SALT Final, R1 M3, Chapter 1, Chapter 23: State and local taxes, ACCT 4400 - SALT #2 Apportionment, Multijurisdictional Tax Issues, Uses of Local/State Taxes, ACCT 570 - Ch 12: State & Local Taxes, 4400, Multi-Jurisdictional Tax, State and Local Taxa...
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
Interstate Commerce
- business conducted between parties in two or more states.
State tax base is divided into
- business income - nonbusiness income
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
Multi-state Tax Commission
- commission encourages states to adopt uniform tax laws that apply to mult-state and multi-national enterprises
Unitary tax return
- companies not filing a federal consolidated tax return - includes all members meeting the unitary criteria (can have nexus or not)
9 organization of agencies
- composed of five to seven members + one of which is appointed as chair -no majority of a particular political party can outnumber another party + 3 out of 5 or + 4 out of 7 May belong to the same political party -appointment at Federal level require Senate confirmation -appointees are not permitted to engage in other business or employment during their term - can be removed by the president + only for inefficiency +neglect of Duty +or malfeasance in office
Turnover tax
- consumption tax - sales tax levied at each step of the business chain (both wholesale and retail) but with no rebates or credits for prior taxes paid
Those that burden interstate commerce incidentally
- courts weigh the burden against the benfitis and find the undue burden , ONLY IF THEY clearly EXCEED THE LOCAL BENEFITS
Progressive Tax System
- current federal income tax system - one in which the tax rates increase as income increases - based on belief that taxpayers with higher levels of income should pay a greater portion of the taxes necessary to support the government
Common State Modifications for State Personal Income Tax
- deduction for state income tax is not allowed some states allow - deduction for federal income tax - exemption of other state's muni bond interest usually not allowed - states have different CC rules - states have different carry forward/back rules - common to "de-couple" from certain temporary provisions (e.g. bonus depreciation)
2 Types of Income are subject to lower tax rates:
- dividend income - long-term capital gains
Examples of Unprotected Activities of P.L 86-272
- engineering and design assistance -customer training (other than sales) - technical assistance -installation and start-up -Warranty, maintenance, and repair -Credit and collection
Three functions of the of the U.S. Constitution
- enumerates specific rights of persons in relation to governments -divides governmental power between federal and state -divides federal power between executive, legislative and judicial
Tax expenditures can take the form of:
- exclusions - deductions - credits - preferential rates for specific activities
Excise Tax
- form of sales tax - only sales tax levied by the federal government - generally levied on taxable goods for which there is a low elasticity of demand or on goods whose use the government wishes to discourage (sin taxes_
Supreme Court's factors to determine whether a group of businesses is unitary
- functional integration - centralization of management - economies of scale
VAT different from sales tax:
- generally included directly in the selling price at the consumer level - VAT not levied on goods exported to other countries
repair contractor
- goes to plant to repair big pieces of equip = real property contractor & the contractor will be responsible for the tax on the cost of the parts or material he uses in his job. NOT TAXABLE TO YOU *if he takes equipment offsite, it becomes taxable
Franchise Tax
- imposed in place of the income tax - excise tax based on the right to do business or own property in the state
Value-Added Tax (VAT)
- in most developed countries of the world besides the U.S. - type of sales tax that is added to a product or service based on the value added to specific points int eh production or service process
Allocable income usually includes:
- income/loss from sale of nonbusiness property - income or losses from rents or royalties from nonbusiness real or tangible property - interest and dividends usually allocated to "home office"
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
State tax law includes
- legislative law - administrative law - judicial law
Inheritance tax
- levied in leu of estate taxes - based on a person's right to receive property upon the death of another
Tangible Personal Property (TPP)
- may be seen, weighed, measured, felt or touched or is in any other manner perceptible to the senses -does not include: stocks, bonds, notes, or other obligations or securities; gold, silver, or numismatic coins; proprietary geophysical survey information etc.
No fed reg
- no fed law at all -state reg of interstate commerce is permissable <as long as it does not impose an undue burden on interstate commerce < does not discriminate against interstate commerce in favor of local bizs --prohibits discrimination against interstate commerce in favor of intrastate commerce <the commerce clause requires that all regulations be the Sam for local BIZ as for BIZ engaged in interstate commerce\ - a state may not place itself in a state of economic isolation from other states -the supreme court clarifies that the ban on discrimination does not apply to functions traditionally conducted by the GOVT for publcs benefit within a specific state <state sponsored activities is not subject to analysis under the commerce clause
Are donations to private, nonprofit corporations dedicated to supporting a college or university and its athletic program subject to state sales tax?
- not subject to state sales tax
Cleaning everything except clothes
- not taxable
Installation Charges
- not taxable
Other forms of wealth taxes (beside real property tax)
- personal property tax - tangible property tax - intangible property tax
Property includes __ but not __
- real and tangible property - intangible property
Pease Limitations
- reduces itemized deductions by lesser of: 3% of the amount by which agi exceeds threshold or 80% of itemized deductions otherwise allowable -applies to charitable contributions, home and mortgage interest, SAL income and property tax, Misc. itemized deductions
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
Computation of income taxes use 3 factors typically:
- sales - payroll costs - tangible property
Three primary revenue sources
- sales and use tax - Income or Franchise tax - property tax
3 primary revenue sources
- sales and use tax - income/franchise tax - property tax
Catering
- sales includes the fabrication, furnishing, preparing or serving, of TPP consumed on the premises of the person furnishing, preparing or serving on TPP -separately stated labor for onsite catering at the customer's location is not subject to 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.
Filing statuses
- single individuals - married couples filing jointly - married couples filing separately - heads of household (single parent)
Are membership dues or fees paid to a private non-profit athletic booster club or non-profit foundation subject to state sales tax?
- subject to state sales tax unless the fees don't grant access to a club or the privilege of accessing amusement, entertainment, athletic, or recreational facilities will not be subject to state sales tax.
Tax Expenditures
- tax breaks - result in a reduction in the revenue that would be collected under a more comprehensive income tax
Export Duties
- taxes levied on goods that are leaving the country of origin - discourage producers from selling their goods abroad by making them more expensive
Import Duties
- taxes on goods brought into a country and levied but eh destination country - encourages the purchase of goods at home by making imported goods more expensive
2 major problems related to wealth taxes have lessened government reliance on them as a source of revenue:
- the difficulty in establishing fair market value annually - the taxpayer's ability to "hide" personal property
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
Internal Revenue Code
- where income tax laws are codified - amendments and revisions can be made to specific sections of the code
overview of multistate corporate taxation
-44 states and District of Columbia impose a tax based on corp's taxable income •SD, WY - no corporate income/receipts tax •NV, OH, TX, WA - gross receipts tax -In more than 40 of those states, the starting point in computing the tax base is taxable income as reflected on the Federal corporate income tax return (Form 1120)
Apportionment Factors
-Apportionment formulas vary among states •Traditionally, states use a three-factor formula that equally weights sales, property, and payroll •Many states use a modified formula where sales factor receives a larger weight ○Tends to pull larger amount of out-of state corporation's income into the state ○May provide tax relief to corps domiciled in the state
Use Tax Examples
-Catalog Purchases -Internet Purchases -Equipment -Building Materials -Retail Dealers who remove inventory for use in their business -Purchase from outside taxing jurisdiction -Hospital, doctors, attorneys, accounting firms, engineering companies, & other service providers - intercompany transfers from outside the taxing jurisdiction
use tax complements sales tax
-Consumers bringing purchased goods into state pay tax to state in which property is used -States have difficulty enforcing use tax
sales tax
-Consumers' tax on tangible personal property acquired for use or consumption •In several states, selected services are subject to tax •Vendor acts as collection agent •Generally, not assessed on goods purchased for shipment out-of-state
Documents for "catch - all provision"
-Depreciation schedules -job listing & job cost detail reports -gross income reported on income statements & tax returns -purchase invoice totaling the cost of goods sold deduction taken on tax return -certain industry-specific documents
Truck Stop Truck Services
-Diesel -Lube Services -Tire Sales and Repairs - Showers - No charge with purchase of $100 or more -Truck Wash -Emergency Road Service
P.L 86-272 Limitations
-Domestic Corporations (only applies to out of state) -Foreign Commerce -Sales of intangible property -Activities connected with the sale of a service - Taxes not based on income
state modifications
-Federal taxable income generally is used as the starting point in computing the state's income tax base •State adjustments or modifications often are made to Federal taxable income to: ○Reflect differences between state and Federal tax statutes ○Remove income that a state is constitutionally prohibited from taxing
In response to the assessment notice: Optional
-File suit & request a commercial bond - include due date counting 30 calendar days
Unitary business are characterized by
-Functional integration -Centralization of management -Economies of scale
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)
allocable income generally includes
-Income or loss from sale of nonbusiness property -Income or losses from rents or royalties from nonbusiness real or tangible personal property
common state additions
-Interest income on state/municipal bonds -State income taxes deducted on Federal return -Federal depreciation expense in excess of amount allowed by state (if depreciation systems differ) -Federal losses where state basis exceeds the Federal basis -Federal net operating loss deduction
common state subtractions
-Interest on U.S. obligations (bonds) to extent included in Federal taxable income -State depreciation expense in excess of Federal (if depreciation systems differ) -State losses where Federal basis exceeds the state basis -State net operating loss deduction -State dividends received deduction
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
Tax characteristics
-Involuntary -made to the general treasury -for general governmental purposes -payment is used to defray general governmental expenditures
When analyzing the impact in relation to the state's uniformity and equality clause, what 2 questions must be asked?
