State and Local Taxation

Business income is generally :

-Generated from business's regular operations (transactional test), or - From the sale of property that is an integral part of the business(functional test)

Nonbusiness income generally included:

-Investment income -Income from transactions not part of regular operations If investment income is generated by regular business operations it is business income

C. Property Taxes

1. Ad valorem taxes 从价税 based on the value or real property (realty taxes) and personal property (personalty taxes) 2. There are usually exemptions for certain types of property , including those for inventory. 3. A few states also tax intangible property 4. Usually levied for property owned at a specific date.

The followings types of activities are usually sufficient to establish nexus with a state (if these activities occur in the state)

1. Approving/accepting orders 2. Hiring/supervising employees other than sales staff 3. Installation 4. Maintaining an office or warehouse (an office maintained by an independent contractor does not establish nexus) 5. Providing maintenance or engineering services 6. Making repairs 7. Investigating creditworthiness or collecting delinquent accounts 8. Providing training for employees other than sales staff

Decreased by:

1. Federal income taxes paid 2. Expenses related to municipal interest income 3. Interest on U.S. bonds 4. Depreciation in addition to that allowed for federal purposes

A. Sales Taxes

1. Levied on tangible personal property and some services 2. Exemptions vary by state but usually include items bought for resale and that are used in manufacturing.

F. Unemployment tax

1. Levied on taxable wages with a limit per employee (usually $7,000) 2. Rate varies based on experience of employer

D. Franchise Tax

1. Levied on the privilege of doing business in a state. 2. Based on the value of the capital used in the jurisdiction (common stock, paid-in-capital, and retained earnings)

E. Excise tax

1. Levied on the quantity of an item or sales price. - Examples include tax on gasoline, cigarettes, and alcohol. 2. Can be charged to a manufacturer or consumer.

NEXUS for taxing a corporation's income does not exist if activity in the state is limited to:

1. Soliciting sales of tangible personal property that are approved and shipped outside the state 2. Advertising 3. Determining reorder needs of customers 4. Furnishing autos to sales staff

Supreme Cort developed 4 tests to determine jurisdiction to tax (complete auto transit v. brandy)

1.Business activity must have substantial nexus with state 2. The tax must be fairly apportioned 3. The tax cannot discriminate against interstate commerce 4. The tax must be fairly related to services that the state provides

State income Tax computation

A model law known as the uniform division of income for Tax purposes Act (UDIPTA) helps to minimize differences among state tax laws.

Types of state and local taxes

A. Sales Taxes B. Used Taxes C. Property Taxes D. Franchise Tax E. Excise Tax F. Unemployment Tax G. Incorporation Fee

Property factor is computed as:

Average value of property in state/All property

Jurisdiction to Tax

Because many businesses conduct operations in more than one state, a significant issue is determining which states have the authority to levy a tax on a particular business.

Apportionment- 分摊

Business income is apportioned among the states in which it is earned based on apportionment factors such as sales, property, and payroll Some states use only one apportionment factor; others vary in how they weight the factors. Different types of factors are used for financial institutions and service businesses.

Difference in business /non business income

Business is apportioned among all states in which the corporation does business. Non-business income is apportioned only to he corporation's home state (determined in various ways) or the state in which the income is earned.

G. Incorporation frees

Charged for incorporating in a state or registering to do business in a state.

Payroll factor is computer as:

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

Foreign Corporation

Corporations incorporated in another state

Domestic Corporation

Entities incorporated under the laws of particular state.

Step 1 for computing state income taxes

Federal taxable income, increased by adjustments such as (specific rules depend on state): 1. Dividends received deduction 2. Expenses related to interest earned on U.S. bonds 3.State income taxes 4. Depreciation in excess of that allowed for state 5. Municipal interest taxed for state purposes

B. Use Taxes

Levied on the use of tangible personal property that was not purchased in the state

Nexus

The degree of the relationship that must exist between a state and a foreign corporation for the state to have the right to impose a tax. The application of NEXUS to state taxation is governed by Public Law 86-272. This law applies to sales of tangible personal property and does not apply to the sale of services or to the leasing or renting of property. Nexus is determined on a year by year basis

Sales factor is computed as

Total sales in state/ total sales