IRS Tax News – Accounting method change procedures for book-tax conformity rule
The IRS announced procedures for taxpayers to change their accounting method to comply with the amendment of Sec. 451(b) enacted by the tax law known as the Tax Cuts and Jobs Act.
Source: IRS Tax News – Accounting method change procedures for book-tax conformity rule
IRS Tax News – Accounting method change procedures for book-tax conformity rule
Tax Policy – A Chicago Commuter Tax Would Drive Business Out of the City
A forthcoming spike in pressure on Chicago’s public employee pension system has mayoral candidates turning anywhere and everywhere for funding to make hundreds of millions of dollars in additional retirement payments. The latest proposal? A tax on the wages of those working in Chicago but living outside city limits.
Bill Daley, among the candidates vying to replace retiring Mayor Rahm Emanuel, on Wednesday raised the possibility of creating several new taxes, including a commuter tax that would require nonresidents to send wage income taxes to City Hall.
The city’s high cost-of-living, including its already hefty tax burden, is one reason many Chicago employees commute in the first place. Each day, hundreds of thousands of individuals travel into Chicago or greater Cook County for work, including tens of thousands from Indiana. However, Chicago itself has seen several years of population decline, and even many suburbanites have become disenchanted enough to leave. Recent data from the U.S. Census Bureau shows net out-migration from Cook County and each of the surrounding “collar” counties.
A tax targeting suburban commuters would incentivize many employed in Chicago to seek work closer to home, and a departing workforce would give Chicago businesses more reason to think seriously about relocating to fiscally greener pastures. Ironically, Daley’s discussion of a commuter tax was part of a speech laying out his platform to increase Chicago’s population by over 280,000 people by the year 2030.
A Chicago Tribune editorial sheds light on why commuter taxes are so appealing to politicians: by definition, none of the people who pay a city’s commuter taxes can effect change to city leadership with their vote; instead, they’re left to vote with their feet.
While proponents of commuter taxes see them as a way to ensure nonresidents pay for the public benefits they receive while working in a city, it’s important to remember that nonresidents already pay a significant share of taxes in Chicago, including parking taxes and steep sales taxes. Further, Chicago is already known for exporting its tax burden to nonresidents. In 2008, SmartMoney magazine cited Chicago as the U.S. city with the highest tax burden on travelers.
Further, commuter taxes have lackluster track records in the other major cities in which they are levied. In a 2011 report, Chicago Inspector General Joseph Ferguson noted that a commuter tax in Philadelphia resulted in job loss in the city, and the major cities that do levy a commuter tax (Philadelphia, Cleveland, and Detroit) are all characterized by population decline and economic stagnation.
While it is tempting for local governments that are strapped for cash to look for ways to export their tax burden to nonresidents, this practice is legally dubious and creates unintended consequences that drive away employees and businesses. Ultimately, tax exporting gives constituencies a false and unsustainable sense of security, creating a temporary illusion that residents can benefit from additional public goods and services while someone else bears the cost.
Source: Tax Policy – A Chicago Commuter Tax Would Drive Business Out of the City
Tax Policy – San Francisco Joins California Cities Levying a Gross Receipts Tax on Cannabis
Unlike the attention being drawn to San Francisco’s legal troubles with Proposition C, there is less fanfare surrounding Proposition D, which creates a new municipal gross receipts tax on cannabis. The measure will distort the cannabis market and raise costs for consumers in an especially opaque manner, as other gross receipts taxes often do.
Proposition D levies a tax on marijuana firms’ gross receipts over $500,000 (exempting retail sales of medical cannabis) beginning on January 1, 2021. The tax was approved narrowly by voters, 50.8 percent to 49.1 percent, and is less likely than Proposition C to face a legal challenge as the measure’s revenue would go to general purposes. The tax will also apply to internet retailers with San Francisco customers, including out-of-state retailers.
San Francisco is following the steps taken by other major cities and counties in California of often assessing gross receipts taxes on cannabis producers and retailers. This tax adds to San Francisco’s broader gross receipts tax, which applies rates ranging from 0.16 percent to 0.65 percent for firms with more than $1 million in gross receipts. On top of that, cannabis is also subject to a statewide 15 percent excise tax on the average market price of cannabis.
Of note is the tax’s proposed rates, which vary between 1 percent and 5 percent depending on the kind of business activity and a firm’s level of gross receipts:
*The first $500,000 of a cannabis firm’s gross receipts is exempt from the Cannabis Business Tax.
|Sub-Sector||Gross Receipts*||Tax Rate under Proposition D|
Retail Sale of Cannabis & Cannabis Products
$500,001 to $1,000,000
$1,000,000 and greater
All Cannabis Business Activities Other than Retail Sale of Cannabis & Cannabis Products
$500,0001 to $1,000,000
$1,000,000 and greater
Localities in California often apply high rates. For example, the city of Alturas, in the northeast corner of the state, levies a 10 percent gross receipts tax on cannabis, and there is a 15 percent maximum rate on gross receipts in Campbell, a municipality just outside of San Francisco.
