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 Local Taxes, Chapter 24, SALT Final, AC...

____ states require only those businesses with nexus in a state to file an income tax return, even when a group of companies file a federal consolidated return

"Separate-return"

The general rules for determining the property factors

- average ppty values for the year [(beg + end)/2] - value property at historical cost rather than adjusted basis (do not subtract A/D) - include property in transit such as inventory in the state of destination - include only business property (values of rented investment properties are excluded) - include rented or leased property by multiplying the annual rent by 8 and adding this value to the avg owned-property factor

State tax base is divided into

- business income - nonbusiness income

Supreme Court's factors to determine whether a group of businesses is unitary

- functional integration - centralization of management - economies of scale

State tax law includes

- legislative law - administrative law - judicial law

Property includes __ but not __

- real and tangible property - intangible property

3 primary revenue sources

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

Property Apportionment is computed as

Average Value of Property in State / Value of all Property

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

The physical presence requirement is a judicial interpretation of the ___

Commerce clause of the US Constitution

Payroll Apportionment is computed as

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

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

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

interstate commerce

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

Payroll for each employee is apportioned to how many states?

one (majority of where they perform services)

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

physical presence

Under PL 86-272, solicitation of tangible personal property is

protected

Payroll includes

salaries, commissions, bonuses, and other forms of compensation

Historically, most states have used an equally weighted 3-factor apportionment formula that uses what factors to arrive at the apportionment factor for each state?

sales, payroll, and property factors

PL 86-272 does not protect

service providers, sellers of real property, or business licensing intangibles or businesses from nonincome-based taxes

Unitary tax return

some states require one return for a group of related entities

Separate tax return

sometimes required for each entity with income tax nexus in the state

___ administer the law and promulgate regulations for their particular state

state tax agencies

Businesses wishing to avoid nexus for taxes based on net income must sell only

tangible personal property within the state

Companies doing business in multiple states must determine

tax return due dates, procedures for filing tax return extensions, and other administrative requirements specific to each state

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

The determination of whether the business has established income tax nexus within a state depends on

the nature of its business's activities in the state

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

If the seller doesn't have nexus, then the customer is responsible for remitting a ___ to the state in which the property is used

use tax

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

The important concept for companies filing a federal consolidated tax return

They can be separated. Also, separate companies can be unitary based on the criteria for unitary

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

T/F: If a business has nexus with a state, it may apportion income to that state - even if the state does not actually impose a tax

True

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

True

T/F: PL 86-272 doesn't apply to nexus for nonincome-based taxes such as gross receipts taxes or property taxes.

True.

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

Use Tax

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

Property Tax

___ along with property violates the PL 86-272 criteria and creates nexus

Providing services

___ are exempt from the sales tax

Purchases of inventory for resale

The power to ___ in the nondomiciliary state exceeds the protection of PL 86-272 and would result in the business being subject to income tax

accept orders

Use tax

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

___ tax returns are subject to passive investment companies.

Separate return

___ tax returns are subject to the potential manipulation through related-entity transactions

Separate return

The primary difference between separate and unitary states

Separate states tax the entire apportioned income of each separate business unit with nexus while unitary states tax the entire unitary group using a smaller apportioned percentage

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

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

allocation (assignment)

Payroll does not include

amounts paid to independent constractors

In addition to a physical presence establishing nexus, many states are asserting that ___ should establish nexus

an economic presence

Business income is subject to ___ among states where nexus exists

apportionment

Nondomicilary business

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

For PL 86-272 protection, accepted orders must be delivered by ___ to avoid creating nexus

common carrier (exceptions apply)

Sales and use taxes

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

Businesses must identify ___ for each specific state before apportioning the income to a particular state where they have income tax nexus

federal/state adjustments

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

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

Judicial

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

False. They can be different

State taxable income calculation

(Business income*Apportionment factor)+Nonbusiness income allocated to the state

The limit is on foreign taxes paid is computed as

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

3 Types of State Tax Law

1 - Legislative law - state constitution and tax code 2 - Administrative law - regulations and rulings 3 - Judicial law - state and federal tax cases

3 Primary Revenue Sources for State Governments

1 - Sales and use tax 2 - Income or franchise tax 3 - 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

Criteria for determining whether states can tax nondomiciliary companies

1. A sufficient connection or nexus must exist between the state and the business 2. A state may tax only a fair portion of a business's income 3. States can't impose a higher tax on nondomiciliary businesses than domiciliary 4. The taxes paid must be fairly related to the services the state provides

An important planning strategy w.r.t. nexus

Because nexus is determined on a legal entity basis, nexus can be limited by creating a separate legal entity

Nondomiciliary Businesses

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

PL 86-272

Congress placed limits on states' power to impose income taxes on nondomiciliary businesses

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)

Sales and Use Taxes

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

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

Foreign Effective Tax Rate

T/F: Nonincome-based taxes such as gross receipts taxes or property taxes are nondeductible for calculating taxable income for net income-based taxes

False

Throwback rule

If the business does not have nexus in the destination state, sales are generally "thrown back" to the state from which the property is shipped

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

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)

Physical presence does not necessarily create nexus for sellers of tangible personal property if their activities within a state are limited to "protected" activities as described by __

PL 86-272

This tax is levied on tangible personal property and some services

Sales Tax

Apportionment formula

Sales factor in state X = (Total Sales in state X)/(Total sales in all states)

TAXATION OF FOREIGN INCOME

TAXATION OF FOREIGN INCOME

Does a one-time sales activity violation create income tax nexus?

Technically, but under the de minimis activities rule, it may be excluded

Commercial Domicile

The state where a business is headquartered and directs its operations; This location may be different from the place of incorporation; A business must always collect sales tax and pay income tax in the state where it is domiciled

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

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