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Taxation in the United States Case Study

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Updated: Jan 3rd, 2020

With reference to tax law, the term nexus refers to the quantity and extent of business activity, which must exist before a state can charge levy on the business income. Nexus is established through income taxes and sales taxes. In New York State, all businesses are required to reimburse state franchise taxes (Karayan 34).

The New York State Tax Law states that taxes are valid for all companies for the purposes of carrying out its corporate franchise, carrying out business tasks, utilizing capital, sustaining an office within the state, or possessing or hiring property within the state. In New York State and the State of Alabama, nexus is determined from a sale tax standpoint.

The Due Process Clause of the 14th Amendment states that an individual cannot be dispossessed of possessions, existence, or freedom in the absence of the due course of law. Ever since the amendment was adopted, it has been used as a limitation on local governments’ rights to give rulings in cases with which they have slight connections.

A famous court ruling where the Due Process Clause was used is Lochner V. New York Case, which was adjudicated in the year 1905. In New York, during the early 20th century the Bakeshop Act outlawed bakery workers from working for more 10 hours in a day. Lochner, a baker, allowed his employees to work for more than 10 hours in a day. He was arrested and convicted for violating the Bakeshop Act.

Later, he appealed his conviction claiming that the regulation infringed his liberty to contract under the Due Process Clause. When the case was being adjudicated, the court reversed Lochner’s conviction stating that a law that infringes on an individual’s right to make a contract is unconstitutional.

Drop shipment refers to a supply chain approach that enables businesspersons to purchase products independently from wholesalers and dispatch them directly to their clients. As a replacement for buying a great inventory, a businessperson collaborates with a supplier and lists his or her products for sale. Businessperson meets the transport cost.

In New York State, all taxable commodities sold through the drop shipment approach are levied. The distributors are mandated to collect taxes from the clients. With regard to nontaxable commodities, the delivery is not taxed.

All the states in the US tax foreign corporations differently from the way they tax their domestic corporations. For instance, non-US corporations are levied based on business proceeds when proceeds are directly linked with the behavior of a US trade (Muchi 56).

The levies are imposed at the same rate as those of domestic corporations. Sometimes, foreign corporations are given tax preferential, unlike local corporations. Through this, some have argued that the government is favoring international commerce at the expense of interstate commerce

A major difference between the concepts of taxable income for Federal purposes and the concept of Entire Net Income for New York State purposes is that the state’s concepts are limited by the constitution, unlike the federal’s concepts. For instance, The Westinghouse Corp Vs. Tully Case affirmed this difference. The Supreme Court restricted New York State from distributing state tax credits to export incomes.

In the US, there are certain rules employed to differentiate between manufacturing and non-manufacturing business. As such, manufacturing businesses are concerned with changing organic or inorganic substances into acquirable products. Non-manufacturing businesses are concerned with offering services. After the manufacturing businesses have completed the production of their products, they rely upon the non-manufacturing business to distribute the products to the end users.

The above differences are very important to every state. If a state wants to enhance economic growth, it has to assess its areas of specialization. A specific state might find that they are best suited to establish more non-manufacturing industries rather than manufacturing industries.

Based on the above dissimilarities, the state will be able to identify manufacturing industries from non-manufacturing industries. After differentiating the two, the state can waive some taxes on the business it wishes to enhance and increase the tax on the business it wants to discourage.

States should compel foreign corporations who do mail order catalog business in their boundaries to pay sales taxes. Currently, these companies are replacing the traditional business with the advancement in internet technology. Given the fact that these emerging businesses have contributed to the collapse of traditional business, which pays taxes to the government, they should be forced to pay tax.

In the Myths vs. Reality Case, the US Supreme Court ruled that if corporations were compelled to pay taxes on interstate sales, it would be trouble on interstate commerce. However, in the same ruling, the court permitted that foreign corporations carrying out of state transactions should be compelled to pay taxes. The same ruling was also issued on Quill Corp. v. North Dakota Case in the year 1992.

A complete auto doctrine emerged during The Complete Auto Transit vs. Brandy Case. During this case, the US Supreme Court considered the constitutional validity of state taxes levied on out-of-state corporations engaged in interstate commerce. This case overruled The Spector Motor service vs. O’ Connor case.

This was the last important Supreme Court decision to strike down a state statue on the ground that the commerce clause forbids the states to levy taxes on corporations for the privilege of engaging in exclusive interstate commerce. Later in the year 1988, the complete auto doctrine was lucidly affirmed in the D.H. Homes Co. case.

Based on The Westinghouse Corp Vs. Tully Case, I believe that investment tax credits and the practice of limiting favorable methods of depreciation such as ACRS are under a constitutional cloud. The above approaches are beneficial to the New York State in that it will raise its exports and revenues. However, they are unconstitutional since they will decrease the interstate commerce.

I believe that the case would have been decided differently if the taxpayer’s assertion in General Motors had been substantiated by record support. During the ruling, the judge compared several purchasing documents used by interstate companies and out-of-state corporations before defining the unfairness issue out of the case. This implies that the ruling was based on presented facts. Therefore, had the taxpayer’s assertion been presented in substantiated record support, the ruling would have been different.

The implication of the above case is that it will generate numerous discriminatory tax issues, as the taxpayers will increasingly turn to the courts to sort out challenges allegedly discriminatory taxes in the future.

The Complete Auto fourth prong that tax must be fairly related to the services provided by the state is a move that has been welcomed by the taxpayer. This would ensure that the taxpayer is given appropriate services by the state. Equally, it will prevent the state from exploiting the taxpayer.

Justice Blackmun did not overstate the case when he said that the Court had weakened the fourth prong. The fourth prolong should still be used together with other prolong in determining the constitutionality of commerce laws. If tax is levied more than it is necessary for the Complete Auto, the fourth prong would have been violated without violating one of the other three prongs.

The implications Japan Line for other taxes affecting foreign commerce is that double taxation will occur. Some of the proceeds taxed without proper collaboration with other foreign nations will result in double taxation. This would affect the end user who has to meet the increased in the cost of the product or service rendered.

I believe that states discriminate against interstate commerce in violation of the Commerce Clause by providing preferential treatment to foreign as compared to interstate commerce. The chief aim of these treatments is to increase the export of goods and services between these states and foreign countries. I believe that local governments should strive to enhance interstate commerce and international commerce. To achieve this, they have to entice foreign corporations through these treatments.

The Congress has powers to remove the restraints that the Due Process Clause imposes of State taxing authority under the Commerce Clause. The authors of this clause were concerned with preventing the federal government from coming up with legislation that would undermine the interstate commerce. The clause does not only enable congress to control commerce in New York State but also across other states in the US.

Works Cited

Karayan, John E.. State and local taxation: principles and planning. Boca Raton, FL: J. Ross Pub., 2003. Print.

Muchi, Mark K.. Multistate income tax: overview, planning and current developments. Eau Claire, Wis.: [National Business Institute], 2008. Print.

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