SALT, Dormant Commerce Clause, 754 State Tax, Tax Chapter 15

Common State Modifications for State Personal Income Tax

- deduction for state income tax is not allowed some states allow - deduction for federal income tax - exemption of other state's muni bond interest usually not allowed - states have different CC rules - states have different carry forward/back rules - common to "de-couple" from certain temporary provisions (e.g. bonus depreciation)

Allocable income usually includes:

- income/loss from sale of nonbusiness property - income or losses from rents or royalties from nonbusiness real or tangible property - interest and dividends usually allocated to "home office"

Unitary business- constitutional test 3 factors

1. Functional integration 2. Centralized Management 3. Economies of Scale

Dealing with Privileges and Immunities and Dormant Commerce Clause Issues

1. If facts mention harm to interstate commerce, lead with Dormant Commerce Clause and mention Privileges and Immunities as an alternative. 2. If facts mention discrimination based on residency or citizenship, lead with Privileges and Immunities and mention Dormant Commerce Clause as an alternative. 3. Remember that corporations are protected by the Dormant Commerce Clause, but not Privileges and Immunities. 4. Market participant exception only applies to Dormant Commerce Clause.

Types of Discrimination against Interstate Commerce

1. Requiring business to be performed in state 2. Protecting local business 3. Discrimination as to in state resources 4. Transportation restrictions 5. Interstate mobility of persons

4 main categories of business entity recognized by tax system

1. Taxable corporation (separate taxpaying entity, income reported on Form 1120) 2. S corporation (flow-through entity, income reported on Form 1120S) 3. Partnership (flow-through entity, income reported on Form 1065) 4. Sole Proprietorship (flow-through entity, income reported on Form 1040, schedule C)

C Corporations tax form

1120

S Corporation tax form (flow through entity)

1120S

Public Law 86-272

1959 response to Supreme court case States may not impose taxes on measure of net income derived from interstate commerce if the "only business activities carried on within the state" are: - solicitation of orders for sales of tangible personal property, AND - orders are sent outside the state for approval/rejection AND - orders are filled by shipment or delivery from point outside state

Streamlined sales tax(SST), 1 state didn't conform

24 states. NY didn't conform

CA min tax

$800 min tax. also requires unitary reporting not separate

Exemptions from True object test

- Sale for resale - Casual or occasional sales - Sales of items used or consumed in manufacturing, processing, or fabrication - Sales of machinery or equipment - Essential items - Sales to religious, charitable or educational organizations - Real property repairs and improvements - Donations - Must obtain exemption certificate in many cases

Double taxation

C Corporations pay the first level of tax on their taxable income. The most profitable corporations are taxed at a flat 35 percent rate. Corporate shareholders are subject to double taxation because they pay a second level of tax on corporate income. Distributions to shareholders of C corporations are taxes as dividends to the extent they come from the "earnings and profits" (similar to economic income) of corporations. The applicable rate for the second level of tax depends on whether corporations retain after-tax earnings and on the type of shareholders.

S corp tax year

Calendar year

Taxable corps accounting period

Can choose a tax year that ends on the last day pf any month of the year - year end of owners is not relevant

Privileges and Immunities Clause

Citizens of each state shall be entitled to all privileges and immunities in the several states "secures and protects right of a Citizen of on state to pass into any other state...for the purposes of engaging in lawful commerce, trade, or business without molestation" *only applies to people not corporations*

Commerce Clause

Congress shall have the power to regulate commerce with Foreign Nations, and among Several States and with the Indian Tribes

DMA v. Brohl

DMA, a trade association of retailers, filed claimed against director of Colorado DoR who imposed a law that required retailers to notify purchasers that use tax is due, send a report of purchasers, and send statement to DOR listing customers *Supreme court reversed judgement of Court of Appeals but remands case for further proceedings regarding comity doctrine*

Delaware Holding Company

Delaware tax code exempts corporations from income tax if activities in state are confined to - maintenance and management of intangibles and collection and distribution of income from such investments or from tangible property physically located outside the state DHC must provide "sufficient substance" within Delaware in order to minimize possibility of taxation in another state

True object test

Determines whether something is property or service

Direct/Indirect Impact on Interstate Commerce

Direct burdens are viewed as being more harmful to interstate commerce than indirect burdens. Direct: if law passed primarily to regulate something in another state. Indirect: if law passed primarily to regulate something in state with incidental impact on other states. Court will be more wary of states directly trying to control other states than of states indirectly impacting interstate commerce by regulating a local problem. Not an independent test (it is part of the unreasonable burdens balancing test), but should be considered if the facts make relevant (If they emphasize local aspect over another state). McGoldrick doesn't like this test!

