Ch 16 State and local tax ISSUES

Common state ADDITIONS

1. interest income on state/muni bonds 2. State income taxes deducted on Federal Return (includes franchise taxes based on income) 3. federal depreciation > state (diff systems) 4. State gain in excess of Federal gain on assets 5. Federal loss in excess of state loss on assets 6. Adjustments to amounts under Federal elections 7. Federal net operating loss deduction

PROPERTY FACTOR property includes: property in transit is includes in the NUMERATOR of _____________ state

1. land 2. buildings 3. machinery 4. inventory 5. offshore, outer space, partnership property destination (FOB destination)

PROPERTY TAXES includes what types of taxes?

1. real estate tax 2. personal property tax (car pmts)

How to find State taxable income? federal taxable income involves:

1. state modifications (addition and subtractions) 2. apportionable (business) Income (apply state's apport. fraction) 3. Non-apportionable income (allocate to the appropriate state)

Apportionment factors traditionally states used a ________- factor formula that equally weights?

3 sales, property and payroll

PROPERTY FACTOR leased property (when included) is values at

8 times its annual rental payments

Allocable income is removed from CORPORATE NET INCOME ______ the state's apportionment formula is used

BEFORE

How to find State taxable income? start with?

Federal taxable income

TAXATION OF PARTNERSHIPS AND LLCS an _______-state partner computes the income tax resulting from all of the _______ income from the entity partner is allowed a credit for ________ paid to other states on this income

IN pass through income income taxes

Unitary taxation each unit is deemed to contribute to ________ profits

OVERALL

PAYROLL FACTOR compensation includes: excludes:

wages, salaries, commissions amts paid to independent contractors MAYBE amts paid to corporate officers

USE TAX complements: consumers bringing purchased goods into state pay tax to state: states have difficulty:

where property is used enforcing use tax

UNITARY TAXATION Multinational operations: If state uses Unitary system, it may require inclusion of ____________ in determining apportionment

worldwide income

TAXATION OF PARTNERSHIPS AND LLCS Income, loss, and credit items are allocated and apportioned among the partners according to the

terms of the partnership agreement

SALES FACTOR sales of services is sourced to

the CUSTOMER's state

NEXUS is (for income tax purpose)

the DEGREE OF BUSINESS ACTIVITY that must be present before a state can impose tax on an OUT-OF-STATE entity's income

OTHER TAXES States may impose a variety of other state & local taxes on corporations, including

*1. Incorporation or entrance fees or taxes* 2. Gross receipt taxes 3. Stock transfer taxes 4. Realty transfer and mortgage recording taxes 5. License taxes, and *6. Franchise taxes based on net worth or capital stock outstanding*

SALES AND USE TAX A majority of states exempt certain sales FROM SALES AND USE TAX including

*1. Sales for resale* 2. Casual or occasional sales 3. Most purchases by exempt organizations 4. Sales of targeted items *5. Sales to manufacturers, producers, and processors*

May generally engage in the following activities WITHOUT establishing NEXUS for the company:

1 .Solicit sales 2. makes sales 3. maintain sales office

Common state SUBTRACTIONS

1. Interest on US obligations included in federal taxable income (states cannot impose income tax on income from US obligations) 2. State deprec > Federal 3. Federal gain > state gain on assets 4. State loss > Federal loss of assets 5. Adjustments to amounts under Federal elections 6. State Net Operating Loss Deduction 7. Dividends received from certain out-of-state corps to extent included in Federal return 8. Federal income taxes paid (not every state allows this deduction)

NEXUS typically exists if:

1. income is derived from within the state 2. property is owned or leased in state 3. persons are employed in state 4. physical or financial capital is located in state

Allocation consists of what type of income?

1. income/loss from SALE of non-business property 2. income/loss from rents/royalities from NON-business REAL or TANGIBLE property

PROPERTY FACTOR property typically values at:

AVERAGE, ORIGINAL OR HISTORICAL COST plus additions and improvements

Sales tax DEF in several states selected ______ are subject to tax

Consumers' tax on tangible personal property acquired for use or consumption SERVICES

SALES FACTOR sales to the US government is assigned to state where?

the sales occurs

Unitary taxation theory: operating divisions are ____________________ so they _______ be segregated into separate units ignores separate legal positions of companies so all combined for __________

Interdependent CANNOT apportionment

UNITARY TAXATION ________ apportionment base _______ apportionment factors

LARGER (all comapnies activities) SMALLER (each states %'s)

PROPERTY TAXES real estate normally fund at _____ level personal property could include ________ taxes

LOCAL Highway use

TAXATION OF PARTNERSHIPS AND LLCS entity is a tax-_______ entity NOT a tax-________ entity

REPORTING paying

TAXATION OF S-CORPS Multistate S corps must apportion and allocate income in same manner as: must file a state tax return where? must inform S/H of their share of income for each state BC WHY?

