Chapter 12 - State and Local Taxes

what is the state tax base?

adjustments made to the federal taxable income

how is non business income allocated?

allocated to one state (usually the state of commercial domicile)

what is another way a business can establish income tax nexus?

an economic presence

what is the formula for state tax income where the business has nexus?

apportioned business income + allocated nonbusiness income for each state where nexus exists

what are sales and use taxes?

levied on the sale or use of tangible personal property within a state

what does Public Law 86-272 protect?

limits the power of states to impose income taxes on nondomicilary businesses

what must companies do in the state where they have commercial domicile?

must always collect sales tax and pay income tax

what types of companies are protected by Public Law 86-272?

nondomicilary companies that engage in interstate commerce

what is a unitary tax return?

one return is filed for a group of related entities within a business

If a business is nondomicilary in a state, do they still need to pay taxes to that state?

only if the business has nexus in that state

how can businesses avoid nexus for taxes based on net income?

only sell tangible personal property in the state

who pays income or franchise taxes?

owed & paid by the tax payer who earns the income

what sales factors are excluded from the single weighted sales factor?

payroll and property factors

what are property taxes paid on?

personal property

how is nexus established for non-protected activities?

physical presence in the state

which types of sales are exempt from the sales and use tax?

purchases of inventory for resale food sale of real property intangible property services

What was the result of Quill vs. North Dakota?

reaffirmed National Bellas Hess decision that out of state businesses must have a physical presence in the state before being required to collect sales tax

what are businesses with sales and use tax nexus in a state responsible for?

remitting the sales tax even when failing to collect it

what types of sales are subject to the sales and use tax?

sales of tangible personal property restaurant meals rental car usage hotel room rentals

what are the 3 apportionment factors that states rely on?

sales, payroll & property

what types of businesses do not create nexus with a physical presence?

sellers of tangible personal property if activities are protected under Public Law 86-272

what must interstate businesses do with their income?

separate into business income and non business income

What types of businesses are not protected by Public Law 86-272?

service providers sellers of real property businesses licensing intangibles & non-income based taxes

what types of businesses create nexus with a physical presence?

service providers, sellers of real property & businesses licensing intangibles

what is commercial domicile?

the state where a business is headquartered and directs it operations (can be different from the state of incorporation)

what is nexus?

the sufficient or minimum connection between a business and a state that subjects the business to the state's tax system

why are adjustments necessary for the state tax base?

to account for the differences in the federal and state income tax laws

what is the purpose of state and local taxes?

to raise revenue that will finance the state government

where do businesses pay their income taxes?

to their state of commercial domicile

what is the ratio that businesses use to determine factors for states where income tax nexus is established?

total sales, payroll or property in a specific state: total sales, payroll or property everywhere

what does the payroll factor calculation include? where is is apportioned too?

- any income on the W-2 - payroll is apportioned to a single state where a majority of the work was completed

how is business income apportioned? what does it include?

- apportioned among states where business is conducted - includes all revenues earned in the ordinary course of business

what does the property factor calculation include? how is the value of the property determined? how is rental or leased property included?

- both real and tangible property only (no intangible) - use the average property values (beg+end/2) - value the property at the original cost (historical cost) - rented or leased property is included by multiplying annual rent by 8

What was the result of National Bellas Hess Inc. vs. State of Illinois? How did this affect states?

- businesses selling products over the internet can avoid collecting sales and use tax in the state where their products are being sold - states have missed out on substantial tax revenue because of this decision

what are the common types of non-business income? what are the general allocation rules for each?

- interest & dividends - commercial domicile - rental income - state where rental income is generated - royalties - state where property is used if nexus is held there - capital & investment gains - commercial domicile

what does the sales factor calculation include?

- sales of tangible personal property are sourced to the destination state - if there is no nexus - sales are "thrownback" to the state where the property was shipped from - sales of services are sourced in the state where they were performed

what is the major difference between separate tax returns and unitary tax returns?

