STATE & LOCAL TAX OUTLINE Fall 2008 Lilly
PRELIMINARY MATERIALS: STATE AND LOCAL TAX SYSTEMS
3 BIG TAXES
(1) Property
i. CA: Prop 13 diff from rest of state—prop tax based on last sale of home
(2) Sales: tax on the consumption of sales; applies to gross amt of consumption
i. There’s an argument that its unfair to lwr income ppl b/c most of their consumption is necessaries (food/clothing) thus maybe sales tax s/only be on discretionary spending rather than on both discretionary and necessaries
ii. CA: no sales tax on food
iii. Sales tax is responsive to the state of the economy
(3) Income: business/personal
i. No income taxes in FL, TX, NV
GENERAL TAX PRINCIPLES
Tax is–
i. A levy upon labor or capital/property
ii. State taxes can be mirrored by local taxes (locality subj to state law)
1. many cities: local income taxes & local sales tax (CA: no local income tax)
2. San Diego does not have local income taxes
Property tax: on property owned, thus tax on capital
Estate tax: single rate tax on entire estate;
Inheritance tax: diff rates depending on variance of closeness to the decedent (distant relatives pay diff rate than H or W or child)
i. CA used to have inheritance tax
ii. CA now does not estate or inheritance tax (inheritance tax was repealed by ballot by the ppl so legislature can’t bypass their wishes and re-instate the tax)
iii. Inheritance tax is taxed alongside property tax—although they’re both taxes on capital
1. Property tax is tax on ownership alone/while inheritance and estate is excise tax based on privilege (but tax is based on the same basis of both property and estate/inheritance
Tax Collection
i. Taxes must be collected for public purpose rather than private
ii. Govt must match tax generated income with cash out: govt not really collecting taxes for future use; it’s for now
iii. But if govt wanted to create revenue for future income: To generate greater income for the govt: allow building growth to generate greater property taxes, potential income taxes; or govt can borrow it.
iv. Revenue streams: govt bills it out now and spends it now
v. Reporting requirement:
1. anyone who pays a lawyer any sum of $ must report the amount in a 1099
Old tax cannons: Everyone should contribute proportionately and it s/b levied consistently (p.29: Adam Smith’s canons of taxation)
Great Britain in 1794 created income tax to fund the Napoleonic war
US Const. restricts how states can tax
i. No excessive burdens on foreign corps/people compared to domestic-Interstate Commerce
ii. Intrastate commerce not really subj to US Const
iii. Equality in tax rules
1. Represent 3 distinct revenue sources (diversify govts ability to raise revenues)
2. Taxing various arenas allows for more predictable and consistent collection of taxes over time
3. UNIFORMITY & EQUALITY REQUIREMENTS OF STATE AND FEDERAL CONSTITUTIONS
State Uniformity & Equality Requirements
Taxation must meet some std of fairness: uniformity or equality—this is the std for many state constitutions and local jurisdictions (not federal)
i. Most states have them; some states only have uniformity stds and some have uniformity and equality; some states require uniformity only w/I classes of persons or prop taxed while others require uniformity throughout the entire state
ii. Only apply to taxes, not fees
iii. CA has these uniformity and equality requirements : Art 13 of CA state constitution. Note: food products are exempt from CA sales tax
Classification Issues under U & E: Taxes v. Fee?
i. If levy classified as fee, then not subj to uniform and equal reqt; if it’s a tax, it is subj to U & E reqt
1. Note: Business entity itself: partnerships—are not subject to income tax b/c they pass through to the owners
2. With corporation or some partnerships—there’s a minimum franchise tax ($800)
3. LLC’s subject to an annual fee that depended on gross income of revenues (scheme cooked up to compensate for lost revenues by allowing LLC’s –Is this a tax or a fee? Ct deemed it a TAX
ii. Sinclair Paint (CA case): diff b/w taxes and fees is often blurred. Taxes are generally for revenue generating and compulsory and not special assessments for privileges or for regulatory purposes
iii. Fee is targeted amt for particular situation with respect to regulatory scheme or special assessment
1. special assessments are considered fees
2. volume based charges for haulers deemed fees
iv. Taxes—imposed for compulsory matter for general revenue purposes
Classification Issues: What kind of Tax is it?
i. Most states require U & E provisions to apply to property taxes ONLY
ii. Excise and privilege taxes vs. property taxes (Douglas Aircraft: CA sup ct 1939): Here, found tax to be an excise tax and not a property tax–if it’ was a prop tax, it’s invalid as applied to this TP, but if another kind then ok b/c can’t tax prop twice and the item at issue’s already been taxed.
