The Folly of Loopholes and Complex Tax Codes

[Dreadnaught]

Just harping/expanding on my usual complaint that tax code simplicity can be just as important as the actual rates in a tax code. In this case, cash-hungry New York State has started enforcing an administrative provision that allows it to collect sales tax if one of our many bagel shops slices a bagel or prepares it to be eaten in the store.

Oddly enough, sales tax is not collected if the bagel is not sliced or prepared to be eaten in the store.

I really do believe these weird loopholes is the folly of VAT taxes as well as a mere symbol of how excessive tax loopholes can dramatically raise business costs, enforcement costs and be a burden on everyone in the tax system.

NY POLITICS| AUGUST 24, 2010
Sliced Bagels, Taxes on Top

By JACOB GERSHMAN

What's the tax on a bagel? It depends how you slice it—or in the case of New York, if you slice it.

State tax officials, under orders from cash-strapped Albany to ramp up their audit and compliance efforts, have begun to enforce one of the more obscure distinctions within the state's sales tax law.

In New York, the sale of whole bagels isn't subject to sales tax. But the tax does apply to "sliced or prepared bagels (with cream cheese or other toppings)," according to the state Department of Taxation and Finance. And if the bagel is eaten in the store, even if it's never been touched by a knife, it's also taxed.

That was news to one New York bagel-store owner, who found out he was out of compliance with the policy this summer when the state audited his company.

Kenneth Greene, the owner of 33 Bruegger's Bagel franchises throughout New York, says the state demanded that he start charging taxes on all bagels, except for those that remain intact and are consumed off premises, and forced him to pay a "significant" sum in taxes that the state estimated he owed.

Mr. Greene says the extra charge, about eight cents a bagel, depending on the local rate, filled his customers with boiling rage. "They felt we were nickel-and-diming them. They thought we were charging them to slice a bagel," he said.

To clear things up, he posted signs at the cashier informing customers that it was Albany, not Bruegger's, to blame. "We apologize for this change and share in your frustration on this additional tax," the signs read.

It's unclear whether the state's crackdown will spread beyond Bruegger's, which operates nationally and in upstate New York.

"I hope they don't come after me for that," said Florence Wilpon, a founding owner of Ess-a-Bagel in Manhattan.

One source of confusion is that the rule isn't spelled out in the tax code. And while sliced bagels are subject to sales tax, a sliced loaf of bread at a bakery isn't, according to tax officials.

A spokesman for the tax department said the state "will provide additional guidance via our Web site and publications in the near future."

http://online.wsj.com/article/SB1000...463314628.html

[RandBlade]

That sounds very similar to VAT in the UK.

Raw food is an "essential" and has no VAT on it.
Cooked food is a "luxury" and has 17.5% VAT (20% VAT from Jan) on it.

Going shopping and taking food home is an "essential" and has no VAT on it.
Eating out is a "luxury" and has 17.5% VAT (20% VAT from Jan) on it.

Combined these come to sometimes some odd situations.

Go to Subway and order a ham sub with salad to take away and it'll be VAT-free (despite being prepared, its cold and taken away. Get it toasted or eat it in and VAT is chargeable. Go to Starbucks and buy a muffin and it'll have two prices on it, one for eating in and another for take away. When I was little I used to think shops were charging for the priviledge of eating in and found that rather mean. Go to Domino's and order a pizza and it will always be charged VAT as it was cooked, but a dessert may be VAT-free.

The rules are more complex than just that though as to which items are luxuries or essentials, leading to debates as to eg is a Kit-Kat a biscuit or chocolate? One has VAT the other doesn't.

[Ominous Gamer]

Subways in Florida suffer from the same tax problem. Toasted subs are taxed, cold subs are not

EDIT:
Its the same in the grocery stores, and it extends to food stamps as well. Cooked meals, something that Publix is really good at, do not qualify.

[Khendraja'aro]

It's even worse in Germany where some goods have a reduced VAT, some do not.

Which goods exactly? Well, you can determine that by rolling a dice, or so it seems. Drugs get 19%, bees 7%. Apples get 7%, apple juice 19%. Mineral water gets 19%, milk 7%. Side products from mollusks, platypusses (sp. pl?) and turtles get 7%. Horses, except for feral ones, get 7%, diapers get 19%. Mussels get 7%, oysters 19%. Salt gets 7%, saline solution gets 19%. Paintings and drawings get 7%, but only if they have been done completely manually.

