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Friday, February 11, 2011

Court: NY Can Tax All Income of Owner of NY Vacation Home Used 17 Days/Year

Wall Street Journal, Out-of-State Owners Could Face Tax Bill:

Connecticut and New Jersey residents with a Hamptons summer cottage or a Manhattan pied-a-terre are about to get a nasty surprise: New York state wants more taxes from them.

A New York court ruled last month that all income earned by a New Canaan, Conn., couple is subject to New York state taxes because they own a summer home on Long Island they used only a few times a year. They have been hit with an additional tax bill of $1.06 million. [In re Barker, No. 822324 (NY Tax App. Jan. 13, 2011).] ....

For years, New York law stated that residents of another state who spend more than 183 days a year in New York have to pay taxes on any income they make in this state. But they generally haven't had to pay New York taxes on income they make outside of the state or on their spouses' income if they work elsewhere.

Under the recent ruling, this might change for many out-of-state residents who own vacation homes or apartments here. In effect, it reinterprets what counts as a permanent residence.

In defining a "permanent place of abode," New York tax code specifically excludes "a mere camp or cottage, which is suitable and used only for vacations." New York tax experts say the new ruling is the first they recall that counts summer homes as permanent residences. ....

[The judge] ruled that the couple's Long Island vacation home qualifies under the law as a permanent abode because it was suitable for living year-round—whether or not the couple actually stayed in the home wasn't relevant. Under the ruling, if an owner doesn't spend a single a day in a home it could still count toward a permanent residence.

The Napeague, Long Island, house was purchased by John and Laura Barker for $260,000 in 1997, according to court documents. From 2002 to 2004, the period that was assessed for back taxes, the Barkers said they spent only [17] days a year at the home, usually during the summer.

(Hat Tip: Doug Levene.)

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Comments

HA.

NY is grabby beyond belief. I love the idea that owning property = we are therefore entitled to a portion of all your earnings. I sometimes think that all the other states with income taxes should start taxing anyone from NY for the same reasons.

Posted by: TexasPatrick | Feb 11, 2011 8:58:34 AM

That sounds questionable to me under Due Process and Commerce Clause principles, I'd be interested to hear from anyone who knows more about this.

Posted by: mike livingston | Feb 11, 2011 9:31:26 AM

This is an example of extremely sloppy reporting by the WSJ.

The New York rule is "permanent resident" + 183 days in NY = resident. The TP here worked in NYC all year round and his home was a permanent residence. Therefore, he was a resident. QED. The dog on the street knows that if you work in NYC and have a home in NY, whatever it is for, and however much you use it, you are a resident of NY.

Posted by: JP Karmodi | Feb 11, 2011 10:23:01 AM

Next, the NY Dept. of Transportation will reduce highway speed limits sufficiently to force more travelers going through the state into owing NY income taxes. And, heaven forbid, don't get stuck in an elevator. An extra hour there could be considered a permanent residency.

Posted by: Woody | Feb 11, 2011 12:20:56 PM

Just because I feast on left over foi gras from your fine city and see a bitch out in the hamptons once in a while, doesn't mean my permanent residence isn't with my dogs up in CT.

Posted by: Dog in street | Feb 11, 2011 12:22:59 PM

I take issue with Mr. Karmodi calling the WSJ reporting sloppy. There is no issue that the Baker's owed NY tax on the income that Mr. Baker earned in NY. In fact all who work in NY are merely taxable NONresidents no matter how long a day they work. The issue is whether Baker income that was not earned in NY is taxable in NY. I believe that the finding that a vacation home was a permanent abode is kinda new.

Merely owning a home in NY that CAN be lived in year round makes one a NY resident even if one never stays in the house.

The court essentially concludes that the Bakers were resident (domiciled?) in two states. This might logically be considered to be the equivalent of being in two places at once.

The Bakers (and other similarly situated) should get out of NY before they die since I would expect them to be subject to state inheritiance taxes in CT and NY. Campbell's soup redux.

Posted by: Ed D | Feb 11, 2011 1:14:05 PM

His home was in Connecticut. You can't call a place they spent only 17 days out of the year their "home" just because of the architecture.

