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

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 chiefcook on January 4, 2010 at 10:20pm

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.

GM would be responsible to pay the Fair Tax to the taxing authority based upon the above. Tiger would not be using the auto for business use as he flies to the events. The use of a vehicle for a specific outing could be considered as B2B transaction.

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Permalink Reply by Jim Bennett on January 7, 2010 at 8:02am

I wouldn't read Section 103 that way because barter is only taxable if one of the parties is a consumer. The operative language appears at the exception to tax liability in Section 102(1)(a), where the property is purchased for use in a business.

Barter is a well-known concept in today's income tax code. If a doctor and a lawyer exchange services, i.e., the doctor gives the lawyer a physical, and the lawyer writes the doctor a will, both transactions are taxable as income. Each has received the value of the other's services. It is no different under the FairTax. If a carpenter fixes a farmer's porch, and the farmer gives the carpenter a bushel of corn, each has received taxable property or services.

The transaction here is that GM is purchasing Tiger's endorsement. That transaction is purely business-to-business. If GM paid cash, there clearly would be no tax due. The red herring is that GM is paying Tiger with a car instead of cash.

Now I suppose the state sales tax authority could impute a consumer purchase by Tiger by arguing that Tiger engaged in two transactions instead of one. The first transaction was payment to Tiger of the fair market value of the car for his endorsement. The second transaction was Tiger's acquisition of a car for personal use. The tax authority might look to the proxy buying provision of Section 901(3).

The tax authority would argue, under this section, that the registered person, GM, provided Tiger with the car as a gift, prize, reward, or as remuneration for employment, and such taxable property or services were not previously subject to tax pursuant to section 101. Tiger would argue that the car was not remuneration for "employment" because he was an independent contractor.

The tax authority might argue, alternatively, that independently of the proxy buying provision, Tiger acquired the car for personal use, and tax is due on its fair market value.

The matter would wind up in Tax Court, and it would be difficult to predict the outcome.

~Jim

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Permalink Reply by Tom Goldie on January 7, 2010 at 8:43am

Interesting angle: A consumer to non-consumer barter. So if Tiger is going to give GM $100,000 in endorsements, then GM better give him $130,000 worth of car(s), so when Tiger -- as the consumer of the car -- pays the FairTax due, he comes out even.