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Foreign. Welcome to the 50th, 50th episode of How Tax Works. I'm Matt Foreman. In this episode, I'm going to discuss sales and use tax, but in the exceedingly specific context of a very specific fact pattern that absolutely happened. And if you don't believe me, if you listen to this, I will give you more than enough facts where you can find it. And it is, it is humorous, especially if you're like me and you like it when people do stupid things and they find out how it works. How things work. All right. How Tax Works is meant for informational and entertainment purposes only. This may be attorney advertising, and it is not legal advice. Please hire your own attorney, especially if you're about to do what this guy did. How Tax Works is intended to help listeners navigate the intricacies and complexities of tax law, regulations, case law, and guidance to demystify how taxes shape the financial and business decisions we all make. New few administrative things. New episodes every two weeks. The next episode is going to talk about theft and scam losses. Well, specifically whether they're deductible. That's the key. You can have a loss that's. That's not really hard to figure out. Questions whether it's deductible. If you have any questions, comments or constructive criticism or you'd like me to speak about a specific topic, shoot me an email at my FRB email address. Which is, which is online. Right. You can find it. Upcoming webinars and speaking engagements are on the Tax Works landing page on the FRB website. So what are we talking about? We're talking about sales and use taxes and cars. All right, we're going for it today. So this is an interesting one. You know, one of my favorite shows of all time is Law and Order. And in it they would always like, rip from the headlines and then it started and would say, you know, this is totally fictional. This is not, you know, from anyone. We're not. This is not taking the facts. Anyone. I am essentially going to discuss the facts of an exceedingly specific case and explain a whole bunch of things about what he did wrong and why he doesn't understand the law and a whole bunch of stuff. And in doing that, I'm almost certainly going to make fun of him because that's kind of what you do, but also because he did some really interesting stuff that, that's worthy of discussing why he did it. And I'm a believer that if you can't laugh it life, then it's just going to be really Long and really frustrating, boring. You're going to be yelling at people. So, so just let's, let's have fun with it, right? It is what it is. So There is a YouTuber which is a word that I cannot believe exists, let alone a job. But there's someone who apparently makes money putting videos on YouTube and he lives in Tennessee. This is important. And he does stuff with cars. I'm not really going to go into more detail what he does, but. But they tend to be fairly high end cars, which is somewhat relevant here. But this is also sort of a cautionary tale and we'll go through it. So he bought a car and well, he didn't actually buy a car. And I think that's important. The important to sort of be the first place where he paused his. He, he formed an LLC in Montana and he bought a car and if you've ever done tax work or legal work and you know that someone like formed an LLC to do something, not in the state and where they live but you know, sort of generally, you know that like sometimes they're trying to do something and sometimes they're not. And the people who think that like, well, I have a Montana llc, therefore Tennessee can't do anything about it are the kinds of people that, you know, make you rub your eyes a lot or if you're me, I kind of run my hand through my hair when I'm. When I'm thinking or frustrating. Frustrated. So anyway, his Montana LLC buys a car. So his Montana LLC bought a car, but it's really not any car, right? It was a 2020 Ferrari F8 Tributo. If I pronounce that right. If I didn't, feel free to scream as loud as you can, not in my presence. So then he the the youtuber and not the LLC because LLCs can't drive cars. So that, that's an important fact that I don't think is in dispute though you never know. He picked up the car in Montana and he drove it back to his home in Tennessee. It sounded like he vote. I don't totally know the facts because I didn't bother looking into it. I don't really care. But I did watch the video. So if you, you may now have enough facts to find the video on YouTube. Highly recommend watching it 1 1/2 or 2x because it just drags on and it's, it's. You don't really need to focus that hard on it. Anyway, so he drove the car around. He eventually ended up back at his home in Montana, in Tennessee, because that's the only place he had a home. And eventually, at some point after being in Tennessee, he drove to Texas, where it was wrecked. He wrecked it, I believe, on a track. So like a racetrack, because when you have a Ferrari driving it. And it's funny because I see him every so often, like in Manhattan. And how are you driving a sports car? Why are you driving a sports car in Manhattan? You know, the roads aren't all that even. You can't drive fast. Speed limits 25, 20. I don't know, it's not fast enough. Where it's pointless. And also, like, why, you know, just. Just, you know, go get something else. But those are the facts. Tennessee, and this is the video. What it was, was Tennessee charged him with two counts of felony tax evasion. Which is. Which is when things got crazy and they arrested him. And he did. The YouTuber did what any attorney will tell you don't do. He recorded. Well, he recorded the arrest, which the defense attorney will actually often tell you to do or have someone do. But then he did what any attorney would tell you, you know, maybe don't do this, which is. He posted it online with his discussion of the arrest and the