Posted by: Dan | Feb 11, 2011 2:00:04 PM

.... WHAT YOU DON'T REALIZE IS THAT THE JUDGE RULED THE PROPERTY IS PERMANENT OR COULD BE USED AS A PERMANENT RESIDENCE BUT THESE PEOPLE DID NOT USE IT THAT WAY. TOO BAD,, NOW NYS CAN GRAB YOUR MONEY BY PRETENDING THAT INDOOR PLUMBING AND SIZE OF PROPERTY EQUALS RESIDENCY NOT USE...... RIDICULOUS. TYRANNICAL....NEED TO MOVE OUT OF NYS

Posted by: LSB | Feb 11, 2011 2:14:17 PM

NY Courts: You get what you pay for.

Posted by: GM | Feb 11, 2011 2:46:23 PM

I guess this means they get to vote in NY now too.

Posted by: jmcnamera | Feb 11, 2011 2:50:49 PM

Does this mean the taxpayer can now vote in CT and NY state elections? That is presumably a duty of a state resident.

Posted by: asdf | Feb 11, 2011 2:50:56 PM

This is one of the main reasons so many of my clients use land trusts. Why anyone would own property other than their home in their own name is beyond me.

Posted by: MarkInFla | Feb 11, 2011 2:51:29 PM

Taxation without representation...didn't somebody a long time ago fight a little revolution or something over this? Wasn't there something about a Tea Party...?

Posted by: Gunga | Feb 11, 2011 2:57:09 PM

I'm curious as to what combination of amenities would render a home "suitable" for living long-term. A refrigerator? stove? air conditioning? winter blankets? floors?

Inquiring minds want to know.

Posted by: Wacky Hermit | Feb 11, 2011 2:57:38 PM

Suppose they rented out their home in the Hampton's during the year.
Does owning rental property in New York State make one a resident?
Suppose they rented it for one day during the year?
What would this mean?
Does staying in rental property for a few days when it is vacant make one a resident?

Posted by: daniel | Feb 11, 2011 2:57:56 PM

Why do I feel like this is going to lead to a whole lot of work for plumbers and HVAC contractors?

I foresee people removing heating systems, winterizing homes and shutting off the utilities after the summer season so that their summer house can't be classified as "very habitable and comfortable year round".

Posted by: Stan Olshefski | Feb 11, 2011 2:59:06 PM

This looks like the 2011 NY full employment act for lawyers and accountants.

First thought out of the box on this one. Form a corporation or other state created entity. "Sell" the home to the artificial NY entity. Have the entity charge the family who wants to use the property from time to time "rent" sufficient to pay the expenses for the home. Have the NY entity pay any net taxes due on the gross income of the entity.

It depends on how many layers deep you want to go with this. To avoid NY making the claim that it is a sham transaction to have the stockholders of a corporation be the only "renters", you could form a CT corporation and have it be the stockholder of the NY corporation, ad infinitum.

Let the tax avoidance planning begin in earnest!

Posted by: Allan Yackey | Feb 11, 2011 3:03:53 PM

According to NYS appraisal law, in order for a property to be considered "occupiable" it needs to have running water and basic amenities like a refrigerator.

Have the sinks and toilets detached and have the fridge removed to a shed. Voila.

But then I'm sure the state will simply levy a $100,000 fridge removal tax. Communists don't care, they just want the money and will employ whatever means necessary to steal it.

I moved out of NY 5 years ago and life has never been better. And I delight watching NYers punish themselves by electing one socialist after another. I'm gonna throw a party the day Wall Street gives up and finally leaves.

Posted by: John | Feb 11, 2011 3:15:02 PM

Having read the decision, I can maybe explain the decision a little bit more, even though I still think this is a farce. The couple were domiciliaries of Connecticut alone. You can only have one domicile. However, you may be treated as a resident of another state, regardless of domicile, if you a) were physically located in the other state 183 days or more, and b) maintained a permanent place of abode in the other state. This is common among income tax states, and the assumption is that people spending time in the other state working or going to school for long-term (but temporary) periods of time are going to be treated as residents nonetheless.

The husband was a commuter who worked in New York year round. The vacation home was a smaller home that no one could have seriously considered a year-round residence for this family. The wife's parents occupied the vacation home for the parts of the years that the couple and their children weren't vacationing there (17 days). The problem here is that there's no relationship between the 183 days physically located in New York and the "permanent place of abode". The tribunal said it didn't matter whether it was too small for that particular family to be considered permanent. This engages in the fiction that the large Connecticut home is nothing but a tax avoidance scheme to avoid their "real" permanent home cramped up in Long Island.

