Solutions to Chapter 1 Problem Assignments Check Your Understanding 1. [LO 1.1] What is a tax? Solution: A tax is a required payment to a governmental unit to support its operations that is not related to the value of goods or services the person or business receives. A fine is levied as a result of an unlawful act. 2. [LO 1.1] Constitutional Authority Solution: The federal income tax system as we know it today did not begin until 1913 when the 16th Amendment to the U.S. Constitution was ratified. The 16th Amendment gave Congress the power to lay and collect taxes ―on income, from whatever source derived,‖ without the previous requirement that all direct taxes be imposed based on population. 3. [LO 1.1] Current Tax Code Solution: The Tax Reform Act of 1986 was so extensive, the Code was renamed the Internal Revenue Code of 1986. Any current changes to the tax laws are now amendments to the Internal Revenue Code of 1986. 4. [LO 1.1] Tax Expenditures Solution: Tax expenditures can take the form of special exclusions, deductions, credits or preferential rates for specific activities. These tax expenditures result in a reduction in the revenue that would be collected under a more comprehensive income tax. 5. [LO 1.1] SALT Solution: The practice of state and local taxation is commonly referred to as a SALT practice. 6. [LO 1.1] Nexus Solution: Nexus is the necessary type and degree of connection between a business and the state in which it is located for the state to impose a tax on its sales or activities 7. [LO 1.1] State Income Tax Solution: Without physical presence within Arizona, the state cannot assess state income tax on Suntan Corporation’s sales made to persons or businesses located within Arizona.