State and local taxes

nondomiciliary businesses

a business that is not domiciled or headquarter in a state ... are subject to tax only when they have nexus

trade show rule

a rule that permits businesses to have physical presence at conventions and trade shows, generally up to two weeks a year, without creating nexus.

Entities that are included on an income tax return require

when a business operates as more than one legal entities a state requires either separate tax return or unitary tax return

Interstate Commerce

- business conducted between parties in two or more states.

what does not meet the definition of solicitation?

- Making repairs. - Collecting delinquent accounts. - Investigating creditworthiness. - Installing or supervising the installation of property. - Training for employees other than sales reps. - Approving or accepting orders. - Repossessing property. - Securing deposits. - Maintaining an office other than in-home.

Sales Tax Nexus

- Nexus is the sufficient connection between a business and a state that allows to levy a tax on the business - establish through physical presence of salespeople or property within a states

Nexus for income tax - what constitutes?

- Physical presence -- for service providers, sellers of real property, and licensors of intangibles - Not for sellers of tangible property if their activity is "protected" under Public Law 86-272

What is exempt for sales tax?

- Purchases of inventory for resale are exempt from sales tax because the item is taxed when the inventory is sold - most states also exempt sales of real property, intangible property and services

Criteria for protection under PL 86-272

- The tax is based on net income - The taxpayer sells only tangible personal property in that state - in-state activities are limited to solicitation of sales - participates in interstate commerce. - The taxpayer is nondomiciliary. - approves orders outside the state. - delivers goods from outside the state.

Use Tax

- a tax imposed on the retail sales of goods (plus certain services) - Retailers are responsible for collecting and remitting the tax; typically sales tax is collected at the point of sale.

Sales tax

- a tax imposed on the retail sales of goods (plus certain services) - Retailers are responsible for collecting and remitting the tax; typically sales tax is collected at the point of sale.

If the sale tax has nexus the seller has to:

- collect sales tax from the buyer - completes sales tax return and remits the sales tax

Unitary tax return

- companies not filing a federal consolidated tax return - includes all members meeting the unitary criteria (can have nexus or not)

non business income is allocated when

- investment income is to the state of commercial domicile - rents and royalties are generally allocated to the states where the property is used

Separate tax returns

- required that each related entity with nexus files a separate tax return for each entity that has nexus in that state - can use tax planning to transfer ownership to a state that does not pay tax royalties, interest and etc.

Primary Goal

- revenue to finance state governments

Three primary revenue sources

- sales and use tax - Income or Franchise tax - property tax

Solicitation

- selling activities or activities ancillary to selling that are protected under Public Law 86-272. ex. any form of advertising, samples without charge, passing inquiries or complaints to home office, checking customer inventory for reorder, the trade show rule, owning personal property and auto in sales activities, recruiting, training and evaluating sales reps using homes or hotels.

What does Public Law 86-272 does not protect?

- service providers, -sellers of real property, or - businesses licensing intangibles.

Commercial Domicile

- the state where the business is headquarters and has direct operations - this location can be different from the place of incorporation

Nexus

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

Taxpayer is subject to tax if:

- the taxpayer's state of commercial domicile and -if the taxpayer has nexus

allocation

-nonbusiness income is subjected to allocation directly to the business's sate of commercial domicile - allocation is the method of dividing or sourcing nonbusiness income to specific states.

When do businesses have a physical presence in the state?

1. if it has sales people or independent contractors representing a business that enter a state to obtain sales 2. tangible property is located within a state ex. Company owned truck making deliveries. THIS CREATES Sales tax nexus

Apportionment formula relies on three factors

1. sales 2. payroll 3. property

What is business income subject to among sates where nexus exists?

Apportionment, which is the method of dividing business income of an interstate business among the states where nexus exists.

Sales tax -- when have to pay

If have nexus in the state (even for internet sales). If no nexus, buyer must pay use tax

Public Law 86-272

federal law passed by Congress that provides additional protection for sellers of tangible personal property against income tax nexus.

Economic nexus

the concept that businesses without a physical presence in the state may establish income tax nexus in the state through an economic presence there.