charges. And look, this is not legal advice, but maybe don't do that. So I'm not, I'm not posting the video. I, I don't, I don't care enough to. And you don't actually need to see it. But if you're curious and you have 20 minutes, or you're like me and watch it twice, speed, you have 10 minutes. It might be worth your time because it is, it is something, man. It is something anyway. And so if you watch it. Yeah, something. I. I don't know how to describe it. So here's. I'm going to summarize the. The video because I think it's important for the facts just to sort of go through before we get into, like, tax law is to understand one. He. He affect. He repeatedly confuses the irs, a federal agency, with the Tennessee Department of Revenue, a state agency. The police actually correct him on this repeatedly. They're like, it's Tennessee. Not. Not the federal government. It's Tennessee. Not the federal government. Not that the federal government won't arrest you for tax evasion, but they won't arrest you for sales tax evasion because there is no sale. There are no sales taxes. There are exceedingly similar taxes. That's what excise taxes are. There are sales taxes, any ad valorem tax, but that's not what Was there here. So the police, A, they repeatedly correct him. And B, they kind of laugh at him repeatedly because he keeps confusing them and being. And saying that. And two, and this is sort of where I kind of. Man, I don't know where you're going with this is he repeatedly says how much tax he pays. I pay so much in tax. I pay so much in tax. I pay so much tax my income. I'm so tax my income. And like, if you know anything about the state of Tennessee and its tax schema, you know that it does not have income taxes. It just doesn't. So he is telling Tennessee state, I assume they're not local police. I assume it's some sort of state police. New York state, they're troopers. Maybe it's the sheriff, the local sheriff. Who would, who would arrest them on behalf of the state. I don't actually know. I don't care. I didn't take notes on it. But he's telling them how much an income tax. And they. They don't. I don't think they correct him. Maybe they do correct him that like, Tennessee doesn't have income tax, but, like, that's the irs. So he again is confusing it. So he is getting arrested. And he talks about in the video, which is recorded later, about how much in tax he pays. And no one has pointed out to him that, like, Tennessee does not really care if you pay the irs, and the IRS similarly doesn't terribly care if you pay Tennessee. They're different authorities. They're different totally. So I think it's really important. But I will give you some legal, legal advice. For someone who watched, has watched in their life, way too much law and order, which, which you should watch. Jerry Briscoe in the man, the Myth, the Legend, you have the right to remain silent. It is guaranteed to you by the Fourth Amendment. I recommend that everyone uses it. Just. Just be quiet. You can ask questions, don't answer theirs, and don't do what he did, which is. He just keeps talking. I'm sure his adrenaline was cranking, but don't, don't. If you get arrested, take the right to remain silent. Use it. Say, I'm just going to. I'm going to stay quiet. That's it. And that's what happened. So what happened here? Okay, I'm going to talk for a little bit. Get the music break, get to specifics. But first, I can tell you kind of what happened here. Okay. He bought a car in Montana, threw about his Montana LLC that he owned. Montana has no sales tax. Generally and specifically on cars. Okay. He picked up the car in Montana, drove it back eventually to Tennessee where he resides. He admits to this in the video. Okay. At this point, Tennessee imposes a use tax on the car which the YouTuber did not pay. Okay, that's it. Those are the relevant facts. I've gone through a number more because I wanted to make jokes, but I think it's important to understand that those are really the relevant or salient facts. That's it. So before we get back, back to this back in the car and hang out, let's get some music in here. We'll come back for the specifics. This isn't the longest one we'll have. And we'll do that. Foreign. I'm back. Okay. Okay. Welcome back. So let's get into specifics. So I'm gonna sort of assume if you're listening to this that you have listened to episode two of how Tax Works. And in episode two of how Tax Works I talk about sales using these tax. I talk about it in more detail and I go through some of the mechanics because it's important. It's something that I think tax practitioners and a lot of people should know because it's really important. However, I'm going to kind of explain what most people get, what a sales tax is because you go to the store and you pay sales tax on things that are sold on things you buy. Pretty simple. If you run a business, you may have to collect sales tax and remit it to the state. Pretty simple. But a used tax is kind of an interesting one. It is a tax on something in this situation, a car in a state where is not purchased but it's where the, the, the, the item tan piece of tangible personal property is used. Hence the name use tax. There is a tax on sale and there's a tax on use. It is not necessarily a double tax. Talk about that in a second. It must be the same rate as the sales tax in that state or else it fails the non discrimination test. In Complete Auto Transit, which is a case about the delivery of General Motors automobiles shipped from the state of Michigan to the state of Mississippi, both of which I assume have the two letter acronym mi. I know they don't and I know which one is not answer is Mississippi. Mississippi. Also you must have a pay to use tax if you have a sales tax or else you'll fail the same non discrimination provision or prong. Whatever. Incomplete Auto Transit. I'm not going to go into why. I'm not going to go into