-Is it a tax or fee? -If tax, is it a property tax or an excise tax?
Repairs to TPP
-Labor & material subject to tax - repairs to immovables become taxable if removed for offsite repair -materials used in repairs to immovables are taxable to the repair dealer (contractor) -taxes are due where the repair is made
Activities that Create Nexus
-Maintaining office in the state -Employees in the taxing state -Doing business within the state -Owning property in the state -Deriving income from sources within the state
taxation of S Corps
-Majority of states with corporate income tax have special provisions that govern S corporations •Only a few states do not provide special treatment for S corps ○In non-S election states, S corps are taxed the same as C corps •Must have valid S corp election at federal level to get S corp treatment in states
taxation of partnerships and LLCs
-Most states treat partnerships, LLCs, and LLPs in a manner that parallels Federal treatment •Entity is a tax-reporting, not a taxpaying, entity •Income, loss, and credit items are allocated and apportioned among the partners according to the terms of the partnership agreement
Inspection charges & Repair Estimates
-Not taxable -unless there is a repair done based off the inspection or estimate = taxable
In response to the assessment notice: Mandatory
-Pmt of assessment -Pmt of under protest pursuant -Appeal to the BTA for re-determination -Include the contract info for the board of Tax appeals
The powers of administrative agencies
-Power to create rules and regulations -power to investigate prosecuted , -advise, supervise -power to decide controversies
Who is a resident?
-Present for a purpose that is not temporary or transitory -Domiciled and absent for a temporary or transitory purpose
sufficient nexus typically exists if
-Property is owned or leased in state -Persons are employed in state -Income is derived from within state
Quill Corp vs. North Dakota
-Quill was a mail order company and did not have physical presence in North Dakota -Mailing catalogs satisfies " minimum contacts" test for due process but does not satisfy "substantial nexus" test for commerce clause
States may impose a variety of other state & local taxes on corporations, including:
-Real property and/or personal property taxes -Incorporation or entrance fees or taxes -Gross receipt taxes -Stock transfer taxes -Realty transfer and mortgage recording taxes -License taxes, and -Franchise taxes based on net worth or capital stock outstanding
some states taxation of partnerships and LLCs
-Require entity make est. tax payments for out-of-state partners -Apply an entity-level tax on operating income -Allow composite returns to be filed for out-of-state partners •Generally, an in-state partner computes the income tax resulting from all of the flow-through income from the entity ○Partner is allowed a credit for income taxes paid to other states on this income
Triggers
-Sale - Use -Importing -Leasing/Renting -Storage for use -Providing a taxable service
A majority of states exempt certain sales including:
-Sales for resale -Casual or occasional sales -Most purchases by exempt organizations -Sales of targeted items (food, clothing, medicine) -Sales to manufacturers, producers, and processors
Four Criteria for determining whether states can tax nondomiciliary companies
-Sufficient connection or nexus -State may tax only a fair portion of the business income -Tax cannot be constructed to discriminate against nonresident businesses -Taxes paid must be fairly related to the services the state provides
Returns and Payment of Tax
-Tax is due and payable on the first day of the month(local) -- 20th(state) -Dealer's signature is required on each return -the dealer shall attest to its accuracy - payment shall accompany the return - bad debts are not allowed as a deduction on a sales tax return
Furnishing of telecommunication services
-Taxable at the state level only -intrastate calls as well as all mobile calls taxed at 3%
Person does NOT include
-The state or any parish, city, district, etc. -federal government -Agent of governmental entity - Regionally accredited independent institution or higher education that is a member of the Louisiana Association of Independent Colleges & Universities -A church or synagogue
Unitary Taxation
-Theory: operating divisions are interdependent so cannot be segregated into separate units •Each unit deemed to contribute to overall profits •Unitary theory ignores separate legal existence of companies: all combined for apportionment -For multistate apportionment, all divisions or entities are treated as a single unitary base: •Larger apportionment base •Smaller apportionment factors (each state's %)
Immovables
-Tracts of land -component parts of tracts of land I.E. buildings, construction attached to the ground, standing timber, crops -building/standing timber when belonged by someone besides the land owner
more info on allocation and apportionment
-Typically, allocable income (loss) is removed from corporate net income before the state's apportionment formula is applied •Nonapportionable income (loss) assigned to a state is then combined with income apportionable to the state to arrive at total income subject to tax in the state
Sources of Law
-U.S. Constitution -State Constitution -legislative sources of law -Administrative sources of law -Judicial Law Sources
Three Unities Test
-Unity of ownership (common ownership) -unity of operation (performance of functions by one corp on behalf of entire group) -unity of use (policies made by central management)
If an amusement, entertainment, or athletic event sponsored by a non-profit corporation or another type of entity is held on a college or university campus, are admissions to this event subject to state sales tax?
-YES
payroll factor
-a fraction •Numerator is compensation paid within a state •Denominator is total compensation paid by the corporation -Compensation includes wages, salaries, commissions, bonuses, etc. •Independent contractor pay is excluded
Sales Factor
-a fraction •Numerator is corp's sales in the state •Denominator is corp's total sales everywhere
Cost Price
-actual cost of the articles of TPP w/o any deduction there from on account of the cost of materials used, labor, or service cost, except those service costs for installing the articles of TPP if such cost is separately billed to the customer at the time of installation, transportation, etc.
Elective Consolidated returns: common qualification requirements
-affiliates must file a federal consolidated return -affiliates must have nexus in state, must derive income from sources within the state, and may not be subject to special apportionment within the state (parent must have nexus too in FL)
providing services
-agencies a arise out of need -the presence of governmental agencies bring about a need for new agencies or expansion on the function of an existing one
Providing expertise
-agencies a created to refer a problem or area of concern to an expert for resolution and mgmt -agencies may have expertise beyond that of Congress or the executive branch - expertise is required for the devolpment of sound policies and proper decisns -provides needed continuity and consistency in the formulation application and enforcement of rules and regulations govenring bizs
Providing regulation
-agencies often replace competition with regulation -when aa biz is given monopoly power it loses it's freedom of contract <govermental body is given the power to determine the provisions of it's contrcts-regulation is often a substitute for competiton
Non-business income
-allocated -Income that is unrelated to a trade or business - Taxpayer allocates 100% of non-business income to a single state
Person
-any individual, firm, co-partnership, joint venture, association, corporation, estate, trust, business trust, receiver, syndicate
Dealer
-any person who manufactures or produces -imports or causes to be imported -sells at retail or offers to sell at retail or who has in his possession for sale at retail -has sold at retail or used, consumed, distributed or stored for use of consumption -leases or rents or who is the lessee or renter of TPP -sells or furnishes any of the services subject to tax -any person engaged in collecting the amt required to be paid by a transient guest as a condition of occupancy at a residential location as provided -receives any of the services subject to tax -is engaging in business in the state -once you become a dealer, you are required to register and remit sales and use tax to that jurisdiction
business income
-assigned to states using an apportionment formula -Business income arises from the regular course of business •Integral part of taxpayer's regular business
An agency relationship exists if....
-authority to act on behalf of principal -agent is subject to control of principal
Cons of Separate returns
-can't offset losses of one affiliate against the income of another -must develop defensible arm's length transfer prices for interecompany transactions
Types of businesses
-car dealerships -contractors -financial institutions -professional businesses -restaurants -retailers -hotel/motel -repair dealers -medical industries
General requirements for right to apportion income
-carry on business in another state -maintain a regular place of business in another state -taxable in another state -file a tax return in another state
Timely filed refund claim
-claims by a taxpayer for a refund of an "over payment" are subject to the same gen. 3 year prescriptive rule as claims by the collector for additional taxes owed
Interruption of Prescription
-collector issues a notice of assessment -collector files a summary proceeding in court - filing of any pleading by either the collector or the taxpayer in any court -filing of a false/fraudulent return -failure to file a return w/intent to defraud
UNdue burden on interstate commerce
-commerce clause invalidates state laws that imposes undue burden on interstate commerce based on race color <does not prohibit the imposing of burdens - only the imposing of undue burdens
2. Regulation of interstate commerce
-commerce clause prohibits one state from interfering with commerce that crosses state lines - Case of gibbons v Ogden
Scaffolding
-considered TPP -taxed as leases or rentals -used temporarily @ multiple locations
material contractor
-contractor supply materials or parts to you = taxable
Inseparably mixed transactions
-different from a transaction that is separably mixed. (Elements of TPP and a service, the facts are such that you separate it out and part is taxable and part of it is not.)