Flow-through entities

Do not pay taxes because income flows through to business owners who are responsible for paying tax on their income

Due Process Clause

Due process nexus requires some sort of "minimum contacts" between the TP and the taxing state. "Has the state given anything for which it can ask return?"

Instrumentalities in Transit (Non-Discriminatory State Tax)

Each state can tax the value of the instrumentality but the tax has to be fairly apportioned to contacts within the state. - State must work out ratio of how much of instrumentality belongs to it. Test for fair apportionment: rational basis.

Partnership accounting method

May use cash method unless they have a taxable corp as a member or partner

S corp accounting method

May use cash or accrual

Texas Margin Tax- 3(4?) mutually exclusive deductions

Modified GI tax Take federal return items of gross income (total revenue excluding pship income) less one of the following: - Total rev-$1 million - Total rev*70% - Total rev-COGS - Total rev- compensation paid to employees

S Corps ownership

Most restrictive - no more than 100 shareholders and cannot have shareholders that are corporations, partnerships, nonresident aliens, or certain types of trusts

Entities taxed as partnerships (LLC, GP, LLPs)

Must have at least 2 partners Partnerships - no restriction on owner type Limited partnerships - must have at least one general partner

States w/o sales and use tax

NOMAD- NH, OR, MT, AK, DE

States w/o corp. income tax

Nevada, Ohio, SD, WA, WY

Import/Export Clause

No State shall, without the consent of Congress, *lay any Imposts or Exports, except what may be absolutely necessary for executing it's inspections Laws:* and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be used by the Treasury of the United States: and all such Laws shall be subject to the Revision and Control of the Congress.

Can corporations avoid the second level of tax entirely by not paying dividends?

No for 2 reasons 1. Corporations that retain earnings may be required to pay a penalty tax in addition to income tax on their earnings. Unless corporations have a business reason to retain earnings, they are subject to a 20 percent accumulated earnings tax on the retained earnings. Also, personal holding companies (closely held corporations) are subject to a 20 percent personal holding company tax on their undistributed income. These penalty taxes remove the tax incentives for corporations to retain earnings. 2. shareholders also pay a second level of tax when corporations retain their after-tax earnings. Shareholders should experience an increase in the value of their shares to reflect any undistributed earnings (increase in assets). Individual shareholders pay the second tax at capital gains rates on this undistributed income when they realize appreciation in their stock by selling their shares. These long-term capital gains are generally taxed at 15 percent. Taxpayers with modified AGI in excess of a threshold amount pay an additional 3.8 percent net investment income tax on dividends. The threshold amount is $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for all other taxpayers. Because shareholders defer paying this second tax until they sell their shares, taxes on capital gains must be discounted to reflect their present value.

Unreasonable Burdens Balancing Test

On exam: do not list all factors (only the ones that a relevant for the facts). Most important factors: (1) state's interest and (2) harm to interstate commerce. Factors: 1. State's interest - Life, health, and safety are all important. - Safety regulations must actually improve safety. 2. Harm to interstate commerce 3. Degree to which burden falls in state or out of state - court more likely to uphold regulation whose burden falls primarily out of state (if burden falls on other states won't be self correcting). - if burden falls primarily in state, court may let political process correct it. 4. Adequate, reasonable alternatives 5. Direct/Indirect impact on interstate commerce 6. Dangers of multiple state regulations - state regulations that conflict with other state's regulations. (mud flaps on trucks that would have to be switched at state borders). 7. Need for uniformity vs. diversity 7. Disproportionate impact 8. Least discriminatory way of addressing

Non-Discriminatory (even handed) State Taxes

Each tax has its own rule. If the tax is fairly apportioned between in state and out of state, it's usually Constitutional. 1. Goods in transit 2. Instrumentalities in transit 3. State income tax 4. Sales tax 5. Use tax 6. Services rendered If tax does not fit into one of the categories below default to the Brady Test: 1. How substantial is nexus with the state? 2. How fairly is it apportioned? 3. How fairly does it relate to services rendered?