1. But—excise taxes are not subject to the U & E provisions
iii. Sales tax- is on the transaction of acquisition (purchase) and pay it at point of sale collected by seller but imposed by buyer.
iv. Use tax- but when buy outside state of CA and bring it to CA to use, then pay use tax w/I first year of use w/I the state (c/b argued to be a tax on ownership rather than tax on transaction and thus a prop tax)
v. Sales, motor vehicle, use tax: deemed to be excise tax that is basically a scheme to tax the transaction or purchase or consumption (and not property) Thus not subject to U & E requirements
vi. Constitutionality of state income taxes under U&E:
1. 1894: held unconst as a direct tax on prop even though it was formulated as income tax. Became an issue due to income tax on rents from realty and court found tax on rents of realty = tax on property (old law: Pollack) some state courts followed this thinking
2. New rule: May levy an income tax b/c it is not property tax but rather an excise tax therefore not subj to U & E rules. However, income tax is not necessarily an excise tax
Nature of the TP
i. Opinion of the Justices: discrimination (ie: violates state constitution) ie: cannot unfairly classify corporations within a single tax w/i same biz revenue in 2 different tax classifications b/w businesses. Facts: if a tax causes discrimination b/w businesses b/c they could choose to compensate one individual more or less when biz’s are in same gross income bracket, it will run afoul of a uniform apportionment statute (pg 46)
1. A minimum tax could also violate equal protection b/c the min is not apportioned
2. Tax exemptions:
a. In favor of charitable orgz can violate state equal protection clauses
b. Exemption for equipmen
found OK to exempt foreign comp’s from a state tax to encourage biz in the state. Ct said it did not burden competitors of residents and it did not adversely affect domestic co’s subj to the tax
iii. ***Summary: Will have more trouble upholding tax laws that discrim vs outta state in favor of in state biz than those that discrim vs in state in favor of foreign biz
Privileges and Immunities (Discriminating vs. Non Residents) Must involve a fundamental rt
In GENERAL:Biz’s are NOT citizens and this clause applies to citizens ONLY.
i. Allows for diff avenue of attack if want to throw in
ii. Main avenues of attack are EPC and U&E claims
iii. Why was elk hunting license ok to charge non residents but shrimp fishing license was not? P&I supposed to deal with federal elements of citizenship. Is there anything fundamental about elk hunting? The activity was charact as pure sport by non-residents/ elk are precious resource of state of MT so could regulate its consumption by non-residents and thus charge license. Holding: MT could regulate and charge non residents more for elk hungting than in-state residents—does not violate P&I. Shrimp may qualify as fundamental b/c the shrimp operations were commercial thus s/b able to conduct biz in another state on equal footings—violated P&I.
iv. Cf: South Dakota prevented all non residents from hunting water fowl in its state. Held: did not violate P&I
14 Amend P&I: right to travel use (not used as often as Art
Art IV, Sec 2 P&I [only to protect fundamental rights varying upon vitality of the nation as a single entity—this is the one most used in the field of state taxation as a principal basis for a clam of denial of P&I]
i. The P&I (art IV sect 2) clause is not an absolute. It does not bar discrimin vs citiz of other states where there is no substantial reason for the discrim beyond the mere fact that they are citiz of other states. But it does preclude disparity of treatment in the many situations where there are perfectly valid independent reasons for it. Thus the inquiry in ea case must be concerned w/ whether such reasons do exist and whther the degree of discrim bears a close relation to them. The inquiry must also be conducted with due regard for the principle that the States should have considerable leeway in analyzing local evils and prescribing approp cures . . . (quoted excerpt on p. 87 “Like many other constitutional . . ”)
ii. This is the std: not the same as rational basis b/c state is asked to provide a substantial reason and have it reas relate to what’s being done, ie: discrim vs non residents. Cf to court looking at situation and fabricating its legit reasons for the state actions. Here, state must show that substantial reasons exist for the discrim.
