Chapter 1 Taxes and Taxing Jurisdictions
Questions and Problems for Discussion
1. Tax payments differ from government fines and penalties because they aren‘t intended to deter
or punish unacceptable behavior. Tax payments differ from fees or user charges because they
don‘t entitle the payer to a specific government good or service, such as a postage stamp or a
driver‘s license. Tax payments also differ from fees or user charges because they are
compulsory.
2. This payment has characteristics of a tax, a penalty, and a user fee. The compulsory payment is
not specifically punitive but does apply selectively to those companies most likely responsible for
the polluted condition of Green River. However, these same companies may be the entities that
benefit most from the environmental clean-up.
3. This payment more closely resembles a fee for a government service than a transaction-based
tax because the transaction occurs between a private party and the jurisdiction itself, rather than
between private parties engaging in a market transaction. The payment also entitles the payer to
a specific benefit (the right to marry under law).
4. To the extent that the decline in exterior maintenance reduces the value of Mr. Powell‘s
apartment complex, he bears the incidence of the increased property tax. To the extent that the
decline reduces the value of adjoining properties or makes the neighborhood less attractive, the
owners of the adjoining properties and the neighborhood residents share the incidence of the tax
increase.
5. People who don‘t directly use public schools (such as Mr. and Mrs. Ahern or people who don‘t
have children) indirectly benefit from a public education system for the general population.
Arguably, public education contributes to a skilled workforce and improves the cultural and social
environment in which Mr. and Mrs. Ahern live. Based on this argument, Mr. and Mrs. Ahern
should not be exempt from the local property tax.
6. The consumers who pay the same price for a smaller bar of soap of lesser quality bear the
incidence of the new gross receipts tax.
7. Real property can‘t be hidden or moved, and its ownership (legal title) is a matter of public
record. In contrast, personal property is mobile and may be easily concealed. Moreover,
jurisdictions may not have an effective means to discover or trace ownership of personal
property.
8. Arguably, private golf courses beautify the locality and are environmentally more desirable than
other commercial activities. They also may require more acreage than other businesses and,
therefore, would be at a competitive disadvantage without a preferential real property tax rate.
9. Many jurisdictions that levy property taxes provide an exemption for public institutions, such as
state universities or private colleges. If University K is entitled to such an exemption, every
commercial building or residence acquired by the University reduces the local jurisdiction‘s
property tax base.
10. Excise taxes are imposed on a much narrower range of consumer goods and services than
sales taxes. Consequently, people can more readily avoid purchasing the specific good or
service subject to excise tax.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
1-1
,11. The tax increase may have reduced the aggregate demand for consumer goods and,
consequently, municipal residents are buying fewer goods. A second possibility is that municipal
residents are traveling to other jurisdictions with lower tax rates or making more purchases
through mail order catalogs or on-line.
12. From a political perspective, liquor and cigarettes sales make an excellent tax base because
consumption of the two products is purely discretionary, and any decline in consumption
because of the tax is socially desirable. From an economic perspective, these sales are a good
tax base because the demand for liquor and cigarettes is relatively price inelastic. In other
words, people who drink and smoke on a regular basis buy these products regardless of a heavy
excise tax.
13. The federal income tax has the broader base. The federal payroll tax is imposed on wages,
salaries, and other forms of compensation earned by employees. The federal income tax is
imposed on all types of compensation as well as net business profit, investment income, and
any other income item from whatever source derived.
14. A property tax is a periodic (usually annual) tax levied on the ownership of property and based
on the value of the property on a particular assessment date. A transfer tax is a transaction-
based tax levied on the transfer of property from one party to another. A transfer tax is based on
the value of the property at date of transfer.
15. If the federal government could ―piggy back‖ a national sales tax on existing state sales tax
collection systems, the federal government could avoid creating a new federal agency for
collecting the tax. In contrast, the federal government would have to create a new collection
system for a national VAT. However, a national VAT would be less likely to cause jurisdictional
conflict between the federal government and the states because states don‘t depend on VATs
as a source of revenue.
16. The Internal Revenue Code is federal statutory law, enacted by Congress and signed by the
President. Technically, Treasury regulations only interpret and explain the statute and aren‘t
laws in their own right. Thus, regulations are less authoritative than the Code itself. However,
because Congress authorized the Treasury to write regulations, they are the government‘s
official interpretation of statutory law. Practically, the regulations carry considerable authoritative
weight.
Application Problems
1. a. The statement of facts identifies three taxpayers: Mr. Josh Kenney, JK Services, and JK
Realty.
b. The government of the locality in which Mr. Kenney resides, the state government of
Vermont, and the U.S. government have jurisdiction to tax Mr. Kenney. The local
governments of the four counties in which JK Services conducts business, the state
government of Vermont, and the U.S. government have jurisdiction to tax JK Services. The
city of Boston, the state government of Massachusetts, and the U.S. government have
jurisdiction to tax JK Realty.
