CH23
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 state may tax only a fair portion of the income. - 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.
Select the 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
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 - Include only business property - Use the average of the beginning balance and ending balance
Which of the following are generally subject to sales tax?
- Tangible personal property - Restaurant meals - Hotel room rentals
Hulk Corp. realizes it has income tax nexus with 5 states (all of which impose an income tax). As a result Hulk will:
- determine how to apportion and allocate income in each of the five states. - determine what adjustment each of the five states - makes to federal taxable income to compute state taxable income. - file a tax return in each state.
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 Reason: 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 are NOT included in the payroll factor? - Commissions paid to salespersons - Amounts paid to independent contractors - Bonuses paid to employees
Amounts paid to independent contractors Reason: Amounts paid to independent contractors are NOT part of the payroll factor.
Apportionable (business) income can be calculated by deducting ______ income from the state base.
Blank 1: allocable, nonbusiness, or allocated
State taxable income is calculated by multiplying business income by the _______ factor and then adding any nonbusiness income allocated to the state.
Blank 1: 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.
Blank 1: economic
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) _______ _______ that state.
Blank 1: physical Blank 2: presence
Match the types of income as described for state tax purposes.
Business income - Apportionable income Nonbusiness income - Allocable income
Hogarth, an accrual-based business, has nexus with States D, E and F. It does NOT have nexus with States G and H. State E does not have an income tax. To which states will Hogarth apportion its business income?
D, E and F Reason: Hogarth will apportion income to each state it has nexus with, including states with no income tax.
True or False: 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 - Gains from the sale of stock by a dealer in stocks - Royalties received from the licensing of a patent used in the company's trade or business. - Interest expense on debt used to buy property plant and equipment
Gain from the sale of stocks held for investment
Which of the following property types are generally excluded from the property factor for apportionment?
Intangible property Reason: Intangible property is generally excluded from the property factor. Note that frequently, income from intangible property is allocated, NOT apportioned.
Match the nonbusiness income with the typical rule for allocation.
Interest and dividends - Allocate to the state of commercial domicile Rental income - Allocate to the state in which the property is located Royalties - Allocate to the state in which the property is used
Alice is an independent sales representative in State C for Jonas Corporation, which does NOT have nexus in State C. Alice is careful to limit her activities to those protected under PL 86-272; however, once when Alice was driving to see her Mother in a nearby town, her car suffered a mechanical problem. In order to effect repairs, Alice had to empty her trunk of all the display inventory she carried. Another customer of the repair shop noticed her items, expressed an interest and due to the unexpected circumstances, Alice took the customer's deposit. As soon as Alice finally arrived at her Mother's she forwarded the deposit to the parent company. Does Alice's activity exceed the protection of solicitation under PL 86-272?
No Reason: Alice's activities were all within 86-272 except for accepting the customer deposit; however, 86-272 allows for a de minimis activity that the one-time circumstances probably allow.
Although generally exempt from sales tax, more and more states are taxing __________ in order to increase revenue.
Service
Strieby Corp. operates a business with three separate entities as subsidiaries that operate as a unitary business: Matty Corp., Kennedy Corp. and Jackson Corp.. Strieby has arranged operations so that Matty has nexus only with Texas, Kennedy has nexus only with Massachusetts, and Jackson has nexus only with California. Strieby is domiciled in California. Assuming California is unitary state, which entities will be included in the Strieby income tax return?
Strieby, Matty, Kennedy and Jackson will ALL be required to file a California return. Reason: Because all the entities operate as a unitary business and California follows the unitary concept, all the entities will file a single California return.
For PL 86-272 to apply, which of the following is NOT required?
The company's employees have no activity in the state. Reason: Activity that rises to the level of mere solicitation is allowed (and protected) under PL 86-272.
Which of the following court cases helps establish the definition of nexus for sales and use taxes?
Wayfair
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. Reason: Howie owes State A the difference between the sales tax paid to State B and the State A use tax.
The method to divide nonbusiness income between different states is:
allocation Reason: Items of nonbusiness income are directly allocated to certain states (often the state of commercial domicile).
Bono Corporation has nexus with States A, B, C and D. States A and C are unitary return states. States B and D are separate return states. Bono Corp will need to calculate state taxable income:
four times Reason: State taxable income is likely to differ for each state, unitary or separate, thus requiring four separate calculations.
The minimum connection between a state and a business that subjects the business to the state's taxes is:
nexus
Separate return states:
require only entities with nexus to file a tax return Reason: Unitary theory states will potentially include state income from businesses without nexus, while separate return states will not.
Sales taxes are collected from customers and remitted to the state by:
the seller