Finally: A Hamburger eaten inside a McDonald's gets 19%, take away gets 7%.

[Dreadnaught]

Wow.

To take things a bit further, if you own a small business engaged in a certain activity, you can apply for tax credits.

[Flixy]

I think it's fairly simple over here: food is 6%, cultural stuff is 6%, there are some other exceptions but that's basically it. Whether it's at a restaurant, supermarket, hot, cold, prepared or not, food is always 6%. Drinks too, unless they have alcohol in them. That's not that hard to take into account, but when I had to do the tax filing for the bar at a festival, I couldn't tell how much we made exactly on beer and how much on sodas, just how much we made in total.

[Dreadnaught]

Sounds like the bagel places. Who the hell is going to track sliced bagels versus unsliced?

How did you figure out the tax burden for the bar?

[Flixy]

Applied the same ratio of alcoholic/nonalcoholic of what we bought on what we sold, margins were roughly the same. Tax services were fine with that, they tend to be very reasonable here.

Big difference with the bagels is that it are distinct products, in this case.

[Dreadnaught]

But did you pass along the tax to each customer on an order-by-order basis or did the bar eat the tax as a cost?

[wiggin]

There are ways to make relatively unoffensive VATs (as unoffensive as a VAT can be, that is) - generally they involve flat rules with zero (or nearly zero) exemptions. Then, to remove the effect of regressive taxation, lower income people get a credit of some sort against estimated VAT expenditures.

That being said, in general our tax code is overly complex and could use some serious house cleaning.

[earthJoker]

It's even worse in Germany where some goods have a reduced VAT, some do not.

Which goods exactly? Well, you can determine that by rolling a dice, or so it seems. Drugs get 19%, bees 7%. Apples get 7%, apple juice 19%. Mineral water gets 19%, milk 7%. Side products from mollusks, platypusses (sp. pl?) and turtles get 7%. Horses, except for feral ones, get 7%, diapers get 19%. Mussels get 7%, oysters 19%. Salt gets 7%, saline solution gets 19%. Paintings and drawings get 7%, but only if they have been done completely manually.

Finally: A Hamburger eaten inside a McDonald's gets 19%, take away gets 7%.

I didn't expected any thing else from the mighty Germans.
But we have the same problem on lower scale. Currently we have 3 types. 7.6% normal, 3.8% special for hotels, reduced 2.5% energy and goods for living (food).
The thing is, in a restaurant the normal rate is used (service) but if you take it out the reduced applies. So every-time you buy something at a take-away the ask you if you eat it there or take it with you.

[Hazir]

By law; consumer prices consist of the price including taxes due. The answer of your question follows from that definition; the consumer pays the tax.

[RandBlade]

But did you pass along the tax to each customer on an order-by-order basis or did the bar eat the tax as a cost?

VAT is part of the price in Europe, not added on afterwards. The customer always knows the real price they're paying.

If you're in a situation where VAT can be 0 or 17.5% here (eg eat it/take away) then both prices will be listed. Otherwise for normal goods and services the price including VAT is shown.

For electronics which are often a business expense, frequently both pre- and post-VAT prices are shown. This is because a company can reclaim the VAT they paid from the VAT they charged (which should be more if they've "Added Value" (why are they in business if they haven't)).

[Aimless]

Okay so basically the gumming doesn't want some people to eat out? Or is this just a case of them taking what they know they can take because people will still eat out, tax or no tax?

In Sweden it's 12% on food from grocery-stores and the like, as well as on take-way. And 25% on anything you eat out, some sort of "serving tax"

[Dreadnaught]

Stretching into another area, how would you like to pay $300 to run your blog in Philadelphia (if it has some AdSense ads). After all, you must pay the business privilege tax!

Posted on Tue, Aug. 24, 2010

Is Philly taxing bloggers?

By Robert Moran
Inquirer Staff Writer
Philadelphia was once again the subject of head-scratching and ridicule on Monday, this time with the "blog tax" controversy.

On BuzzFeed, a popular website for stories, photos, and video competing to go viral, "Philadelphia Blogger's License: $300" was in the running, in between videos of a bored cat having a birthday party and Lady Gaga dancing at a Kiss concert.