Nexus
-estab. nexus by having a presence in the taxing jurisdiction by: maintaining a physical location in the taxing authority; having an agent or salesman in the taxing jurisdiction, delivering TPP with a company vehicle, Rented movable property -a dealer who does not have nexus or a substantial presence is not required to register and collect the tax
11. Regulation of foreign commerce
-fed GOVT has pwr to reg foreign commerce < vested exclusively in the fed GOVT <extends to all aspects of foreign trade -fed GOVT can prohibit foreign commerce entirely -fed GOVT cn allow commerce with restrictions -state and local GOVT may not regulate such commerce < some states may regulate foreign commerce only if the activities takes place within the state boundaries only
Local sales tax does not apply to:
-fees or dues of nonprofit, civic organizations (YMCA) -admissions to museums -admissions to entertainment events furnished by domestic non-profit charitable, educational, and religious organization.
Limitations of PL-86-272
-foreign commerce -sale of intangible property, leasing and licensing -sale of services -taxes not based on income
Sales price includes even if separately stated
-freight from the supplier to the vendor ( freight in, inbound freight) - handling charges -surcharges -overhead charges
Contractor to fabricate & deliver
-fully taxable
Truck stop retail
-gasoline -24 hour restaurant -store: including food/ non food items -fast food -R/V parking
Freight
-generally freight, deliv., & shipping charges = not taxable -inbound freight is taxable~freight from manufacturer to supplier
Property Factor
-generally includes value of real and tangible personal property owned or rented •Numerator is amount used in the state •Denominator is all of corp's property everywhere -Includes land, buildings, machinery, inventory, vehicles, etc. -Generally at original cost; some at net value -Rented property included at 8x rent expense
To avoid interest & penalties:
-have the return postmarked by the 20th -only US postal service postmarks are considered - postage machine marks are invalid in determining whether a return is timely - interest is calculated daily from the due date until paid -penalty is calculated per 30 day period from the date delinquent
Members of agency booard or commision
-hears appeals from the decisions the Admin law judges made
Exclusions from payroll factor denominator
-independent contractors -nontaxable fringe benefits (medical insurance) -sometimes officer salaries -compensation related to production of non-business income
Common addition modifications from federal taxable income
-interest income received on state and municipal obligations exempt for federal tax purposes -expenses deducted in computing federal income tax related to federal obligations -state income taxes deducted for federal purposes -amount of depreciation difference
Common subtraction modifications from federal taxable income
-interest on U.S. obligations exempt from state income tax -expenses directly related to municipal interest that is taxable for state purposes -refunds of state taxes included in federal taxable income -amount by which state deduction for depreciation exceeds federal deductible amount
Exclusively fed
-internal matters where uniformity on a nationwide basis is essential -any state regulation is void whether Congress has expresivley regulated the area or not ,opening and closing of airports
Solicitation by independent brokers
-is sufficient nexus for sales tax purposes •Turns "use" tax into "sales" tax for that state •Seller required to collect tax •Facilitates collection by state
Pros of Separate company returns
-isolate activities and nexus -simplicity -allow for shifting of income between afiliates
drawbacks of federalism
-lack of consistency of laws from state to state -tension between the state and federal officials -the constitution doesn't always draw a clear line of powers between the state and national government
Real Property
-land -buildings -component parts of land/buildings -immovable by declaration
allocation
-method used to directly assign specific components of a corp's income, net of related expenses, to a specific state •Rare to see allocable income; most income is considered apportionable
ultimate decision
-most states follow •Tangible asset sales are assumed to take place at *point of delivery*, not where shipping originates
multistate S Corps
-must apportion and allocate income in same manner as regular corp •Must file a state tax return in each state with nexus •Must inform shareholders of their share of income for each state so their tax returns can be prepared -S corp may be allowed to file a single return and pay tax for all shareholders
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.
Packaging
-not taxable
Repairs to immovable property
-not taxable I.E. building & central air -repair dealer is responsible for all taxes due on materials used/consumed during the course of business
Pros of Consolidated returns
-offset losses -eliminate intercompany dividends -defer gains on intercompany transactions -use credits that otherwise would have been denied due to lack of income
Bankruptcy & receivership assessments
-only applicable to a bankruptcy proceeding or a receivership proceeding -allows for the collector to make an immediate determination
Jeopardy assessment
-only when tax collector is in jeopardy -cant be used to avoid NOIA -immediately collectible by distrait & sale
Admissions
-places of amusement -dues to clubs -fees for the use of amusement, entertainment, athletic or rec facilities
Public hearing interested party
-presents evidence in support tor opposition of proposed rule or reg
Apportioned
-prevents multiple taxation of interstate biz -formulas allocate the tax burden of an interstate biz among the states entitled to it
6 limitations on state taxation
-primary form of regulation -taxes imposed by state and local govt are subject to limitation by the commerce clause
Benefits of federalism
-protects against the tyranny of the majority -allows for unity without imposing on uniformity -Individual states can as as laboratories for policy experiments -encourages political participation
Cons of Consolidated returns
-reduced ability to use structure planning to shift income -may increase income apportioned to state if out-of-state affiliates are more profitable than in-state affiliates -binding election
Non-immune activities
-repairs, maintenance, including supervision -A/R activities -Picking up or replacing damaged or returned property -HR activities, except for sales force -Consigning goods or other tangible personal property to any person including an independent contractor for sale -maintaining an office or place of business of any kind -franchising or licensing activities
In response to the assessment notice: additional allowed
-request admin hearing w/ collector -file missing tax return & remit taxes due along w/ corresponding penalties and interest
Nebraska Advantage Act-LB 312
-requires application be filed for each project. -
Audit Control Records
-sales & tax auditors try to establish certain "audit controls" to ensure taxpayer produces 100% of a particular records population for the period at issue
Suitable Records
-sales invoices -purchase invoices -merchandise orders -inventory records -credit memo -bills of lading & shipping records
2 types of nexus
-sales tax nexus (physical presence) -income tax nexus
What events qualify as amusement events, athletic entertainment events, and recreational events'?
-school plays -band performances -choir performances -dances -sporting events *not limited to the above
Maintenance agreements, service contracts & warranty work
-seller agrees to perform work at their cost - taxable (prepaid repair) -extend warranty where a third party performs work. - not taxable -warranty work - not taxable
the great society
-set of programs designed to end poverty, eliminate racial injustice, and improve the environment. (pres. Johnson) -came with strict regulations as to how the money could be spent. -led to a increase in federal involvement in state and local gov.
SALT
-shifting and splitting -added value -location -timing
Types of taxable purchases
-shop tools & supplies -computer equipment purchases, leases, or rentals - brochures, training materials, promotional materials from the manufacturer - office supplies -office equipment/furniture -repairs to equip or other movables not for resale -rental cars rented for the use of service customers while their vehicle is being repaired -promotional items
PL 86-272 protects corporations from income tax nexus an out-of-state corporation whose only in-state activity is...
-solicitation -by an employee or representative -on orders of tangible personal property -sent out of state for approval and -filled for shipment and delivery from a point outside of the state
Dormant COMMERCCE CLAUSE CONCEPT
-state regulation must not be Arbitrary, capricious, or unreasonable -state regulation must nott violate the commerce clause
If item is cleaned in order to be repaired
-taxable
Furnishing of cold storage or temperature controlled storage and the preparation of TPP for such storage
-taxable - does NOT include storage in units cooled to normal room temperature -does not include "bailment" transactions
Laundry, cleaning, pressing, and dyeing services & its storage
-taxable -courts restricted this services to the cleaning of fabrics
Maint. Agreement on TPP
-taxable I.E. Elevators and buildings
Handling
-taxable if the vendor has separately stated them from the shipping charges -if not separately stated then the entire amount of shipping & handling would be taxable
Final Assessment
-taxpayer/dealer is precluded from asserting "any defenses" after the 30 days elapsed -30 day period is preemptive -enforcement of final assessment
fed preeemption
-the fed GOVT has preempted the field - by express language or by comprehensive regulation <Congress shows that it intends to exercise exclusive control over the subject matterclause . -state and local laws that try at regulate any area preempted by fed is void under the commerce clause and the supremacy clause
apportionment
-the means by which business income is divided among states in which it conducts business •Corp determines net income for the company as a whole and then apportions some to a given state, according to an approved formula
3.impact on interstate commerce
-the power the federal GOVT has expanded to include <persons engaged in interstate commerce <activities affecting interstate commerce - labeling an activity local or intrastate does not prevent Congress frm regulating it under the commerce clause <power of Congress extends to those intrastate activities that affects interstate commerce -activity that is purely intrastate in character may still be regulated by congress <when the activity combined with the like conduct by other similarly situated substantially affects commerce among states
Sales & Use tax
-the sale of tangible personal property at retail in this parish -The use etc. of TPP -The lease or rental within this parish of any item or TPP -The sale of services
advisory opinions
-unique device -not available to the judicial system - as binding as a formal ruling -give biz an indication of the view an agency will take if they were to be challenged formally.
