State and Local Taxes - Chapter 3

Assume three companies (A and B and C) each have $1 million of sales in state Z. The three companies are all members of the same unitary group, but only Company A has nexus in the state Z. Under Finnigan method, how much sales would be included in the numerator of the sales factor calculation for state Z?

3 million

The Nevada commerce tax applies to entities that are engaged in business in Nevada and have Nevada gross revenue that exceeds ____________ annually.

4 million

Which California case established the three-unities test for determining the existence of a unitary business.

Butler Brothers v. McColgan

Which California case established the function integration test for determining the existence of a unitary business.

Container Corporation of America v. California Franchise Tax Board

The nexus requirement is rooted in which clause or clauses of the U.S. Constitution?

Due Process and Commerce

The ______________ was formed to solve problems through interstate cooperation, avoid double taxation by the use of fair apportionment, increase compliance in tax return filing, and achieve uniformity in tax administration.

Multistate Tax Commission (MTC)

Name the two states that require an S corporation election to be filed directly with the state

New Jersey, Pennsylvania

Which California case established the contribution dependency test for determining the existence of a unitary business.

Edison Stores Inc. v. McColgan

In the ___________ case, the court determined that the term "taxpayer" meant all the corporations within the combined unitary group (the corporations taken together).

Finnegan

List the three states that tax LLCs as corporations.

Florida, Texas, Pennsylvania

Nonbusiness income is:

Allocated to the state where the company is headquartered (commercial domicile).

For purposes of computing the Ohio CAT liability, a number of items are excluded from the gross receipts including:

both interest and dividends

UDIPTA Section 18 provides __________________ with the opportunity to use alternative apportionment formulas when use of the traditional three-factor formula would cause distortions.

both taxpayers and states

Income that meets either the transaction test or the functional test is considered _______________ income subject to apportionment.

business

The Multistate Tax Compact makes it more likely that income will be classified as ______________ income.

business

For income and franchise tax purposes, nexus exists if a corporation meets which of the following tests: a. It is incorporated in the state or has commercial domicile in the state. b. It is doing business in the state or is qualified/registered to do business in the state. c. All of above activities will create nexus for franchise tax purposes.

c

A ________________ group may consist of affiliated corporations that are not members of the same unitary group.

consolidated

In a market-based sourcing state, sales are sourced to the:

customer state

All states tax interest income generated by investments in federal obligations. (T/F)

false

California and New York are examples of states that require cost of performance rather than market-based sourcing. (T/F)

false

California and New York are examples of states that require separate accounting. (T/F)

false

Maryland has adopted combined reporting for unitary groups. (T/F)

false

Massachusetts has adopted combined reporting for unitary groups. (T/F)

false

Most states allow a deduction for state and local income taxes based on net income. (T/F)

false

Payroll related to activities that generate nonbusiness income are included in the payroll factor. (T/F)

false

The majority of states allow net operating loss (NOL) carrybacks. (T/F)

false

The payroll factor includes compensation paid to both employees and independent contractors (T/F)

false

The property factor usually includes intangible property. (T/F)

false

There has been a trend among states toward adopting separate accounting since 2010. (T/F)

false

Under UDIPTA, nonbusiness receipts are also included in the sales factor. (T/F)

false

Virginia has adopted combined reporting for unitary groups. (T/F)

false

When payroll is in a state where nexus does not exist, the payroll is thrown back to the state of commercial domicile. (T/F)

false

Property is included in the property factor when:

it becomes eligible for depreciation

State combined tax returns are _____________ in a unitary state.

mandatory

States have increasingly made _____________________a requirement since it drives more revenue to their states from out-of-state businesses.

market-based sourcing

Which type of nexus can be asserted for income/franchise tax purposes when the taxpayer has assets or employees in the state, even temporarily?

physical

Most states require the apportionment of NOLs on a ______________ basis.

post-apportionment

P.L. 86-272 prohibits the imposition of a net income tax on a seller of _____________ property.

tangible personal

"Nowhere sales" can occur if a state lacks a throwback rule. (T/F)

true

(T/F) A corporation that is incorporated in a state (and thus organized under its laws) is required to file an income tax return.

true

(T/F) In Gillette v. California Franchise Tax Board, a California appeals court upheld that California law could be modified to require single sales factor (SSF) apportionment.

true

California has adopted combined reporting for unitary groups. (T/F)

true

Companies are usually considered a unitary group if they are required to be consolidated for financial statements purposes under generally accepted accounting principles. (T/F)

true

For states with a throw-out rule, inventory that is in transit between states is eliminated from both the property factor numerator and the denominator. (T/F)

true

For states without a throw-out rule, inventory that in transit property is included in the numerator of the state of destination. (T/F)

true

Gain or loss from the sale of a plant by the manufacturer would be classified as business income. (T/F)

true

Historically, most (but not all) states east of the Mississippi River are separate accounting states. (T/F)

true

Historically, most (but not all) states west of the Mississippi River are unitary states. (T/F)

true

Illinois has adopted combined reporting for unitary groups. (T/F)

true

In a cost of performance state, sales are sourced entirely to one state. (T/F)

true

In states requiring separate accounting, each corporation doing business in a state files a separate tax return even if it is a member of a group that files a federal consolidated tax return. (T/F)

true

In the Finnigan case, the court held that sales by a unitary group member should not be thrown back to the state of origination if the sales were to states where the corporation itself was not taxable, but other members of the group were taxable. (T/F)

