The Fair Tax Act, Part XXX
Wrapping up Section 501…
`(f) Determination of Report Filing Date- A report filed pursuant to subsection (a) shall be deemed filed when–
`(1) deposited in the United States mail, postage prepaid, addressed to the sales tax administering authority,
`(2) delivered and accepted at the offices of the sales tax administering authority,
`(3) provided to a designated commercial private courier service for delivery within 2 days to the sales tax administering authority at the address of the sales tax administering authority, or
`(4) by other means permitted by the Secretary.
This locks down the timing of when tax reports are actually filed. Legal rules. Blah.
`(g) Security Requirements- A large seller (within the meaning of subsection (e)(3)) shall be required to provide security in an amount equal to the greater of $100,000 or one and one-half times the seller’s average monthly tax liability during the previous 6 calendar months. Security may be a cash bond, a bond from a surety company approved by the Secretary, a certificate of deposit, or a State or United States Treasury bond. A bond qualifying under this subsection must be a continuing instrument for each calendar year (or portion thereof) that the bond is in effect. The bond must remain in effect until the surety or sureties are released and discharged. Failure to provide security in accordance with this section shall result in revocation of the seller’s section 502 registration. If a person who has provided security pursuant to this subsection–
`(1) fails to pay an amount indicated in a final notice of amount due under this subtitle (within the meaning of section 605(d)),
`(2) no Taxpayer Assistance Order is in effect relating to the amount due,
`(3) either the time for filing an appeal pursuant to section 604 has passed or the appeal was denied, and
`(4) the amount due is not being litigated in any judicial forum,
then the security or part of the security, as the case may be, may be forfeited in favor of the Secretary to the extent of such tax due (plus interest if any).
A large seller has to maintain a $100,000 (or perhaps more depending on how much business they do) security in order to act as insurance on their tax payments. The business should easily have this much money to invest in such a bond if it is selling this much stuff (it amounts to no more than 150% of their taxes for an average month). The only weird bit I could see is if your sales were growing you might need to increase the bond amount sometimes. It might simply be wise to keep an extra-large bond, just in case. In any event, this is invested money, and shouldn’t economically harm the business, although it might not be as useful as other kinds of investments.
`(h) Rewards Program- The Secretary is authorized to maintain a program of awards wherein individuals that assist the Secretary or sales tax administering authorities in discovering or prosecuting tax fraud may be remunerated.
A rewards program would be used to help expose tax fraud in the marketplace.
`(i) Cross Reference- For interest due on taxes remitted late, see section 6601.
That’s all for monthly reports/payments. Next time we’ll cover registration.
Whoa up, James,
I don’t agree that you are right to downplay the security bond requirement. A large seller is one who collects $100,000 or more in taxes each year. A “minimum” large seller therefore does around $36,000 in retail sales per month. I’m not a business owner, but having to stuff $100,000 cash into a bond of some sort seems to me to be quite a burden for a business with that level of cash flow.
I’m also curious about why the federal government is demanding a surety bond from retailers when the retailers simply send the weekly tax funds to their state administrator. Perhaps it should have been up to the states to establish the security requirements?? (Missouri doesn’t seem to require a bond- they just accelerate the payment schedules for larger sellers in order to minimize losses due to possible fraud.) Notice, there is no security bond required of the states. That would have been un- constitutional, I believe.
I sure hope there are some business owners reading this blog–I’d like to hear their views.
James, Regarding the Rewards Program—Oh swell, we’ll all be ratting each other out??? Except that I can’t think of a scenario where an individual could ever know if a neighbor or retailer was potentially committing fraud. How would one know if your neighbors prebate check was the right amount? How would one know if the retailer sent off the right amount of tax to the state administrator?? Please tell me just what this rewards program is really all about. I think it’s just window dressing–looks and sounds good, but it really makes no sense to me!
Actually it’s $100,000 in any particular MONTH in the past year.
And a rewards program is nothing new for any agency enforcing laws. Local lawmakers do the same for business permits, health code violations, even evading traffic tickets. I think the rewards program is nothing special other than a way to help the Treasury Dept. to find out if tax evasion is happening on a small scale.
If I did $100,000 of sales in a month, I would more than likely have at LEAST that much in capital saved up to maintain an annuity of that size. And again, it’s invested money. If used as a bond, it will mature and you can pocket the interest when you get your new one. What’s so bad about that?
Oops!, you are right. $450,000 in sales per month is indeed a large seller.
I’d still like to hear about a case where a rewards program might work. The only possible one I can think of is a bookkeeper for a business somehow figures out that the owner isn’t submitting the correct amount of tax? So, the bookkeeper turns the owner in, gets the reward and loses the job? Such a deal!
I’m not a business owner, but I can’t help but think that expanding the business or adding inventory would be far preferable to socking that amount of cash in a surety bond. Where are the business owners when we need them?
Well I think if you are in the Big Business Camp, the trade of having no Federal tax on profits or business expenses would so far outweigh the cost of providing a security bond that it’s a no-brainer, but that’s just me.
The rewards program may or may not work. It might not even get established (it isn’t by default). It’s in the bill sort of as a ‘just in case’ measure I think.
I think y’all are imagining the bond in the wrong way. A surety bond isn’t like a treasury bond where you have cash sitting around waiting for a problem to arise. It’s effectively an insurance product. I’m sure there would be a regulation enacted to specify some basic terms for such bonds (e.g. discovery periods, who gets paid by the surety company, what is a recoverable damage, etc.).