2. a. The United States has jurisdiction to tax Mrs. May because she is a permanent resident.
b. The United States has jurisdiction to tax Mrs. May only on the U.S. source rental income
generated by the Manhattan real estate.
c. The United States does not have jurisdiction to tax Mrs. May.
d. The United States has jurisdiction to tax Mrs. May because she is a U.S. citizen.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
1-2
,3. a. The United States has jurisdiction to tax Mr. Tompkin because he is a U.S citizen.
b. The United States has jurisdiction to tax Mr. Tompkin only on the U.S. source rental income
generated by the Buffalo real estate.
c. The United States has jurisdiction to tax Mr. Tompkin because he is a permanent resident.
d. The United States has jurisdiction to tax Mr. Tompkin on his share of the U.S. source
business income generated by Sophic Partnership.
4. State A:
Volume of sales before rate increase $800,000,000
Original tax rate .05
Revenue before rate increase $40,000,000
Volume of sales after rate increase $710,000,000
New tax rate .06
Revenue after rate increase $42,600,000
Additional revenue ($42,600,000 $40,000,000) $2,600,000
State Z:
Volume of sales added to tax base $50,000,000
Tax rate .05
Additional revenue $2,500,000
5. a. The property tax is $8,300 ($415,000 2%).
b. The property tax is $19,000 ([$500,000 2%] + [$225,000 4%]).
6. a. The property tax is $39,000 ($1.3 million 3%).
b. The property tax is $85,000 ([$2 million 3%] + [$2.5 million 1%]).
7. Increase in County G‘s aggregate assessed property tax value $23,000,000
Assessed value of Lexon‘s new facility (20,000,000)
Net increase in County G‘s tax base $3,000,000
Tax rate .04
Net effect on County G‘s current year revenue $120,000
8. a. Value of property purchased in State K $600,000
Use tax rate in State H .06
Pre credit use tax $36,000
Sales tax paid to State K (18,000)
Use tax owed to State H $18,000
b. Value of property purchased in State L $750,000
Use tax rate in State H .06
Pre credit use tax $45,000
Sales tax paid to State L (48,750)
Use tax owed to State H -0-
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
1-3
, 9. a. Value of property purchased in State B $90,000
Use tax rate in State V .05
Pre credit use tax $4,500
Sales tax paid to State B (5,400)
Use tax owed to State V -0-
b. Value of property purchased in State D $200,000
Use tax rate in State V .05
Pre credit use tax $10,000
Sales tax paid to State D (7,000)
Use tax owed to State V $3,000
10. a. Mrs. Palencia owes $658 Rhode Island use tax ($9,400 7%).
b. Mrs. Palencia owes no Rhode Island use tax because her $823 New York sales tax ($9,400
8.75%) exceeds $658.
c. Mrs. Palencia owes $188 Rhode Island use tax ($658 – $470 credit for Wisconsin sales tax
[$9,400 5%]).
11. a. Ms. Pike owes $1,450 California use tax ($20,000 7.25%).
b. Ms. Pike owes $425 California use tax ($1,450 – $1,025 credit for New Mexico sales tax
[$20,000 5.125%]).
12. a. State R residents who purchase property out-of-state (i.e., through the mail) but use and
consume the property in State R owe the 6 percent use tax.
b. The fact that Correll must collect the State R use tax does not affect the legal liability of
State R residents to pay the tax. However, very few people actually pay a self-assessed use
tax. Thus, State R might collect as much as $1,080,000 additional revenue (6 percent of $18
million sales to State R customers) if Correll was required to collect use tax at point of sale
and remit the tax to State R.
13. a. Mr. and Mrs. Ruiz aren‘t required to pay sales tax on the purchase of inventory goods
because they aren‘t the final consumers of the goods. The hardware store‘s retail customers
must pay the sales tax when they purchase goods. Mr. and Mrs. Ruiz are required to collect
this tax at point of sale.
b. Mr. and Mrs. Ruiz should time their purchases to minimize their inventory on hand as of
December 31 of each year, thereby minimizing the book value on which the personal
property tax is based.
14. Querrey Inc.:
Sales revenue ($9 12.4 million units) $111,600,000
Cost of sales ($6 12.4 million units) (74,400,000)
Value added by Querrey Inc. $37,200,000
Tax rate .03
VAT $1,116,000
Ronno Inc.:
Sales revenue ($10 12.4 million units) $124,000,000
Material cost of sales ($9 12.4 million units) (111,600,000)
Value added by Ronno Inc. $12,400,000
Tax rate .03
VAT $372,000
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
1-4
Questions and Problems for Discussion
1. Tax payments differ from government fines and penalties because they aren‘t intended to deter
or punish unacceptable behavior. Tax payments differ from fees or user charges because they
don‘t entitle the payer to a specific government good or service, such as a postage stamp or a
driver‘s license. Tax payments also differ from fees or user charges because they are
compulsory.