how that works. It really doesn't matter for that. It's just important to know that every state has, that has a sales tax, has a use tax, A. And every state that has a sales tax and a use tax, which is every state that has either one, they're at the exact same rate and they are required to be by the Constitution. So that's really important. So what would happen with other states? Right. The issue is, and this is where the, you know, the loophole, if you go, gee, if you let your fingers do them walking on the Internet, you'll find out stuff about the Montana loophole. And friends, there is no loophole. And Montana is an outlier simply because it doesn't have sales tax. Okay. There's, I think, five states that don't have sales tax. Montana is the one they like to use. I don't, I don't know why some states don't really have sales taxes or they'll have a different rate for automobiles. I mean, can you imagine, you know, a lot of states it's just lower rate, or if you have a really low sales tax, could be higher. Things like that. States have varying rules, but generally, if you get title to a car in a state, you have to pay the sales tax immediately. For example, I know for a fact in New York, and I believe every state. I went through a couple of states, which I'll go through some states in a second, that you can't get the title unless you've shown you've paid the sales tax, unless the state has no sales tax. And if you're registering in a state where you didn't buy it, you can't get the title unless you've shown you've paid the sales and or use tax as applicable. Okay, so for example, if you were to live in New York and buy a car in New Jersey, pick it up in New Jersey and immediately drive it back to New York in theory, right? Pay New Jersey sales tax, then New York use tax. Get into that in a second. And how that works. Some people just intentionally have the car delivered to New York so they don't deal with two taxes. And they will deliver it. There is a fee because either A, someone's driving it in for you, or B, they're getting one of those super awesome gigantic trucks. I used to love seeing those on the highway as a kid because they're so fascinating. They have like, you know, 10 automobiles sort of on the back of it. And it's just kind of like wild to see because you don't really see what's inside, you know, 18 wheelers, but you get to really see what's in those. So as a kid, that always kind of fascinated me. I don't know, maybe that's strange. I'm not. I never really thought about it till now anyway, so. So that. That's how it works. But I think it's really important to pause here and point out that what happens is. So, for example, if you were to do this, pick up the car in Montana, drive it to California, for example, and pay. And live with there, yes, California imposes sales use tax. However, California gives a credit for the taxes paid in the other state. The reason that Tennessee really doesn't like what's going on and what people clearly think they can do in Montana is exceedingly specific. And it's because if you've picked up where I'm going with this, Montana doesn't have a sales tax. So he is altogether attempting to pay no taxes, no sales tax, simply because he picks it up in Montana. And anyone who's ever read Gregory knows that you can structure things however you want, but it's substance over floor. That's what Gregory says. And it's the same way in sales tax. Even though that's an income tax case, it's the same idea. I looked into it just for fun. Florida, same rule, gives a credit. New Jersey gives a credit. New York gives a credit. Even Tennessee gives a credit. So if he were to pick it up at, let's say, Rock Hill, South Carolina, then drive it back to Tennessee, what would happen is he'd pay the sales tax in. In South Carolina, then he'd pay the additional use tax in Tennessee. He may not even owe use tax, because if the tax rate in South Carolina is 10% and the rate in Tennessee is 5%, okay, he'll pay no use tax because there's no refund. There's nothing else going on there. However, if you flip it and let's say that there's a 3% sales tax in South Carolina and there's a 4% sales tax in Tennessee, he'd pay 3% sales tax in South Carolina, 1%, 4 minus 3 in Tennessee. That's how the crediting mechanism works. It is the same basic principle as the income tax rec. As the income tax crediting mechanism that exists. And so the fact that he seems surprised by this is sort of interesting to me. I don't want to use the word fascinating. Kind of fascinating to me. All right, we're gonna do a quick music break right here, and we're gonna answer the question that was bothering me. Why do people think this works? I've already suggested the answer, but let's get some music. I'll be back in a moment. Okay, so. So we're back with how tax works. So the question becomes in this one, why do people think this works? And my answer is, I don't really know. Because what I've learned in life is that people sort of think they find a loophole and they stop. And one of the things that I've always found makes a good advisor, doctor, lawyer, accountant, structural engineer, is that they keep reading and they keep going and they confirm their results. And so people look, they want this to work and they're like, well, they registered it in Montana and it has Montana plates. So even though it's basically never in Montana, that really doesn't matter because. Ta da. Right? It's got Montana plates. I'm good. That's one theory. My other one is that people don't actually know that use taxes exist. I commented this on the episode where I talk about use tax, sales and use taxes is that the use tax rates are incredibly low. Incredibly low. Because they don't. People don't know they exist. And I think that's a fair lack of knowledge. However, like, I don't mean to sound rude, but like, you can probably Google, you know, will this work? Why won't it work? And I