) x Base(B)

-do this for every single tax

Flat rate

a single percentage that applies to the entire tax base

-aka proportionate rate structure

-rate stays the same and the base changes

Progressive rate structure

as the base goes up, the rate goes up

regressive rate structure

as base goes up, the rate goes down

Graduated rate

Multiple percentages that apply to specified brackets, or portions, of the tax base.

Revenue

the total tax collected by the government and available for public use

-sum of all rate x base

-governments can increase revenues by increasing either the rate or the base in the design of their tax systems

-if govt doesnt collect enough money, services still have to be provided regardless of if we have enough money

-govt will budget how much revenue they need and sometimes that need to be met before redefining rate amd base structure

-can borrow money like from other countries but have to pay back with interest

taxes to accomplish goal

every govt uses taxes to accomplish natational goals like encouraging behavior by lessening taxes and penilizing behavior by raising taxes

Transaction- or activity-based taxes

-taxes can be characterized by the frequency with which they are levied

-a tax an be even or transaction based, so that the tax is triggered only when an event occurs or a transaction takes place (sales tax or estate tax)

--> tax payers have control over these types of taxes because they can avoid buying stuff, but some you cany avoid like estate tax

-a tax can also be activity-based when it is imposed on the cumulative result of an ongoing activity.

--> tax payers must maintain records of the activity, summarize the result at periodic intervals, and pay tax accordingly (annual income tax)

Income tax

imposed on the periodic inflow of wealth resulting from a person's economic activities.

-the more economic activities you partake in, the more challenging the process of measuring taxable income becomes

Earmarked taxes

a tax that generates revenues for a designated project or program rather than for the government's general fund

-ex: revenues from local real property taxes are typically earmarked to support public school systems

The pervasive nature of taxation

-our economy is tax relevant in almost every detail

-taxes are so pervasive because...

the multiplicity of jurisdictions in which people conduct business. Every firm operates in some geographic location within the taxing jurisdiction of one or more local governments

--> business managers who want to control tax costs must be aware of any local, state, federal, or foreign tax for which the firm is, or might become, liable

Local taxes

local governments depend heavily on real property taxes and personal property taxes, which are frequently referred to as ad valorem taxes

-70% of local government tax revenues

real property taxes

-all 50 states allow local jurisdictions to tax the ownership of real property sited within the jurisdiction

-real property, or realty, is defined as land and whatever is erected or growing in the land or permanently affixed to it

-real property taxes are levied annually and are based on the market value of the property as determined by the local government. Elected or appointed officials called tax assessors are responsible for deriving the value of realty and informing the owners of the assessed value.

--> if you disagree with assessed value you can challenge the assessment in an administrative or judicial proceeding

-the tax rate is determined annually according to the jurisdiction's need for revenue for that particular budget year

-local governments establish different tax rates for different classifications of property

-governments may also grant permanent tax-exempt status to realty owned by charitable, religious or educational orgs and publicly owned realty

-may also grant temporary tax exemptions called abatements for limited periods of time

--> usually granted to lure commercial enterprises into their jurisdiction to create jobs and benefit the local economy

Personal property taxes

personalty is any asset that is not realty

-personal property taxes are based on the value of the asset subject to tax and individuals and orgs must determine the value of their taxable personalty and render/report the value to the assessor

-Three classes off taxable personalty: household tangibles (automobiles and rec vehicles, pleasure boats and private airplanes), business tangibles (inv, furniture, fixtures, machinery, equipment), and intangibles (securities like stocks and bonds)

-recently declined heavily as a revenue source because it is much more difficult to enforce than other taxes because owners can hide their assets or move them to another jurisdiction and govt cant just go and search for them

state taxes

state governments rely in almost equal measure on sales taxes and income taxes as major sources of funds

-90% of total tax revenues

-retail sales, use, and excise taxes; personal income taxes; corporate income taxes

Retail sales, use, and excise taxes

-sales tax is typically based on the retail price of tangible personalty. They are broad-based and apply to most types of consumer goods and even to selected consumer services like telephone and cable services,

--> can be a business tac levied on the seller or a consumption tax levied on the purchaser who is the final user of the good or service. No matter which one, the seller is responsible for collecting the tax at POS and remitting it to the state government

-every state with a sales tax imposes a complementary use tax on the ownership, possession, or consumption of the tangible goods within the state. The use tax applies only if the owner of the goods didnt pay the states sales tax when the goods were purchased

--> a use tax acts as backup to a sales tax by discouraging residents from purchasing products in neighboring jurisdictions with lowers sales tax rates

-an excise tax is imposed on the retail sale of specific goods, such as gas, cigs, alc or on specific services like hotels motels and accommodations; can be in addition to or instead of general sales tax

personal income taxes

tax on individuals who reside in the state and nonresidents who earn income withint the state

-computation varys from state to state

corporate income taxes

tax corps on their net income attributable to the state

--> the states that dont do it impose a corporate gross receipts tax

-many states authorize their cities and countries to tax either the income or gross receipts of both incorporated and unincorporated businesses operating within the locality

-the computation of corporate taxable income is prescribed by state law

-all states with a net income tax refer to the federal definition of taxable income as the starting pornt for calculating state taxable income

Advantages of state conformity to federal income tax law:

1. state legislatures do not have to reinvent the wheel by enacting a comprehensive income tax statute

2. state conformity to federal tax law eased the compliance burdens of corporate tax revenues. each time congress changes the federal definition of taxable income, the income tax base of conforming states is increased or decreased

Federal taxes

-the use govt depends almost exclusively on the income tax as a source of general revenues

