South-Western Federal Taxation 2022: Individual Income Taxes 45th edition by James C. Young Test ban
180. In terms of Adam Smith’s canons of taxation, how do state sales taxes fare as far as convenience of payment is concerned?
ANSWER: Because the sales tax is owed at the time of purchase, the taxpayer is able to determine if they can afford to pay the tax and it is collected at that time rather than say, for example, at the end of the buyer's tax year..
181. Due to population change, Goose Creek School District has decided to close one of its high schools. Since it has no further need of the property, the school is listed for sale. The two bids it receives are as follows:
United Methodist Church$1,700,000
Planet Motors1,600,000
The United Methodist Church would use the property to establish a sectarian middle school. Planet, a well-known car dealership, would revamp the property and operate it as a branch location.
If you were a member of the School District board, what factors would you consider in evaluating the two bids?
ANSWER: Although the bid from the United Methodist Church is higher, several other factors need to be considered. Does, for example, Goose Creek School District exempt property owned by churches from its ad valorem taxes? If so, losing this property from the tax base could prove very costly over the long run. Also, it is probable that income-producing property (such as a car dealership) would be taxed at a higher rate than that owned by a nonprofit organization (a school operated by a church). This assumes, of course, that the school would be taxed at all. The auto dealership also would generate sales tax.
182. Morgan inherits her father’s personal residence including all of the furnishings. She plans to add a swimming pool and sauna to the property and rent it as a furnished house. What are some of the ad valorem property tax issues Morgan can anticipate?
ANSWER: The real estate taxes probably will increase for several reasons. The capital improvements and the conversion from residential to rental will trigger the increase. Furthermore, the furnishings may generate an ad valorem tax on personalty. (Depending on applicable law, furniture might not be subject to tax unless used for business purposes—such as in this case.)
183. In 2019, Deborah became 65 years old. In 2020 she added a swimming pool and in 2021 she converted the residence to rental property and moved into an assisted living facility. Since 2018, Deborah’s ad valorem property taxes have decreased once and increased twice. Explain.
ANSWER: The decrease probably came in 2019 when Deborah reached age 65. The increases probably occurred in 2020 when she added the pool and in 2021 when the residence was converted to rental property with the property reassessed due to the change in use and/or removal of the homestead exemption.
184. A lack of compliance in the payment of use taxes can be resolved by several means. In this regard,
comment on the following:
a.Registration of automobiles.
b.Reporting of Internet purchases on state income tax returns.
ANSWER: a.
As reflected in Example 5, re-registration of a car purchased out of state is
the occasion for the owner’s home state to collect the use tax.
b.
Completing the state income tax return reminds (or forces) the taxpayer to
pay use tax on out of state purchases.
185. What are the pros and cons of the following state and local tax provisions?
a.An ad valorem property tax holiday made available to a manufacturing plant that is relocating.
b.Hotel occupancy tax and a rental car surcharge.
c.A back-to-school sales tax holiday.
ANSWER: a.
Such a holiday is designed to attract new industry to the area. This will bring more jobs and growth in consumption. On the other hand, if the tax holiday is too generous, this places a strain on available public revenue. The result could be that schools and capital maintenance (roads, public services) will suffer.
b.
The hotel occupancy tax and car rental surcharges are popular because they mainly impact visitors. Also, they can generate considerable revenue to finance major capital improvements. If these taxes become excessive, however, they could discourage major events (such as conventions).
c.
Such holidays are very popular with both merchants and consumers and serve the social need of defraying some of the costs of sending children to school. Once established, however, they are difficult to get rid of. Thus, they become an annual drain on sales tax revenue.
186. What is a severance tax? How productive can it be in terms of generating revenue?