suspect at this point every AI well, and I might be totally wrong on this, actually good question to ask it, but you know, to see if it gets it. There is a lack of sophistication. If you watch the video, you know what fascinated me about it and fascinates the right word is they need to go bail him out. Okay. And like, I've never been bailed out because I never been arrested and I've never bailed anyone out. But I know enough that you don't do the thing that they did, which is they went to, they, they went to the local jail or whatever with a duffel bag of cash. And this fascinated me. They had like a, you know, the gym bag, right? And it had just cash in it. And, and I was talking about this with a friend and they asked actually a really good question and they asked me like, like, how much money are we talking about here? Right? And I don't know because they didn't say, but it was enough that they needed a gym bag. And I don't think those are $1 bills. You know, I think those were fairly large denomination bills. So there was sort of A lack of sophistication they had. They just did not understand that use tax exist. This didn't work. They saw it on the Internet, everyone's doing it, and therefore they should do it. So, you know, look, get a cashier's check if you're ever going to bail anyone out. Highly recommend that to carrying on cash because A, it's cashier's check, so the bank says you have the money. So. So the government will take it, A. And B, then if someone mugs you, which, like, I mean, maybe it's not a concern of theirs, I don't know. But if someone mugs you or something happens, you know, you get in a car accident, your duffel bag gets thrown out and the money goes flying everywhere. It's a check and get reprinted and canceled and it's made out to someone, right? So you can do that. They must have gone there and figured out how much it was done and stuff like that. So that was kind of amazing. And. And my final point on this really is someone asked me, well, why, you know, and he kind of said this in the video. And it's. It's actually a fair question. Again, I assume by this point he had a lawyer. So I'm surprised the lawyer didn't really discuss this with him. But, like, why was he arrested? And he said, oh, they just want to make an example out of me. And actually he got that right. Because what they figured would happen is one of two things. I don't totally think they thought he'd do what he did. I think they thought either A, the media would pick up on it, or B, to get the charges to go away, they would. He would issue a statement saying, don't do this, or he would talk about it after it was done. I don't think they thought he would record a video of getting arrested and post it online. But we are in an age where there is no embarrassment and it's, you do it for the clicks. So apparently he decided to do that and that was a good idea. I hope he had his lawyer look at it first. But there is a bunch of stuff. I don't think if I were a lawyer, I would have let him say, but here we are, right? So they arrested him because he flagged the law. They wanted him to do it. They wanted to make an example. They wanted the publicity, and they did it for an exceedingly specific reason. Look, is he gonna end up in jail or in prison? No, this is not worthy of it. It doesn't do anything. Do people go to Jail for tax evasion? Yes. Ask Wesley Snipes. Do people who do stuff that we'll say our aggressive positions run into problems? Yes. Ask Nicholas Cage. You know, public record, right? That's it. You know, so they, they want to let everyone know about it. But more importantly, Tennessee is just not thrilled about this. There's a lot of states that are losing tax revenue as a result of something that they're like, well, this doesn't work. This doesn't make sense. Why is everyone doing it? And the answer is because they think it does. So if you make an example out of someone, they might stop. I might remind people, and I think it's important that tax evasion is illegal. You can be as moral or amoral or indifferent to it as you want, but it's illegal, as people often point out. You know, Al Capone didn't go to jail for running a criminal ring. He didn't do it for homicide. He didn't do it for theft. He didn't do it for selling drugs. He didn't do for selling liquor or anything else that he did. He went to prison because they were able to crack his bookkeeping, which apparently was quite good, the code in his bookkeeping. And he went to prison because he didn't pay his taxes. And that should suggest the strength of the Internal Revenue Code and the irs. And I appreciate, again, I'm somewhat conflating New York, the, the state of Tennessee or Tennessee State, I don't know what it is, and the federal government, but the same thing exists. If you are flouting, flouting, flouting, fluting, flouting, FL o u T I N J flouting, I guess, whatever, that you're breaking the law. They are interested in making an example out of you and they will do it. They watch the Internet, they see things that are happening and they are like everyone else. I wonder how if he did, if he did this right, someone saw it was happening, they went in and looked to see if there's a use tax return. They waited for him to pass the statutory period and they went, let's do this. He also talks about that they didn't give him notice. I don't know why the government should have to give someone notice before they arrest them. That's kind of an interesting one. Maybe they should have sent him a letter and said, hey, where's your use tax? Maybe. But I think they, I think they wanted the publicity. I think that's, that's an important factor. So don't do it, you know, just don't do it. All right. Okay. That was the 50th episode of How Tax Works. I'll be back two weeks with the 51st episode. I'll be discussing theft and scam losses and their deductibility. Now for the best song of all time. Ra.