Tuesday, February 26, 2013
Marketplace Fairness Act Aims To Allow States To Obtain Sales Tax From Large Internet Retailers
On February 14, 2013 a bipartisan group of Senators and Representatives introduced legislation that will supposedly level the playing field between local brick-and mortar retailers and out-of-state Internet retailers. The Marketplace Fairness Act of 2013 would allow states to require out-of-state online retailers to collect sales and use tax on in-state purchases. Businesses with less than $1 million in annual domestic sales would be exempt from the bill. Despite the optimism for the passing of the bill, critics question whether it will achieve its goal of leveling the playing field between local businesses and out-of-state online retailers without introducing a host of unintended consequences.
Currently, due to a 1992 Supreme Court decision, states have been unable to require out-of-state online retailers to collect sales taxes from in-state customers. See Quill Corp. v. North Dakota ex rel. Heitkamp, 504 U.S. 298, 313 (1992) (holding that although businesses did not need to have a physical in-state presence to permit the state to require the business to collect taxes from its in-state customers, physical presence within the state is required for the business to have a “substantial nexus” with the taxing state as required by the Commerce Clause). Customers who order products from online retailers from outside of the state are supposed to declare these purchases on their tax forms, but few customers do. Due to this outdated Supreme Court ruling the National Conference of State Legislature reports that, collectively, states miss out on approximately $23 billion in tax revenue annually. Furthermore, local business are at a disadvantage because consumers can walk into these local stores, try out the product that they are interested in, and go home and purchase the item from an out-of-state online retailer without paying the state sales tax.
The current version of the bill combines several proposals from the previous bill that failed to pass last year while incorporating revisions intended to make the bill more palatable to critics and opponents. In particular, the exemption threshold for businesses was raised from $500,000 to $1 million in out-of-state annual sales. The Marketplace Fairness Act of 2013 would empower states to compel out-of-state online retailers to collect sales and use taxes provided that the state simplifies its sales and use tax system. Several online retailers, including Amazon, have expressed their support for the bill.
Despite the optimism and support for the passing of this bill, it is not without critics. Some critics argue that given that one of the prerequisites for states to use this bill is that they must simplify their sales and use tax system, the bill may have the potential to create a complicated new tax system with differences in each state. Furthermore, the legislation may be difficult to enforce because determining whether a retailer is not collecting the taxes may be challenging and needs to be addressed. There are concerns that the bill has a potential to stifle Internet commerce. Large online retailers such as Wal-Mart and Amazon can easily deal with the increase reporting expenses and decreased revenues in out-of-state sales but the smaller online retailers may be forced to keep their sales within their state of operation or confined to states where they have their largest out-of-state sales revenues. The bill, if passed, will likely do the most good in terms of getting states sales revenues that they are already rightfully owed but are not being paid because customers fail to report their out-of state purchases. In this tough economy an infusion of sales revenue may be the much-needed resource that may allow state governments to keep their taxes steady and prevent the need for cuts in programs and services and this bill appears like it has the potential to help in this respect.
The Marketplace Fairness Act appears most misguided in its focus on putting local business on a level playing ground with out-of-state online retailers. The bill may just be slowing down the inevitable. The fact that residents have to pay taxes on goods bought in local business may not be the only reason for why customers are choosing to buy from out-of-state online retailers. The prices of the online retailers may still be significantly lower than the local business even after the passing of this bill because some online retailers are able to provide lower prices due to economies of scale and the fact that they do not have the expense of having locations or warehouses within the state. Therefore, the bill should be presented more as a way for states to obtain revenue that they are rightfully owed and less as a savior of local businesses.
Tuesday, November 29, 2011
US Investigating Chinese Solar Imports
Photo by: Living Off Grid
China’s new energy manufacturing sector has been growing rapidly in the last two years. In 2009, there were $640 million in U.S. imports of Chinese solar. Last year that amount grew three times that amount to $1.5 billion. U.S. solar manufacturing however, has been struggling.
