From Henry VIII to James Bond: Weird Tax Facts Throughout History
David Stewart: Welcome to the podcast, I'm David Stewart, Editor-in-Chief of Tax Notes Today International. This week: tax trivia. It's about time. We took a break from serious topics and took stock of some of the weirder things that we've learned from working in tax. To help me out, I'm joined by Tax Notes Chief Correspondent Stephanie Johnston, from her home in Pittsburgh. Stephanie, welcome back to the podcast.
Stephanie Johnston: Good to be here again.
David Stewart: Well, we reached out to the tax community on Twitter to get some of their favorite facts, but I'll kick things off with the thing I mentioned to get that thread going. My fact is that Donald Duck once appeared in a propaganda video urging people to pay taxes.
Now this comes from 1943, the cartoon is called "The Spirit of 43" and it was at a time when Americans were paying significantly more in taxes because of the war effort, and they were also expected to pay taxes quarterly. So unlike today when taxes are withheld, you had to have the money ready on these specific quarterly dates. And so this cartoon has Donald Duck getting paid and coming out. Now this video is not available on Disney+ as far as I can tell, it is available out on YouTube, but if it were on Disney+, it would likely get one of those disclaimers about it having outdated cultural depictions. So, Donald gets his cash, and then he gets these two visitors, that's sort of an angel-demon type of dynamic, and the angel is a Scotsman who's urging him to be frugal and save his money. And the demon is a zoot suiter urging him to go and spend his money on frivolous things.
And it's interesting in that it's actually the first time Scrooge McDuck appears. He wasn't Scrooge McDuck at the time, but he became Scrooge McDuck at some point later on. And, so you have these two pulling at him trying to get him to spend his money or save his money. And the cartoon is actually really interesting to watch because there's a lot of discussion about how you're paying a lot more in taxes, but then saying what the money is paying for. It spends a long time talking about guns and it uses the phrase, "taxes to destroy the Axis."
Stephanie Johnston: Ha. It's catchy.
David Stewart: It's a really fascinating cartoon. I watched it on YouTube, which I don't think is an officially sanctioned version of it. But it's really fascinating and kind of interesting as a cultural artifact, because one year after it was released, withholding came in so people didn't actually have to save their money to pay taxes anymore.
Stephanie Johnston: Huh. Who would have thought? Donald Duck and taxes. OK, so my favorite tax fact is something that you'll actually love as a dog owner and dog lover. So the Doberman Pinscher breed was actually bred by a tax collector. Around 1890 there was a guy named Karl Friedrich Louis Dobermann, who was a local tax collector in the town of Apolda in Germany, who also happens to run the town's pound.
He really wanted a dog to protect him while he was going on his tax collection trips, because he usually had to go to some really shady areas of town, needed some extra protection, so he decided to breed a bunch of dogs together and eventually came up with a Dobermann and that's why it's called Dobermann.
David Stewart: OK.
Stephanie Johnston: Because he needed protection.
David Stewart: That seems to make some sense.
Stephanie Johnston: Beats carrying a gun around, I guess.
David Stewart: Alright, well let's go to some of the things that we got from Twitter. And I'll start off with one of my favorite things that I learned from the tax community, this is pretty fantastic, is that we can understand Egyptian hieroglyphics in part due to a tax break.
Stephanie Johnston: Huh.
David Stewart: Now this relates to the Rosetta Stone. And as we usually learn in school, is the reason that we can understand hieroglyphics is because the Rosetta Stone was written in three languages, basically two versions of Egyptian and then in Greek. And we might learn also about how it wound up in the British Museum and how it was used to study, but nobody really talks about what it says.
And so we got a tweet from David Sites. He's @DavidSites_Tax, and he said the Rosetta Stone is the result of tax policy changes. And so that sent me down looking at what does this actually say? Apparently, it is a decree from a group of priests commemorating the anniversary of Ptolemy V's coronation. It mentions all the good things that he did, including giving tax breaks to priests.
Stephanie Johnston: Huh. That's cool.
David Stewart: And so apparently, this document continues and says there'll be basically returning the favor by promoting the cult of Ptolemy, and building statues, and such. But there you have it. If it weren't for tax breaks for special interest groups, we might not know how to read hieroglyphics.