New York magazine's website weighed in, as did the Washington Post's. The New York Daily News had a story about "Cash-strapped Philly" resorting to a blog "tax."

So does Philadelphia have a blog tax?

The city says no.

It has a business-privilege license that is required of any business operating in the city. The license costs $50 a year or $300 for a lifetime license.

Well, some bloggers who make a few dollars from Web ads were informed recently that they had to obtain a license. Not because they were bloggers, the city says. But because they made money.

Something about small-time bloggers getting hit up for money by the government got a lot of blog writers and readers fired up.

"Unbelievably stupid," wrote a commenter on BuzzFeed. "Even if you look past the issues of free speech and excessive regulation, no city progresses economically by making its young, tech-savvy residents move away."

Philebrity, a local blog that makes money and has a business-privilege license, declared: "Philly brain drain is so drastic and wild that any sort of news story that runs anywhere about how the City, in an official capacity, discourages creativity or free speech feels like a punch in the face."

Anna Goldfarb, who runs Shmitten Kitten, a Philadelphia blog about relationships from the female perspective, said she hoped that "it doesn't discourage somebody from starting a blog."

Her blog has no ads, though she has made "beer money" from hosting a few social events through her blog, she said in an interview.

Considering the unknown number of blogs in the city, "it seems kind of hard to enforce," Goldfarb said.

How is the city finding blogs to go after?

First, the Internal Revenue Service shares tax information with the city. As part of Philadelphia's tax-amnesty program that ended in June, the city Revenue Department sent 30,000 letters notifying federal taxpayers that they may also have city tax liability.

Bloggers who reported blog income to the IRS, no matter how little, were flagged by the city.

Second, in response to questions from the arts community, the city provided outreach on what would be considered a business.

"There's often a blurry line when someone's passion becomes their profession," Mayor Nutter's spokesman Doug Oliver said.

A blog is not a business unless it starts selling ads or otherwise generating revenue, Oliver said.

"It is the same standard for any business operating in Philadelphia," Oliver said.

http://www.philly.com/inquirer/local...bloggers_.html

[EyeKhan]

I really do believe these weird loopholes is the folly of VAT taxes as well as a mere symbol of how excessive tax loopholes can dramatically raise business costs, enforcement costs and be a burden on everyone in the tax system.

I agree with you totally.

[Hazir]

Okay so basically the gumming doesn't want some people to eat out? Or is this just a case of them taking what they know they can take because people will still eat out, tax or no tax?

In Sweden it's 12% on food from grocery-stores and the like, as well as on take-way. And 25% on anything you eat out, some sort of "serving tax"

Sigh, the idea behind this is of course not that people shouldn't eat out, but that the people who can afford to eat out pay more taxes than those who can't afford to eat out. It's a re-distribution tool.

[Hazir]

I agree with you totally.

Interesting since he shows at every turn that he doesn't understand at all how VAT works. I think that if you ask the average business person in the EU about administrative burden you will find that the VAT ranks very low on the list of complaints.

[Ominous Gamer]

Stretching into another area, how would you like to pay $300 to run your blog in Philadelphia (if it has some AdSense ads). After all, you must pay the business privilege tax!

Lesson here seems to be to not claim your blog on your tax return

[EyeKhan]

Interesting since he shows at every turn that he doesn't understand at all how VAT works. I think that if you ask the average business person in the EU about administrative burden you will find that the VAT ranks very low on the list of complaints.

I'm more agreeing that complexity increases cost. Would you agree that a simpler tax system that is fair and sufficient to run an effective government is better than a very complex tax system that is also fair and sufficient to run an effective government?

In the US we have a very very complex tax system and that complexity appears to effectively make it unfair and these days its insufficient, apparently, to run an effective government. I believe if the complexity were reduced it could be made more fair and likely be more capable of providing sufficient funds. Unfortunately, (and incredibly, IMO) there are powerful forces in and outside the government that oppose both fairness and effective government and so a complex tax code suits their purposes just fine.

[Aimless]

Sigh, the idea behind this is of course not that people shouldn't eat out, but that the people who can afford to eat out pay more taxes than those who can't afford to eat out. It's a re-distribution tool.

I can buy that, although I have hard time figuring out exceptions such as take-away, pizza, and cold sandwiches

[RandBlade]

VAT is simpler even than PAYE.

