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12 Feb 2019

State and Local Taxes

Westinghouse raises the questions as to the constitutionalstatus of various tax incentives

designed to induce in-state location.Are investment tax credits and similar credits limitedto

in-state expenditures under aconstitutional cloud after Westinghouse? What about the

practice of limiting favorablemethods of depreciation, such as ACRS, to investments in in-

state property?

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Keith Leannon
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15 Feb 2019

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Answer the following questions about tax base.

a. Explain what Haig-Simon comprehensive income definition is; how it is applied to defining a tax base; and explain why we deviate from such definition in case of property and casualty losses, medical expenditures, and state and local taxes.

b. Explain what tax deductions and tax credits are by using examples of charitable donations and Earned Income Tax Credit (EITC), respectively; and explain their implications in terms of equity.

61-David R. and Ella M. Cole (ages 39 and 38,respectively) are husband and wife who live at 1820 Elk Avenue,Denver, CO 80202. David is a regional sales manager for WrenIndustries, a national wholesaler of plumbing and heating supplies,and Ella is a part-time dental hygienist for a chain of dentalclinics.

David is classified by Wren as a statutory employee withcompensation for 2014 (based on commissions) of $95,000. He isexpected to maintain his own office and pay for all businessexpenses from this amount. Wren does not require him to render anyaccounting as to the use of these funds. It does not withholdFederal and state income taxes but does withhold and account forthe payroll taxes incurred (e.g., Social Security and Medicare).The Coles are adequately covered by Wren’s noncontributory medicalplan but have chosen not to participate in its §401(k) retirementplan.

David’s employment-relatedexpenses for 2014 are summarized below:

Airfare $8,800

Lodging 5,000

Meals (during travelstatus) 4,800

Entertainment 3,600

Ground transportation (e.g.,limos, rental cars, and taxis) 800

Businessgifts 900

Office supplies (includepostage, overnight delivery, andcopying) 1,500

The entertainment involvedbusiness meals for purchasing agents, store owners, and buildingcontractors. The business gifts consisted of $50 gift certificatesto a national restaurant. These were sent by David during theChristmas holidays to 18 of his major customers.

In addition, David drove his2012 Ford Expedition 11,000 miles for business and 3,000 forpersonal use during 2014. He purchased the Expedition on August 15,2011, and has always used the automatic (standard) mileage methodfor tax purposes. Parking and tolls relating to business use total$340 in 2014.

When the Coles purchased their present residence inApril 2011, they devoted 450 of the 3,000 square feet of livingspace to an office for David. The property cost $440,000 ($40,000of which is attributable to the land) and has since appreciated invalue. Expenses relating to the residence in 2014 (except formortgage interest and property taxes; see below) are asfollows:

Repairs andmaintenance900

Painting office area; arearugs and plants (in the office)1,800

In terms of depreciation, theColes use the MACRS percentage tables applicable to 39-yearnonresidential real property. As to depreciable property (e.g.,office furniture), David tries to avoid capitalization and useswhatever method provides the fastest write-off for taxpurposes.

Ella works part-time as a substitute for whicheverhygienist is ill or on vacation or when one of the clinics isparticularly busy (e.g., prior to the beginning of the schoolyear). Besides her transportation, she must provide and maintainher own uniforms. Her expenses for 2014 appear below.

State and city occupationallicenses380

Professional journals andmembership dues in American Dental

HygieneAssociation340

Correspondence study course(taken online) dealing with teeth whitening

Ella’s salary for the year is$42,000, and her Form W-2 for the year shows income taxwithholdings of $4,000 (Federal) and $1,000 (state) and the properamount of Social Security and Medicare taxes. Because Ella is apart-time employee, she is not included in her employer’s medicalor retirement plans.

Besides the items already mentioned, the Coles had thefollowing receipts during 2014.

