New Ways To Generate Revenue

TaxConnections Blogger Annette Nellen Posts about revenue generationIn the past few months, I have been interviewed or heard stories about state and local government practices to generate revenue in new and unusual ways. For example, some California cities are willing to enter agreements with vendors to locate a sales office in their borders and receive a return of some of the sales tax generated. I think the opportunities for doing this will increase when/if the Marketplace Fairness Act passes. With the MFA, more vendors will be required to collect California sales tax despite the lack of a physical presence in the state. So, why not locate some small office in a city that is willing to rebate some of the tax collected for the city to the vendor?

Another instance is a government hiring a third party to help it collect taxes owed. While that might seem innocent enough – outsourcing, it raises a variety of issues. There is a nice write-up of many of these issues in a Action News Alameda article I was interviewed for a few weeks ago – “City of Alameda Moves Forward With Contingency Fee Business Tax Audit Effort,” David Howard, 7/30/13.

The tax sharing is problematic as this is not what we pay taxes for. Taxes are to help fund government operations. When people learn that part of their taxes go into the coffers of a vendor, they will think that the government doesn’t really need the revenue so why not lower rates and will be puzzled about what the purpose of tax is. This is also a race to the bottom as local governments reduce their hard to generate tax revenues and compete against each other for tax dollars.

The outside auditor situation is also problematic, such as because the third parties, typically paid on a commission basis, are not trying to determine if the proper amount of tax was paid, but if too little tax was paid. There are also privacy issues. The solution – hire more auditors that work for the government.

In accordance with Circular 230 Disclosure

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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