Software
-upgrades, manuals, updates = taxable -telephone support, training, & consulting = not taxable * unless it comes with upgrades/updates
Examples of unitary business group
-vertically integrated manufacturing process -horizontally integrated chain of retail stores -multi-office service company with shared executive force, technology, and other intangibles
Fee characteristics
-voluntary -made to segregated fund -for a specific government benefit -payment is imposed by a regulatory agency on those subject to regulation
Notice of Tax Due
-when tax payer files for "no-remit" -allows taxpayer 10 days to respond & pay -not required to be mailed
Suspension of prescription
-written agreement between collector & taxpayer -during bankruptcy -by filing of a claim for refund by tax payer
3 factors used to determine whether a group of businesses is unitary
1. Functional Integration - vertical or horizontal integration 2. Centralization of management - common officers and interlocking directors 3. Economies of scale- group discounts and other efficiencies due to size
Unitary business- constitutional test 3 factors
1. Functional integration 2. Centralized Management 3. Economies of Scale
Sale of Services - Taxable
1. Furnishing of sleeping rooms (Hotel/Motel) 2. Admissions to place of amusement 3. Furnishing of storage or parking 4. printing and copying services 5. laundry, cleaning of textiles 6. furnishing of cold storage 7. repairs to TPP 8. furnishing of telecommunication services
7 Taxable Services
1. Furnishing of sleeping rooms, cottages or cabins by hotels 2. the sale of admission 3. furnishing of storage or parking privileges by auto hotels & parking lots 4. furnishing of printing/over printing 5. furnishing of laundry, cleaning, etc 6. furnishing of cold storage space & furnishing of the service of preparing tangible personal property for cold storage 7. furnishing of repairs to TPP
Personnel
1. Government has diffi culty in hiring and retaining the best-qualifi ed people. Salaries are often not competitive, and advancement is often slower than in the private sector. Also, some people are overqualifi ed for their positions. 2. The reward system usually does not make a signifi cant distinction between excellent, mediocre, and poor performances. There are few incentives to improve productivity and job performance. 3. It is very diffi cult, if not impossible, to discharge unsatisfactory employees. Transfers of employees are easier to accomplish than discharges. 4. The Peter Principle, which holds that people are promoted to their level of incompetence, is obviously present in many administrative agencies. 5. Personnel in many top positions are selected for political reasons. They often lack the necessary
Dealing with Privileges and Immunities and Dormant Commerce Clause Issues
1. If facts mention harm to interstate commerce, lead with Dormant Commerce Clause and mention Privileges and Immunities as an alternative. 2. If facts mention discrimination based on residency or citizenship, lead with Privileges and Immunities and mention Dormant Commerce Clause as an alternative. 3. Remember that corporations are protected by the Dormant Commerce Clause, but not Privileges and Immunities. 4. Market participant exception only applies to Dormant Commerce Clause.
Scripto
1. Presence of independent contractors sufficient to establish taxing jurisdiction 2. Court refused to embrace formal distinction between employee and independent contractor.
Quill
1. Quill required a physical presence to satisfy substantial nexus between state and vendor 2. solicitation by catalogues and shipment by common carrier held not to be sufficient
analysis of the commerce clause in 4 areas
1. Regulation of foreign commerce 2. Regulation of interstate commerce 3. Impact on interstate commerce 4. Possible limits on the fed regulatory authority
Types of Discrimination against Interstate Commerce
1. Requiring business to be performed in state 2. Protecting local business 3. Discrimination as to in state resources 4. Transportation restrictions 5. Interstate mobility of persons
8 positive federal/state adjustments that increase TI
1. SALT income tax 2. SALT bond interest income from bonds in other states 3. DRD 4. FIT refunds (only in states where allowed) 5. intercompany expenses with related parties (for separate return states) 6. MACRS over state 7. bonus depreciation 8. DPAD
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
Under Complete Auto Transit, a state tax satisfies the requirements of the commerce clause if it meets 4 requirements
1. Substantial nexus 2. Fairly apportioned 3. Fairly related to services provided by the state 4. tax does not discriminate against interstate commerce
What are 2 of the 4 parts to test lawfulness in cases of taxation under negative commerce power?
1. Substantial nexus (do they have a presence in the state) 2. Fair appointment (businesses that have a presence in more than one state are allowed to apportion their taxation across all states in which they have a legitimate presence)
The general rules for determining the amount of sales to include in the sales factor calculation...
1. Tangible personal property sales are sourced to the destination state (where property is delivered) 2. 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(if California ships goods to Montana where it does not have nexus, the sales are treated as if they are California sales) 3. Sales of services are sourced in the state where the services are performed
Complete Auto CC requirements
1. Tax must be applied to an activity with a substantial nexus with the taxing state; 2. Tax must be fairly apportioned; 3. Tax cannot discriminate against interstate commerce; and 4. Tax must be fairly related to the services provided by the state
4 main categories of business entity recognized by tax system
1. Taxable corporation (separate taxpaying entity, income reported on Form 1120) 2. S corporation (flow-through entity, income reported on Form 1120S) 3. Partnership (flow-through entity, income reported on Form 1065) 4. Sole Proprietorship (flow-through entity, income reported on Form 1040, schedule C)
What are instances of negative commerce power?
1. Taxation (4 part test to decide if it's lawful) 2. Regulation (2 part test to decide if it's lawful)
Under PL 86-272, businesses are protected from income tax nexus in a particular state if ALL of the following apply:
1. The tax is based on net income (not gross receipts) 2. The taxpayer sells only tangible personal property in that state 3. The taxpayer's in state activities are limited to solicitation of sales 4. The taxpayer participates in interstate commerce 5. The taxpayer is nondomiciliary 6. The taxpayer approves orders outside the state 7. The taxpayer delivers goods from outside the state
6 negative federal/state adjustments that decrease TI
1. US interest income (notes, tbills, bonds) 2. state DRD 3. foreign dividend gross up 4. subpart F income 5. SIT refunds on fed return 6. state depr over fed
Property includes both real and tangible personal property, but not intangible property. General rules for determining the property factors are..
1. Use average property values for the year (beginning + ending / 2) 2. Value property at historical cost rather than adjusted basis (do not subtract accumulated depreciation in determining value) 3. Include rented or leased property by multiplying the annual rent by eight. The annual rent is multiplied by eight to approximate the value of the rental property
2 reasons materials are brought into the country/for tariff:
1. a foreign country is selling goods to the purchasers in the destination country at prices that are believed to be below production costs in the country of origin; the foreign business may be attempting to capture a market and put the local operations out of business 2. a local business's operating costs are higher than those costs for the same product produced int eh foreign jurisdiction
The sales factor includes what 3 items
1. all gross business receipts net of returns, allowances, and discounts
Two ways a business can operate in multiple states
1. branch operation 2. separate corporation
A business has a physical presence in a state if (2 things)
1. bus representatives (e.g. salespeople) enter a state to obtain sales 2. tangible property located within a state
3 Categories of Losses
1. business losses 2. investment losses 3. personal losses
Types of Contracts
1. contractor to fabricate & deliver 2. contractor to fabricate & install 3. material contractors 4. Repair Contractor 5. Variation of above
4 Canons of Taxation
1. equity 2. convenience 3. certainty 4. economy * consider whether the tax is a good tax
3 factors that determine whether a group of businesses is unitary
1. functional integration 2. centralization of management 3. economies of scale
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
Which allocable income items (4) have NO throwback rule
1. interest & divs, 2. rent/royalties from real property, 3. CG/CL from real property, 4. CG/CL from intangible personal property
5 common allocations of nonbusiness income
1. interest and divs to state com dom (except on work cap, which is BI) 2. rental income to state where prop gen income 3. royalties to state where prop used ( if bus has nexus; if not, alloc royalties to state of com dom) 4. cap gains from invest prop to com doc 5. cap gains from sale rental prop to state where rental prop located
Just like federal tax law, state tax law is comprised of 3 things
1. legislative 2. admin 3. judicial
Complete auto transit
1. nexus must exist between state and business 2. state only tax fair portion of business income 3. tax cant discriminate against nonresident businesses 4. tax paid must fairly relate to services the state provides
Apportionment factor includes 3 thangs
1. property 2. payroll 3. sales
Goals of MTC
1. reduce compliance burdens for mult-state businesses 2. prevent undertaxation or overtaxation of interstate commerce 3. lessen the possibility that congress will intervene in state taxation
Tax expenditures can be paid for in 3 ways:
1. reducing spending 2. adding to the budget deficit 3. raising other tax revenue to offset the cost of the tax expenditures
Payroll includes what 4 items
1. salaries 2. bonuses 3. commissions 4. other forms of compensation
Apportionment formula relies on three factors
1. sales 2. payroll 3. property
5 general rules for sales factor
1. sales of tang pp are included to the destination state 2. If doesnt have nexus in dest state, sales are thrown back to state from where shipped 3. dock sales should be sourced to goods ultimate destination 4. sourced where services performed (except IL) 5. gov sales sourced in state from where shipped
Public Law 86-272 does not protect what 3 things
1. service providers 2. sellers of real property 3. businesses licensing intangible
Tax Return Purposes: 4 Types of Entities
1. sole proprietorships 2. partnerships 3. C corporations (regular corporations) 4. S corporations (corporations electing S status)
Public Law 86-272 protects businesses from income tax nexus in a particular state if (and only if) ALL of the 7 apply....