Distributions Partnerships

Entities taxed as partnerships do not recognize gain or loss when they distribute property (appreciated or depreciated) to owners. distributions to owners of entities taxed as partnerships are treated as a nontaxable return of capital to the extent of the owner's basis. Amounts in excess of basis are generally treated as capital gain to the owners.

Quill Corp. v. ND

Established that physical presence was need to collect tax under commerce clause- having customers in the state isn't enough

Converting to other entity types

Existing corporations have only two options for converting into flow-through entities. First, shareholders of C Corporations could make an S election to treat the corporation as an S corporation (a flow through entity). The only other option is for shareholders to liquidate the corporation and form the business as a partnership or LLC.

Commerce Clause

Fed. govt. regulates interstate commerce A tax is constitutional under the Commerce Clause if the four following criteria are met: 1. The tax must be applied to an activity that has aeswq in the state. 2. The tax must be fairly apportioned to activities carried on by the taxpayer in the state. 3. The tax must not discriminate against interstate commerce. 4. The tax must be fairly related to services provided by the state. "Fairly related" test significantly limited and is dead letter.

State Modifications

Federal and Munit Bond interest State income taxes Depreciation methods NOL Deduction Dividends Received

Services Rendered

Fee for services must fairly relate to services (very lenient standard). ex: LAX charging tax for each plane that lands.

Articles of organization

Filed to form LLC with the state

Articles of incorporation

Filed to legally form corporation with the state

4 Part Complete Auto Test

For commerce clause: 1. The tax must be applied to an activity that has substantial nexus in the state. 2. The tax must be fairly apportioned to activities carried on by the taxpayer in the state. 3. The tax must not discriminate against interstate commerce. 4. The tax must be fairly related to services provided by the state. (dead letter)

General partnerships

Formed by written agreement among the partners (partnership agreement) or formed informally without a written agreement when 2 or more owners join together in an activity to generate profits

Requiring Business to be Performed In-State

Generally per se invalid unless: 1. Law actually protects reputation of particular in state products; or 2. State is market participant preferring to buy in state products (distinguish between government owned and private entities). Example: public contractor case where city could not give subsidy to private contractor to which law gave monopoly. - Held to be discriminatory and per se invalid. - State can favor public entities more than it can private entities. - But city could give subsidy to a public contractor.

Goods in Transit (Non-Discriminatory State Tax)

Goods in transit are immune from state taxation. Once goods are moving or are committed to common carrier for purpose of moving, they are exempt from taxation until transit ends.

Dormant Commerce Clause

If Congress is given commerce power, then states have power taken from them and cannot discriminate or impose an unreasonable burden on interstate commerce and foreign commerce.

FICA and Self Employment Tax for partnerships

If owner is a general partner - income allocation is subject to self employment tax Limited partner - not subject to self employment tax

Discrimination towards Interstate Commerce

If state law is discriminating against interstate commerce, then it is per se invalid. 1. It is discriminatory if state favors in-state commerce over out-of-state commerce for no reason. 2. If treated differently because it's different, it is not discriminatory.

Unreasonable Burden on Interstate Commerce

If state law is even-handed, the state cannot impose an unreasonable burden on interstate commerce. Triggered when law is even-handed between in and out-of-state commerce, but harms interstate commerce. Balance competing interests to determine if burden to interstate commerce is justified by the state's interest.

Market Participant Exception

If state, city, or county is a market participant, then it can discriminate against interstate commerce and impose unreasonable burdens. The state can prefer in state over out of state. Taxing power does not fit within the market participant exception. 3 ways for a state to act like a private enterprise: 1. State as a buyer. 2. State as a seller (exception only applies for first sale, doesn't extend "downstream"). 3. State as an employer. (State's refusal to hire out of state employees would not violate the dormant commerce clause but it would violate the Privileges and Immunities Clause).