The analog is one that’s near and dear to my heart… I work in ERISA, and ERISA benefit plans are required to maintain a fidelity bond in the amount of 10% of the plan assets (up to $500,000) that are “handled” by fiduciaries during the plan year. The bond must insure against fraud or dishonesty (e.g. embezzlement from the plan). For smaller businesses/plans, those bonds are typically included in a business’ employee dishonesty insurance policy. Some larger plans maintain a specific bond.
In the context of ERISA, a fidelity bond typically costs a few hundred bucks a year unless the plan is investing in strange assets with a higher risk for fraud or dishonesty of some sort. I’m not an insurance actuary, so I couldn’t tell you how prices might translate, but that’s where they are for ERISA bonds. I don’t really see why they would be significantly more expensive for the FairTax-required bonds.
Treasury Circular 570 lists the surety companies that are approved for such bonds, and I assume however that list is maintained would be the same under the FairTax. Your typical large corporate insurers with high ratings are mostly on the list.
I suppose the question at hand is instead…
Does this represent a real cost to a large seller or is it just money that is ‘tied up’ in the surety bond?
Actually, three of the four choices are cash or cash equivalent instruments which will certainly be a real cost to the big sellers one way or another. But, TCG is correct that the fourth option is a surety bond provided by an approved company. A little research on such companies shows that the annual premium for a $100,000 bond is around $1000. Seems to me that retailers will have a choice- pay the premiums, or purchase a cash, CD, or Federal/State bond and lose the opportunity value of the money but gain a little interest on the investment.
Just a little back of the envelope scratching, but if the estimate is correct that 80% of the sales tax revenue is going to be collected by the “large sellers”, then surety bonds in the minimum amount of $2.4 trillion would be sold annually if every business chose the surety bond option. ($3.0 trillion revenue x .8 = $2.4 trillion). Unless I’ve dropped a zero, this means that $24 billion would be pumped into the surety bond businesses every year, courtesy of the federal government”s concern over fraud. If their concern is valid, then why don’t states require surety bonds today? Fraud can be controlled and limited by more frequent reporting and tax revenue submittals.
At the risk of sounding cynical, I wonder if the authors of HR25 perhaps had a vested interest in surety companies???
If I was in business I would rather purchase a treasury bond or ‘tie up’ some money rather than pay premiums on an insurance product, unless of course I ran a risky business that might perhaps dunk my ability to remit tax. It’s hard to speculate on that though.
It appears to me, that if the bill allows you to provide your own security in lieu of surety bonds, or invest money as well, that would eliminate the conspiracy theory of the bill’s backers being vested in surety bondsmen.
Also, you are dropping a zero. We would only be insuring 1.5 month’s worth of taxes at the most with this measure. Try 2.4 trillion divided by 8.666 (roughly the fraction of 6 weeks out of a year). That’s about $277 billion.
And it’s also a misleading number to talk about the value of bonds rather than their cost, since we’d only be talking about $1000 per every $100,000 worth of bonds actually spent on bonds, and that’s only $2.77 billion of actual money being spent.
And of course, there are alternatives, which means that more than likely this option won’t see anywhere near this level of investment.
Oops!!! You are right- dropped a zero. And my bad hair day just got worse. Talk about hoof-in-mouth disease. I just got an email from the state of Missouri which correctly states that businesses in Missouri have to get a surety bond equal to three times the monthly tax liability in order to get a business license. I apologize for my incorrect input.
I think I’ll look for something else to nit-pick on!!! James, could we move on to Section 502?
Your evaluation of Section 501 is good as far as it goes. Someone with large retail corporate accounting should comment on 501.e. The questions are 1) what is the effect on the corporate accounting procedures and 2) what is the compliance cost associated the question 1. In my opinion the compliance cost will quadruple or the corporation will be required to estimate 3 out of 4 weeks.
Additionally, the required bank account for depositing taxes is not defined to being per corporation or per store. Look at Home Depot with nearly 2,000 stores in all 50 states.
I thought one of the functions of the FairTax was to reduce compliance costs, not raise them significantly.
Well the FairTax locks down who is paying to a per-corporation (perhaps per sub-company) level. ‘Affiliated firms’ can be lumped together as one entity according to the business registration rules, so that shouldn’t be an issue for Home Depot (they should just be uploading their store data to the home office, er, no pun intended).
I don’t think there is much change in the accounting procedures as many states already require large sellers to do pretty much what the FairTax requires, and in addition, the states would be the ones collecting anyway, so there might not even be so much as a change of where to mail the check!
James,
The problem for large corporations is getting audited data. A company with a national footprint uses an armor car service to collect the funds as frequently as daily and as infrequently as twice a week, and transport to one of many banks. The bank counts the money and many times disagrees with the amount the store says it sent in. Then there are credit card sales where charges can be denied or lost in processing. Next let’s mention return merchandise.
These companies operate on a fiscal calendar and monthly balance all those sales and revenue sources. Now they will have to do it weekly. That seems to me to be 4+ times the effort and cost.
Next, why weekly? If the payments are made to the states they probably won’t forward the money weekly. The legislation doesn’t say they have to. Where’s the advantage and to who?
The legislation also says the week ends on Friday and the tax must be submitted in 3 business days. For most large corporations, who only close 2 days a year, that means Monday.
Actually, many large corporations are already required to do weekly remittals in several states. For the corporations of a size required to do this kind of thing, it means that in at least some areas, they already do it, and do a lot of it electronically to save money.