1. tax based on NI 2. sell only tang personal property in that state 3. activities in state limited to solicitation of sales 4. participate in interstate commerce 5. nondomiciliary 6. approves orders outside state 7. delivers goods from outside state
3 Types of people subject to income taxation in the U.S.
1. the individual 2. the C corporation 3. the fiduciary
5 rules for property factor
1. use avg property for CY 2. historical cost, not AB (dont subtract accum depr) 3. include property in transit 4. include only business property 5. rented or leased property - multiply annual rent * 8 and add to average owned-property factor
3 ways to accrue taxes
1. wait until receive shipment of equipment & accrue that point on the entire job 2. wait until the end of the project & accrue on all pmts the entire contract (except for delivery charges) 3. accrue on each progress pmt as you receive them *must pick one and stick with it.
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
Costs required to be capitalized
1.Direct materials 2.Direct labor 3.Applicable indirect costs
Uniform capitalization rules apply to
1.Produced for use 2.Produced for sale 3.Acquired for resale
Occupancy requirements for residence to be treated as personal/rental residence
1.Rented for at least 15 days 2.Used for personal purposed for the greater of at least 15 days or 10% of rental days
2 perspectives
1.does the commerce clause contain any unstated restrictions on the fed GOVT 2 Are there any areas of the regulation of commerce that require the fed GOVT to defer to state and local govt
"unique" rules for personal property contracts
1.must be completed withing 1 year 2.must be for manufacture of unique item
Residence rented for fewer than 15 days
1.treated as personal residence 2.excluded from income 3.mortgage interest (first or second home) and real estate taxes can be itemized 4.Depreciation, utilities, and repairs not deductible
C Corporations tax form
1120
S Corporation tax form (flow through entity)
1120S
Public Law 86-272
1959 response to Supreme court case States may not impose taxes on measure of net income derived from interstate commerce if the "only business activities carried on within the state" are: - solicitation of orders for sales of tangible personal property, AND - orders are sent outside the state for approval/rejection AND - orders are filled by shipment or delivery from point outside state
-extra weight placed on sales factor -specialized industry formula
2 types of deviations from 3 factor approach
NOL Carryover
2 year carryback 20 year carryforward
Streamlined sales tax(SST), 1 state didn't conform
24 states. NY didn't conform
Texas Margin Tax
3 options for deductions: 1. COGS 2. Compensation to employees (capped at 360k per employee); or 3. 30% right off the top
Formula for Sales Factor in a State
= (Total sales in state X)/(Total sales in all states)
What activities do not meet the definition of solicitation, and, therefore, create income tax nexus?
>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
Effective Tax Rate
???
Quasi legislative
A agency can issue rules that have the impact of laws
Passive Investment Companies (PICs)
A company simply creates a subsidiary and transfers ownership of its trademarks and patents to a state that does not tax royalties, interest, and other similar types of intangible income
Quill holding
A corporation may have the minimum contacts required by the due process clause and still fall short of the substantial nexus required by the Dormant Commerce Clause.
CA min tax
$800 min tax. also requires unitary reporting not separate
Equally-weighted 3-Factor Formula
((In state sales/total sales)+ In state property/total property)+ In state payroll/Total payroll))/3
The only regressive taxes that taxpayers are subject to at the federal level are....
- FICA - unemployment taxes
Economic Nexus
- Licensing intangibles in state is sufficient to satisfy "substantial nexus" requirement
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.
Are dues or membership fees for Mardi Gras Krewes subject to sales tax?
- NO
3 major periods involving major expansion of govt regulation of biz activities
- New DEALS OF 1930 AND 1940 - great society of 1960 and 1970 - sarbanes oxley act
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
Exemptions from True object test
- Sale for resale - Casual or occasional sales - Sales of items used or consumed in manufacturing, processing, or fabrication - Sales of machinery or equipment - Essential items - Sales to religious, charitable or educational organizations - Real property repairs and improvements - Donations - Must obtain exemption certificate in many cases
Vending Machines
- Sales to vending machine operators are sales for resale - the sale from the machine is a retail sale
2 components of the FICA tax
- Social Security - Medicare
Positive State Adjustments
- State and local income taxes - Muni bonds from other states - Federal DRD - Federal income tax refunds if federal tax allowed as a deduction - Intercompany expenses with related parties *separate return states - MACRS depreciation over state depreciation - Federal bonus depreciation - Federal DPAD
Rentals
- Taxable UNLESS IT HAS AN OPERATOR=not taxable
Repairs to TPP
- Taxable as sales of services -Taxable where repairs & services are performed - If w/ in calcasieu parish both are taxable where the repairs are performed -if not w/in, only parts would be taxable
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.
Negative State Adjustments
- US interest - State DRD - Foreign dividend gross up - Subpart F income - State income tax refunds - State depreciation over federal depreciation
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.
Elective Consolidated Return
- affiliate must file a consolidated federal return, so they must have 80% control. - affiliate must have nexus in state, mus derive income from sources within the state, and cannot be subject to special apportionment
providing protection
- agencies exist to protect the public <especially from bizs -bizs tend to lack self regulation <does not benefit the public -public tends to turn to a govt agency when a biz practice injure a significant number of the general public < the attitude of the public is that it is the govt duty to protect the public from harm
10. Infuencing agency decisions
- agency adopts rules and regs -must maintain due process <before a law can be adopted interested parties must receive notice of the rule <given a opp to express their view -agencies give pub notice <holds pub hearings -
Fiduciary
- an estate or a trust, may be subject to income taxes but in most cases the income is passed through he income beneficiaries and is included in the beneficiaries' income for taxation - modified "flow-through" entity because the tax may be levied on income retained by either the estate or the trust, or not he income distributed to the recipients
Sale
- any transfer of title or possession or both, exchange, barter, conditional or otherwise in any manner or by any means whatsoever, of tangible personal property for a consideration.
Cost of performance rule
- applies when income-producing activity occurs in 2 or more states -Assign sale to the state with the greater percentage -some states use a pro-rate rule
Business Income
- apportioned - income earned in regular course of business or from asset that serves operational function -taxpayer apportions a % of income to each nexus state
5. Limits of police powers
- are not limitless
What are similarities between rule and order making?
Both have formal and informal modes
Complete Auto Transit v. ______ (not a state)
Brady
The first five years a corporation operates as an S Corporation with unrealized built-in gains.
Built-in Gains Tax Recognition Period
A tax created to prevent C corporations from avoiding corporate taxes on sales of appreciated property by electing S corporation status.
Built-in- Gains Tax
Consolidate Freight
Burdens ISC makes it harder, more expensive to haul freight Impacts are excessive in relation to putative local benefits TF UNC
The state tax base for a business is divided into two income types.
Business and nonbusiness income
Interstate Commerce
Business conducted between parties in two or more states
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.
Apportionment
Business income.
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.
Nondomiciliary Business
Business that is no domiciled or headquartered in a state. Subject to tax only where they have nexus
Non-temporary purposes of residency
Business, Employment, Movement of family, retirement with no intent to leave, and indefinite illness
Nondomiciliary Businesses
Businesses not domiciled or headquartered in a state; These are subject to tax only where they have nexus
Due Process Clause-Fair apportionment
Butler Brothers In order to attack apportionment formula either on it's face or in it's application, taxpayer must present "clear and cogent evidence" that extra-territorial value will be reached.
Double taxation
C Corporations pay the first level of tax on their taxable income. The most profitable corporations are taxed at a flat 35 percent rate. Corporate shareholders are subject to double taxation because they pay a second level of tax on corporate income. Distributions to shareholders of C corporations are taxes as dividends to the extent they come from the "earnings and profits" (similar to economic income) of corporations. The applicable rate for the second level of tax depends on whether corporations retain after-tax earnings and on the type of shareholders.
Credit for Monies Paid
Calculated by multiplying the rate of tax due by the lower of the cost or FMV and giving credit for the local tax monies paid or accrued
S corp tax year
Calendar year
Several states such as ______ and ______ impose a franchise tax rather than an income tax but they are essentially the same thing
California and New York
reverse credit states
California, Oregon, Virginia, Arizona, Indiana
Taxable corps accounting period
Can choose a tax year that ends on the last day pf any month of the year - year end of owners is not relevant
Pike v. Bruce
Cantaloupes a nondiscriminatory state law can violate the DCC
Foreign currency exchange gains and losses resulting from investment or personal transactions are
Capital
A distribution in excess of a shareholder's basis results in this type of gain.
Capital Gain
Excess foreign tax credits can be
Carried back 1 year and carried forward 10 years
Quill
Case dealt with physical presence and was limited to sales tax
Do most farmers use cash basis or accrual basis?
Cash
Farming income inventory is expensed when using
Cash basis
Organizational chart of typical NC
Chairperson secretary General council Advisory council Director of operations Executive director of Administration Admin law judges
G. Incorporation frees
Charged for incorporating in a state or registering to do business in a state.
Executive director of administration
Chief Operating official of an agency -supervis usual administrative functions
Privileges and Immunities Clause
Citizens of each state shall be entitled to all privileges and immunities in the several states "secures and protects right of a Citizen of on state to pass into any other state...for the purposes of engaging in lawful commerce, trade, or business without molestation" *only applies to people not corporations*
Gibbons v. Ogden
Commerce clause case (1824). Decision greatly enlarged Congress' interstate commerce clause power
The physical presence requirement is a judicial interpretation of the ___
Commerce clause of the US Constitution
Wynne Case
Commerce clause; case involved no credit (state credit but no local) in resident state for taxes paid to nonresident state (not dual residency)
The state where a business is headquartered and directs its operations.