Posted by: Dan | Feb 11, 2011 3:17:56 PM

That goose must be full
Of beautiful golden eggs!
Let's take them all now!

Posted by: Haiku Guy | Feb 11, 2011 3:28:09 PM

So basically the change is that NY is saying that the Bakers owe taxes on all of their income, not just the amount that Mr. Baker earned in NY?

Just to put some numbers on it, let's say that Mr. Baker earned $500K in taxable income while working in NY State and the Bakers total taxable income was $800K.

Presumably, the Bakers were paying income taxes on the remaining $300K (800-500) in Connecticut, where their primary residence is. Is Connecticut going to just say to the Bakers, hey no problem, NY can have the income taxes on that $300K, or are the Bakers going to have to pay income taxes on the $300K in both states?

Posted by: WJ | Feb 11, 2011 3:28:31 PM

So what about rental income property? If it is tennent occupied than it should be self evident that the property is not available as a potential residence by the owner. Hopefully an out of state real instate investor will only be responsible for taxes on the rental income and it will have no bearing on his other incomes earned out of state.

Posted by: Bob | Feb 11, 2011 3:33:13 PM

So if you are considered a resident of two states for tax purposes, can you now vote in two states, as well? Get in-state tuition?

Posted by: Aristotle | Feb 11, 2011 3:41:42 PM

Seems like more of a problem with how NY has worded its statute than with any mistake by the court.

I couldn't tell from the court's opinion, but I'm wondering why they didn't go after the "183 days" language, by arguing that, if NY wants to count his work time as being within the state, they can only count the actual time spent on NY soil - i.e., maybe 10 hours per day - and then add up the hours to see if they totaled more than [{183 days} x {24 hours per day}].

After all, if they're going to insist on this overly formalistic interpretation, they should be stuck with ALL overly formalistic interpretations. Clearly, if someone drove over a tip of NY for one minute per day passing from home to work, it would be a stretch for NY to claim the 183 day requirement was satisfied.

Posted by: bobby b | Feb 11, 2011 3:45:39 PM

Curious whether this cuts the other way. New York law allows married couples to have separate permanent residences. If I work outside of New York and keep my permanent residence outside of New York (say, in Texas, where there is no state income tax) and my wife, who stays home and cares for our kids keeps an apartment (lease in her name) in New York, will she be eligible for New York's generous child-care tax credit (or, since she earns no income, subsidy) when she files a separate New York return?

Posted by: lostingotham | Feb 11, 2011 3:52:00 PM

Would this translate into other areas? Could a person living in another state have the right to vote because they rent an apartment in NY? What about holding office?

Posted by: Ralph | Feb 11, 2011 3:56:53 PM

Can you say "Nevada Corporation?"

Posted by: Kevin M | Feb 11, 2011 3:57:53 PM

So would Charles Rangel be considered a resident in each of his rent-controlled apartments, and thus liable for 4 NYS tax bills?

Posted by: Steve Two | Feb 11, 2011 4:00:03 PM

Might I respectfully suggest you read the opinion, and a least make a better informed decision on the law and not invective laden commentary on what the law should or might be, or that it is an ass! A permanent place of abode (not THE permanent place of abode) + 183 days = residency under NY law. Whether you agree or not with the decision and its political implications, the judges simply applied the law in both the original case and the appeal. Think of it this way: if they held differently it would leave a hole in the law whereby people could characterize their NY principal residence (THE principal place of abode) as a vacation home and their Florida or New Hampshire o/w holiday home as their principal residence, making them non-residents of NY. I stand by my comment above that the WSJ reporting is sloppy and I for one would expect more.

Posted by: JP Karmodi | Feb 11, 2011 4:05:45 PM

So, just sell your home to a holding company and consider it a time share.

Posted by: Garrettc | Feb 11, 2011 4:13:12 PM

"Does owning rental property in New York State make one a resident?"

The Illinois Supreme Court recently ruled that Rahm Emmanuel could run for office there because he owns one rental property. I could easily see NY doing something similar.