FICA and Self Employment Tax for S Corp

If you receive a salary from an S Corp as well as income from being an owner the income allocation is not subject to FICA or self employment tax

Individual shareholders

Individual shareholders receiving distributions from corporations pay the second tax on the dividends they receive, usually at a 15 percent tax rate. Also, taxpayers with modified AGI in excess of a threshold amount pay an additional 3.8 percent net investment income tax on dividends. The threshold amount is $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for all other taxpayers.

Pros/Cons to state conformity w/ IRC

Pros to conformity: - Simplicity - Reduction in compliance costs Cons to conformity: - Loss of control over tax revenues - Loss of control over policy making

Property Factor

Real and tangible personal property o Inventory o Owned property o Leased property Property must be rented and used by the taxpayer o Sourced to location of property Exclusions o Intangible property o Property producing non-business income In-state property/Total property

States without Retail Sales Tax

Alaska, Delaware, Montana, New Hampshire, and Oregon

Partnerships liability

All general partners are ultimately responsible for the liabilities of the partnership

Entity-level taxes S-corp. Exceptions

Almost all states will conform to federal S election: treat as pass-through entity Exceptions: CA, IL, MA, LA, NH, TN, TX

Basis Computation Flow through

An owner's tax basis in a flow through entity interest is increased for contributions to the entity and income allocated from the entity to the owners. The tax basis of the interest is decreased by distributions to owners and losses allocated from the entity to the owner.

Sales Tax

Seller's state always has first dibs (always has the right to charge sales tax).

Shareholder tax

Shareholders generally pay the second tax immediately when they receive dividends or in the future when they sell their stock and pay capital gains tax. For individual shareholders, the tax rate applicable to both dividend income and long-term capital gain is generally 15 percent under current tax law.

3 major movements in MTS towards:

Single Sales Factor Combined reporting to avoid shifting tax consequences Market sourcing

LLC liability

Solely responsible

Alabama Reg.

Targets out of state retailers with substantial sales in the state Sellers without an Alabama presence must pay state tax when making retail sales of tangible personal property into the state - must exceed $250,000 and perform "certain activities" AL trying to push back, contradicts physical presence requirements in Quill Corp. North Dakota

Ohio Commercial Activity Tax

Tax on the privilege of doing business in Ohio Gross receipts tax Not an income or sales tax

Accounting method for taxable corp

Taxable corps are required to use accrual method but can use cash method if annual gross receipts do not exceed 5 million for the three previous tax years

Unincorporated entities with more than one owner tax rule

Taxed as partnerships - form 1065

Unincorporated entities with only one individual owner

Taxed as sole proprietorship - schedule C form 1040

Gamble vs. SC

Taxpayers claimed they were owed a refund of $14,172 due to their status as nonresidents. The department determined that the taxpayers were residents of SC for the 2012 pursuant to SC Code Section 12 which states that a "resident individual" is an "individual domiciled in the state". Concluded the taxpayers are residents of the state of SC fro the tax year 2012 because ti was their state of domicile

Contributions of Property and Services

When a business owner contributes appreciated property to an entity in exchange for an ownership interest, the business owner realizes a gain in the amount of the value of the ownership interest received in excess of the basis of the property transferred. Shareholders of taxable corporations and S corporations are allowed to defer this gain as long as the shareholders contributing property to the corporation "control" the corporation after the exchange (defined as 80 percent ownership). In contrast, members of LLCs and partners in partnerships are allowed to defer the gain no matter their level of ownership in the business entity.

Unincorporated entities with only one corporate owner

Typically a single member LLC - Disregarded for tax purposes - income reported as if it had originated from a division of the corporation and is reported directly on the single member corporation's return

Converting partnerships/sole proprietorships to Corps

Typically, converting entities taxed as partnerships and sole proprietorships can be accomplished in a tax-deferred transaction without any special tax elections. For this reason, many businesses that plan to eventually go public will operate for a time as entities taxable as partnerships to receive the associated tax benefits and the convert to C Corporations when they finally decide to go public.