Computer does it all for me. Is a good VAT-chargeable? If yes: Charge VAT. If no: Don't. Done.

Cold food (eg to take home and cook/eat) is a necessity, so is zero-rated.
Cooked food and eating out are luxuries (so charge VAT). That is the logic Minx. The oddities of being charged differently for the same product somewhere like Subway is just a consequence, its not the intention. Trying to do away with those oddities would probably make the tax code even more complex though!

[EyeKhan]

VAT is simpler even than PAYE.

Computer does it all for me. Is a good VAT-chargeable? If yes: Charge VAT. If no: Don't. Done.

Cold food (eg to take home and cook/eat) is a necessity, so is zero-rated.
Cooked food and eating out are luxuries (so charge VAT). That is the logic Minx. The oddities of being charged differently for the same product somewhere like Subway is just a consequence, its not the intention. Trying to do away with those oddities would probably make the tax code even more complex though!

Seems like Subway, whether you heat your sandwich or not, (I prefer mine toasted ) is "eating out."

[RandBlade]

Eating inside Subway is classed as "eating out" but taking it home then it is not. How would you define eating out better?

[Veldan Rath]

Eating inside Subway is classed as "eating out" but taking it home then it is not. How would you define eating out better?

So the tax is there cause they can afford the tax if they eat in Subway? (posted above) but magically they can't afford it if they go home, so thus evade the tax ,to eat it?

It's just a typical rationalized money grab by the tax man.

[RandBlade]

I think the tax definition is older than Subway stores.

The general logic is that eating in a restaurant is a different from getting food from the Supermarket. Subway's are small but big enough to cross the border between the two types. Again though, how would you define it better?

[Veldan Rath]

I wouldn't try.

Then again I wouldn't have a tiered taxation system on this either. It's a rationalized money grab by government that they can always get away with because it is such a small amount.

Edit: Haha! You used the word logic in a tax discussion!

[wiggin]

I think the real issue with complexity here is not that it's complex on the part of the of the final merchants (although it can be). Rather, the Byzantine rules require a large bureaucratic infrastructure to create, maintain, and enforce. Furthermore, large changes in effective tax rates for substantially similar products (e.g. bras of slightly different sizes; sandwiches packaged/sold one way vs. another) encourages evasion and behavior modification, which is rarely the point of the tax. Lastly, even if a computer automatically figures out how much tax to pay for a given transaction, the computers need to be programmed, and frequently updated (given the fairly common changes to tax code) - this is an expensive proposition. In fact, in supply chains there's an enormous paperwork burden that falls on industry. Sure, they may have an incentive to do the paperwork since each supplier effectively enforces the previous one in the chain, but even if they don't stoop to avoidance it's still a significant drain on resources.

[Ominous Gamer]

The general logic is that eating in a restaurant is a different from getting food from the Supermarket. Subway's are small but big enough to cross the border between the two types. Again though, how would you define it better?

i think it tries to draw a line in the preparation. I can go to the supermarket and buy hot, ready to eat, food and get taxed. I can buy the same food cold, and not get taxed.
Cooking is considered a service, thus its taxed.

[EyeKhan]

Eating inside Subway is classed as "eating out" but taking it home then it is not. How would you define eating out better?

I've always divided meals first in terms of:

A. what was prepared in my kitchen

vs.

B. what was prepared in a restaurant kitchen.

From there I would divide B into:

-B1. Restaurant food that I brought home to eat in my dining room (aka "carryout").

vs.

-B2. Restaurant food that I consumed in the restaurant's dining room. (aka "dine in")

In any case, if the restaurant kitchen is preparing my food, I think of it as eating out. You still pay the premium of having a separate commercial entity purchase the ingredients and assemble your meal, meaning you can "afford" the luxury of not using your own labor to prepare your food. Therefore you get taxed. Whether its warmed or not has nothing to do with it at all - Is that some sort of energy consumption tax?

My state charges a flat sales tax on all food bought from a restaurant but not food purchased in a grocery store. So if I buy a sandwhich at Subway I get hit with a flat 6% tax on the purchase regardless if its toasted, cold, eaten there or taken home. But, if I go to the local grocery store and I buy a pre-made sandwhich in the deli section, I will pay no sales tax on it.