Stephanie Johnston: I did not know that. I learned something new today. That's great. Speaking of antiquities and legends and hieroglyphics and all the sort, Heather Self of Blick Rothenberg, she's at @hselftax , she reminded us that Star Wars is actually a tax story. And if you go back to the opening crawl of Star Wars Episode I: The Phantom Menace, it reads, "A long time ago in a galaxy far, far away, turmoil has engulfed the Galactic Republic. The taxation of trade routes to outlying star systems is in dispute. Hoping to resolve the matter with a blockade of deadly battleships, the greedy Trade Federation has stopped all shipping to the small planet of Naboo. While the Congress of the Republic endlessly debates this alarming chain of events, supreme chancellor has secretly dispatched two Jedi knights, the guardians of peace and justice in the galaxy, to settle the conflict."
So, if it weren't for a tax dispute, Episode I would have never happened, and we could have avoided Jar Jar Binks.
David Stewart: Well, you know, listening to that as a description of the beginning of the movie, it sounds like it could have been a better movie if they just spent more time developing that story line. I think I would have enjoyed it more.
Stephanie Johnston: Right? I think I would have too. So speaking of controversial historical figures, let's talk about Henry VIII. Henry VIII, everyone knows who he is. He had a bunch of wives, really cool guy. Not really. Anyway, so under his rule, he introduced a beard tax, which varied based on the beard bearer's social standing. So, beards, therefore, were pretty cool. So if you paid the tax, you were legit. You were like high end. So that was a weird tax fact I got from Santhie Goudar, one of our U.K. Correspondents. You can find her on Twitter at @santhiegoudar.
David Stewart: Well, I guess a beard tax could work today. It would make a lot of money while everyone's in social distancing.
Stephanie Johnston: Right? I personally am a fan of the beard. Peter the Great, however, was not a fan of the beard. He ruled in Russia in the late 1700s, and he imposed a beard tax because he didn't want his subjects to have beards. He thought that beards were outdated and he wanted the clean shaven look to be a thing because he thought of it as more modern and I guess cool. So, men could dodge the tax by simply shaving, but the men who wanted to keep their beards had to pay the tax, and in exchange for their payment, they got a beard kopek as a proof of payment. And apparently the kopek said, "The beard is a useless burden," and it had a big beard on it, it was really cool. And if a man was found without a token and a beard, then he was forcibly shaven.
David Stewart: That's a different way to impose a tax. If they brought Dobermanns, now that could be even more troubling.
Stephanie Johnston: So now that we're on the subject of hair, let's talk about Lady Godiva. Here's a fact from Deepak Joshi who came to us on Twitter with this fact that Lady Godiva's story is actually a tax story. She was an 11th century Anglo-Saxon noblewoman, who was married to a guy named Leofric, the earl of Mercia. You know, the area included Coventry in the U.K. And legend has it that Lady Godiva was concerned about the tax burden that Leofric was imposing on his subjects. And he sort of scoffed at her and said, "Well, I'll lower their taxes if you ride through the town naked." And so she did. She got on her horse. She was totally naked except for her hair, which was super long, and rode through the town. And he held up his end of the bargain and cut taxes for everybody.
Lady Godiva's legend is still alive to this day, but we kind of associate her name more with fine Belgian chocolates than we do with taxation, which brings us to our next category of tax facts: food.
David Stewart: So, speaking of foods that aren't particularly good for you, one of my favorite tax facts is the long litigation over the definition of Pringles. And what is a Pringle? This is important in the U.K. because food gets a zero rate for VAT purposes, while potato crisps, as an American would call potato chips, are subject to full VAT. And in the lower courts, the court sided with Proctor & Gamble saying that Pringles are not potato crisps.
And this was appealed by HMRC and it ended up in the Court of Appeal, where there was a long discussion about the nature of what a Pringle is. It turns out, reading through this description, that they're only 42 percent potato. That they are made from a dough that starts out with potato flour, it's cut into shaves and fried, but at the Court of Appeal, they decided that 42 percent was enough to declare them made from potato, therefore they're crisps.
Stephanie Johnston: Huh. OK. You've changed my perception of Pringles forever.
David Stewart: Interestingly enough, that while they are considered not to be potato crisps for the U.K. market, I have a can of them here and for the U.S. market, they are marketed as potato crisps.
