ACCT 4400 - SALT #2 Apportionment, Multijurisdictional Tax Issues, Uses of Local/State Taxes, ACCT 570 - Ch 12: State & Local Taxes, 4400, Multi-Jurisdictional Tax, State and Local Taxation, Tax Law, Test 1: State Tax, Tax Chapter 23 - State and Loca...

Property apportionment factor =

"property" in state / total property (use COST, compute avg BOY & EOY prop, cap leased property at 8 * annual lease, exclude property that produces allocable income

The limit is on foreign taxes paid is computed as

(US Tax on WW Income * Foreign source taxable income) / WW Taxable Income

State tax base is divided into

- business income - nonbusiness income

State tax law includes

- legislative law - administrative law - judicial law

3 primary revenue sources

- sales and use tax - income/franchise tax - property tax

When do businesses have a physical presence in the state?

1) salespeople/independent contractors rep. a business enter a state to obtain sales 2) tangible property is located within a state

The sales factor includes what 3 items

1. all gross business receipts net of returns, allowances, and discounts

Two ways a business can operate in multiple states

1. branch operation 2. separate corporation

Which allocable income items (4) have NO throwback rule

1. interest & divs, 2. rent/royalties from real property, 3. CG/CL from real property, 4. CG/CL from intangible personal property

5 common allocations of nonbusiness income

1. interest and divs to state com dom (except on work cap, which is BI) 2. rental income to state where prop gen income 3. royalties to state where prop used ( if bus has nexus; if not, alloc royalties to state of com dom) 4. cap gains from invest prop to com doc 5. cap gains from sale rental prop to state where rental prop located

Apportionment factor includes 3 thangs

1. property 2. payroll 3. sales

Payroll includes what 4 items

1. salaries 2. bonuses 3. commissions 4. other forms of compensation

5 general rules for sales factor

1. sales of tang pp are included to the destination state 2. If doesnt have nexus in dest state, sales are thrown back to state from where shipped 3. dock sales should be sourced to goods ultimate destination 4. sourced where services performed (except IL) 5. gov sales sourced in state from where shipped

5 rules for property factor

1. use avg property for CY 2. historical cost, not AB (dont subtract accum depr) 3. include property in transit 4. include only business property 5. rented or leased property - multiply annual rent * 8 and add to average owned-property factor

Property Apportionment is computed as

Average Value of Property in State / Value of all Property

A typical formula for apportionment =

BIstate = BI * (%propstate + %payrollstate + %salesstate)/3

Foreign currency exchange gains and losses resulting from investment or personal transactions are

Capital

Excess foreign tax credits can be

Carried back 1 year and carried forward 10 years

Payroll Apportionment is computed as

Compensation paid or accrued in state / Total compensation paid or accrued

This is a corp for which more than 50% of the voting power or value of stock is owned by US Shers on any day of the tax year (limited to the SHers that own 10% or more)

Controlled Foreign Corp (CFC)

This tax is levied in the quantity of an item or sales price

Excise Tax (ex: gasoline, cigarettes and alcohol)

T/F: Commercial domicile is in the location of the place of incorporation

False. They can be different

The credit for foreign taxes paid are limited if the US effective tax rate exceeds the

Foreign Effective Tax Rate

Unearned income is foreign source if received from a

Foreign resident or from property that is used in a foreign country

This tax is levied in the privilege of doing business

Franchise Tax

The transfer of assets from the US to a foreign country may trigger

Income

These fees are charged for incorporating in a state or registering to do business in a state

Incorporation fees

__ law plays a significantly more important role in state tax law than in federal tax law

Judicial

The degree of the relationship that must exist between a state and a foreign corp for the state to have the right to impose a tax is called

Nexus

When is a business required to collect sales tax from customers?

Only if the business has sales and use tax nexus with that state

Foreign Currency exchange gains and losses resulting from the normal course of business are

Ordinary (NOT CAPITAL)

This tax (ad valorem) is based on the value of real property (realty taxes) and personal property

Property Tax

___ are exempt from the sales tax

Purchases of inventory for resale

This tax is levied on tangible personal property and some services

Sales Tax

This income is income from a CFC that are taxed to US Shers as a constructive dividend even if no actual distribution has occurred

Subpart F Income

TAXATION OF FOREIGN INCOME

TAXATION OF FOREIGN INCOME

What is one aspect of state tax research that makes it very difficult?

There are different tax codes for each state in which they are required to pay taxes

Sales Apportionment is computed as

Total Sales in State/ Total Sales

These have priorities over the tax provisions when dealing with US Tax Law or Foreign Tax Law

Treaties

Foreign tax payers are usually taxed only on US source income (T/F)

True

T/F A US Corp is generally not taxed on the net income of a foreign subsidiary corp until the income is repatriated in the form of a dividend to the parent corp in the US

True

T/F: A business must always collect sales tax and pay income tax in the state where it is domiciled.

True

T/F: Businesses with sales and use tax nexus in a state are responsible for remitting the sales tax even when they fail to collect it.