Property is valued at...

average historical cost plus additions and improvements some states use net book value or adjusted basis

Wrigley v. Wisconsin

U.S. Supreme Court defined "solicitation" De minimis level of non-solicitation activity establishes only a trivial connection with the taxing state-does not forfeit protection of P.L. 86-272

Congressional Authorization Exception

Under the Commerce Clause, Congress has the power to permit states, cities, or counties to violate dormant commerce clause rules. It takes an express federal law permitting them to discriminate or impose unreasonable burdens. Permission is narrowly construed. (ex: allowing discrimination against banks does not allow discrimination against investment advisors).

Business Income- 2 tests

Used for apportionment Transactional Test- Income arising from transaction and activities in the regular course of the taxpayer's trade or business Functional Test-Income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations

Tax Commissioner of WV s. MBNA

WV's imposition of its business franchise and corporation net income tax on MBNA for 1998 and 1999 did not violate the commerce clause based on substantial nexus and economic precedes test (empowers states to tax corporations that conducted business within the state without having physical presence)

Distributions Taxable Corp and S Corp

both taxable and S corporations recognize gain when they distribute appreciated property to shareholders. However, they are not allowed to recognize loss when they distribute property with a value less than its basis (depreciated property). shareholders of taxable corporations generally recognize dividend income in the amount of the fair market value of the distributions they receive. Distributions to S corporation shareholders are treated as a nontaxable return of capital to the extent of the owner's basis.

Losses generated by flow through entities

generally available to offset the owners' personal income. Note: The owner of a flow-through entity may only deduct losses from the entity to the extent of the owner's basis in the flow-through entity. In addition, deductibility of losses from flow-through entities may be further limited by the "at-risk" and passive activity loss limitations.

Property Factor

generally includes average value of real and tangible personal property owned or rented *Amount used in the state divided by all of corp's property owned or rented*

Washington B&O tax

gross receipts tax 40 cities impose, no city east of cascades

Phillips vs. NY

had little supporting evidence to confirm the fact that his home office was a necessity, his compensation was omission or salary and the location of the transaction (argued all commissions from years were based on sales to customers located out of NY but there is not proof)

Throwback Rule

if adopted by state, requires that out-of-state sales not be subject to tax in destination state be pulled back into origination state sales are treated as in-state sales of origination state

How to treat income and apportionment percentages for unitary basis

if partner and pship act on unitary basis, combine income and apportionment percentage, if not pship level apportionment- 2 levels

"Dormant" Clause

imposing an implicit restriction on ability of states to regulate interstate commerce

Interstate Mobility of Persons

Restrictions to interstate mobility are per se invalid because they violate the Privileges and Immunities Clause (and the Commerce Clause).

Income/ loss allocation

S - allocated based on stock ownership percentages

Property included in Property Factor

land, buildings, machinery, inventory, etc. may include CIP, offshore property, outer space property, partnership property if leased property is included it is valued at 8x annual rental payments

Apportionment

means by which business income is dividend among state in which it conducts business (has nexus) corporate determines net income for the company as a whole based on each state's income tax rues, the apportions some to each state, according to a mandated formula

Allocation

method used to directly assign specific components of a corporations income, net of related expenses, to a specific state typically income (loss) is removed from corporate net income before the state's apportionment formula is applied

Uniform Division of Income for Tax Purposes (UDITPA)

model law (1957) relating to assignment of income among state for multistage corporations many states have adopted by joining Multi-state Tax Compact or meddling their law

Provisions for S Corps

must have a valid S corp election at federal level to get S corp treatment in states

Losses generated by taxable C Corps

net operating losses (NOLs). While NOLs provide no tax benefit to a corporation in the current year the corporation experiences the NOL, they may be used to reduce corporate taxes in other years. Taxable C corporations with a NOL for the current year can carry back the loss to offset the taxable income reported in the 2 preceding years and carry it forward for up to 20 years. Losses from taxable corporations are not available to offset their shareholders' personal income.