Commercial domicile
Leanin' tree holding
Common understanding test. All tests engage in some attempt to identify characteristics of the transaction at issue that make it either more analogous to what is reasonably and commonly understood to be a sale of TPP, or more analogous to what is generally understood to be the purchase of a service or intangible right."
Commerce Clause-Fairly Related
Commonwealth of Edison v. Montana "Reasonably related to taxpayer's activity or presence in the taxing state"
Payroll Apportionment is computed as
Compensation paid or accrued in state / Total compensation paid or accrued
Payroll factor is computer as:
Compensation paid or accrued in state/ Total compensation paid or accrued
Most important case related to the commerce clause
Complete Auto Transit
Commerce Clause-Complete Auto Test
Complete Auto Transit v. Bradley 1. Substantial Nexus 2. Fairly Apportioned 3. Non-Discriminatory 4. Fairly related services received in the taxing state.
This case established a four-prong test for determining whether states can tax nondomiciliary companies and whither the tax imposed is discriminatory against nondomiciliary businesses.
Complete Auto Transit, Inc. v Brady
Dell, Inc Facts
Computers and service contracts with lump sum invoices
Providing specificity
Congress cannot not create laws that will cover every issuer -courts can't cover all disputes and controversies < due to this impossibility they delegate powers the agencies such as the securities exchange commission. -makes rules a regulations to fill In the gaps and make necessary details to make security laws workable - An agency develops detailed rules and carry out a legislative policy
Western & Southern Life Ins. V. SBOEC
Congress may let states restrict flow of interstate commerce CA tax on out-of-state insurers
PL 86-272
Congress placed limits on states' power to impose income taxes on nondomiciliary businesses
Public Law 86-272
Congress placed limits on the power of states to impose income taxes on nondomiciliary businesses
Commerce Clause
Congress shall have the power to regulate commerce with Foreign Nations, and among Several States and with the Indian Tribes
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)
Major SALT tax types
Corporate income/franchise tax; sales and use tax; property tax; personal income tax
46. On which of the following transactions should sales tax be collected? A. Architecture plans delivered through the mail. B. Sales of woolen goods to a state without nexus delivered through common carrier. C. Accounting services provided in Alaska. D. Meal purchased at McDonald's.
D. Meal purchased at McDonald's. Restaurant meals are generally subject to sales tax.
43. Mighty Manny, Incorporated manufactures ice scrapers and distributes them across the midwestern United States. Mighty Manny is incorporated and headquartered in Michigan. It has product sales to customers in Illinois, Indiana, Iowa, Michigan, Minnesota, and Wisconsin. It has sales personnel only where discussed. Determine the state in which Mighty Manny does not have sales and use tax nexus given the following scenarios: A. Mighty Manny is incorporated and headquartered in Michigan. It also has property, employees, sales personnel, and intangibles in Michigan. B. Mighty Manny has a warehouse in Illinois. C. Mighty Manny has independent sales representatives in Minnesota. The representatives distribute ice scraper-related items for over a dozen companies. D. Mighty Manny has two customers in Wisconsin. Mighty Manny receives orders over the phone and ships goods to its customers using FedEx.
D. Mighty Manny has two customers in Wisconsin. Mighty Manny receives orders over the phone and ships goods to its customers using FedEx. Delivery through common carrier doesn't create sales tax nexus.
54. Which of the following states is not asserting economic nexus? A. New York with the Amazon rule. B. South Carolina in the Geoffrey case. C. West Virginia in the MBNA case. D. Wisconsin in Wrigley.
D. Wisconsin in Wrigley. Wrigley does not deal with economic nexus.
DMA v. Brohl
DMA, a trade association of retailers, filed claimed against director of Colorado DoR who imposed a law that required retailers to notify purchasers that use tax is due, send a report of purchasers, and send statement to DOR listing customers *Supreme court reversed judgement of Court of Appeals but remands case for further proceedings regarding comity doctrine*
Cash basis start date for long term contracts
Date on which contractor incurs costs
Unlike partnerships, this will not affect a shareholder's stock basis.
Debt
Loans made by a shareholder directly to the S corporation will create this.
Debt basis
Bad debts actually written off for an accrual basis taxpayer
Deductible
Business SALT paid
Deductible
Business portion of automobile expense
Deductible
COGS
Deductible
Depreciation of business assets
Deductible
Employee benefits
Deductible
Interest expense on business loans
Deductible
Legal and professional services
Deductible
Salaries and commissions paid to others
Deductible
Nexus
Degree of contact which gives a state the right to impose a tax obligation on an out-of-state corporation
Geoffrey is a subsidiary of Toys R Us in this state
Delaware
Delaware Holding Company
Delaware tax code exempts corporations from income tax if activities in state are confined to - maintenance and management of intangibles and collection and distribution of income from such investments or from tangible property physically located outside the state DHC must provide "sufficient substance" within Delaware in order to minimize possibility of taxation in another state
Must be limited
Delegation of authority to an agency from the legislative or executive branch must have limitations - the agency's power to act is limited to areas that are certain +even if these areas are not specifically defined - state and local agencies nay regulate areas of business that are not subject to Federal Regulations -broad standards Meet The Limited power test -courts cannot interfere with the discretion given to the agency +cant substitute their judgment for that of the agency
Incidence of Tax
Determination of who actually bears the economic burden of tax
True object test
Determines whether something is property or service
Direct/Indirect Impact on Interstate Commerce
Direct burdens are viewed as being more harmful to interstate commerce than indirect burdens. Direct: if law passed primarily to regulate something in another state. Indirect: if law passed primarily to regulate something in state with incidental impact on other states. Court will be more wary of states directly trying to control other states than of states indirectly impacting interstate commerce by regulating a local problem. Not an independent test (it is part of the unreasonable burdens balancing test), but should be considered if the facts make relevant (If they emphasize local aspect over another state). McGoldrick doesn't like this test!
Flow-through entities
Do not pay taxes because income flows through to business owners who are responsible for paying tax on their income
True Object Test Variations
Dominant purpose and Essence of the transaction
What is another name for negative commerce power?
Dormant
The 15th day of the 3rd month.
Due date for S Election
____________ _____________ ____________ 14th amendment clause stating that no state may deprive a person of life, liberty, or property without due process of law - enough contact with the state so that the tax is fair
Due process clause
Due Process Clause
Due process nexus requires some sort of "minimum contacts" between the TP and the taxing state. "Has the state given anything for which it can ask return?"
Separate Company Returns
Each affiliate with nexus in state files its own state tax return, regardless of its position in an organizational structure, or inter-company transactions as if it were a separate and distinct economic entity
Separate Company returns
Each affiliate with nexus in the state files its own separate state tax return (regardless of position in organizational structure and intercompany transactions) as if it were a separate and distinct economic entity
Local Sales Tax Registration Ap: Who Must File?
Each person pursuing any trade, vocation, calling, or business should complete this form. Each person is required to keep reasonable records. Separate records are required for each place of business
Instrumentalities in Transit (Non-Discriminatory State Tax)
Each state can tax the value of the instrumentality but the tax has to be fairly apportioned to contacts within the state. - State must work out ratio of how much of instrumentality belongs to it. Test for fair apportionment: rational basis.
Partnership accounting method
May use cash method unless they have a taxable corp as a member or partner
S corp accounting method
May use cash or accrual
McDonalds Holding
McDonalds met the burden, they were reselling toys to consumer
Meadwestco Corp v. Illinois
Mead (Ohio Corp) owns Lexis Nexis (IL Corp); sold Lexis Nexis; court held that Mead and Nexis were not a unitary business and Mead owed no CG tax in IL on the sale
Combined Unitary Reporting
Member of Unitary group apportions income by multiplying: Combined business income of all groups * (In-state factors of only the taxpayer member/factors everywhere of all group members)
Import-Export Clause
Michelin Tire Co. v. Wages 1. Impairs the governments ability to speak with one voice 2. does it divert federal revenue to the states? 3. does it risk damaging interstate harmony? (Complete Auto Test)
Complete Auto is located in this state
Michigan
Nexus
Minimum amount of contact a taxpayer must have with a state to be subject to state tax
NW States Portland Cement vs ________ (state)
Minnesota
Brady was the chairman of the tax commission of this state
Mississippi
Complete Auto Transit was a case against this State's Commission
Mississippi
Who won CAT?
Mississippi
National Bellas Hess was located in this state
Missouri
This Supreme Court case provides three factors that can be used to determine whether a group of businesses is unitary.
Mobil Oil Corp v. Vermont Tax Commissioner
add: muni interest and dividends, federal NOL Deduct: Us gov interest, foreign dividends, NE college savings plan contributions
Modifications in NE
Texas Margin Tax- 3(4?) mutually exclusive deductions
Modified GI tax Take federal return items of gross income (total revenue excluding pship income) less one of the following: - Total rev-$1 million - Total rev*70% - Total rev-COGS - Total rev- compensation paid to employees
Adjustments IRS can make:
Modify basis of assets Require taxpayer to recognize income that would otherwise be tax-free
S Corps ownership
Most restrictive - no more than 100 shareholders and cannot have shareholders that are corporations, partnerships, nonresident aliens, or certain types of trusts
How is state and local bond interest income treated for state tax returns?