SolarWorld Industries America, Inc., joined by other American solar manufacturers, alleged in a petition to the Department of Commerce that they have suffered financial injury and requested tariffs to be imposed on Chinese solar. The Chinese government allegedly provides preferential loans, land discounts, discounted raw materials, tax breaks, export assistance grants, and export insurance to domestic solar companies. The claim is that illegal Chinese subsidies result in artificially low prices that are unfairly disrupting sales of American manufactured cells. The scale of the Chinese subsidies may violate World Trade Organization (WTO) rules. The requested tariffs on Chinese solar panels, which could potentially exceed 100%, are intended to level the playing field to allow the struggling U.S. solar manufacturing sector to compete.
U.S. solar generating companies and the Coalition for Affordable Solar Energy oppose the potential duties. The Coalition has 25 members, including U.S companies, Solar City and MEMC Electronic Materials Inc., as well as Chinese companies with U.S. arms such as Yingli Green Energy and Suntech Power Holdings. There is criticism that the tariffs will cause prices for solar to rise, making solar projects too expensive. In response to the potential action CECEP Solar Energy Technology Co. Ltd., China’s largest solar power developer, put $500 million worth projects on hold in anticipation of the foreboding rise in costs.
Instead of imposing tariffs on Chinese solar, the U.S. should provide new legal subsidies to domestic solar manufacturers. The 1603 Treasury Cash Grant Program for renewable energy projects is sunsetting in a few months. If the U.S. wants to be a part of the green energy future, incentives like these need to be extended and expanded. Inciting a trade war will not be the solution to growing solar in the U.S.
On December 5th, the ITC will vote on whether there is sufficient evidence of injury to U.S. manufactures such that a case should go forward. In January, the Commerce Department will make preliminary decisions on whether to impose the duty on Chinese-subsidized solar panels.
Monday, November 21, 2011
House Subcommittee Hears Testimony on Online Gambling Regulation
On October 25, 2001, the U.S. House Energy and Commerce Committee’s Subcommittee on Commerce, Manufacturing, and Trade held a hearing on the state of online gambling and the potential impact of regulation. A wide range of testimony was given by varied groups, most of it coming down in favor of taxing and regulating. Given the Joint Select Committee on Deficit Reduction, also known as the Supercommittee, and its mandate to issue a formal recommendation on reducing the budget deficit by at least $1.5 trillion over the next decade, the time seems right to get such legislation passed.
Online gambling has a rocky history in the U.S. In the early 2000’s the Bush administration attempted to use the Wire Act, mostly unsuccessfully, to prosecute online gambling; federal courts have typically held that the Wire Act only applies to online sports betting, not online gambling in general. The Bush administration responded by sneaking the Unlawful Internet Gambling Act of 2006 (UIGEA) into the SAFE Port Act as a last-minute amendment that received almost no review. The UIGEA prohibits payment processors from accepting payments in connection with unlawful online gambling, but neglects to specify what types are unlawful. The UIGEA did cause a number of large online gambling sites to pull out of the U.S. market, but the market quickly recovered and continued to grow, with online poker being a particularly popular form. On April 15, 2011, the Department of Justice seized the domain names and froze the domestic assets of three of the largest online poker sites; Poker Stars, Full Tilt Poker, and Absolute Poker. These sites no longer operate within the U.S. although many smaller sites still operate domestically.
The October 25th hearing may have marked a turning point in online gambling in the U.S. Over the past few years, numerous pieces of legislation were drafted, and at least one was formally introduced. Yet most have stalled in either the drafting or committee review stage. The recent hearing, however, shows that the momentum may have finally shifted. There was key discussion about how regulation could help with consumer protection, and subcommittee members spoke in favor of regulating online poker in particular. Perhaps surprisingly, the National District Attorney’s Association issued a statement supporting online poker. Likewise, the National Council on Problem Gambling, while recognizing that online gambling may increase the danger of gambling addiction, explained how technology could be used to help combat compulsive gambling more effectively in an online setting than in traditional casinos. Finally, former FBI Director Louis Freeh submitted testimony in favor of regulating online poker. Given the potentially large source of revenue that taxing and regulating online gambling could bring to federal and state governments, along with its widespread popular support, it is time for Congress to stop forcing online gambling underground, and instead license and regulate it to provide a safe environment for the players and much needed revenue for the government.