true

In the Joyce case, the court held that sales could not be included in the numerator of the California combined sales factor even though the corporation was a member of a unitary group that had other members taxable in California. To do so, the selling corporation itself must be taxable in California. (T/F)

true

Income from the sale of a subsidiary would be classified as business income. (T/F)

true

More than one unitary group can exist in a group of affiliated corporations. (T/F)

true

Most state require partnerships to file informational returns if they conduct or derive income from the state. (T/F)

true

Most states follow the federal rules and do not tax partnerships. (T/F)

true

Most states provide a resident individual with a credit for taxes paid to nonresident states. (T/F)

true

Most states recognize LLCs as flow-through entities and do not tax them. (T/F)

true

Most states require federal taxable income to be increased by the amount of interest received from state and municipal bonds, unless such interest is from an obligation issued from that state. (T/F)

true

New Jersey has adopted combined reporting for unitary groups. (T/F)

true

New York has adopted combined reporting for unitary groups. (T/F0

true

Payroll related to activities that generate business income are included in the payroll factor. (T/F)

true

S Corporation status permits a corporation to be taxed as a flow-through entity. (T/F)

true

Sales into a jurisdiction that does not impose an income tax (such as South Dakota) are counted as being for the state from which the sales originated. (T/F)

true

Single-factor sales formulas can be especially detrimental to out of state businesses because they do not allow any relief despite the company's property and payroll being located outside of the taxing jurisdiction. (T/F)

true

Some states require that the filing of a worldwide unitary group. (T/F)

true

States have increasingly adopted single sales factor (SSF) apportionment since it favors locally based companies. (T/F)

true

The Joyce case dealt with sales into California by a corporation that was not taxable in California due to P.L. 86-272. (T/F)

true

The denominator in the payroll formula is total compensation paid everywhere during the tax period, including compensation paid in a state where the taxpayer is not subject to tax. (T/F)

true

The goal of the throwback rule ensures that all sales are accounted for in the numerator of at least one of the states where the entity is taxable. (T/F)

true

The lessee should include leasehold improvements in its property factor. (T/F)

true

The numerator of the payroll factor includes compensation paid for services rendered within the state. (T/F)

true

UDIPTA provides a model three-factor formula usable by states to apportion a corporation's net taxable income among the states with which it has nexus. (T/F)

true

Under UDIPTA, all gross receipts from transaction and activities that are conducted in the regular course of the taxpayer's business are included in the sales factor. (T/F)

true

Under UDIPTA, sales of tangible personal property are sourced to the state of destination (where the shipment is destined). (T/F)

true

Under the throwback rule, sales are sourced to the state where the shipment originated if the purchaser is not taxable in the state of destination. (T/F)

true

Under the unitary approach, affiliated corporations that are considered part of the same business pool their results as a unitary group and file a combined tax return.(T/F)

true

When computing taxable income for federal income tax purposes, a corporation may annually choose to take either a credit or a deduction for foreign income taxes paid or accrued. (T/F)

true

When filing a combined tax return, transactions between members of the affiliated group are eliminated.

true

State consolidated tax returns are _____________ in a unitary state.

voluntary

Assume three companies (A and B and C) each have $1 million of sales in state Z. The three companies are all members of the same unitary group, but only Company A has nexus in the state Z. Under the Joyce method, how much sales would be included in the numerator of the sales factor calculation for state Z?

1 million

Rented property is multiplied by a factor of _____ and included in the property factor.

8

Which type of nexus can be asserted for income/franchise tax purposes when a subsidiary of the taxpayer is in the state?

Affiliate

In the ___________ case, the court reasoned the term "taxpayer" in the throwback rule applies only to the individual corporate taxpayer and not to its affiliates or to other members of the unitary group.

Joyce

The U.S. Supreme Court ruled that a state violates the Foreign Commerce Clause if it taxes foreign source dividends more heavily than domestic dividends in which landmark case.

Kraft General Foods v. Iowa (1992)

Commercial domicile exists if the corporation's principal place of business or headquarters is located in the state. A corporation with commercial domicile in a state is required to file an income tax return in that state. (T/F)

True

Nexus is the "minimum contact" that an entity must have with a state for the entity to be subject to the state's tax jurisdiction. (T/F)

True

The U.S. Supreme Court defined "solicitation" for purposes of P.L. 86-272 in which landmark case.

Wisconsin vs. Wrigley

Which type of nexus can be asserted for income/franchise tax purposes when an agent in the state acts for the benefit of the taxpayer?

agency

Business income is:

apportioned among all states with nexus

State _______________ tax returns include the pooled information of affiliated group of corporations operating in a unitary group.

combined

The Texas margin tax is calculated based on an entity's gross receipts after deductions for:

compensation or cost of goods sold

Delaware is a favorite place of incorporation because it does not tax:

dividends or intangible income

The Multistate Tax Compact regulations provide that the presence of the following factors creates a strong presumption that the activities of the taxpayer constitute a single trade or business: a. Horizontally integration b. Vertical integration c. Strongly centralized management d. Only A and B e. All of the above (A, B and C)

e

Which type of nexus can be asserted for income/franchise tax purposes when the taxpayer receives an income stream from an intangible asset that it owns in the state

economic

Under UDIPTA, owned property is valued at _______________.

original cost