Replace All Federal Taxes on Income with the Fair Tax Act , HR 25 and S 122

Is the Fair Tax due and collectable on "Endorsements"?

I was disussing the Fair Tax earlier this week. One person stated that ir realsy does not matter because the rich do not pay all the taxes they should As we were discussing it, the individual asked about the following.

There is a lot of compensation provided to actors, sports stars etc by various manufacturers. Examples would be clothing and shoes provided to professional sport stars or vehicles for personal use by the same individuals. The cost of these items under the current income tax system is a tax write off. The recepients may not report this benefit as "income" and therefore there is no income tax revenue collected. (big tax avoidance area)

Does the Fair Tax apply to the value of the goods provided for the direct use of the individual (retail) and would be paid by the manufacturer?

This was the first time anyone had brought up this. As I thiought about it later, it would provide a huge source of tax revenue. Tiger Woods receives two SUV's from General Motors for his personal use. Would General Motors be required to pay the Fair Tax based upon the value of the automobile provided to Tiger?

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Permalink Reply by Sean Fagan on December 11, 2009 at 9:23pm

Cheifcook,

I have to admit that this is a rather thought provoking question. However, I must say that I am surprised that you are not able to answer this question for yourself since I think you know the FairTax better than most. Perhaps my thinking on this is too simplistic, but I think that since the FairTax is designed to collect taxes at the point of sale (at the cash register), then I would have to think that the transfer of ownership does not necessarily constitute a "sale" and would therefore not be taxable.

This would seem to suggest that there is a "loophole" in the Fairtax, but I would submit a couple of points to consider. First, under the FairTax, the cost of these items would no longer be a tax write off (no income tax, no deductions); and second, I believe that under the current tax code these items are reportable as "income" by the recipients. Whether they report them or not is questionable.

I would have to think that if there is no value to giving things away in terms of a write-off, then less "things" will be given away. The recipients of the the "gifts" would not have a method to report them (again, no income tax), but if they are not reporting them now then what would be the difference?

By the way, how's everything going with Central Florida?

My 3 cents

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Permalink Reply by chiefcook on December 12, 2009 at 8:46am

The area of the Fair Tax that addresses this is

`SEC. 103. RULES RELATING TO COLLECTION AND REMITTANCE OF TAX.
`(d) Barter Transactions- If gross payment for taxable property or services is made in other than money, then the person responsible for collecting and remitting the tax shall remit the tax to the sales tax administering authority in money as if gross payment had been made in money at the tax inclusive fair market value of the taxable property or services purchased.

In the vast majority of barter transactions they are very small between two individuals and would be very difficult to catch. However, with the endorstments of very well known actors or professional sports persons, it would be very well known and easily tracted by the taxing authority. These individuals are providing a service by using their popularity to help the manufacturer sell their products to the public.

Think of how many movie stars wear a designer dress for the Oscars (new goods) that they do not buy. All the clothing worn on TV by the news anchors on major media are a form of compensation they do not pay for by cash. It is still new goods used bu the retail customer.

Maybe this is something that needs to be considered as a big "under the table" tax loophole that the Fair Tax will generate a lot of revenue to the Feds.

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Permalink Reply by Joe McCune on December 12, 2009 at 9:02pm

If I were in the position of a Tiger Woods (before this scandal hit), and the FairTax were passed, I would immediately incorporate myself, therefore all transactions would be business to business and no taxes collected. It could also be interpreted that having a PGA card would put him in the same category as a licensed plumber, and would only have to remit the FairTax when being paid for some service. Still an interesting question.

All of the above is just my opinion, I have not really researched the subject.

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Permalink Reply by Kerry D. Bowers on December 12, 2009 at 11:52pm

Greetings,

The situation decribed would be liable to H.R. 25 sec 901 "Addtional Matters" paragraphs e and f (page 104, line 16-25 and page 105 line 1-4). In such case where the argument may occur that the vehicle would be for "business use", then to completely avoid the sales tax records must be kept indicating the mileage and for what purpose and, where the mileage is more than 5% for personal use, then the mixed use ratio (business to personal consumption) may be applied to assess the appropriate amount of tax. Also, unpaid taxes while the vehicle was used for business will be collected on thefair market value of the vehicle when it is sold for personal consumption.

Kerry Bowers
Co-District Director
Florida FairTax Educational Association

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Permalink Reply by Jim Bennett on December 13, 2009 at 5:14pm

There would be no FairTax due on an endorsement because an endorsement is simply a "sale" of a celebrity's name for compensation to the owner of a brand. When Tiger Woods (to name a celebrity in the news for better or worse) sells a license Nike to put its swoosh on Tiger's hat, in return for money, Tiger can take an intermediate sales credit. The end product is the sneaker sold at retail.
~Jim Bennett

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Permalink Reply by Tony on December 20, 2009 at 6:44pm

Here is my opinion, and I think that Walt has it down.

They're giving an item to someone...but its not a gift....it's part of an endorsement.
So if they give a $1,000 pair of shoes to Tiger Woods then the company giving them would be liable for the 23% FairTax.

But then would that not be considered payment? They're paying for their endorsement and the shoes are part of the payment? So would that not be income?!?!?