Posted by: Greg | Feb 11, 2011 4:16:27 PM

Funny how anyone who does not get a free ride considers the bus driver to be a "socialist". Pay your way or get out. And Wall Street was quick to holler "save me" to the same government it now enjoys bashing. Wall Street pockets the gains and the taxpayer picks up the losses. Sweet deal in their version of a capitalist paradise. I am sure the Fox Street Journal spun the story to make it look like some poor millionaire is being taken to the cleaners again by the socialist jackboots. Of course you could spin it that another corporate welfare recipient is being asked to pony up his fair share.

Posted by: George W | Feb 11, 2011 4:19:59 PM

Well, this is an overreach. Sure, the court is getting grabby for more green. But they also read the exclusion for "a mere camp or cottage, which is suitable and used only for vacations," from the statute is a rather, shall we say, novel way.

But, as David Patterson said, if raising taxes was all it took to get rid of Limbaugh...and by extension all you rich people, then we'd have done it sooner.

Once Wall Street leaves, then the socialists will finally get their paradise where all the swell hipsters can hang out without having squares harsh their mellows.

But this begs an even bigger, more modern question...is the court going to grant waivers, similar to the Obama regime, for friends of the judges and other most-favored-status persons?

Posted by: joeindc44 | Feb 11, 2011 4:25:10 PM

Happened to a friend of mine. His partnership owned a condo in NY which he had unlimited access to (as did others). Accordingly, NY held, despite the fact that he owned and lived in a house in CT, that he was a NY resident. Of course, CT did not see it the same way. He was therefor a resident for tax purposes in two states. Since this happened years afterwards, and his business and income had declined in the interim, he didn't have the resources to pay and wound up selling the house in CT at a distressed price and turned most of his liquid assets to NY.

Just criminal.

Posted by: Peter | Feb 11, 2011 4:32:15 PM

The answer is always the same...Ignore the state court and avoid the state...problems solved.

Posted by: JIMV | Feb 11, 2011 4:38:17 PM

The position that a vacation home isn't a "permanent place of abode" is extraordinarily agressive and risky. And dumb, IMHO.

"I couldn't tell from the court's opinion, but I'm wondering why they didn't go after the "183 days" language, by arguing that, if NY wants to count his work time as being within the state, they can only count the actual time spent on NY soil - i.e., maybe 10 hours per day - and then add up the hours to see if they totaled more than [{183 days} x {24 hours per day}]"

If you're in NY for a second (except for layovers enroute elsewhere), it counts as a day for these purposes.

Posted by: jpe | Feb 11, 2011 4:48:29 PM

@ Mike Livingston: these sorts of cases are regularly challenged on due process grounds and the statute is just as regularly upheld.

re: voting: that relies on domicile; tax residence is a statutory test. Two different things, and one doesn't impact the other (eg, they can't vote in NY).

@ Allan: whether an abode is available to someone is facts & circumstances. If you regularly stay at a CT corp's home in NY, it's pretty clear it's an abode available for use. There's no way to dodge this bullet.

@ Bob: yes, if it's a rental property that's occupied or one is, in good faith, trying to let, then it doesn't count as an abode for these purposes.

Posted by: jpe | Feb 11, 2011 4:52:05 PM

What will the judge do when all the land in NY State is owned by the US Government and all of the taxpayers live elsewhere?

Posted by: setnaffa | Feb 11, 2011 4:59:09 PM

How long before Governor Patterson rips everyone that sells off their NY vacation home for being selfish?

Posted by: Brian G. | Feb 11, 2011 5:10:10 PM

So much for the Hamptons. Good luck for the Connecticut real estate market on the other side of the sound.

-jcr

Posted by: John C. Randolph | Feb 11, 2011 5:16:37 PM

183 days isn't just a number legislators agreed was a longish time to spend in state, but a number chosen so there can be only one state where a majority of your time is spent. I think bobby's formulation (24hr*183days) make sense even if it inadvertently traps workaholics who average more than 12 hours/365 day working in NY.

AFAICT, according to this ruling, if you lived in CT, worked in NJ* and had some sort of vacation place in NY which you may not even use at all, your entire income is taxable in NY. Catching you is one issue, but that wouldn't change their claim, only their ability to find the people who do this.

*I am presuming you don't fly from CT to NJ or take a boat to commute.