2. This payment has characteristics of a tax, a penalty, and a user fee. The compulsory payment is
not specifically punitive but does apply selectively to those companies most likely responsible for
the polluted condition of Green River. However, these same companies may be the entities that
benefit most from the environmental clean-up.
3. This payment more closely resembles a fee for a government service than a transaction-based
tax because the transaction occurs between a private party and the jurisdiction itself, rather than
between private parties engaging in a market transaction. The payment also entitles the payer to
a specific benefit (the right to marry under law).
4. To the extent that the decline in exterior maintenance reduces the value of Mr. Powell‘s
apartment complex, he bears the incidence of the increased property tax. To the extent that the
decline reduces the value of adjoining properties or makes the neighborhood less attractive, the
owners of the adjoining properties and the neighborhood residents share the incidence of the tax
increase.
5. People who don‘t directly use public schools (such as Mr. and Mrs. Ahern or people who don‘t
have children) indirectly benefit from a public education system for the general population.
Arguably, public education contributes to a skilled workforce and improves the cultural and social
environment in which Mr. and Mrs. Ahern live. Based on this argument, Mr. and Mrs. Ahern
should not be exempt from the local property tax.
6. The consumers who pay the same price for a smaller bar of soap of lesser quality bear the
incidence of the new gross receipts tax.
7. Real property can‘t be hidden or moved, and its ownership (legal title) is a matter of public
record. In contrast, personal property is mobile and may be easily concealed. Moreover,
jurisdictions may not have an effective means to discover or trace ownership of personal
property.
8. Arguably, private golf courses beautify the locality and are environmentally more desirable than
other commercial activities. They also may require more acreage than other businesses and,
therefore, would be at a competitive disadvantage without a preferential real property tax rate.
9. Many jurisdictions that levy property taxes provide an exemption for public institutions, such as
state universities or private colleges. If University K is entitled to such an exemption, every
commercial building or residence acquired by the University reduces the local jurisdiction‘s
property tax base.
10. Excise taxes are imposed on a much narrower range of consumer goods and services than
sales taxes. Consequently, people can more readily avoid purchasing the specific good or
service subject to excise tax.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
1-1
,11. The tax increase may have reduced the aggregate demand for consumer goods and,
consequently, municipal residents are buying fewer goods. A second possibility is that municipal
residents are traveling to other jurisdictions with lower tax rates or making more purchases
through mail order catalogs or on-line.
12. From a political perspective, liquor and cigarettes sales make an excellent tax base because
consumption of the two products is purely discretionary, and any decline in consumption
because of the tax is socially desirable. From an economic perspective, these sales are a good
tax base because the demand for liquor and cigarettes is relatively price inelastic. In other
words, people who drink and smoke on a regular basis buy these products regardless of a heavy
excise tax.
13. The federal income tax has the broader base. The federal payroll tax is imposed on wages,
salaries, and other forms of compensation earned by employees. The federal income tax is
imposed on all types of compensation as well as net business profit, investment income, and
any other income item from whatever source derived.
14. A property tax is a periodic (usually annual) tax levied on the ownership of property and based
on the value of the property on a particular assessment date. A transfer tax is a transaction-
based tax levied on the transfer of property from one party to another. A transfer tax is based on
the value of the property at date of transfer.
15. If the federal government could ―piggy back‖ a national sales tax on existing state sales tax
collection systems, the federal government could avoid creating a new federal agency for
collecting the tax. In contrast, the federal government would have to create a new collection
system for a national VAT. However, a national VAT would be less likely to cause jurisdictional
conflict between the federal government and the states because states don‘t depend on VATs
as a source of revenue.
16. The Internal Revenue Code is federal statutory law, enacted by Congress and signed by the
President. Technically, Treasury regulations only interpret and explain the statute and aren‘t
laws in their own right. Thus, regulations are less authoritative than the Code itself. However,
because Congress authorized the Treasury to write regulations, they are the government‘s
official interpretation of statutory law. Practically, the regulations carry considerable authoritative
weight.
Application Problems
1. a. The statement of facts identifies three taxpayers: Mr. Josh Kenney, JK Services, and JK
Realty.
b. The government of the locality in which Mr. Kenney resides, the state government of
Vermont, and the U.S. government have jurisdiction to tax Mr. Kenney. The local
governments of the four counties in which JK Services conducts business, the state
government of Vermont, and the U.S. government have jurisdiction to tax JK Services. The
city of Boston, the state government of Massachusetts, and the U.S. government have
jurisdiction to tax JK Realty.
