Tax Exempt Property and the Cities: Striking a Balance

All states grant a property tax exemption to certain non-profit organizations. Tax-exempt property further erodes many cities’ tax bases. Connecticut has recently adopted legislation in an attempt to solve this problem. This legislation, proposed by Professor Richard D. Pomp, provides municipalities with state subsidies for property taxes lost due to tax-exempt hospitals and colleges. This article is the reprinted testimony of Professor Pomp before the Connecticut State Finance Committee. Professor Pomp outlines the proliferation of tax-exempt property in Connecticut, which contributes to forgone revenue for major cities. Tax-exempt property not only results in diminished tax revenue, but also imposes additional costs on cities. Professor Pomp further explains that tax-exempt organizations provide no greater net economic impact than businesses that pay the property tax. Professor Pomp analyzes three relevant questions that must be asked when considering alternatives to the current system. He concludes by proposing seven alternative options: (1) municipal permission before any taxable property can be purchased by a tax-exempt organization, (2) phase in the exemption whenever taxable property is bought by a tax-exempt organization, (3) phase out the exemption after a certain period, (4) limit the number of acres qualifying for the exemption, (5) set a dollar limit on the amount of property that can be exempt, (6) impose a user charge, or (7) state payments to jurisdictions containing tax-exempt property in excess of the state average

Myth vs. Reality: Airbnb and Its Voluntary Tax Collection Efforts

In this report, Professor Pomp debunks the claims presented in several reports commissioned by the American Hotel and Lodging Association (Hotel Association). Despite hotel profits reaching all time highs, the Hotel Association has continued to attack Airbnb. Part I serves as an introduction to Airbnb and its solution to an administrative challenge confronted by tax jurisdictions. Airbnb operates a platform that links guests looking for short-term rental opportunities with hosts offering such services. There are potentially millions of hosts who are unaware that they are subject to municipal taxes on short-term rentals. Municipalities lack the resources required to track down all these hosts. Airbnb has entered into more than 200 voluntary collection agreements (VCAs) with municipalities to collect taxes on behalf of these hosts. Part II details the Hotel Association’s attacks on Airbnb’s VCAs. In 2017, a report commissioned by the Hotel Association accused Airbnb of undermining tax fairness, transparency, and the rule of law. The Hotel Association repeated many of these claims in a 2018 press release: “Tax Day: Hoteliers Call for More Transparency and Oversight in Taxing Airbnb.” In 2019, it presented another press release emphasizing a new, and equally misleading, report by the author of the 2017 report. Part III attacks the falsehoods promoted by the 2017 report and 2018 press release. Tax jurisdictions face a sizable administrative dilemma: millions of hosts, untrained in tax accounting and law, are potentially unaware of the tax consequences of short-term renting. Furthermore, the hosts are likely not prepared to confront tax liability on profits they have already spent. Airbnb has helped to ameliorate this problem by entering into VCAs with municipalities. Contrary to the Hotel Association’s claims, Airbnb supports taxes on short-term rentals. And it is untrue that Airbnb does not pay its fair share of taxes; the VCAs cover municipal hotel taxes that Airbnb does not owe. These VCAs are groundbreaking, not “atypical;” there is not anything relevant to compare them to. Despite the Hotel Association’s assertions, the content of the VCAs is publicly available. Many jurisdictions have openly announced when they have entered into these agreements, and municipalities provide information regarding their VCAs to those interested. Airbnb also has a web page that lists the states and municipalities in which it collects and remits taxes. Although the Hotel Association suggests that public officials have been duped into entering these agreements, the article provides numerous quotes from public officials praising Airbnb for its tax collection efforts. The 2017 report misleads by comparing VCAs to Voluntary Disclosure Agreements (VDAs). VDAs are fundamentally different from VCAs. They allow a business the opportunity to pay some of its owed taxes from prior years, and in return a municipality will ignore penalties and forgive a portion of the taxes owed. In contrast, the VCAs cover taxes owed by the hosts, not taxes owed by Airbnb. Airbnb is not a hotel, thus it is not liable for those taxes. The Hotel Association’s comparison is misleading: VCAs are not a mechanism for Airbnb to pay back taxes (it owes none). Rather, VCAs guarantee the payment of future taxes by hosts to municipalities. The claim that Airbnb has secured tax amnesty through these VCAs is fueled by the false assumption that Airbnb owed taxes to begin with. Airbnb does not disclose the names and addresses of hosts. Airbnb has a legitimate interest in protecting the privacy and security of the hosts. And this information is not relevant to the collection of taxes, so the Hotel Association’s suggestion that the lack of disclosure could lead to something resembling the Volkswagen Dieselgate scandal is pure paranoia. Part IV addresses the myths emphasized by the 2019 report and press release. The report argues that Wayfair renders Airbnb liable under lodging and sales taxes. The outcome of Wayfair is irrelevant; Airbnb has not made arguments premised on its physical presence relative to the states. Rather, it has argued that those taxes never applied to Airbnb in the first place. Platform statutes, passed in response to Wayfair, do not eliminate the need for VCAs. VCAs fill the gaps between platform legislation and the collection of hotel taxes. Furthermore, the landscape of platform legislation is chaotic. Municipalities benefit from VCAs while the scope of platform statutes is gradually teased out through litigation and legislative change. And contrary to the report’s suggestions, Airbnb already files returns as required under the IRC. Part V, in reaction to the Hotel Association’s distorted picture of Airbnb, emphasizes some of Airbnb’s innovations outside the realm of tax collection. Airbnb uses a scoring system which utilizes artificial intelligence and predictive analytics to flag suspicious activity. All hosts are screened against watch lists, and U.S. residents are submitted to background checks. Airbnb has a Trust and Safety team, composed of a diverse selection of experts, including response agents who are on call 24/7. Airbnb offers the hosts insurance, safety workshops, and free smoke and carbon monoxide detectors. Part VI concludes by reaffirming that the VCAs cover taxes owed by the hosts, not taxes owed by Airbnb. Thus, the Hotel Association’s claim that Airbnb does not pay its fair share of taxes is vacuous. The appendix contains more statements from public officials praising Airbnb for its innovative VCAs