- separate returns tax the entire apportioned income - unitary returns tax an entire group using a smaller apportioned percentage

what was the result of Mobil Oil Corp vs. Vermont Tax Commissioner?

- the income of a multi-state business can be apportioned if the in & out of state activities can form part of a unitary business - defined the 3 factors to determine unity

what are the requirements for businesses to be protected under Public Law 86-272?

- the tax is based on net income - only tangible personal property is being sold - in-state activities are limited to solicitation of sales - taxpayer participates in interstate commerce - taxpayer is nondomicilary - taxpayer approves orders outside the state - taxpayer delivers goods from outside the state

what are the 3 factors to determine unity?

1. Functional Integration (vertical or horizontal) 2. Centralization of Management (common officers) 3. Economies of Scale (group discounts)

what are the common federal/state adjustments made to determine state taxable income?

1. Positive Adjustment - state and local taxes cannot be deducted (raises state tax liability) 2. Positive Adjustment - Municipal Bond Interest taxed outside the state where it was earned 3. Negative Adjustment - US Obligation Interest can be deducted bc states cannot tax federal interest income

All 50 states have a combination of which 3 types of taxes?

1. Sales and Use 2. Income or Franchise 3. Property

which states do not impose a sales and use tax?

Alaska (All) Delaware (Dogs) Montana (Must) New Hampshire (Name) Oregon (Ostriches)

Which states do not impose income taxes?

Nevada (Never) South Dakota (Scream) Washington (Willy) Wyoming (Wonka)

what is the state tax base divided into?

business income and nonbusiness income

how is nexus created?

by having a physical presence in the state either through sales people entering to obtain sales or tangible personal property is located in that state

what is a separate tax return?

each entity of a company files a return for the states where they have nexus

what is the starting point for determining state taxable income?

federal taxable income

what must businesses engaged in interstate commerce do in terms of income taxes?

if requirements for nexus are met, businesses might have to remit income tax to that state

where do businesses file income tax returns?

in the states where they have nexus

where does the use tax liability accrue?

in the the state where purchased property will be used when no sales tax was paid

what weighted sales factor is used by most states?

single weighted sales factor

how is the state tax liability computed?

state taxable income * state tax rate

how is non business income divided?

subject to allocation directly to the business' state of commercial domicile

how is business income divided?

subject to apportionment among the states where nexus exists

what was the result of Northwestern States Portland cement vs. Minnesota?

the Supreme Court allowed Minnesota to tax an Iowa based business which resulted in widespread alarm and intense lobbying resulted in enactment of Public Law 86-272

What was the result of Wisconsin vs. Wrigley?

the Supreme Court defined solicitation activities as - advertising - samples & promotional materials being displayed without charge - passing inquiries or complaints to headquarters - checking inventory for reorder - maintaining a sample room for 2 weeks or less - recruiting/training/evaluating salespeople - owning & furnishing personal property/autos used in sales activities ** activities that do not meet the criteria of the definition create nexus

what was the result of Complete Auto Transit vs. Brady?

the Supreme Court provided 4 criteria that determine if states can tax nondomicilary companies & whether the tax is discriminatory 1. a sufficient nexus must exist 2. the state can only tax a fair portion of the business' income 3. the tax cannot be constructed to discriminate against nonresident businesses 4. taxes paid must be fairly related to services the state provides

when selling tangible personal property what must a company do in a state where they have nexus?

the business must collect and remit sales tax on a monthly, quarterly or annual basis depending on the size of the liability and state law thresholds

what is the requirement for businesses collecting sales tax in a state?

the business must have sales and use tax nexus

what happens if the buyer charges a sales tax in another state?

the buyer will have a sales tax liability for the incremental amount

what happens to the sales tax liability if the seller does not have nexus?

the customer is responsible for remitting a use tax (at the same rate as the sales tax) in the state where the property is being used

who collects the customer's sales tax liability?

the seller with nexus