Stephanie Johnston: Well, once you pop you can't stop, I guess. Yeah, you know these cases involving classifications of food, it's an issue I think most countries and even our states, kind of grapple with on almost a daily basis. When I first started this job, I learned about the Jaffa Cakes case. I mean everyone was talking about Jaffa Cakes and had them out for so long, I finally actually got to taste these Jaffa Cakes when we went to London last year for IFA Congress, and I have to say they were rather interesting, and I could see why it was a debate whether the Jaffa Cake was a biscuit or cake. So for people who don't know what Jaffa Cakes are, they are these rounds spongy treats with a layer of chocolate around it, and some orange jelly in the middle. It is kind of weird. I personally like them.
David Stewart: I'm not a fan.
Stephanie Johnston: So, Jaffa Cakes, they are popular in the U.K., They're made by McVities, which is a brand owned by United Biscuits. And for a long time, the company classified them as cakes. And that's sort of important because in the U.K., biscuits and cakes are zero rated for VAT purposes. But if a biscuit is covered in chocolate, then it's considered confectionary and is therefore subject to the standard rate of 20 percent VAT.
And so, for a long time United Biscuits said, "This is a cake, therefore zero rated for VAT purposes." So, in 1991, Jaffa Cakes became the subject of a pretty famous case, now I think all tax lawsuiters know this case. So the U.K. tax authority took a second look at the classification of Jaffa Cakes and said, "Well that's not cake. It's actually a biscuit covered in chocolate, so therefore should be subject to the higher standard rate of VAT."
So a VAT tribunal considered whether Jaffa Cakes are in fact cakes or biscuits. And they considered many factors like texture, size, packaging, marketing, and the tribunal was even served a giant Jaffa Cake for research purposes. So, the judges ultimately decided they do have biscuit properties, but ultimately they're more cakey in nature. Some of the reasons they cited was when a Jaffa Cake goes stale, it turns hard rather than soft like a biscuit. And the sponge base makes up a significant part of the Jaffa Cake.
Stephanie Johnston: So, they decided ultimately that they are cakes, and they kept classification. And that's why they are zero rated in the U.K. Also, fun fact about Jaffa Cakes: the term Jaffa refers to Jaffa oranges, which are used to flavor the cake part of it. But the actual jam goo in the middle of it is actually more apricot and tangerine oil.
David Stewart: Well staying in the U.K. for the next fact we have mine, which is that the U.K. tax year starts on April 6 because their tax system is older than the calendar. Now this comes via @PJChapman74 who tweeted at us, "From 1155 until 1752, new year in England was on March 25th." Now New Year and the tax year were the same: March 25th. But that was back when England was on the Julian calendar.
And Pope Gregory had come up with a new calendaring system that fixed the problem of the dates shifting around. And eventually England adopted the Gregorian calendar, which meant that they were 11 days off. Rather than give up 11 days worth of tax for the year, they just shifted the tax date to April 5th.
Now, one of the features of the Gregorian calendar as opposed to the Julian calendar, is under the Julian calendar, you do a leap year every four years without skipping any. But under the Gregorian calendar, in order to fix that weird shifting problem that they have, the Gregorian calendar takes away a leap year every hundred years, unless it's a year also divisible by 400. It's a little too complicated.
So apparently in 1800, even though the calendar said, "This is not a leap year because it's a year divisible by 100," under the Gregorian system, they decided to actually add a leap year in for tax purposes. So the tax year ended up shifting to April 6th instead of April 5th and has been on April 6th ever since. They apparently decided not to do the same thing in 1900 when there was also not a leap year. There's a lot of moving parts in that one, I admit.
Stephanie Johnston: I would not have guessed that. So thank you for that fact. So, I'm just going to take us across the pond back to the United States. So you know the phrase, "death and taxes." Who do you think of when you hear it?
David Stewart: Well, that's Ben Franklin, right?
Stephanie Johnston: Yes, but did you know that he was not the first one to say it? In a letter dated November 1789 to a French physicist, he wrote, "Our new constitution is now established, and it has an appearance that promises permanency, but in this world, nothing can be said to be certain except death and taxes."
So, but according to an investigator, the phrase "death and taxes" came way before Franklin's letter. It was traced back to play called "The Cobbler of Preston." This was a farce in 1716 written by a guy named Christopher Bullock. And so one of the characters in this farce, his name was Toby Guzzo, who happened to be a drunken cobbler. Appropriate name, right? He said, "You lie, you are not sure for I say woman, 'tis impossible to be sure of anything but death and taxes." 1716 was the first known instance of the phrase, "death and taxes".