Incidentally, this may boost teleworking for NY workers.

Posted by: anomdebus | Feb 11, 2011 5:19:59 PM

@WJ -- Your first sentence is correct. They had been paying New York tax as nonresidents, which allowed them to apply an apportionment percentage just for Mr. Barker's wages earned in New York. As residents, the state tax would be applied on all income, wherever sourced.

Using your numbers to keep it simple, the preliminary NY tax would be imposed on the $800K, and to determine how much of that the Barkers would have to pay, the percentage would be applied to this preliminary tax (in this hypo, 500K/800K = 62.5%). In CT, they would also compute a preliminary tax based on $800K, and would apply a credit for income tax imposed by NY. However, the credit is limited to the percentage of income applied to *CT* tax or the full NY tax, whichever is lower. And because NY's income tax rates are higher than CT's, it probably didn't quite even out moneywise, but it made some logical sense.

But now that NY is taxing them on all of their income, I'm not sure what CT would do if the Barkers tried to claim a bigger credit. They wouldn't become nonresidents of CT to allow an apportionment percentage, and they wouldn't necessarily *have* to let them increase their resident credit. In another aggressive NY/CT case - Zelinsky - CT didn't allow an increase to their credit when NY increased the tax on a nonresident for extra days he was actually working in CT. The same principle may apply here. If that happens here, the taxpayers are out a lot of money (several hundred thousand, in the actual case) without any credit in CT to offset it.

Posted by: Dan | Feb 11, 2011 5:20:28 PM

Who wants to own a second home in NY ?
NY is great for welfare and government workers.

Posted by: Jim | Feb 11, 2011 5:32:28 PM

Well...just how many people live in Southwestern CT, work in NYC, and own vacation homes on Long Island?

I can picture a wide swath of upper middle class folks that are rich enough to own a vacation home, but not rich or smart enough to have their vacation property held under some sort of incorporation or trust scheme.

Posted by: Xmas | Feb 11, 2011 5:36:15 PM

The WSJ's reporting is creating a controversy where there is none. The article conveniently glosses over the fact that the individuals in question worked in New York for at least 183 days in the year. That the individual owned a 'vacation home' in New York is only one of many FACTS that would have been taken into account in determining residency.

This is not a travesty - this is consistent with tax law in most jurisdictions. If you don't want to pay the tax in a region, don't work there.

Posted by: John Schappert | Feb 11, 2011 5:40:32 PM

Why there are any productive citizens still living in NY baffles me. The entire state seems like a conspiracy to mulct every possible cent from the worker while distributing the gains only to the bureaucrats and the tax-eating section of the body politic.

The reality is that NY, like Ill, Cal and Mass, are beyond hope. There's a huge crash coming in the near future for all of them and it's going to be very ugly. When it happens, I hope the state residents don't come looking to the rest of us for bailouts. My response would be a simple, emphatic, extremely negative two-word rejoinder. They did it to themselves; they should suffer the consequences.

Posted by: mac | Feb 11, 2011 6:06:45 PM

So what would be the "Maximum" number of states/cities who could claim you as a resident for the purpose of extracting tax money out of your pocket? Say for example you were a Pro Basketball player, or some sort of traveling salesman and traveled several states, each of which you had some sort of small permanent type residence, such as a studio appartment or sublease. (being cheaper than a hotel, and always available).

Could you wind up in a situation where your actual tax rate would exceed 100% of your taxable income?

Posted by: Georg Felis | Feb 11, 2011 6:16:13 PM

Change You Can Believe In!

Posted by: harkin | Feb 11, 2011 6:23:01 PM

"What will the judge do when all the land in NY State is owned by the US Government and all of the taxpayers live elsewhere?"

Then the judge will make something up. Thats what lawyers do. Eventually painting himself into a corner with this silliness and then will make up something even sillier.

You could do it, too. But, unless you are a judge, or legislator, your made up silliness won't become law.

Posted by: mack | Feb 11, 2011 6:41:27 PM

Are taxpayers liable for taxes on the same income to two or more states?

Posted by: Goatweed | Feb 11, 2011 6:50:50 PM

The day Texas opens a stock exchange New York will be empty. There is absolutely no upside to doing business or living there.

