Chapter 23-State and Local taxes

Lucy operates a hat shop in Alexandria, Virginia. Lucy's also ships hats nationwide upon request. Lucy's Virginia sales are $500,000 and out of state sales are $300,000. Assuming that Virginia's sales tax is 6%, what is Lucy's Virginia sales and use tax liability?

$30,000. $500,000 x .06=$30,000

Manner in which a state adopts the federal Internal Revenue Code?

-Adopt a previous version of the code. -Adopt the current version of the COde

Hulk Corp. realizes it has income tax nexus with 5 states (all of which impose an income tax). As a result Hulk will do what

-File a tax return in each state. -Determine what adjustment each of the five states makes to federal taxable income to compute state taxable income. -Determine how to apportion and allocate income in each of the fives states

What 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.

State law comes from what sources?

-Legislative (or statutory law) -Administrative Law -Judicial Law

How is business income apportioned?

-Sales -Payroll -Property

What are typically factors used to apportion income?

-Sales -Payroll -Property

What are typically used to apportion income?

-Sales -property -payroll

general rules for sales factor

-Sales of tangible personal property are sources to the destination state (the state where the personal property is delivered and used) -If the business does not have income tax nexus in the destination state, sales are generally "thrown back" to the state from which the property is shipped. (exp; if Wild West ships goods from Idaho to Montana, where it does not have income tax nexus, the sales are treated as if they are Idaho sales) -Dock sales should be sourced to the good's ultimate destination (e.g., sale picked up by an out-of-state buyer at the seller's in-state dock rather than being shipped to the buyer's out-of-state location) -Sales and services are generally apportioned to the state in which the services are performed. (California and Illinois are exceptions to this general rule, but the list of states that apportion services to the state in which the services are consumed is growing) -Government sales are sourced in the state from which they are shipped.

What are generally subject to sales tax?

-Tangible personal property -Restuarant meals -Hotel room rentals -rental car usage -some services (vary by state)

Under PL 86-272 businesses that sell tangible personal property within a state are protected from paying income taxes, even in a state where income tax nexus exists only IF they meet ALL of the criteria

-The tax is based on net income. -The taxpayer sells only tangible personal property in that state. -The taxpayer's in-state activities are limited to solicitation of sales. -The taxpayer participates in interstate commerce -The taxpayer is nondomiciliary -The taxpayer approves orders outside the state -The taxpayer delivers goods from outside the state through a common carrier

General rules for determining the property factors

-use the average property values for the year (beginning + ending/2) -Value property at historical cost rather than adjusted basis (do not subtract accumulated depreciation in determining value) -Include property in transit (such as inventory) in the destination state. -Include only business property (values of rented investment properties are excluded) -Include rented or leased business property by multiplying the annual rent by 8 and adding this value to the average owned-property factor.

Shelby has the following sales, payroll and property factors: North Dakota; Sales 50% North Dakota; payroll 10% North Dakota; property 25% South Dakota; Sales 50% South Dakota; payroll 90% South Dakota; property 75% What is Shelby's North Dakota apportionment factor if North Dakota uses a single factor sales formula?

50%. The single factor sale formula uses only the 50% sales factor

What will NOT automatically create sales and use tax nexus between a state and a business assuming the Wayfair rules are in addition to prior rules?

A business registration or license to do business in that state.

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

A seller with nexus

Nonbusiness income typical rule for allocation: Rental income

Allocate to the state i which the property is located in

Nonbusiness income typical rule for allocation: Royalties

Allocate to the state in which the property is used

Nonbusiness income typical rule for allocation: Interest and Dividends

Allocate to the state of commercial domicile.

The method to divide nonbusiness income between different states is

Allocation

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

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

What is not included in the payroll factor?

Amounts paid to independent contractors

An income tax is assessed on corporations by ____ states.

An income tax is assessed on corporations by most states.

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

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

All states employ a sales and use tax, income or franchise tax, and property tax.T/F

False

Businesses must collect sales tax unless protected by Public Law 86-272. T/F

False

Nexus is defined the same for sales and use tax as it is for income taxes. T/F

False

Public Law 86-272 protects sellers of real property from creating nexus. T/F

False

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

False

The state tax base is computed by making adjustments to book income. T/F

False

Unitary return states require each member of a consolidated group with nexus to be included in the unitary state tax return. T/F

False

The starting point for state taxable income is frequently?

Federal income tax

Nonbusiness income

Gain from the sale of stocks held for investments

What could create income tax nexus through physical presence?

Hiring an agent who performs warranty services. (Warranty work creates physical presence required for income tax nexus.)

State Z wihes to decrease the tax on companies with large capital investments in State Z and companies with substantial payroll in State Z. One way to achieve this change would be to

Increase the weight on the sales factor

What is NOT business/apportionable income?

Interest income

Where is income allocated to?

Investment income is allocated to the state of commercial domicile.

Separate return states require

ONLY entities with nexus to file a tax return

Pl 86-272?

Protects of places limits on states' power to impose income taxes on certain nondomiciliary businesses.

Where are rents and royalties allocated to?

Rents and royalties are allocated to the state where the property is used.

What is correct regarding a use tax?

Sales tax and use taxes can both apply to a sale if a good is purchased in a state where sales tax is paid and then brought into a state with a higher sales and use tax is in effect. (The sales tax is paid in the state were purchased and subsequently a use tax is paid on the incremental amount of tax in the destination state.)

What is NOT one of the general rules for calculating the sales factor?

Sales to a state where nexus exists, but no tax is imposed are thrown back to the state where the goods were shipped from. (Sales to a state are sourced to the state where they were shipped from)

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

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

What is not a primary revenue sources for most states?

Stock transfer taxes. Stock transfer taxes may be primary taxes in a state which has a stock exchange such as New York.

For PL 86-272 to apply, what is not required?

The company's employees have no activity in the state

The existence of either employees or property in a state to a degree that triggers nexus is also known as a business having a ______ ______ in that state

The existence of either employees or property in a state to a degree that triggers nexus is also known as a business having a physical presence in that state.

The ------ ------- ------ standard was adopted by the Multistate Tax Commission to provide a consistency for participating state determining economic nexus

The factor presence nexus standard was adopted by the multistate tax commission to provide a consistency for participating states in determining economic nexus

What isn't a requirement of Public Law 86-272?

The taxpayer sells only intangible personal property. (The taxpayer must only sell tangible personal property)

The Wayfair decision held that an out-of-state seller had economic sales tax nexus and a sales tax collection responsibility. T/F

True

The sales and use tax base includes services in come states? T/F

True

The trade-room rule allows businesses to maintain a sample room for up to fourteen days in a state without creating nexus. T/F

True

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

Unitary return

Is business income apportioned?

Yes

Is nonbusiness allocated?

Yes

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 of 7%, and enjoys it for the next few years. Does Howie owe additional sales or use taxes?

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