Oh Sean you weren't kidding....talk about thought provoking.

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Permalink Reply by Steve Bang on December 22, 2009 at 1:40pm

Can we get a ruling on this from Ken Hoagland or John Linder?

Thanks
Steve

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Permalink Reply by Dan Hunt on December 22, 2009 at 2:37pm

Would this scenario fall under `SEC. 705. MIXED USE PROPERTY?

(a) Mixed Use Property or Service-

`(1) MIXED USE PROPERTY OR SERVICE DEFINED- For purposes of this section, the term `mixed use property or service' is a taxable property or taxable service used for both taxable use or consumption and for a purpose that would not be subject to tax pursuant to section 102(a)(1).

`(2) TAXABLE THRESHOLD- Mixed use property or service shall be subject to tax notwithstanding section 102(a)(1) unless such property or service is used more than 95 percent for purposes that would give rise to an exemption pursuant to section 102(a)(1) during each calendar year (or portions thereof) it is owned.

`(3) MIXED USE PROPERTY OR SERVICES CREDIT- A person registered pursuant to section 502 is entitled to a business use conversion credit (pursuant to section 202) equal to the product of--

`(A) the mixed use property amount; and

`(B) the business use ratio; and

`(C) the rate of tax imposed by section 101.

`(4) MIXED USE PROPERTY AMOUNT- The mixed use property amount for each month (or fraction thereof) in which the property was owned shall be--

`(A) one-three-hundred-sixtieth of the gross payments for real property for 360 months or until the property is sold;

`(B) one-eighty-fourth of the gross payments for tangible personal property for 84 months or until the property is sold;

`(C) one-sixtieth of the gross payments for vehicles for 60 months or until the property is sold; or

`(D) for other types of taxable property or services, a reasonable amount or in accordance with regulations prescribed by the Secretary.

`(5) BUSINESS USE RATIO- For purposes of this section, the term `business use ratio' means the ratio of business use to total use for a particular calendar month (or portion thereof if the property was owned for only part of said calendar month). For vehicles, the business use ratio will be the ratio of business purpose miles to total miles in a particular calendar month. For real property, the business use ratio is the ratio of floor space used primarily for business purposes to total floor space in a particular calendar month. For tangible personal property (except for vehicles), the business use ratio is the ratio of total time used for business purposes to total time used in a particular calendar year. For other property or services, the business ratio shall be calculated using a reasonable method. Reasonable records must be maintained to support a person's business use of the mixed use property or service.

`(b) Timing of Business Use Conversion Credit Arising Out of Ownership of Mixed Use Property- A person entitled to a credit pursuant to subsection (a)(3) arising out of the ownership of mixed use property must account for the mixed use on a calendar year basis, and may file for the credit with respect to mixed use property in any month following the calendar year giving rise to the credit.

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Permalink Reply by chiefcook on December 22, 2009 at 11:09pm

Well, now we have three sections that address some possibilities that can be considered.

SEC. 103. RULES RELATING TO COLLECTION AND REMITTANCE OF TAX.
(d) Barter Transactions-

SEC. 705. MIXED USE PROPERTY?
(a) Mixed Use Property or Service-

SEC 901 "Addtional Matters"
paragraphs e and f

Are the products supplied to the celebrity used for both business and personal use?

How frequently does Tiger drive the auto to the golf events? Does he leave it home and only uses it around town?

Are the dresses worn at only one event? If donated to charity for auction, does the Fair Tax get collected as it then becomes sold "at retail for the first time?"

I do believe this is an interesting discussion and would like to know the answer as to when and from whom the Fair Tax would be collected. Would this be a source for a large amount of tax dollars collected under the Fair Tax? Is it an example of one of the tax loopholes that will be closed by eliminating the Income Tax?

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Permalink Reply by Tom Goldie on January 1, 2010 at 7:11pm

My thought would be that compensation would be income and not taxed until they spent it on a new house, a yacht, or a Bentley.

The vehicle GM bought would not be for business use and would be taxed when they bought it.

I think it's simpler to think of it as a CONSUMPTION tax. Because income is not taxed, neither is the endorsement. When GM buys a car for Tiger to USE, then it IS taxed.

Of course, this is my layman's interpretation of the SPIRIT of the law.

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Permalink Reply by chiefcook on January 4, 2010 at 8:27am

If Tiger were paid in cash/check for his services, that would be income. Then when he buys the car, it would be CONSUMPTION and subject to the Fair Tax. We all would agree on this. Under "barter" conditions, GM just gives the auto to Tiger in lieu of cash. It is also a taxable transaction. GM would be held responsible for paying the Fair Tax to the local state where the auto is registered at the retail level. Depending upon the state laws, (in FL) Tiger would have to pay the FL state sales tax and registration fees.

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Permalink Reply by Jim Bennett on January 4, 2010 at 3:44pm

GM would be better off under the FairTax to pay cash. Since Tiger is "selling" his endorsement to GM, and not to a consumer, Tiger can take an intermediate sales credit on the transaction. There is, of course, no tax on the income to Tiger from the endorsement because that tax disappears under the FairTax.

If GM, instead, were to give Tiger a car - and not cash, the transaction could be viewed by the state sales tax authority as proxy buying, and tax it.