New Mexico Taxation vs. barnesandnoble.com

nexus was sustained in NM because bn.com's competitors did not receive customer date, gift cards were usable online/in stores; loyalty programs were used by both; trademarks and logos were used; etc.

Separate taxpaying entities

pay tax on their own income

Sales/Use Tax Nexus

require suppliers to collect sales tax and remit it to the state

Mobil Oil test

set up factors of probability test for unitary business- functional integration, centralized management, economies of scale

S Corp basis computation

shareholders of S corporations are not allowed to increase the basis in their S corporation stock by liabilities of the S corporation. receive nontaxable distributions to the extent of the basis in their ownership interest, and they are not allowed to deduct losses allocated to them in excess of their tax basis.

State Personal Income Tax

starting point is federal income tax and adjusted for common state modifications

Use Tax

substitution for sales tax for online retailers that do not collect sales tax

State Taxation of Non-Residents

supreme court asserted states' right to tax nonresidents on income from property owned within the state and their business, trade, or profession carried on in the state Issues with professional athletes, work from home, interstate transport, and reciprocity agreements

Ultimate Destination Concept

tangible asset sales are assumed to take place at point of deliver, not where shipping originates

Geoffrey v. South Carolina Tax Commission

taxation of Geoffrey's royalty income is not prohibited by the due process clause or the commerce clause of the US constitution Geoffrey must be taxed and must pay the corporate license fee

Selective Sales Tax

taxes on specific items not as visible as retail sales tax including alcohol, tobacco, and gasoline

Cons of liquidating Corp

the taxes imposed on liquidating corporations with appreciated assets can be very punitive. Liquidating corporations are taxed on the appreciation in the assets they distribute to their shareholders as part of the liquidation. Further, shareholders of liquidating corporations are also taxed on the difference between the fair market value of the assets they receive form the liquidating corporation and their basis in their stock.

Apportionment Factors

three-factor formula that equally weights sales, property, and payroll states may modify formula where sales favor receives a larger weight

Compensation included in Payroll Factor

wages, salaries commissions EXCLUDES: amounts paid to independent contractors; some states exclude amounts paid to corporate officers Some states require deferred compensation amounts be included

How to opt out of including foreign income in in combined return for four states that include it

water's edge election

Sales Factor

*Corp's sales in the state divided by corp's total sales* everywhere must follow UDIPA's "ultimate destination" concept

Payroll Factor

*compensation paid within a state divided by total compensation paid by the corporation*

Common State Income Modifications

- Depreciation (IRC Sec 179) - Domestic Production Activities Deduction-Sec 199 - State Income Taxes-IRC Sec. 164 - Dividends received deduction-IRC Sec 243 - NOL carryback/carryforward - Section 78 Gross Up - Subpart F Income - Interest on Federal Obligations - Federally Tax Exempt Interest - Intangible and Interest Expense incurred with related entity transactions - Fed. int. income - Fed. income taxes

To retain limited liability protection for shareholders

1. Create, update, and comply with bylaws 2. Have a BOD and hold regular Board meetings 3. Annual shareholder meeting 4. Issue shares of stock to owners 5. Comply with annual filing requirements specified by the state of incorporation 6. Pay any required corporate taxes

State Taxation of Interstate Commerce

1. Discriminatory state taxes 2. Non-discriminatory (even handed) state taxes

2 objectives accomplished by making tax-deductible payments to shareholders

1. It shifts income away from (relatively) high tax rate corporations to (relatively) lower tax rate shareholders. 2. The deduction shields income from the corporate level tax. Strategies that shift income from corporations to shareholders include: • Paying salaries to shareholders (salaries are deductible to the extent they are reasonable) • Paying fringe benefits to shareholders (common fringe benefits include medical insurance, group-term insurance, dependent care assistance, tuition benefits). • Leasing property from shareholders • Paying interest on loans from shareholders.

If state treats out-of-state commerce differently because it is actually different

1. Law must actually advance a legitimate policy reason for discriminating. 2. If facts do not support state's justification, then apply virtually per se invalid rule.