Most states require a positive adjustment for state and local bond interest income if the bond is from another state (they tax out-of-state bond interest income)
How are state income taxes treated for state tax returns?
Most states require a positive adjustment for state income taxes because they do not allow business to deduct state income taxes
Progressive Rate Structure/Graduated Rate Structure
Multiple percentages that vary based on size of the tax base
How is state income tax liability calculated?
Multiply business income by the apportionment factor and then add any non business income allocated to the state
The state tax liability is computed by....
Multiplying state taxable income by the state tax rate
-not taxable on federal return but is taxable in most states
Muni interest taxable?
Entities taxed as partnerships (LLC, GP, LLPs)
Must have at least 2 partners Partnerships - no restriction on owner type Limited partnerships - must have at least one general partner
Non-property tax
N/A
Case that said "No physical presence = no collection of sales tax"
NBH
Goodyear v. Brown
NC resident killed in bus crash in France; sued Goodyear in NC; USSC ruled that the tires lacked a connection to NC because the subsidiaries in France did not market or solicit in that state; merely placing goods into the stream of commerce does not create jurisdiction
City of Philadelphia v. NJ
NJ prohibited importation of waste originated outside state violated DCC law is facially neutral, but in its effect is discriminatory
McIntyre v. Nicastro
NJ worker injured by machinery built by McIntyre; sued McIntyre in NJ even though the company didn't market or ship products directly to NJ; court ruled that placing goods into the stream of commerce does not create jurisdiction
States w/o sales and use tax
NOMAD- NH, OR, MT, AK, DE
PL 86-272 came out of this case
NW States
Specter case was overturned based on this case
NW States
SFA Folio
NY based mail-order vendor; didn't have any facilities or employees in Ohio; an affiliate, Saks Ohio, accepted returns of Folio merchandise (charging them to their own inventory) and distributed some Folio catalogs; ruled that Folio did not have sales tax nexus in the state; Saks-Ohio was not considered Folio's agent because it accepted returns for its own benefit
Amazon/overstock facts
NY presumption for nexus of an online retailer if there is an instate "click through" and there are more than 10K in gross receipts
Red Earth LLC v. US
Native American tobacco sellers sold via mail order; challenged collection of excise on delivery of their products into other states; court cited McIntyre; excise tax collections on sales did not create nexus under the Due Process Clause
-single sales factor and doesn't require throwback
Ne apportionment
-individuals and composites file form 1040N -partnerships file form 1065N -corporations file form 1120N
Nebraska filings
-nebraska advantage act -microenterprise -rural development -R&D
Nebraska tax incentive programs (tax credits)
3.8% tax on gross income from interest, dividends, annuities, royalties, and other investment income
Net Investment Income Tax
A tax created to encourage C corporations to distribute their accumlated earnings and profits.
Net Passive Income Tax
This represents the net gain (if any) a corporation would recognize if it sold each asset at its fair market value on the first day of being an S corporation.
Net Unrealized Built-in Gain
Farming income accrual basis gross profit calculation
Net sales + End inv - Beg inv - inv purchases
Which 4 states do not impose an income tax on corporations?
Nevada South Dakota Washington Wyoming
States w/o corp. income tax
Nevada, Ohio, SD, WA, WY
Which states do not impose income tax on corporations?
Nevada, South Dakota, Washington, Wyoming
States without sales tax
New Hampshire, Oregon, Montana, Alaska, Delaware
Amazon vs. ______(state)
New York
Washington Times Herald Facts
Newspaper contracted for supply of comic strips. Creators sent fiber matrices bearing the impressions of the comics.
Businesses must file income tax returns in states where they have income tax ___________.
Nexus
Sufficient or minimum connection
Nexus
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
agency nexus
Nexus over an out-of-state corporation may be established by the activities of unrelated third parties who act on behalf of the corporation in the state (scripto, tyler pipe)
Is rental income from a residence rented for fewer than 15 days included in income?
No
Import/Export Clause
No State shall, without the consent of Congress, *lay any Imposts or Exports, except what may be absolutely necessary for executing it's inspections Laws:* and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be used by the Treasury of the United States: and all such Laws shall be subject to the Revision and Control of the Congress.
Avoiding penalties: §482 study NOT based on allowable pricing methods:
Not required to use allowable pricing methods if you can show that it would not have come up with an appropriate price Must be completed by the time you file federal return
Restocking Fee
Not taxable
Utilities
Not taxable at the local level
Oklahoma v. Jefferson Lines
OK imposed sales tax on price of tickets sold by Jefferson lines; court ruled that the sale of tickets was a discrete event, so the tax is fairly apportioned to the state
Horizontal Equity
Occurs if taxpayers with the same ability to pay actually do pay the same amount
Gross receipts tax
Ohio commercial activity tax, B&O tax, Kentucky limited liability entity tax, New Jersey Alternative Minimum Assessment
Unreasonable Burdens Balancing Test
On exam: do not list all factors (only the ones that a relevant for the facts). Most important factors: (1) state's interest and (2) harm to interstate commerce. Factors: 1. State's interest - Life, health, and safety are all important. - Safety regulations must actually improve safety. 2. Harm to interstate commerce 3. Degree to which burden falls in state or out of state - court more likely to uphold regulation whose burden falls primarily out of state (if burden falls on other states won't be self correcting). - if burden falls primarily in state, court may let political process correct it. 4. Adequate, reasonable alternatives 5. Direct/Indirect impact on interstate commerce 6. Dangers of multiple state regulations - state regulations that conflict with other state's regulations. (mud flaps on trucks that would have to be switched at state borders). 7. Need for uniformity vs. diversity 7. Disproportionate impact 8. Least discriminatory way of addressing
Equality and Uniformity only applies to which type of taxes?
Only apply to property taxes; NOT excise taxes
When is a business required to collect sales tax from customers?
Only if the business has sales and use tax nexus with that state
When does a use tax occur?
Only when a seller in one state ships goods to a customer in a different state and the seller is not required to collect the sales tax; The seller does not have sales and use tax nexus in the state in which the goods are shipped to
What is adjudication?
Order making
Non-Discriminatory (even handed) State Taxes
Each tax has its own rule. If the tax is fairly apportioned between in state and out of state, it's usually Constitutional. 1. Goods in transit 2. Instrumentalities in transit 3. State income tax 4. Sales tax 5. Use tax 6. Services rendered If tax does not fit into one of the categories below default to the Brady Test: 1. How substantial is nexus with the state? 2. How fairly is it apportioned? 3. How fairly does it relate to services rendered?
Presence in Quill for Due Process Nexus
Economic Nexus
States have asserted that busineses without a physical presence may still have established this type of nexus.
Economic Nexus
Purpose of commerce clause
Ensures that a taxpayer engaged in interstate commerce pays it's fair share of state taxes -requires state to use reasonable formulas when more than 1 state is taxing THE SAME THING FOR APPORTIONMENT
Domestic Corporation
Entities incorporated under the laws of particular state.
Distributions Partnerships
Entities taxed as partnerships do not recognize gain or loss when they distribute property (appreciated or depreciated) to owners. distributions to owners of entities taxed as partnerships are treated as a nontaxable return of capital to the extent of the owner's basis. Amounts in excess of basis are generally treated as capital gain to the owners.
State Equality and Uniformity clauses cannot conflict with...
Equal Protection Clause (federal law trumps state law)
The most difficult of the 4 canons on which to achieve consensus
Equity
Quill Corp. v. ND
Established that physical presence was need to collect tax under commerce clause- having customers in the state isn't enough
Required if estimated federal income tax liability is greater than $500.
Estimated tax payments
-providing a car or free samples for salesperson -renting space for temp display (two weeks for less) -assisting with product display in retail shops (but not replacing stock) -maintaining informal home offices
Examples of protected activities for 86-272
sales tax, use tax, income tax, franchise tax, payroll tax, real property and personal property tax
Examples of state taxes:
-providing technical assistance -maintaining a company office -repairing or servicing product -approving sales -account collections -replacing spoiled product -engaging in "agency stock checks" -storing product not related to solicitation (warehouse)
Examples of unprotected activities 86-272
This tax is levied in the quantity of an item or sales price
Excise Tax (ex: gasoline, cigarettes and alcohol)
Transfer Taxes
Excise tax assessed on the right to transfer property at death - Estate tax, gift tax, generation-skipping tax
Sales and Use Taxes
Excise taxes levied on the sale or use of tangible personal property within a state
3 subject areas of GOVT regulation that emerge from supreme court decisions
Exclusively fed Exclusively state Dual regulation
Occasional Sale Exemption
Exemption typically applies to sales made by those who are NOT regularly engaged in the business of selling the items at issue
Converting to other entity types
Existing corporations have only two options for converting into flow-through entities. First, shareholders of C Corporations could make an S election to treat the corporation as an S corporation (a flow through entity). The only other option is for shareholders to liquidate the corporation and form the business as a partnership or LLC.