-applies to both individuals and corporations as well as trusts and estates

Income taxes ; Employment and unemployment taxes ; Excise taxes; Transfer taxes

History of the income tax

-1861 enacted to raise money to support the union in the civil war

-1872 tax expired

-1894 congress needs perm source of funds so brought back personal income tax and ratified the 16th amendment to do so

-revenue act of 1913 income tax became permanent and revised internal revenue code

-2017 trump signed the tax cuts and jobs act that changed tax rules relating to individual and corporate taxpayers

-2025 trump signed one big beautiful bill to make perm the temp things from the TCJA and enhanced tax relief for workers, families, and businesses

Employment and Unemployment taxes

-SS system provides monthly old-age, survivors, and disability benefits to qualifying citizens and residents

-medicare provides hospital insurance for people who are elderly or disabled

-the revenues from the fed employment taxes are earmarked to pay for social security and medicare. These taxes are based on annual wages and salaries paid by employers to their employees and on the net income earned by self-employed individuals

-the federal and state governments act in coordination to provide monetary benefits to individuals who are temporarily unemployed through no fault of their own

--> administered by the states and financed by federal and state taxes imposed directly on employers

-unemployment taxes are based on the annual compensation paid to employees

excise taxes and transfer taxes

-the fed government raises general revenues from excise taxes imposed on the retail purchase of specific goods and services such as tobacco products, lux automobiles and firearms

-fed transfer taxes are based on the value of an individual's wealth transferred by gift or at death are also a source of general revs

Taxes levied by foreign jurisdictions

the types of taxes firms encounter when expanding from domestic to international operations are varied

-many foreign taxes have a familiar structure like income taxes, property taxes, and retail sales taxes

-ones that arent: value added tax (VAT) are levied on firms engaged in any phase of the production of goods are based on the incremental value that the firm adds to the goods

jurisdiction competition

-govts understand that their taxing jurisdictions overlap and that they are competing for the same businesses. Taxpayers are also mobile and business managers make location decisions with an eye on comparative tax costs

dynamic nature of taxation

taxes are pervasive in the modern world but tax systems are in a constant state of flux

--> they must be attuned to the fiscal condition of their respective jurisdictions

tax base changes

any govt dependent on a tax system that fails to raise sufficient revenues will sooner or later be forced to change the system

-usually because of an reoding tax base

legalized gambling

-source of nontax revenue

sales tax exansion

-state and local govts are aggressive in exploiting new tax bases that develop in the economy

-state sales taxes apply to retail purchases of tangible property but not to purchases of retail services

-utilities, cable, parking, and theater tickets are not being added to their sales tax base

taxes and the political process

-local, state, and federal laws are the result of democratic systems in which elected or appointed reps are sensitive to the political climates of their respective constituencies

-changes in tax structure usually have to do with change in public attitude concerning the proper role of taxes in society

-special interest groups have a significant effect on the tax legislative process

-tax laws are constantly changing as out elected reps seek new ways to ensure that whatever tax advice we receive is incorrect

tax and data analytics

meeting tax req demands sophisticated data reporting systems. Effective tax planning to minize the cost of these diverse tax systems often require analysis of large amounts of tax data, both across jurisdictions and across time

-data analytic tools assist taxpayers and tax professionals with tasks such as repsponding to tax authority audit requests, analyzing sales and use tax for multistate businesses, accumulating country-by-country reporting info for global busnesses, and many more

tax law

three sources of authority: statutory law, administrative pronouncements, and judicial decisions

-the sources provide the rules of the game by which both taxpayers and governemnts must abide

statutory authority

-in its narrowest sense, federal tax law means the IRC of 1968 which is the statutory rules enacted by congress

--dynamic document modified at least once a year

legislative process

-tax legislative process begins in the HoR

-the og version of a new bill is drafted by the House Ways and Means committee and then considered by the full House

-if House approves, it moves to the Senate Finance committee which makes revisions, additions, or deletions before presenting its amended bill to the full sentate for approval

-both the amended and not amended version are considered by the Conference Committee composed of members from both the House and Senate committees. it reconciles the difference between the two and drafts a compromise bill

-of both house and senate vote to approve this version, the bill is submitted tot he president for signature or veto

-if signs the bill, it is redesignated as a tax act and becomes a law

referencing code sections

the IRC has numerically ordered sections, beginning with Section 1 and ending with 9834

-each section contains an operational, definitional, or procedural rule relating to one of the federal taxes

-sections are divided into subsections, paragraphs, and subparagraphs

-footnotes have references citing the precise statutory rule under discusion

Administrative authority

Treasury Regulations: Dept of treasury is responsible for writing regulations to interpret and illustrate the rules contained in the IRC

-provide guidance to taxpayers and advisers

-while treasury regulations carry great authority as the governments official explanation of the law, they are not laws themselves

-consists of sequence of numbers--> one identifies the type of federal tax under consideration, next identifies the Code section to which the regulation relates, and the last is the number of the regulation itself

IRS (internal rev service): the subdivision of the treasury responsible for the enforcement of the law and collection of tax

Revenue Rulings: explains how the IRS applies the tax law to a particular set of facts

Revenue Procedures: advises taxpayers how to comply with IRS procedural or admin matters

Internal revenue bulletins (IRB) : rulings and procedures are published here weekly

Cumulative bulletins (CB) complied IRBs semiannually into this

Judicial Authority

-taxpayers who disagree with the IRS's interpretation of the law as it applies to their own situations may take their cases to federal court

-trial court verdict is less authority than appallater court and supreme court rulings are law