The United States Interest Equalization Tax

The United States Interest Equalization tax is a one-time tax levied on certain foreign securities, proposed by President Kennedy in order to reduce the balance-of-payments deficit by restricting portfolio investment. Although the tax was enacted in 1964 as a short-term measure, it was continually extended and amended. This article explores the contours of the tax. Prior to the tax, many foreign debt issues were attracting large amounts of capital due to their high interest rates. The IET attempts to equalize the yield of foreign debt issues with domestic debt issues by imposing a tax on the foreign issues and thus diminish the attractiveness of the foreign issues. The IET’s success in reducing foreign investment resulted in six extensions of the tax and it is now set to expire on July 1, 1974. Current international monetary condition may necessitate yet another extension of the tax. The IET functions by levying a tax on the acquisition by a United States person of a foreign issuer or foreign obligor based on the actual value of the security acquired. The tax rate on stock acquisitions is 11.25% of the stock’s actual value, while the rate on debt obligations is a function of the period remaining until maturity and is intended to equal the present value of the difference between European interest rates and the United States interest rate. The term “acquisition” includes any purchase, transfer, distribution, exchange, or any other transaction by virtue of which ownership is obtained. The IET also specifies that certain transactions, even though outside the definition of acquisition, will be considered taxable under the IET. This Article explores the rates on debt obligations, the various exemptions from the tax that exist where United States balance-of-payments is not adversely affected, as well as the elective provisions that the IET legislation contains to allow United States persons to be treated as a foreign issuer or obligor

Report on the Internal Training Program of Zambia’s Department of Taxes

This report covers a review of the internal training program of Zambia’s Department of Taxes in 1975 and offers numerous suggestions for improvement. The report begins with a brief description of the courses of study in the training program, followed by a discussion of problem areas of the three main components of each course (field training, classroom instruction, and examinations) with recommendations for reform. After noting a general dissatisfaction with the quality of trainees the Tax Department attracts, the report suggests two main avenues for improvement. One avenue is establishing working conditions that attract and keep high-quality individuals. The other is publicizing the Department’s role, the opportunities within, the skills necessary for success, and the job satisfaction employees can expect. The report also suggests several approaches to meet those ends. After proposing some areas for further study, the report concludes with ways Harvard’s International Tax Program can leverage its expertise in tax administration, policymaking, and economics to help Zambia’s government improve the program

A Report to the Connecticut Office of Policy and Management Regarding a Proposed Payroll Tax

This Report analyzes a 5% payroll tax that would be imposed on employers in the amount of the Connecticut wages they pay to their employees. An anticipated response to this tax is that employers would shift this tax to their employees by reducing their wages by the cost of the tax. In this case, there would also be a reduction of the existing personal income tax rates by 5 points, but only if there were a reduction in wages. The effect would be to eliminate the 3% and 5% brackets, and would only be applicable to wages; it would not apply to income from dividends, capital gains, interest, rents, royalties, and the like. This “tie-in,” that is, the reduction in tax rates only if wages are reduced, should be required or else there would be little incentive for employees to support a wage reduction. Tie-ins, such as this, have many complexities and are examined in the Report. The goal of the proposal is that workers would have more take-home pay, despite their wages being reduced. This results from a reduction in their taxable income and a reduction in their FICA taxes. Employers would also save in reduced FICA taxes. Consequently, a payroll tax would increase an employee’s take home pay at the expense of the federal fisc, which is part of its State charm. Somewhat counter-intuitively, even though wages are reduced, the combination of State income tax savings and the federal income and FICA tax savings means the employee is actually better off and will end up with more take-home pay. In the event that wages cannot be reduced, the payroll tax becomes an explicit tax on employers. Because wages would not be reduced, employers would not receive any decrease in the amount of FICA taxes they pay and the payroll tax would essentially be a 5% increase in the cost of doing business. In determining the outcomes of a proposed payroll tax, a critical threshold question is whether employers will be able to shift the payroll tax to employees by reducing their wages. If they cannot, there is no reason to adopt a payroll tax. However, this question could be avoided if the tax were elective by employers. Presumably they would not make the election if they thought they could not reduce wages. Because there are so many moving and interdependent parts, the lack of a fully drafted bill limits what can be said in this Report with any certainty. Nonetheless, the Report identifies many of the issues needing to be addressed, such as what groups could benefit from the tax, how the tax could be imposed on the federal government and tribal nations, and the tax’s impact on insurance companies. The Report suggests that the State reach out to New York to evaluate their experience, which has adopted a similar tax through a credit mechanism, which is a simpler approach than the one Connecticut is considering

