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University of Connecticut School of Law
Pomp, Richard D.

[…] = stuff that confuses me
[…] = questions
[…] = interesting

a. HISTORICAL DEVELOPMENT: Traditionally the rap against the sales tax is that it is regressive. Our income tax is viewed as progressive—meaning as your income goes up you pay a higher percentage of the income tax; the wealthy bear the greatest burden % wise. More income = more % of income paid because marginal tax rates go up as you make more money. WWII we had top rates that reached 91%. But with the sales tax even people who are too poor to be included in the income tax system still have to pay sales tax.
iii. TAXATION OF SERVICES: pattern in most states is to tax tangible personal property unless specifically exempted, but to exclude services unless specifically enumerated. This is the result of a number of historical and political factors.
1. More Progressive? If it is true that the wealthy consume a disproportionate portion of services offered then taxing services would help to relieve the regressivity of the sales tax. Our economy is becoming more and more dominated by the service sector.
a. Political Suicide: Think medical services… do you really want to tax the visit to the doctor, do you really want to tax people’s bad health? Elective cosmetic surgery is sometimes taxed but the other stuff might be political suicide. Legal? Do you want to tax justice? Well most legislators are lawyers too so that’s off the table.
2. Distinction Fuzzy: Tangible products are taxed but services are not. However if we look at products and consider the element of service involved in producing that product then taxing it as a good rather than a service may seem absurd. For instance, a painting is taxable but a blueprint for a building is exempt. A newspaper delivered to your home is taxable, but a newspaper read on the internet usually is not. A text book is taxable, but very little of the price is a result of the cost of the paper and ink—the greater portion results from the labor and work (service) put into the drafting and re-drafting of it by the authors and contributors.
3. Administrative Concerns Relating to Taxation of Services:Service providers are smaller and more numerous than tangible property distributors. It may be harder for them to collect and less worthy of administrative aggression to force them to collect a sales tax.
a. More Little Guys:It’s easier to become a service provider if you’re small, babysitters, cutting lawns, delivering papers, etc. You don’t need much capital to invest to start up. It would be much more difficult to tax those small guys. We don’t want to turn babysitters into sales tax collectors. Unlike wholesalers, retailers and manufacturers there wasn’t much action ($) there during the Depression era and later.
4. “Bundled Transactions” If I go to dentist and I have a gold crown put in and I pay for the transaction no sales tax will be collected on that transaction because it is viewed as a dental service which is exempt. This is the type of situation this test was meant to address, something where the service and the property were intimately wrapped up in the service. Wouldn’t have been content if the dentist just gave you the crown. At the same time if you went to the firm and they said you had to go to Kinkos to make your own copies you wouldn’t be happy. You would much rather have the firm take care of it. Client wouldn’t be happy with just the service. True object is to have the firm do everything needed to further the case. Pomp thinks its really more custom and tradition but the reality is that in many cases we have a bundled transaction and one without the other doesn’t do it for you.
5. Hypo: pretend an attorney publishes a book called 103 wills for every situation. Not paying him for his time, your paying him for his knowledge and experience.
a. Pomp:POMP: the systemic problem is that legal services are not taxable, this is overly broad. If legal services constitute personal consumption they should be taxed, anything that isn’t a business input should be taxed. Divorce is inherently personal so money paid for legal services for divorce are taxable. Just like any other personal consumption. Where they are a business input they are exempt. Business inputs are not for immediate consumption.

iv. EXCLUSION OF BUSINESS INPUTS AND INVESTMENT-RELATED ACTIVITIES: When you tax a business input you are creating a hidden sales tax (anti-democratic, people should know what government costs them), it shouldn’t matter whether company A created something in-house or purchased it from the outside economy. These arguments fall on deaf ears when the state is in need of revenue. And there is the copycat mentality if your neighboring states are doing something or not doing something you’re going to follow so as to keep your state competitive. Florida did not exempt business inputs, they didn’t fully appreciate that business inputs are supposed to be exempt under a sales tax. So they didn’t exempt advertising. The newspapers saw this as a threat to their livelihood and you can’t fight the newspapers because editorial after editorial started railing against the sales tax. CT taxes a lot of business inputs—throw back to day when we had no personal income tax (like Florida and Texas) had to tax business inputs.
1. Second Best or Implicit Sales Tax: even items that don’t have an explicit sales tax may have been manufactured or farmed using materials that were subject to a sales tax so the sales tax paid by the manufacturer or farmer is passed on or buried in the price so the ultimate consumer pays it but doesn’t see it—this is done wherever it is politically dangerous to explicitly levy the tax.