2. a. The United States has jurisdiction to tax Mrs. May because she is a permanent resident.
b. The United States has jurisdiction to tax Mrs. May only on the U.S. source rental income
generated by the Manhattan real estate.
c. The United States does not have jurisdiction to tax Mrs. May.
d. The United States has jurisdiction to tax Mrs. May because she is a U.S. citizen.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
1-2
,3. a. The United States has jurisdiction to tax Mr. Tompkin because he is a U.S citizen.
b. The United States has jurisdiction to tax Mr. Tompkin only on the U.S. source rental income
generated by the Buffalo real estate.
c. The United States has jurisdiction to tax Mr. Tompkin because he is a permanent resident.
d. The United States has jurisdiction to tax Mr. Tompkin on his share of the U.S. source
business income generated by Sophic Partnership.
4. State A:
Volume of sales before rate increase $800,000,000
Original tax rate .05
Revenue before rate increase $40,000,000
Volume of sales after rate increase $710,000,000
New tax rate .06
Revenue after rate increase $42,600,000
Additional revenue ($42,600,000 $40,000,000) $2,600,000
State Z:
Volume of sales added to tax base $50,000,000
Tax rate .05
Additional revenue $2,500,000
5. a. The property tax is $8,300 ($415,000 2%).
b. The property tax is $19,000 ([$500,000 2%] + [$225,000 4%]).
6. a. The property tax is $39,000 ($1.3 million 3%).
b. The property tax is $85,000 ([$2 million 3%] + [$2.5 million 1%]).
7. Increase in County G‘s aggregate assessed property tax value $23,000,000
Assessed value of Lexon‘s new facility (20,000,000)
Net increase in County G‘s tax base $3,000,000
Tax rate .04
Net effect on County G‘s current year revenue $120,000
8. a. Value of property purchased in State K $600,000
Use tax rate in State H .06
Pre credit use tax $36,000
Sales tax paid to State K (18,000)
Use tax owed to State H $18,000
b. Value of property purchased in State L $750,000
Use tax rate in State H .06
Pre credit use tax $45,000
Sales tax paid to State L (48,750)
Use tax owed to State H -0-
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
1-3
, 9. a. Value of property purchased in State B $90,000
Use tax rate in State V .05
Pre credit use tax $4,500
Sales tax paid to State B (5,400)
Use tax owed to State V -0-
b. Value of property purchased in State D $200,000
Use tax rate in State V .05
Pre credit use tax $10,000
Sales tax paid to State D (7,000)
Use tax owed to State V $3,000
10. a. Mrs. Palencia owes $658 Rhode Island use tax ($9,400 7%).
b. Mrs. Palencia owes no Rhode Island use tax because her $823 New York sales tax ($9,400
8.75%) exceeds $658.
c. Mrs. Palencia owes $188 Rhode Island use tax ($658 – $470 credit for Wisconsin sales tax
[$9,400 5%]).
11. a. Ms. Pike owes $1,450 California use tax ($20,000 7.25%).
b. Ms. Pike owes $425 California use tax ($1,450 – $1,025 credit for New Mexico sales tax
[$20,000 5.125%]).
12. a. State R residents who purchase property out-of-state (i.e., through the mail) but use and
consume the property in State R owe the 6 percent use tax.
b. The fact that Correll must collect the State R use tax does not affect the legal liability of
State R residents to pay the tax. However, very few people actually pay a self-assessed use
tax. Thus, State R might collect as much as $1,080,000 additional revenue (6 percent of $18
million sales to State R customers) if Correll was required to collect use tax at point of sale
and remit the tax to State R.
13. a. Mr. and Mrs. Ruiz aren‘t required to pay sales tax on the purchase of inventory goods
because they aren‘t the final consumers of the goods. The hardware store‘s retail customers
must pay the sales tax when they purchase goods. Mr. and Mrs. Ruiz are required to collect
this tax at point of sale.
b. Mr. and Mrs. Ruiz should time their purchases to minimize their inventory on hand as of
December 31 of each year, thereby minimizing the book value on which the personal
property tax is based.
14. Querrey Inc.:
Sales revenue ($9 12.4 million units) $111,600,000
Cost of sales ($6 12.4 million units) (74,400,000)
Value added by Querrey Inc. $37,200,000
Tax rate .03
VAT $1,116,000
Ronno Inc.:
Sales revenue ($10 12.4 million units) $124,000,000
Material cost of sales ($9 12.4 million units) (111,600,000)
Value added by Ronno Inc. $12,400,000
Tax rate .03
VAT $372,000
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
1-4
