Chapter 23 Smartbook

The existence of either employees or property in a state to a degree that triggers nexus is also known as a business having a(n) __________ in that state.

physical presence

Separate return states:

require only entities with nexus to file a tax return

Although generally exempt from sales tax, more and more states are taxing _____ in order to increase revenue.

service

Apportionable (business) income can be calculated by deducting _____ income from the state base.

nonbusiness

Futbol Corporation (located entirely within State A) has federal taxable income of $100,000. This includes a state tax deduction for State A of $10,000. Futbol also earned tax-exempt interest (both Federal and State A) of $1,000. Depreciation calculated under federal rules was $20,000. Depreciation calculated under State A rules was $15,000. Calculate State A taxable income.

$115,000 Reason: $100,000 +$10,000 (state taxes are NOT deductible for state purposes) + $0 muni bond interest (the interest was not included for federal and is not included for State A) + $5,000 (federal depreciation exceeds state A depreciation by $5,000) = $115,000.

In Complete Auto Transit, the Supreme Court provided criteria for whether a state can tax an out-of-state business. Which of the following are those criteria?

- A sufficient connection between the business and the state must exist - The taxes must be fairly related to services provided. - A tax can NOT discriminate against out-of-state businesses. - A state may tax only a fair portion of the income.

Public Law (PL) 86-272:

- applies when activity is limited to solicitation only. - is a Federal law intended to protect certain businesses from state income taxation. - applies to an income tax only.

Which of the following are rules that generally apply to calculating the property factor for apportionment?

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

Popavich Company has the following average property values: State A = $300,000; State B = $200,000; State C = $600,000. State B has the throwback rule and State C is a non-taxing state. Calculate the property factor for State B.

.18 Reasons: $200,000/Everywhere $1,100,000 =.18 The throwback rule applies ONLY to sales.

McCoppin Industries has three employees: Dean, Annie and Kent. Dean works entirely in State A and was paid a salary of $130,000 plus a $30,000 bonus. Annie works entirely in State B and was paid a salary of $50,000. Kent works 60% of the time in State A and 40% of the time in State B and was paid $100,000 in commissions. Calculate McCoppin's payroll factor for State A.

.84 Reasons: All of Dean's salary and bonus are included in State A as both are compensation. None of Annie's salary is included in State A. All of Kent's commissions are included in State A, since Kent performed the majority of his services in State A.$130,000 + $30,000 + $100,000 = $260,000 for State A divided by $310,000 = 84 percent.

Which party to a sales transaction generally collects the sales taxes to remit to the state?

A seller with nexus

Which of the following transactions is likely to be EXEMPT from sales and use taxes?

A wholesaler buying inventory from a manufacturer to sell to retailers

Nonbusiness income

Allocable income

Rental income

Allocate to the state in which the property is located

Royalties

Allocate to the state in which the property is used

Interest and dividends

Allocate to the state of commercial domicile

Business income

Apportionable income

Which of the following activities exceeds the definition of mere solicitation under PL 86-272?

Collecting overdue accounts receivables. Maintaining an office other than an in-home office. Running credit checks on prospective customers.

Which of the following are included in the payroll factor?

Commissions paid to salespersons Bonuses paid to employees

States may only assess income tax on businesses with physical presence in the state.

False

Which of the following items are nonbusiness income?

Gain from the sale of stocks held for investment

Which of the following are typically factors used to apportion income?

Sales Payroll Property

Which of the following taxes are, on the average, a primary source of state tax revenue?

Sales and use taxes Property taxes Income taxes

JJ Legume is a business that sells outdoor clothing and equipment exclusively through mail order catalogs sent to consumers all over the U.S.. JJ Legume operates its entire business from its home state of State A and does NOT use its own trucks to ship to any customers (preferring the services of FedFast, an express shipping company). State B, in attempt to increase its revenues under the Wayfair decision, attempts to assert nexus against JJ Legume. Legume reported $300,000 of sales in state B. What is the expected result of the case for purposes of sales tax?

State B will prevail under the Wayfair criteria because JJ Legume reported over $100,000 of sales in State B.

Weasel Corp. has nexus in State A only. A consumer from State B purchases goods from Weasel, and Weasel is NOT required to collect sales taxes for State B. The consumer from State B owes use tax.

True

Which type of tax concept does NOT respect the separate ownership form and structure of related businesses?

Unitary return

Howie drives over the state line from his home State A into State B to buy furniture. He pays State B sales tax of 4%. He brings the furniture back to his home in State A, where the sales tax rate is 7%, and enjoys it for the next few years. Does Howie owe any additional sales or use taxes?

Yes; Howie owes an additional 3% use tax to State A.

The method to divide nonbusiness income between different states is:

allocation

State taxable income is calculated by multiplying business income by the _____ factor and then adding any nonbusiness income allocated to the state.

apportionment

When a state exerts the right to tax a business based on factors beyond a physical presence, such as providing infrastructure such as phone lines, they have invoked _____ income tax nexus.

economic

The starting point for state taxable income is frequently:

federal taxable income

An income tax is assessed by _____ states.

most