Examples of Discrimination against Interstate Commerce

1. Law: no out of state milk. - State interest: protecting WI milk quality. - Court bought claim, but McG does not. 2. Law: AZ cantaloupes must be packed in AZ. - State interest: protecting reputation of AZ cantaloupes. - Failed balancing test because reputation not actually advanced by packing. 3. Law: no importation of out of state cattle. - State interest: protecting in state cattle from disease. - Court bought claim, but it did not know that in state cattle were already diseased. Therefore, we would decide that the law fails balancing test. 4. Law: refineries could not sell their own franchises. - State interest: protecting independent gas stations. - Court upheld law because state interest outweighed harm to commerce.

Discrimination as to In-State Resources

A state cannot prefer itself for its resources (per se invalid). (Example: prohibiting out of state waste). A state can discriminate if there is an actual, valid state concern: 1. If state alleges a legitimate state interest, use balancing test. 2. Cannot place entire burden of state concern on other states. 3. More likely to be valid if there are in state regulations advancing the state concern (ex: in state water regulation laws when it burdens other states). Reciprocal agreements are per se invalid. Exception: state can prefer itself over over states if it is a market participant. (ex: state can choose to buy only from in state manufacturers).

States without Individual Income Tax

Alaska (oil), Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming

States that include worldwide income in combined income

CA, ID, MT, ND

Reverse Credit States

CA, OR, VA, AZ, Indiana

Corporate shareholders

Corporate shareholders receiving dividends are not entitled to the reduced dividend tax rate (15 percent) available to individual shareholders. Rather, the dividends are subject to the corporate shareholder's ordinary rates. Further, dividends received by a corporation are potentially subject to another (third) level of tax when the corporation receiving the dividend distributes its earnings as dividends to its shareholders. This potential for more than two levels of tax on the same earnings prompted Congress to allow corporations to claim the dividends received deduction (DRD). A corporation receiving a dividend is allowed to deduct a certain percentage of the dividend from its taxable income to offset the potential for additional layers of taxation on the dividend when the corporation distributes the dividend to its shareholders. The dividends received deduction percentage is 70, 80 or 100 percent depending on the extent of the recipient corporation's ownership in the dividend paying corporation. Thus, the DRD partially mitigates the tax burden associated with more than two levels of tax on corporate income.

Corporation liabilities

Corporation is solely liable

Legal classifications of a business entity

Corporation, limited liability company, general partnership, limited partnership, sole proprietorship under state law

Joyce vs. Finnegan state

Joyce: (TX & OR) separate entity approach- each corp. in the unitary group is evaluated separately when determining whether it is taxable in each state Finnegan: (AZ & CA) Combined group approach- each unitary group evaluated as a whole, if one corp. in a group entire unitary business is taxable for apportionment

Discrimination against Interstate Commerce on Exam

Lead with per se invalid, but then recognize that the Court has balancing test when state offers justification for discrimination. Court tends to accept state's justification. Factors to balance: 1. state interest (law must actually advance that interest); 2. harm to interstate commerce; 3. degree to which burden falls in-state or out-of-state; 4. reasonable, adequate alternatives; 5. direct/indirect impact on interstate commerce; 6. danger of multiple state regulations.

Taxable Corporations

Least restrictive ownership requirements - can have between 1 and infinity shareholders

Limited liability companies (LLC)

Legal entities separate from owners (members)

Limited partners liability

Limited partners are not responsible for liabilities but they also cannot participate in the activities of a business

Equal Protection

No state shall deny to any person within its jurisdiction the equal protection of law Supreme Court - state tax classifications require only a rational basis to satisfy and in taxation legislator possesses greater freedom in classifications laws that discriminate in favor of non-residence are allowed but laws that favor residents violate

Fifth Amendment

Nor shall any person...be deprived of life, litter or property without due process of law

Fourteenth Amendment

Nor shall any state deprive any person of life, liberty, or property without due process of law Supreme Court - state cannot assert personal jurisdiction over someone unless that person has "minimum contacts" with the state

Sole proprietorships

Not considered separate legal entity from owner

Transportation Restrictions

Not discriminatory if it actually improves safety. (ex: mudflaps improved safety, but outweighed by harm to interstate commerce).