Regular Corp in each state with NEXUS so the S/H tax returns can be prepared

apportionment factors modified formula where ____ factors receives a larger weight tends to pull _______ amt of out-of state corp's income into the state tax relief to corps ______ in the state

SALES LARGER DOMICILED

TAXATION OF S-CORPS S corp may be allowed to file a _______ return and pay tax or all ________

SINGLE return shareholders

TAXATION OF S-CORPS special tax treatment? in non-S election states, S corps are taxed the same as: must have a valid ________________ at federal level to get S corp treatment in states

YES C-Corps S corp election

UNITARY TAXATION combined reporting? consolidated returns?

YES filed in every unitary state where more untiary members have NEXUS YES some states allow/require if filed for FEDERAL

PROPERTY FACTOR fraction

amt of REAL and TANGIBLE PERSONAL PROPERTY owned or rented in the state _____________________________________________ ALL corp's property owned or rented

How to find State tax liability? take state taxable income and?

apply tax rates (FLAT TAX 21%??) AND subtract state tax credits

ECONOMIC NEXUS

broader definition of NEXUS physical presence is NOT required

Apportionment consists of what type of income?

business income (integral part of taxpayer's regular business)

apportionment is:

the way a business income is divided among state where it conducts business (net income as a whole then apportions it ti a given state)

SALES TAX vendor acts as

collection agent

PAYROLL FACTOR fraction

compensation paid within state _____________________________________________ total compensation paid by the corporation

PAYROLL FACTOR some states require ___________ be included in the payroll factor

deferred compensation (401k plans)

SALES FACTOR dock sales occur when? purchaser has out-of-state loc

delivery is taken at SELLER s shipping dock purchaser's state

SALES FACTOR *throwback rule* out of state sales that aren't taxed in __________ state are ________________________________ : treated as _________ sales of the origination state also applies if purchaser is _________

destination pulled back into origination state in state US government

Allocation is:

directly assign specific components of a corp's income, net of related expenses, to a specific state

PAYROLL FACTOR if compensation is in more than one state?

employee's base of operations place where work is directed/controlled employee's state of residency

TAXATION OF PARTNERSHIPS AND LLCS SOME STATES: require entity make __________ for out-of-state partners allow _______ returns to be filed for out-of-state partners

estimated tax payments composite

TAXATION OF PARTNERSHIPS AND LLCS Most states treat partnerships, LLCs, and LLPs in a manner that parallels _______ treatment

federal

SALES FACTOR fraction

in state corp sales + sales to the Fed Gov ___________________________ corp's TOTAL sales everywhere

non-business income

investment income -dividends, interest, rent places NOT related to business

Many states have adopted UDITPA either by

joining the Multistate Tax compact or modeling their laws after UDITPA

Uniform Division of Income for Tax Purposes Act (UDITPA) is a

model law relating to assignment of income among states for multistate corps

UNITARY TAXATION Most unitary states allow Water's Edge election so

only U.S. operations are included

PAYROLL FACTOR only compensation related to _____________ of apportionable income is included in payroll factor compensation related to _______________ income is NOT included

production non-business

PAYROLL FACTOR if compensation is related to both business and nonbusiness income then?

prorated between the two

No NEXUS if the only "connection" to a state is solicitation for

sale of TANGIBLE, PERSONAL PROPERTY with orders sent outside the state for approval and shipping to customers SALES TAX still apply

SALES FACTOR double weighted

sales factor is counted twice and divide by 4

SALES AND USE TAX Solicitation by independent brokers is sufficient NEXUS for _______ turns _______ tax into ______ tax for that state seller required to _______ tax facilitates collection by ________

sales tax purposes USE, SALES collect state

SALES TAX generally not assessed on goods purchased for

shipment out of state

UNITARY TAXATION For multistate apportionment, all divisions or entities are treated as

single unitary base

non-business income is allocated to the:

state in which the income-producing asset is located

PAYROLL FACTOR employee compensation allocated to: UNLESS employee is

state where services are primarily performed transferred or changes positions

SALES FACTOR UDITPA's ultimate destination concept: _________ asset sales are assumed to take place at point of ____________?

tangible delivery, NOT where shipping irginates