Interest income-

State of Colorado generalpurpose bonds$2,500

IBM bonds800

Wells Fargo BankCD1,000$4,500

Federal income tax refund foryear 2013510

Life insurance proceeds paidby Eagle Assurance

Inheritance of savingsaccount from Sarah Cole 50,000

Sales proceeds from twoATVs9,000

For several years, theColes’s household has included David’s divorced mother, Sarah, whohas been claimed as their dependent. In late November 2014, Sarahhad a life insurance policy and savings account (with David as thedesignated beneficiary of each). In 2013, the Coles purchased twoATVs for $14,000. After several near mishaps, they decided that thesport was too dangerous. In 2014, they sold the ATVs to theirneighbor.

Additional expenditures for 2014 include:

Funeral expenses forSarah$4,500

Real property taxes onpersonal residence$6,400

Colorado state income tax due(paid in April 2014

For tax year2013)3106,710

Mortgage interest on personalresidence6,600

Paid churchpledge2,400

Contributions to traditionalIRAs to Ella and David

($5,500 +$5,500)11,000

In 2014, the Coles madequarterly estimated tax payments of $1,400 (Federal) and $500(state) for a total of $5,600 (Federal) and $2,000(state).

Part 1- TaxComputation

Using the appropriate formsand schedules, compute the Coles’s Federal income tax for 2014.Disregard the alternative minimum tax (AMT) and various educationcredits as these items are not discussed until later in the text(Chapters 12 and 15).

Relevant Social Securitynumbers are:

DavidCole123-45-6788

EllaCole123-45-6787

SarahCole123-45-6799

The Coles do not want tocontribute to the Presidential Election Campaign Fund. Also, theywant any overpayment of tax refunded to them and not applied towardnext year’s tax liability. Suggested software: H&R BLOCK TaxSoftware.

Part 2-Follow-UpAdvice

Ella has always wanted topursue a career in nursing. To this end, she has earned asubstantial number of college credits on a part-time basis. WithSarah no longer requiring home care, Ella believes she can nowcomplete her degree by attending college on a full-timebasis.

David would like to know howElla’s plans will affect her income tax position.

Specifically, he wants toknow:

How much Federal income tax they will save if Ella quitsher job.

Any tax benefits that might be available from cost ofthe education.

Write a letter to Davidaddressing these concerns. Note: In making your projections, assumethat David’s salary and expenses remain the same. Also disregardany consideration of the various educational tax credits as theseare not discussed until Chapter 12.

[The following information applies to the questions displayed below.]

Melanie operates Mel’s Bakery in Foxboro, Massachusetts, with retail stores in Connecticut, Maine, Massachusetts, New Hampshire, and Rhode Island. Mel’s also ships specialty breads nationwide upon request.

Determine Mel’s sales tax collection responsibility and calculate the sales tax liability for Massachusetts, Connecticut, Maine, New Hampshire, Rhode Island, and Texas, using the following information: (Leave no answer blank. Enter zero if applicable.)

a. The Massachusetts stores earn $580,000 in sales. Massachusetts’s sales tax rate is 5 percent; assume it exempts food items including bakery goods.

b. The Connecticut retail stores have $464,000 in sales ($340,000 from in-store sales and $124,000 from catering) and $18,000 in delivery charges for catering activities. Connecticut sales tax is 6 percent and excludes food and bakery products but taxes prepared meals (catering). Connecticut also imposes sales tax on delivery charges on taxable sales.

c. Mel’s Maine retail store has $314,000 of sales ($248,000 for take-out and $66,000 of in-store sales). Maine has a 5 percent sales tax rate and a 7 percent sales tax rate on prepared food; it exempts other food purchases such as take-out purchases.

d. The New Hampshire retail stores have $274,000 in sales. New Hampshire is one of five states with no sales tax. However, it has a room and meals tax rate of 8 percent. New Hampshire considers any food or beverage served by a restaurant for consumption on or off the premises to be a meal. (Note: Sales and use taxes are excise taxes levied on the sale or use of tangible personal property within a state regardless of what they are called.)

e. Mel’s Rhode Island stores earn $324,000 in sales. The Rhode Island sales tax rate is 7 percent and its restaurant surtax is 1 percent. Rhode Island considers Mel’s a restaurant because its retail store has seating.

f. One of Mel’s best customers relocated to Texas, which imposes an 8.25 percent state and local sales tax rate but exempts bakery products. This customer entertains guests regularly and ordered $6,600 of food items this year.

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