Monday, March 17, 2014

Sales Tax on Strip Club Fake Money (aka Beaver Bucks)

No sales tax is charged when a person buys a gift card.  Sales tax is imposed later when the gift card is used to buy a taxable good or service, but no tax if the card bought groceries or other tax-exempt goods.

In the landmark case of Petition of HDV Manhattan LLC [pdf], the Hustler Club in New York City (located at 51st Street and 12th Avenue) sold to patrons 'scrip' known as Beaver Bucks.  Beaver Bucks was used for certain purchases within the Club, such as admission to private rooms, lap dances, and tips. 

A 20% surcharge is imposed on each purchase of Beaver Bucks.  For example, $100 of Beaver Bucks would require a $120 charge to the patron's credit card, from a company called Reading to Blind African Children LLC or a similar name.

Club employees would redeem their Beaver Bucks at the end of each work day, with different redemption rates for different employees. The Club sells around $1 million Beaver Bucks each month.

Unfortunately for the Club, its management could not prove how much of the Beaver Bucks was used for sales-taxable services such as lap dancing, and how much was used for sales-tax-exempt purchases.  The court therefore concluded that all $24 million of Beaver Bucks sold in 2006-2008 should have been subject to the 8.875% New York sales tax.

The obvious solution is for the Club to provide all of its entertainers and hosts with sales tax calculators and receipt generators, so that each private dance purchase for $120 (according to the Internet) would require an extra $10.65 in Beaver Bucks for taxes.

Wednesday, March 5, 2014

Tax Break for Policemen, Firemen, and Paramedics Retiring in Their Early 50s

Normally, a person who withdraws money from his or her 401(k) plan or pension plan before turning 59.5 years old has to pay a 10% penalty on the premature withdrawal.  There are a few other exceptions that allow penalty-free withdrawals, including retirement plan distributions to an employee who stops working for the plan's employer after turning 55 years old (Internal Revenue Code section 72(t)(2)(A)(v)).

So someone who retires at age 53 must wait until age 59.5 before taking retirement withdrawals, while someone who retires at age 56 can take withdrawals immediately from the former employer's retirement plan (but not from other plans).  In fact, the former employer can come back to work, for example at age 57, and continue to make penalty-free plan withdrawals.

For absolutely no reason whatsoever, the retirement-at-age-55 exception applies only to 401(k) plans and other employer retirement plans, but not to IRAs, even if funds from a 401(k) plan had been rolled over into the IRA.

In order to make the above simple rules more complicated, a further exception (section 72(t)(10)) provides that the retirement-at-age-55 exception becomes the retirement-at-age-50 exception for certain "public safety employees" making withdrawals from their government defined benefit pension plans.  Public safety employees include state or local government workers whose principal duties require specialized training in the area of police protection, firefighting services, or emergency medical services. 

So a police officer can retire at age 50 and immediately start collecting a penalty-free pension, while the DMV clerk must wait until retirement at age 55.

The retirement-at-age-50 exception-to-the-exception for public safety employees was added by the Pension Protection Act of 2006, when Congress recognized that "public safety employees often retire earlier than workers in other professions."  Congress did not note that public safety employees also often retire with bigger pensions than other employees, and some hard workers are able to find second jobs in their sprightly early 50s.