04 Dec Do State Governments Pay Federal Income Taxes?
The IRS is a nuisance to some and a surge of problems for others. We can’t escape them, and we have to do what they ask, as long as it doesn’t violate our rights!
Most people know that no one can avoid the IRS, but what about the government itself? At least state governments – does the IRS bother them? Do they have to pay federal income taxes like the rest of us?
Let’s take a look at how that whole system looks and whether or not state governments are required to pay federal income taxes.
In general, the U.S. government doesn’t tax other branches of government. This is due to a doctrine called intergovernmental immunity. According to this doctrine, the federal government doesn’t have the right to tax states without their consent, and the states are not allowed to tax the federal government without its permission.
All of this is established in the Constitution, as well as in each individual state constitution. Additionally, Indian tribal governments are also recognized by the Constitution, so the same rules apply to them as well. Other entities that not included can be recognized as governments by a specific court decision or by new state law.
It sounds simple and set in stone, but the reality is a bit different.
The Rules and Exemptions from the Rules
As is usually the case with everything, there are rules, but there are also exemptions to those rules.
We, as people, are required to pay our income taxes to the government. The state governments are exempt from this rule and are under no obligation to pay federal income taxes. The Internal Revenue Code Section 115 states that all income coming from the exercise of or administration of a public function is exempt from gross income tax. In translation, everything done for and in the name of the state government cannot be taxed by the federal government.
However, if the state government engages in market participant activities, then they can be subject to some forms of taxation. That means that if a state government starts selling some products to its residents through an entity, then the product is still subject to the federal excise tax. In essence, if a state participates in the economy in a way that’s not part of its primary administration function, then the state has to pay taxes like all other market participants – i.e., businesses, organizations, and other similar entities.
In layman terms, as long as the state government does its primary job of governing and nothing else, it cannot be taxed by the federal government in any way.
The Bottom Line
Even though the answer to this question is a bit convoluted, in general, state governments don’t pay federal income taxes.
The same doesn’t go for you, though, and you’ll always have to pay your taxes. If you happen to do the opposite or end up in trouble with the IRS, you should contact Golden Tax Relief immediately. Our experts will explain your rights to you and help you in your dealings with the IRS by getting you the best possible outcome from your IRS predicament!