David Stewart: I guess we were misattributing quotes long before the internet came around.
Stephanie Johnston: Exactly. So talking about death and taxes, literally, I did not know this, but up until February 2011, tax fraud was punishable by death in China. Do you know that?
David Stewart: That seems pretty recent.
Stephanie Johnston: A little extreme, right?
David Stewart: So it's a bit heavy handed. I think.
Stephanie Johnston: Apparently according to Amnesty International, China had added tax fraud to its list of capital offenses in 1995. And in 2011 they decided to remove it, along with 12 other economic crimes from the list. It was sort of a hall of victory for Amnesty International because it was a very seldomly used punishment.
David Stewart: Well, sticking to the bright subject of death, are you familiar with the Day of the Dead Parade in Mexico City?
Stephanie Johnston: I have seen pictures, but I have not attended.
David Stewart: Alright. Are you aware that it exists because of taxes?
Stephanie Johnston: No. I didn't know that.
David Stewart: So, there's a fact that is actually widely spread around the internet -- not because it's wrong, it's true -- that the day of the dead parade is actually a relatively recent addition to the celebration. So the Day of the Dead is a holiday that's been around for a very long time. But the parade itself is actually a creation of the James Bond movie "Spectre."
Stephanie Johnston: Ahhh.
David Stewart: So, the story goes that this James Bond movie comes out and there's this really cool parade scene. And if you haven't seen it, I do highly recommend at least watching that scene, because it's pretty much made to look like a single shot as he's going through the parade and goes into a hotel. And just the way that scene is shot is really interesting. And apparently the only reason that scene is there is because of tax breaks that were given to movies that would highlight Mexico City. And now we know that this was part of the process of deciding to put this scene in the movie because if you remember a few years back there was a hack of Sony's emails.
Stephanie Johnston: Oh yeah.
David Stewart: It was believed to have been done by North Korea. And in those emails, there are a bunch of concerns that this movie is going way over budget. And they start talking about ways that they can redo the opening, which is supposed to take place in Mexico, but it's supposed to be in kind of a nondescript location. And so they add in this parade scene, which again, is a really cool scene, really well shot.
Stephanie Johnston: It is really cool.
David Stewart: But there's also discussion in there about, if you remember toward the end of that scene after there's a whole lot of fighting, they go to a helicopter and they start flying around in a helicopter. Now apparently, the reasoning behind that was that they needed to get shots of the modern skyline in order to get more tax breaks.
Stephanie Johnston: Huh. OK. Cool.
David Stewart: So, from all of this, we learn that had it not been for these tax breaks, that parade scene might not have been shot. And that people wouldn't have seen how cool that Day of the Dead Parade could look, and they wouldn't have actually decided to adopt that as their own celebration for the Day of the Dead.
Stephanie Johnston: That's so crazy. I love that.
David Stewart: It is. I really like how it sort of encapsulates how taxes can just change the reality around you.
Stephanie Johnston: Indeed. That's the fact.
David Stewart: Well, Steph, it's been great having you and being able to talk about weird and interesting tax facts. Where can people find you online if they want to tweet more interesting facts at you?
Stephanie Johnston: You can tweet at me at @SoongJohnston. Feel free to ping me at any time.
David Stewart: Alright. Well, thank you for being here.
Stephanie Johnston: Thanks for having me again.
David Stewart: And now, coming attractions. Each week we highlight new and interesting commentary from our magazines. Joining me now from her home is Content and Acquisitions Manager Faye McCray. Faye, what will you have for us?
Faye McCray: Thank you, Dave. In Tax Notes Federal, Francois Chadwick proposes a framework for developing administrable pillar 1 rules that promote a solution to the taxation of the digital economy. Amy Chapman and Alexander Dobyan examine the interaction between the CARES Act's five-year net operating loss carryback provisions and the retained alternative minimum tax rules. In Tax Notes International, Nana Ama Sarfo analyzes OECD past and present international tax reform efforts. Prita Subramanian and Milind Shah examine the implications of the economic downturn for pricing controlled intangible property transfers. And on the Opinions page, Marie Sapirie argues that Congress should look at the research credit to help remedy the economic damage from COVID-19.
Faye McCray: And now for a closer look at what's new and noteworthy in our magazines, here's Tax Notes State Editor-in-Chief, Jéanne Rauch-Zender.