Resisting the Siren Song of Gross Receipts Taxes: From the Middle Ages to Maryland’s Tax on Digital Advertising-Abstract

A turnover tax, more commonly known as a gross receipts tax, has a long and sordid history. The tax has ancient roots, first appearing when economies were primitive and underdeveloped, with few alternatives for raising revenue. A turnover tax makes no pretense of taxing profits, income, consumption, wealth, or other bases that have come to be accepted as legitimate around the world. Instead, it taxes business activity, and is fundamentally different in concept, and inferior to, either a well-designed retail sales tax or a value-added tax. Economists throughout the ages have nearly universally condemned turnover taxes; some even blame the Spanish version of the tax (the “Alcabala,” first imposed in the 14th century) for that country’s downfall. The adoption of a turnover tax often led to taxpayer rebellions. Turnover taxes benefit from the myth that they are low-rate, stable, and easy to administer. The reality is quite the opposite. The many faults that infect turnover taxes have led throughout the world to their replacement by value-added taxes (or corporate income taxes). The most glaring exception is the United States, which has no value-added tax at either the federal or the sub-national levels. Despite turnover taxes being vilified, condemned, and railed against by economists, Ohio adopted one in 2005—its commercial activities tax (CAT). Its name obscures the fact that it is a turnover tax. Maryland recently adopted a narrow-based turnover tax on digital advertising. Maryland was inspired in part by foreign digital service taxes, a type of turnover tax designed to overcome the permanent establishment rule in tax treaties and the lack of market-based sourcing, two serious obstacles to taxing the digital economy. Those obstacles are not inherent in the state tax systems. Ironically, Maryland already eliminated the physical presence requirement from its state income tax, replacing it with an economic nexus standard, and has adopted market-based sourcing. Besides being unnecessary, the Maryland tax has numerous drafting and constitutional weaknesses and has been challenged in both federal and state courts. Neither Maryland nor any of the other state turnover taxes (Washington, Delaware, Ohio, Texas, Nevada, Oregon, Maryland) is worthy of imitation. These states are false prophets. Hopefully, policymakers who learn of the abject history of gross receipts/turnover taxes will not be doomed to repeat it

Brief of Interested Law Professors as Amici Curiae Supporting Petitioner in Brohl v. Direct Marketing Association

Amici curiae are 14 professors of law who have devoted much of their teaching and research to the area of state taxes and the role of state tax policy in our federal system. The amici are concerned with the effect of this Court’s dormant Commerce Clause jurisprudence on the development of fair and efficient state tax systems. No decision of this Court has had more effect on state sales and use tax systems than Quill Corporation v. North Dakota. We believe the Tenth Circuit properly decided the case below. But if the Court decides to grant the Direct Marketing Association’s petition to review the issue of discrimination which it raises, we respectfully request that the Court also grant the conditional cross-petition filed by Executive Director Barbara J. Brohl of the Colorado Department of Revenue asking the Court to reconsider Quill. This brief sets forth the reasons for our support of that cross-petition. Co-authored by: Joseph Bankman; Jordan M. Barry; Robert J. Desiderio; David Gamage; Andy Haile; Richard Handel; Hayes Holderness; Darien Schanske; Erin A. Scharff; Kirk Stark; John Swain; Dennis J. Ventry, Jr.; Edward Zelinsk

Turnover Taxes: Their Origin, Fall from Grace, and Resurrection

The turnover tax, a hallmark of developing nations and even once blamed for Spain’s decline, has made a comeback in the states, starting with Ohio. A turnover tax is a gross receipts tax that is applied every time a good or service “turns over,” that is, every time the good or service transfers from one entity to another for consideration. The tax base is therefore turnover, and the measure of the tax is gross receipts. In this article, Professor Richard Pomp examines the turnover tax’s deep roots dating back to ancient Athens, and tracks its course from the time the Romans applied a 1% turnover tax on all goods, then on to medieval Spain, where the alcabala (cascading turnover tax) was blamed for that country’s economic decline, up through the end of World War I when many European countries adopted a turnover tax to deal with their fiscal needs after the war. Professor Pomp notes that in Europe, the turnover tax was traded in for a VAT as soon as possible and discusses the defects of the turnover tax. The states better take heed of the old adage that “those who don’t know history are doomed to repeat it.” Professor Pomp concludes by arguing that the defects of the turnover tax deserve a broader audience