332 State and Local Taxes

General rules for determining the property factors are:

Average: [(beginning + ending)/2]

Public Law 86-272

Businesses are protected from income tax nexus if: - Tax is based on net income (not gross receipts or revenue) - Sells only tangible personal property - Limited to solicitation of sales - participates in interstate commerce - nondomiciliary - approves orders outside the state - delivers foods from outside the state. (Providing services along with tangible property violates the criteria and creates income tax nexus)

Economic Nexus

May establish income tax nexus if it has an economic presence in the state. (Use MTC Factor Presence Test)

Taxpayer has nexus

Nexus is the sufficient (or minimum) connection between a business and a state that subjects the business to the state's tax system.

State taxable Income

(Business income × Apportionment factor) + Nonbusiness income allocated to the state

Calculating the property factor for apportionment:

-Leased property is given an average value of the annual lease payments x eight -Include only business property - Use the average of the beginning balance and ending balance

Non Soliciting activities:

-Making repairs -Collecting delinquent account -Installing or supervising the installation of property -Training for employees other than sales representatives -Approving or accepting orders -Repossessing property -Securing deposits -Maintaining an office other than in-home

Solicitation Requirements:

-Soliciting by any form of advertising -Carrying samples and promotional materials for display or distribution without charge -Passing inquiries or complaints to the home office -Checking customer's inventory for reorder -Maintaining a sample room for two weeks or less; this is known as the trade show rule -Recruiting, training, and evaluating salespeople using homes or hotels -Owning or furnishing personal property and autos used in sales activities

Unitary Tax Return

-States west of the Mississippi River (Illinois) - Functional integration (vertical or horizontal integration or knowledge transfer) - Centralization of management (interlocking directors, common officers, or rotation of management) - Economies of scale (group discounts or other efficiencies due to size)

Four criteria for determining whether states can tax nondomiciliary companies

-Sufficient connection or nexus exists between the state and the business -State may tax only a fair portion of a business's income. -Tax cannot be constructed to discriminate against nonresident businesses. -Taxes paid must be fairly related to the services the state provides.

Select the manner in which a state adopts the federal Internal Revenue Code:

-adopt the current version of the Code. -Adopt a previous version of the Code.

Non-Business Income allocation

Interest & Dividends: State of commercial domicile Rental Income: Where property is located Royalties: Where property is located.

Income tax is assessed by:

MOST!!! 46 states to be correct!

Taxpayer's commercial domicile

State where a business is headquartered and directs operations

Separate states

Taxes all members where flow exists, but only to the extent of their combined apportionment factors.

Unitary States

Taxes only the amount apportioned to that state, based on the statutory apportionment methods.

Apportionment Formula

Three Factors: -Sales -Payroll -Property