Jéanne Rauch-Zender: Thank you, Faye. I'm here with Marty Eisenstein of the law firm Brann & Isaacson to discuss his article, "Alexa Is AI taxable?" published in the May 11th edition of Tax Notes State. Marty is joining us by phone. Welcome, Marty.
Marty Eisenstein: Thank you, Jéanne.
Jéanne Rauch-Zender: Can you tell us a little bit about what readers can expect to see in your recent article?
Marty Eisenstein: This article is first of a two-part series, and it covers the taxation sales tax of AI, or artificial intelligence, services. So in the last quarter century, the use of AI has proliferated, and it's been an everyday occurrence such that we even call it AI as opposed to artificial intelligence. However, the sales tax laws are from the 1930s and 1940s, and generally applied to the sale of tangible personal property. There are very few states that have adapted their laws to the modern services economy.
So, what we tried to explore in this article was how the sales tax laws actually apply to the sale of AI services. And in particular, it's trying to squeeze a square peg in a round hole. There are six or seven potential categories of taxable services throughout the state and none of them, no state taxes artificial intelligence per se. So, the six or seven categories we explain in the article can be even the sale of tangible personal property.
So when a customer buys a Kindle or an iPad, which has either Alexa or Siri on it, embedded in that is a product called Alexa or Siri that was created by artificial intelligence, but the whole product is sold as one piece and the whole product is taxable. Then there are other six or so categories of other services from software as a service all the way through consulting, that may or may not apply to the taxability, but there isn't a good fit. And so what we do is we explore three situations to see what is the most applicable and to tell and inform the practitioner as to the nature of the analysis.
The bottom line is that one looks to the principal object or primary purpose of the transaction, which one can obtain through a review of the statement of work, which describes the services that the service provider will provide, as well as promotional materials and the use of terms like licenses or not. So as we describe in situation one, one of the critical features of whether or not it is software as a service is whether or not it's described as whether or not the consumer is described as getting a license to use the software.
And sometimes, a fatal mistake made by practitioners is to call it a license when in fact it's really a service that's being provided. So in any event, we explore the taxability of the different categories and three situations, and we apply analysis to that. This is against the background of trying to decide which state's laws apply in the first place. And so, sourcing can vary and unlike the sale of tangible personal property, there may be users of this service in multiple states. So determining where to source the service and the taxability of the service is a real challenge.
Jéanne Rauch-Zender: And Marty, what inspired you to write this article on AI?
Marty Eisenstein: It was a confluence of three things. One is obviously our current times with the COVID-19 crisis and a number of the solutions for at least determining whether a person has been infected with COVID-19 virus rely on artificial intelligence. So you may want to input information to a provider and then that provider can give you a preliminary analysis based upon other demographics it has in its possession.
The second thing, was the amount of work I've done for providers of artificial intelligence and other services, and to try and fit that proverbial square peg in a round hole, and to advise them on some of the dilemmas and problems that occur in that regard. And the third was really the MTC's look at the effect of Public Law 86-272 on services and website internet providers. Those three things caused me to write articles both on sales tax and income tax point of view on the taxability of AI services.
Jéanne Rauch-Zender: Very interesting, Marty. Now you mentioned that this is part one of part two. Do you want to give a quick rundown of what you're expecting for part two?
Marty Eisenstein: In part two we want to explore the income tax implications for a provider of AI services. Is that provider protected by Public Law 86-272, which is the federal statute that prohibits a state from imposing income tax on certain interstate traders? And that's a big issue as you may know. As some of the listeners may know, the Multistate Tax Commission Uniformity Committee has made certain proposals with regard to providers of services, including providers from a website, and we explore the implications of that. And then we also consider the apportionment rules including sourcing as well as it would apply to a seller or provider of artificial intelligence services.
Jéanne Rauch-Zender: Thank you, Marty, I'm very much looking forward to part two as well. Can you tell our audience where they can find you online?
Marty Eisenstein: You can find me either on my website, which is www.brannlaw.com, or at my email, which is firstname.lastname@example.org.
Jéanne Rauch-Zender: Excellent, Marty, thank you so much. You can find Marty's article online at www.taxnotes.com, and be sure to subscribe to our Tax Analysts YouTube channel for more in-depth discussions on what's new and noteworthy at Tax Notes. That's Tax Analysts with an "s". Back to you, Dave.
David Stewart: You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax.
David Stewart: If you have any comments, questions or suggestions for a future episode, you can email us at email@example.com. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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