Closing the B2B Loophole, Part II
From reader Tanner E:
I was hoping you or someone else could help me understand this regarding FairTax. I came across the “The ‘I’m My Customers’ Employee’ Trick” post from 10/05/06… and read through all the comments. I’m sorry, but I’m not convinced that the loophole for that is closed.
Quadrupole gave the example of someone hiring a cleaning service to come clean his house vs. hiring an employee. Well, they state that if he fires the cleaning service, the cleaning service collects the tax, but if he employs someone he is responsible for collecting the tax. My question is what type of accountability is there to keep him from paying his employee ‘under the table’ and not reporting the transaction?
Also, one more thing… no b2b transactions are taxed. So technically, a company can go to a grocery store a buy a cake tax-exempt… and then take it back to the office and have the employees eat (consume) it… tax-free? The company may not raise any red-flags because it is profiting from selling whatever it sells… but it is consuming things without taxing the consumption. Does this also allow companies to pay their employees in tax-free ipods, big screen tvs, cars, etc… instead of salary?
Keep in mind, I’m only raising these issues to broaden my understanding of FairTax… I am not trying to shoot it down. I think regardless of these issues, there’s still be much less corruption under FairTax than today’s income tax.
Have at it, guys.
Even I can aswer that one.
Any purchases made for employees as a part of their compensation would be taxable as consumption. The biggee, of course, will be health insurance.
Under the FairTax, the cost of employer provided health insurance will now be taxable to the EMPLOYEE. Thus, not only will the employer no longer get a tax write-off for providing health insurance (and thus, will probably no longer provide such insurance), the employee will get hit with a tax on the premiums.
In your cake example, I think that might be considered a legitimate business expense (e.g., for an office party) and thus be tax-free.
This is my understanding.
I have a biz and a method of paying the FairTax to the feds. My biz needs a hammer and I go to the big box store pay for it including the FairTax, then get reimbursed for that taxed purchase through my own dealings with the collector.
Through this process if I don’t think my purchase will pass an audit then I don’t report and the Government gets to keep the FairTax that I paid to the big box store.
Thanks for your replies, they’ve been helpful. Kevin, are you saying that businesses will be submitting the taxes they collect directly to the tax collector?
I’d still like to know what will hold people accountable, regarding when people would personally hire an employee, a maid for example, and pay this person under the table... thus not paying taxes on this service.