Limited partnerships

Organized by written agreement and must file a certificate of limited partnership to be recognized by state law

Flow through entity tax year

Owner's tax year

Shareholders

Owners of a company - separate legal entity from corporation

Basis computation partnership

Owners of entities taxed as a partnership are allowed to increase the tax basis in their ownership interest by their share of the entity's liabilities. receive nontaxable distributions to the extent of the basis in their ownership interest, and they are not allowed to deduct losses allocated to them in excess of their tax basis.

General rule for taxation of tangible property vs. sale of services

Sale of tangible personal prop subject to sales tax unless exempt Sale of services presumed to be exempt unless identified as taxable

Exceptions to Dormant Commerce Clause

State can discriminate or impose unreasonable burdens on interstate commerce if: 1. it is a market participant; or 2. there is congressional authorization.

State Income Tax

State may impose income tax on any interstate business as long as it is fairly apportioned. - Determine ratio of goods and services rendered in state vs. out of state.

Protecting Local Business (Quarantine Laws)

State quarantine and inspection laws are allowed as long as the burden on interstate commerce is outweighed by valid health and safety reasons. Balance state's alleged interest against reasonable adequate alternatives and harm to interstate commerce. Triggered when state does not accept out of state goods. Difficult to determine if they're actually discriminating.

Discriminatory State Taxes

State taxation laws that discriminate against interstate commerce are per se invalid. ex: MD had county tax that gave credit to in state people but not out of state people. This is discriminatory, thus per se invalid. Out of state people were being taxed more because they're out of state. ex: tax rebates to only in state manufacturers.

Discriminatory Law is Virtually Per Se Invalid

States are allowed to treat out-of-state commerce differently if it is actually different. However, states cannot impose customs duties for goods imported from other states.

Use Tax

States can always impose a use tax on state residents for purchases in other states. If seller has substantial nexus with in state buyer's state, the seller has to collect tax. (Substantial nexus: retail outlet, warehouses, substantial amount of employees).

Supremacy Clause

The Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every state shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

Quill Corp. v. North Dakota

The lack of a physical nexus in a state is sufficient grounds to exempt a corporation from having to pay sales and use taxes to a state.

Rational Basis Test and Commerce Clause

There must be a rational basis for Congress to believe there is a substantial impact on interstate commerce, allowing Congress to intervene.

Payroll Factor

Total amount paid for compensation: o Includes paid directly to employees or third party (leased employees) o Generally payments made to contractors are not included In-state payroll/Total payroll

Reducing the Corporate Level Tax

When a corporation's marginal tax rate exceeds its individual shareholder's marginal tax rates, the overall tax rate on corporate income will exceed the flow-through rate even if shareholders can defer the second level of tax indefinitely. In these situations, it makes sense for closely held corporations and their shareholders to consider strategies to shift income from the corporation to shareholders. These strategies are all designed to move earnings out of the corporation and to shareholders with payments that are deductible (dividends are not deductible payments) by the corporation.

Partnership tax year

Year end consistent with the year end of partners

Residents for purposes of personal income tax

defined by different states as one or more of the following concepts: - domicile - presence in state for other than temporary or transitory purpose - presence in state for specified period of time - maintenance of permanent place of abode or a place of abode for a specified period of time - combination of the above

Kraft v. Iowa

eliminated discriminatory taxation of foreign dividends

Protected Activities- PL 86-272

o Soliciting orders for sales by any type of advertising. o Carrying samples and promotional materials only for display or distribution without charge or other consideration. o Providing cars to sales personnel for their use in conducting protected activities. o In-home office

Unprotected Activities- PL 86-272

oMaking repairs or providing maintenance or service to the property sold or to be sold. o Collecting current or delinquent accounts, even if using 3 rd party. o Installation or supervision of installation at or after shipment or delivery. o Training courses for personnel other than solicitation personnel. o Approving or accepting orders.

Unitary Taxation

operating divisions are interdependent so shouldn't be segregated into separate legal entities each unit is deemed to contribute to overall profits ignores separate legal existence of corporations