v. USE TAXES: Are typically levied upon the use storage or consumption of tangible personal property within the state if such property had not already been subject to the state’s sales tax. Use tax is typically the same as the sales tax and property that would have been exempt from the sales tax if purchased within the state is exempt from the use tax. A credit is allowed for any sales taxes paid to other states and if the credit is equal to or greater than the use tax then no use tax is due. If it is less then a use tax is due. It’s seen in FOUR SITUATIONS:
1. Item not initially subject to sales tax because of buyer’s intended use where good is subsequently used for taxable purpose—i.e. merchant buys something for resale and later uses it for personal enjoyment.
2. Sales tax should have been charged on original purchase but was not collected for whatever reason.
3. Where taxpayer produces property for itself for use in its own business.
4. Purchase of personal item in state where tax is lower than it would have been if taxpayer purchased it in home state.
Example: E-Bay: to force the vendor to collect the CT use tax there has to be nexus between the vendor and CT. Specifically, there must be 1) due process clause nexus (easy to satisfy: purposeful availment, present in internet sales); and 2) commerce clause nexus (more difficult: not present in internet sales UNLESS they have people or property in CT). If I advertise on E-bay and show a shipping address in CT and sell to someone in CT then I have to collect the CT use tax.

vi. LOCAL SALES TAXES: There is no federal level sales tax. But at the local level, you don’t have a sales tax unless you have a sale. This is usually defined as transfer of title or possession or both, exchange or barter, rental, license to use or consume, etc. for a consideration—doesn’t say it has to be from the purchaser. Sales tax applies whether you make money or not, you can sell at cost or loss and still have to pay a sales tax.

a. STATUTORY OVERVIEW: A sale is to a sales tax what a realization is to an income tax—without a sale there will be no tax. The definition of a sale will include barters exchanges, rentals and sometimes licenses. Not all s

and Comments: (answers in class notes)
c. SALE FOR RESALE EXEMPTION: A normative sales tax would exempt ALL business inputs, but no state has adopted such a plan. Typically exemptions include sales for resale, purchases of ingredients that will be used in a final product, and the purchase of machinery to be used in production.
i. Bollock v. Cordovan Corp (1985):Cordovan sued to recover 19mil in use taxes paid under protest. Cordovan produced two magazines that were sent free of charge to subscribers who dealt in the advertised products—air cargo and western apparel. The manufacturers of the products paid Cordovan to place their ads in the magazines. Cordovan outsourced its printing expenses and disclaimed the sales tax on the grounds that the purchase of the finished magazines was a purchase for resale. The problem was that Cordovan only sold a de minimis number of its publications and delivered the majority for free. The comptroller’s position was that in order for there to be a resale there must be a consideration in money received from Cordovan by someone for the magazines—the whole transaction was, essentially, escaping taxation.
1. Issue: does Cordovan receive consideration for the transfer? If not, there is no sale.
2. Consideration: definition of sale for resale does not require that the consideration received be valued in money.
a. Third Party: Consideration can come from third party, doesn’t have to be received from the transferee—the statute didn’t specify who the consideration had to come from. BUT the consideration can’t just be for the inclusion of the advertisement it must be reflective of the actual delivery.
3. Premium: the advertisers pay higher prices in this controlled distribution because Cordovan guarantees that the publication will only reach interested parties. Therefore, the advertisers aren’t just paying to have their ads printed in the magazines they are also paying to have them sent to the right people.
a. WTF:why all the focus on this premium?Doesn’t everyone pay to get their ad to the target audience? Isn’t it just one price? Why did this judge think that he needed to get some special premium out of this? POMP: I don’t have an answer, but I hope you tripped over it.
b. Thought:Cordovan had to argue that the price included an unstated premium for the shipment because otherwise the sale would seem to end with the ad purchasers—Cordovan’s customers—and then the tax would just be moved on to the ad purchasers.
c. Holding: YES, this was a sale for resale and accordingly exempt.
Why Charge? POMP: The advocate is free, the penny savers are free… why? A paper like the Times or Courant has a sophisticated computer model, the greater your circulation the more you can charge your advertisers. If I am a high end advertiser I will be unimpressed with your large circulation if you are giving it away for free because most of the people getting it probably aren’t interested in my products. NY Times on the other hand is reaching more of the target audience—and you know exactly who they are because you charge them! So The Times has two-fold income: sales and advertising. But demand is elastic, can’t charge too much or people will stop buying. This company resolved the