True

US TPers are taxed on usually all income all over the world (T/F)

True

____________ makes rules for allocating nonbusiness income across states

UDITPA

A model law known to help to minimize differences among state tax laws

UDITPA (Uniform Division of Income for Tax Purposes)

This tax is levied on taxable wages with a limit per employee

Unemployment Tax

This tax is levied on the use of tangible personal property not purchased in state

Use Tax

Use tax

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

Most states require businesses to _____________ nonbusiness income

allocate

_____________ _____________ means to directly trace income to a specific state based on established rules

allocating income

Nonbusiness income is subject to ___ directly to the business's state of commercial domicile

allocation (assignment)

Net business income is _________

apportioned

Business income is subject to ___ among states where nexus exists

apportionment

___________ means not directly traces, but indirectly apportioned via a mathematical formula

apportionment

A ___________ ____________ has 1 tax entity only

branch operation

Only the corporation doing _____________ in the state must ____________ and ___________ its ______________ to that state (territorial answer for most states)

business, allocate & apportion, income

Nondomicilary business

businesses not domiciled or headquartered in a state; subject to tax only where they have nexus

for payroll apportionment factor, paid comp is actual payment for ___________ basis taxpayer and expense for ___________ basis taxpayer

cash, accrual

____________ ____________ is the location where prop is delivered to and used in

destination state

Result for branch operation

divide 1 TI between states

CG/CL from intang personal prop allocated to

domicile state (no throwback)

Sales and use taxes

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

T/F: interest and dividends are NOT an allocable income item

false, they are - allocated to domicile state (no throwback)

if shipped to state - _______________ rule, if shipped from state ____________ throwback

general, throwback

The following activities are usually sufficient to establish nexus in a state

i) Approving/accepting orders ii)Hiring/supervising employees other than sales staff iii)Installation iv) Maintaining an office or warehouse v) providing maintenance or engineering services vi) Make repairs

Supreme Court created 4 tests to determine jurisdiction tax

i) Business activity must have substantial nexus in state ii) tax must be fairly apportionated iii) tax cannot discriminate against interstate commerce iv) tax must be fairly related to services that the state provides

Business income is apportioned among the states in which it is earned based on apportionment factors such as

i) Sales ii) Property iii) Payroll

Business Income has 2 tests to determine if it is considered this form of income

i) Transactional Test - generated from business regular operations ii) Functional Test - from the sale of property that is an integral part of the business

Throwback rule is

if state doesnt have nexus in destination state, sales are thrown back to the state property was shipped from

Payroll does NOT include amounts paid to _____________ ______________

independent contractors

Businesses engaged in ___ must also deal with income tax related issues.

interstate commerce

Payroll for employees who work in more than one state is sourced to the state where they perform the ____________________ of services

majority

We compute the state tax base by

making adjustments to federal taxable income

Sales tax

must be collected and remitted on a periodic basis by a business - when the business sells tangible personal property and - it has nexus in that state

Businesses create sales tax nexus when they have a __ in the state

physical presence

Property generally includes both ___________ and ________ ___________ property, but not ______________ property

real, tangible personal, intangible

Which allocable income items (4) have a throwback rule

rents/royalties from personal property, CG/CL from tangible personal property, patent/copyright royalties

Equally weighted three-factor apportionment formula =

sales + payroll + property factors/ 3

Double-weighted sales factor formula =

sales factor * 2 + payroll + property factors / 4

Result for separate corporation

separate accounting TI numbers - no dividing if each operates in only one state (potential for abuse?)

A ____________ ____________ has 2 tax entities

separate corporation

A unitary answer to multi-corporation taxpayers impacts returns filed - ___________ _____________ vs _________ ___________

single corp, combined return

Payroll for each employee is apportioned to a ____________ _____________

single state

Payroll apportionment factor =

state "comp" "paid" / total comp paid

Rents/royalties from real properties are allocated to

state of property location (no throwback)

Capittal gains and losses from real property allocated to

state of property location @ time of sale (throwback - domicile state)

Rents/royals from personal property allocated to

state of use by payer (throwback - domicile state)

patent/copyright royalties allocated to

state of use by payer (throwback - domicile state)

% sales apportion factor

state sales / total sales (if shipped to customer in state or shipped from that state)

___ administer the law and promulgate regulations for their particular state

state tax agencies

Income taxes

taxes based on *net* income

Whether or not a TP is subject to a state's taxing regime depends on

the TP's state of commercial domicile and whether the TP has nexus in that state

Apportionment among states is based on

the extent of the business's activities and property in various states

Commercial domicile

the state where a business is headquartered and directs its operations

Nexus

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

Primary purpose of state and local taxes

to raise revenue to finance state governments

Payroll is generally defined as _________ _____________ paid to employees

total compensation

_____________ answer - commonly-controlled corporate group alloc and apportion income to that state even if only one corporation does business in the state

unitary

Use tax only occurs

when a sell in one state ships goods to a customer in a different state and the seller is not required to collect the sales tax