Posted by: Shakin' the tree boss, shakin' the tree | Feb 11, 2011 6:55:50 PM

"@ Bob: yes, if it's a rental property that's occupied or one is, in good faith, trying to let, then it doesn't count as an abode for these purposes."

How do you know? Using the same reasoning, it would be trivially easy for the court to rule otherwise.

Posted by: Cousin Dave | Feb 11, 2011 7:01:43 PM

You know, some of my ancestors lived in thatch huts all year round. Does this mean I can be taxed if I put up a pup tent at a campsite upstate?

Posted by: seguin | Feb 11, 2011 8:02:48 PM

Greg said: "And Wall Street was quick to holler 'save me' to the same government it now enjoys bashing."

You wanted an all-powerful government, unrestrained by the Constitution, and you got it. What's the matter? You don't sound happy. Not working out like you planned?

Posted by: John | Feb 11, 2011 8:31:43 PM

Greeeaaaattttt. New York will find a way to drive out more high earners.

Posted by: Alex | Feb 11, 2011 8:45:42 PM

John Schappert,
Just to be clear, no one has complained about the income tax he pays on his NYC job (which I expect he'd have to pay if he came into the NYC office, but less than 183 days/year). The complaints are only about the taxing of income that is not generated in NY. They are twisting the residency requirement to grab more in tax revenues.

If any part of the day being in the state counts, then the limit of how many states can claim you reside in is only limited by the speed you can zip around. I think you could probably get all of New England easily, perhaps most of the eastern seaboard.

Posted by: anomdebus | Feb 11, 2011 9:02:56 PM

I suggest that they register to vote on Long Island as New York has declared them residents.
Rahm should have had it so easy in Chicago

Posted by: Neo | Feb 11, 2011 9:08:18 PM

Well let's take it to the extreme. Suppose you had homes in multiple states, each one played this NY card, and that the sum of the effective tax rates of each of the states plus the feds was >100%?

Posted by: steve sanchez | Feb 11, 2011 9:45:33 PM

There is a saying in recovery and it's called a "low bottom". It seems to me that NY (like CA) is going to have to hit the absolute rock bottom of fiscal suicidal stupidity before they finally realize that you can't tax and spend your way to prosperity.

Posted by: DocinPA | Feb 11, 2011 10:23:00 PM

This demonstrates the lack of common sense of so many attorneys who actually revel in the irony of insane interpretations. A standard principle in interpreting contracts, laws and constitutions is you don't follow interpretations that lead to absurd results.

The issue was where is their actual residence? The facts show that they actually lived in another state, and the story implied strongly that New York did not contest that fact. Instead the decision was based on a distorted interpretation of the elements of the law.

Do you attorneys wonder why there are so many disrespectful lawyer jokes?

Posted by: Ken in Camarillo | Feb 12, 2011 5:40:53 AM

I made a harsh comment about the tax attorneys (and a couple of commenters on this thread) who think this ruling will stand. I think it is obvious that it won't, but it is interesting to figure how the legal system will get to that result. I think it will be a federal court ruling based on the commerce clause, to resolve a commercial conflict between states. The court will rule that New York cannot arbitrarily declare a citizen of another state to be a New York resident.

This would be similar to a state law that says pi=3.00. It is obvious that the law is wrong, but on what grounds could a state judge set it aside or disregard it? Probably based on the damage to commerce and public safety that would be caused by enforcing it. But I'm sure plenty of attorneys would be ready to step up and defend full enforcement of such a law.

Posted by: Ken in Camarillo | Feb 13, 2011 4:08:06 AM

To Dan at 2/11 5:20pm posting.

Thank you for answering my question.
Regards,
WJ

Posted by: WJ | Feb 13, 2011 3:36:33 PM

I couldn't acquaint from the court's opinion, but I'm apprehensive why they didn't go afterwards the one hundred eighty three days language, by arguing that, if NY wants to calculation his plan time as getting aural the state, they can alone calculation the absolute time spent on NY clay - i.e., maybe 10 hours per day - and again add up the hours to see if they totaled added than abounding day.

Posted by: american gold buffalo | Feb 15, 2011 4:47:23 PM

Does this mean, if you take a driving vacation, all states you drive through would get a piece of your income as well? After all, you spent time there!

Posted by: Tom | Feb 16, 2011 1:11:37 PM