Friday, October 07, 2011
Reforming R&D Tax Incentives: Do Video Games Deserve Special Treatment?
Edited on: Friday, October 07, 2011 5:58 PM
Categories: Computers, Entertainment, Legislation, Patent, Taxation
Image Courtesy of Wikimedia
In September, the New York Times reported that video game designers have been taking advantage of tax breaks meant for other industries, often under terms more favorable than those received by many of the originally intended recipients. Electronic Arts (EA), for example, paid $98 million on $1.2 billion of operating profits over the last five years—an effective corporate tax rate of just under 8.2%. In addition, EA has set up off shore subsidiaries in tax havens and successfully lobbied Congress for new tax breaks.
Firms claiming the federal R&D tax credit elect to receive either a credit for 20% of their research costs above a base amount, or 14% of the excess above the average of the last three years’ R&D spending. I.R.C. §41. Inventive procurement of R&D tax credits has become a lucrative business for the accountants and attorneys who assist firms in obtaining these tax breaks. AlliantGroup, for example, specializes in helping clients obtain tax incentives, and claims credit for helping its clients secure over $1 billion in R&D tax incentives to date.
Claiming the R&D tax credit has become more difficult since its heyday in the 1980s, the NY Times writes, “the credit was being claimed by businesses with little technological background — fast-food restaurants, hair stylists and fashion designers.” Marketing and social science research are no longer eligible for the R&D tax credit. But previous plans to further restrict the credit to basic research have been as poorly designed as the original credit. The Clinton administration proposed restricting the credit to research producing an “actual innovation,” but the Bush administration dropped the proposal as unenforceable.
This difficulty of the enforcement rationale, however, is specious. According to Alliantgroup, more than $5 billion in R&D tax credits are given out annually. Given the amount of money at stake, significant enforcement efforts are warranted. The entire budget of the US Patent and Trademark Office is only about half the amount spent on R&D tax credits. The cost of determining the novelty for products supposedly qualifying for R&D tax credits would be worthwhile if it brought in more revenue by ending frivolous tax credits.
The actual cost, however, would be much lower than the cost of de novo assessments of novelty, as the IRS could treat R&D tax credits as it does the rest of the tax code: grant the credit, only questioning it if the application raises red flags or is part of a routine audit. The threat of being one of those randomly chosen for an audit would ensure substantial honesty from most taxpayers. In the event of an audit, a patent could be accepted as incontrovertible evidence of an “actual innovation.” An innovation subject to trade secret protection would still be eligible for the tax credit as long as the company could prove to auditors that such an innovation existed.
The real problem with the “actual innovation” requirement is that it would increase the tax burden on companies which engage in significant, valuable, but unsuccessful research. Ninety percent of new drugs, for example, fail in clinical trials. Successful research is already incentivized through market forces. There is no need to convince companies to engage in research they know will be successful. The real benefit derived from R&D tax credits is the mitigation of risks involved in R&D expenditures, by reducing total losses, so research failures must be subsidized along with successes.
Alternatively, Congress could simply make a political judgment about which industries or types of research create enough public benefit to deserve R&D tax credits. When video game developers change a few lines of code to create version 10 of their game are the really conducting “research” on something that provides public benefits beyond what the market can reward adequately? Alliantgroup argues that video games do produce public benefits, such as the use of some video games in training military personnel. But this benefit is rewarded by lucrative defense contracts. The best rationale Electronic Arts can come up with is that it donates some games to charity. This, of courses, is already rewarded by a separate tax write-off.