The gross receipts tax will apply to every transaction in the cannabis production process. A cannabis grower will collect the tax on their gross receipts when they sell to a cannabis processor. The processor will then collect a tax on their transaction with a cannabis retailer. The tax is levied on the value of the inputs–the previously taxed cannabis purchased from the grower–in addition to the value added by the processor. This phenomenon is known as tax pyramiding, which is distortionary and inefficient.
A gross receipts tax applied to the cannabis industry alone will have only minor effects on the broader economy and may be viewed by some as a form of excise tax on cannabis consumption. However, the effects of the tax on cannabis firms are anything but minor.
Dispensaries with lower profit margins will bear a heavier burden of the tax due to how it pyramids. The effective tax rate is higher than the statutory rates of 1 percent to 5 percent, as the tax pyramiding compounds the amount of tax paid over the production sequence.
For vertically-integrated businesses engaging in retail sale of cannabis and other aspects of cannabis production, the $500,000 exemption will apply first to gross receipts attributed to the non-retail activity. Firms may prefer to exempt their gross receipts from retail sales first, as those are subject to a higher tax rate. Instead, vertically-integrated firms with more than $500,000 in gross receipts from non-retail business will have to pay the higher rate on their retail activities.
As my colleague Amir El-Sibaie points out, gross receipts taxes tend to encourage vertical integration to avoid the tax, even if the integrations are not economically efficient in the tax’s absence. Evidence from Washington State’s gross receipts tax on marijuana suggests that up to 44 percent of the tax burden will fall on consumers, raising the cost of cannabis. The increased costs will not necessarily be evident to consumers, as part of the tax is hidden in the final purchase price. The State of Washington has since repealed its gross receipts tax on cannabis, switching to a more transparent and less distortive excise tax on final consumption instead.
While it is still not clear what the ideal tax rate should be on cannabis, San Francisco should consider a better tax structure than the anachronistic and economically costly gross receipts tax.
Source: Tax Policy – San Francisco Joins California Cities Levying a Gross Receipts Tax on Cannabis
IRS Tax News – Proposed foreign tax credit regulations issued
The IRS issued proposed regulations on the determination of the foreign tax credit after the changes in the law made by the Tax Cuts and Jobs Act.
Source: IRS Tax News – Proposed foreign tax credit regulations issued
Tax Policy – San Francisco about to Face a Legal Morass After Voters Approve Proposition C
Voters in San Francisco adopted Proposition C earlier this month, adding another gross receipts tax to the city’s businesses. It is a particularly pernicious form of taxation enjoying a resurgence at the state and local levels, leaving San Francisco about to face a legal quagmire that threatens to halt the tax’s enactment.
Proposition C introduces a new gross receipts tax on businesses with more than $50 million in gross receipts within the city, with rates varying by industry from 0.175 percent to 0.69 percent. Proposed to fund services for the homeless, the tax adds to San Francisco’s broader gross receipts tax, which applies rates ranging from 0.16 percent to 0.65 percent for firms with more than $1 million in gross receipts.
The proposal, passing with only 60.5 percent of the vote, faces legal hurdles as a result of California’s constitutional requirement that many of the state’s taxes must be approved by a two-thirds vote of the people.
In California, governments must receive voter approval to increase or enact local taxes. If the tax is dedicated to a specific purpose (in Proposition C’s case, support for the homeless), levied by a special district, or a property tax, it is considered a special tax and requires a two-thirds majority to be approved. Otherwise, the proposal is considered a general tax and may pass with simple majority approval.
The dispute over Proposition C centers around whether voter-initiated measures are included in the two-thirds approval requirement, or if that standard only applies to measures introduced by government officials.
This isn’t the first time this question has been raised: litigation is pending over a separate initiative to enact a commercial rent tax, which also received only a simple-majority approval by voters.
The day after Proposition C was approved, the San Francisco Controller notified the San Francisco Board of Supervisors that his office would not certify the expected revenue from the tax for appropriations until the legal uncertainty is resolved. Mayor London Breed (D) defended the measure, introducing an ordinance to seek a court order to authorize the simple-majority threshold for passing the tax.
Breed is relying on a 2017 memo by the San Francisco City Attorney’s Office, which argued that the voting threshold for voter-initiated measures is a simple majority under the California Constitution. The memo rests on a decision by the California Supreme Court in California Cannabis Coalition v. City of Upland. Crucially, the decision did not directly discuss the issue of voter-initiated measures but decided whether a voter-initiated measure can be held during a special election. The City Attorney’s Office argues that the Court treated legislatively-introduced taxes and voter-initiated taxes differently in that case; the latter measures may be considered during special elections, although the former measures may not. This implies, the memo argues, that the two-thirds voter threshold only applies to legislatively-introduced tax proposals.
The lack of case law directly addressing the matter suggests that the city should expect a legal battle before the measure is implemented, a battle they are at risk of losing.
Source: Tax Policy – San Francisco about to Face a Legal Morass After Voters Approve Proposition C