Making video games does create jobs, just like every industry. But making video games is profitable. There is no evidence that game producers would choose to stop making potentially profitable investments if they stopped receiving favorable tax treatment. And even if deprived of the R&D credit, they would still be eligible for the economic development credits given to every industry. R&D tax credits will continue to be just one more government handout for the already well off, unless they are restricted to research which has public value beyond what the market will reward. Those who advocate preserving or expanding the R&D tax credit for video game producers have failed to make a convincing case that there is a public benefit.
Monday, September 26, 2011
Grudge Match: Amazon versus the Bear Flag Republic
Photo Courtesy of Nils Liehberr on Flickr
In an attempt to collect sales taxes from Internet retailers, California introduced the “Amazon Tax” in June. California’s new law will require Internet retailers to collect sales tax if they use an affiliate program within the state to solicit business and their cumulative sales during the preceding twelve month period are greater than $500,000.
In a move consistent with its battle over sales taxes with New York, Amazon immediately cut ties with all of its California affiliates and began to promote a ballot referendum to block the law. In an open letter to their affiliates Amazon explained, “We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue.”
Governor Jerry Brown rejected an offer from Amazon to delay sales tax collection until 2014 in exchange for new Amazon warehouses being located in California, perhaps in response to the wide speculation that without an avenue to avoid sales tax collection, Amazon is likely to build the warehouses simply to serve its California customers better. He did, however, accept an offer from Amazon to drop the ballot referendum initiative in exchange for a grace period. The new law takes effect immediately, but does not require retailers to collect taxes until Sept. 15, 2012.
Amazon has since banded together with independent storeowners and big-box retailers, including Target and Wal-Mart, to lobby Congress for a federal law regulating sales tax collection by Internet retailers. Per the Amazon-California agreement, any federal law will supersede the California law.
Tuesday, January 04, 2011
The Technologically Challenged Tax Code
(Photo by: Ambimb)
While operating a cell phone has become so simple that it seems like every ten-year-old has one, dissecting your cell’s bill has become so confusing it almost requires the use of the Rosetta Stone. Anyone who has had the joy of questioning a cell phone bill knows how hard it is to decipher what fee is for what and which charge goes to what line. It has come to the point where it is more efficient to just pay the bill rather than waste half the day waiting on hold to try to correct the discrepancy with technical support. Over the last few years, it seems like every month there is a new “regulatory fee” or tax increase. For those of us locked into two year contracts so we could afford to buy the newest Blackberry Apocalypse or iPhone 12, what choice do we have but pay it? Luckily the end is in sight, at least partially.
Last year the Cell Tax Fairness Act was introduced, a bill which, if enacted, would ban any new state or local taxes imposed on mobile phones. Currently, taxes on cell phones are twice that of other goods and services. In recent years, these taxes increase four times faster than similar taxes on other goods and services, according to a study by the National Taxpayers Union. While the Act would not repeal any existing state or local taxes, it would prevent further taxation from being enacted.
While it might not result in significant savings, the Act would be a welcome relief for taxpayers who have little recourse against the recent tax hikes in an increasingly cell phone driven world. Not only will it prevent state and local governments from increasing our tax bill, but it will prevent wireless companies from increasing fees and dressing them up as mandatory taxes. Every cell phone bill is riddled with various fees and charges that are passed off as mandatory and presented as if they are imposed by the government. With the enactment of the Cell Tax Fairness Act, consumers can be certain that any new “fee” imposed by their specific carrier, could possibly be avoided on another network. If nothing else, this will give the public back some of the bargaining power and clarity when analyzing their next bill.
Congress has already passed another measure to repeal a provision in the tax code which currently treats personal use of an employer provided cell phone as taxable income to the employee. This legislation, coupled with the Cell Tax Fairness Act, demonstrate a few small steps toward tax reform. There are countless areas of the tax code in great need of an overhaul due to the ever-changing technological world. Every step toward reform is a welcome shift from the outdated, archaic rules that were enacted decades before the Internet existed.
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