September 15th
Extended Due Date for an S Corporation
12. Physical presence does not always create sales and use tax nexus. T/F
FALSE
16. In Complete Auto Transit the court determined eight criteria for determining whether a state can tax a nondomiciliary company. T/F
FALSE
23. A unitary return includes only companies included on a federal consolidated tax return. T/F
FALSE
29. The payroll factor includes payments to independent contractors. T/F
FALSE
8. All 50 states impose a sales and use tax system. T/F
FALSE - Alaska, Delaware, Montana, New Hampshire, and Oregon do not.
35. Rental income is allocated to the state of commercial domicile. T/F
FALSE - Allocate rental income to the state where the rental property is located.
7. Business income is allocated to the state of commercial domicile. T/F
FALSE - Business income is apportioned based on the extent of business's activity and property in various states.
26. A state's apportionment formula divides nonbusiness income among the states where nexus exists. T/F
FALSE - Nonbusiness income is allocated to a specific state (usually the state of commercial domicile).
31. The annual value of rented property is included in the property factor. T/F
FALSE - The annual value of rental property is multiplied by eight and then added to the property factor.
33. In recent years, states are weighting the sales factor because it is easier to calculate. T/F
FALSE - Weighting the sales factor tends to decrease taxes on in-state businesses and increase taxes on out-of-state businesses.
3. Nondomiciliary businesses are subject to tax everywhere they do business. T/F
FALSE- Nondomiciliary businesses are only subject to tax where they have nexus.
Property tax: based on
FMV
State tax base =
FTI +/- state tax adjustments
CTS
Facts: Indiana law regulated tender offers. Holding: States, as creators of corporate entities, have the ability to define the protections afforded to shareholders providing that it is possible to comply with the state law and federal law.
Due Process Clause-Corporate Income Tax
Fair apportionment for corporate taxes Exxon v. Wisconsin -Requires a rational connection between income and the interstate values of the enterprise -Can't be out of proportion or produce a "grossly distorted" result.
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
T/F: The rules for determining income tax nexus are the same as those for determining sales and use tax nexus
False
T/F: Solicitation of services is protected under Public Law 86-272
False, this would create income tax nexus due to a physical presence
T/F: You must identify federal/state adjustments for each specific state AFTER apportioning the income to a particular state where they have income tax nexus
False, you must do this BEFORE
T/F: Commercial domicile is in the location of the place of incorporation
False. They can be different
3 areas of dual regulation
Fed preemption Fed reg but no preemption no fed regulation
Commerce Clause
Fed. govt. regulates interstate commerce A tax is constitutional under the Commerce Clause if the four following criteria are met: 1. The tax must be applied to an activity that has aeswq in the state. 2. The tax must be fairly apportioned to activities carried on by the taxpayer in the state. 3. The tax must not discriminate against interstate commerce. 4. The tax must be fairly related to services provided by the state. "Fairly related" test significantly limited and is dead letter.
FICA stands for
Federal Insurance Contributions Act - employment taxes, federal and state unemployment taxes
Multistate Taxation Formula
Federal TI +/- State modification items =State tax base +/- Total net allocatable income (nonbusiness income) = Total apportionable income (business income) * state apportionment percentage =Income apportioned to state +/- Nonbusiness income (loss) allocated to state = State taxable income * state tax rate = Gross Income tax liability for state - state tax credits = Income tax liability for state
Starting point for computing state taxable income
Federal Taxable Income
State Modifications
Federal and Munit Bond interest State income taxes Depreciation methods NOL Deduction Dividends Received
Tax Law
Federal income tax statute and all of the primary interpretive authority related to that statute
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
Services Rendered
Fee for services must fairly relate to services (very lenient standard). ex: LAX charging tax for each plane that lands.
Articles of organization
Filed to form LLC with the state
Articles of incorporation
Filed to legally form corporation with the state
Domicile
Fixed home or permanent establishment of taxpayer
Sales Tax
Flat rate imposed on in-state sales of tangible personal property -45/50 states
4 Part Complete Auto Test
For commerce clause: 1. The tax must be applied to an activity that has substantial nexus in the state. 2. The tax must be fairly apportioned to activities carried on by the taxpayer in the state. 3. The tax must not discriminate against interstate commerce. 4. The tax must be fairly related to services provided by the state. (dead letter)
How are formal rules made through the Administrative Procedures Act (APA)?
For formal rule making they require quasi-judicial hearings
-tax credit for tax paid in another state
For individuals method used to prevent double taxation
How are informal rules made through the Administrative Procedures Act (APA)?
For informal rule making they gave to publish notice and take comments.
The credit for foreign taxes paid are limited if the US effective tax rate exceeds the
Foreign Effective Tax Rate
This type of individual is prohibited from being an S Corporation shareholder
Foreign citizen
Unearned income is foreign source if received from a
Foreign resident or from property that is used in a foreign country
The U.S. Income Tax Return for an S Corporation
Form 1120S
Filed with the IRS when making a valid S election.
Form 2553
General partnerships
Formed by written agreement among the partners (partnership agreement) or formed informally without a written agreement when 2 or more owners join together in an activity to generate profits
This tax is levied in the privilege of doing business
Franchise Tax
A benefit that might be taxable to a shareholder that owns more than 2% of the company.
Fringe benefit
Requiring Business to be Performed In-State
Generally per se invalid unless: 1. Law actually protects reputation of particular in state products; or 2. State is market participant preferring to buy in state products (distinguish between government owned and private entities). Example: public contractor case where city could not give subsidy to private contractor to which law gave monopoly. - Held to be discriminatory and per se invalid. - State can favor public entities more than it can private entities. - But city could give subsidy to a public contractor.
This case focused on this use of trademarks and trade names
Geoffrey
This lead to Economic Nexus
Geoffrey
Geoffrey v. SC
Geoffrey= DE sub of ToysRUs; held the retailer's intangibles; had no physical presence in SC but licensed intangibles to an affiliate with stores in SC; licensing intangibles is subject to income tax nexus
Commerce Clause-Internal Consistency
Goldberg v. Sweet If every state would impose an identical tax to the one in question, would double taxation result?
Commerce Clause-External Consistency
Goldberg v. Sweet Whether the state has taxed only that portion of revenues from interstate activity reasonably reflecting the in-state component being taxed.
Goods in Transit (Non-Discriminatory State Tax)
Goods in transit are immune from state taxation. Once goods are moving or are committed to common carrier for purpose of moving, they are exempt from taxation until transit ends.
Hardware vs. Software
Hardware - taxable software maintenance -- upgrades, manuals, updates - taxable -- software support, training, consulting - not taxable
Question related to govt regulations of biz
How DO GOVT.GET THE AUTHORITY TO REGULATE BIZ ACTIVITY? How is regulation actually acomplished What limits are there to GOVT pwr regulation
Nexus
How does a company know if they have to file a return in a state and potentially pay tax?
most start with federal income
How does a company with multiple entities know which entities need to file in a state?
As Applied
Hunt WA apples Creamery only taxes OOS providers because of subsidy
Change in accounting method for long term contracts
IRS permission required
Dormant Commerce Clause
If Congress is given commerce power, then states have power taken from them and cannot discriminate or impose an unreasonable burden on interstate commerce and foreign commerce.
Are beads/throws purchased for a Mardi Gras krewe subject to sales tax?
If a krewe purchases throws with intent to mark up and resale, they have to pay sales tax on the difference bw the purchase price and the markup. if a krewe purchases throws from a vendor for $100, then the vendor will collect the sales tax and remit it. if the krewe marks up the throws bought from a vendor and resales them, then it will pay use tax on the difference between the purchase price and the resale price. if the member fees include supplying throws and there is no mark up for resale then the krewe is only responsible for paying state sales tax due upon the purchase of beads and throws which is collected and remitted by the vendor
Sales tax -- when have to pay
If have nexus in the state (even for internet sales). If no nexus, buyer must pay use tax
FICA and Self Employment Tax for partnerships
If owner is a general partner - income allocation is subject to self employment tax Limited partner - not subject to self employment tax
Discrimination towards Interstate Commerce
If state law is discriminating against interstate commerce, then it is per se invalid. 1. It is discriminatory if state favors in-state commerce over out-of-state commerce for no reason. 2. If treated differently because it's different, it is not discriminatory.
Unreasonable Burden on Interstate Commerce
If state law is even-handed, the state cannot impose an unreasonable burden on interstate commerce. Triggered when law is even-handed between in and out-of-state commerce, but harms interstate commerce. Balance competing interests to determine if burden to interstate commerce is justified by the state's interest.
Market Participant Exception
If state, city, or county is a market participant, then it can discriminate against interstate commerce and impose unreasonable burdens. The state can prefer in state over out of state. Taxing power does not fit within the market participant exception. 3 ways for a state to act like a private enterprise: 1. State as a buyer. 2. State as a seller (exception only applies for first sale, doesn't extend "downstream"). 3. State as an employer. (State's refusal to hire out of state employees would not violate the dormant commerce clause but it would violate the Privileges and Immunities Clause).
Dominant purpose test
If the "dominant purpose" of the transaction is the transfer of TPP, the transaction will constitute a taxable sale of TPP; If the "dominant purpose" of the transaction is the transfer of services or an intangible, the transaction will constitute a nontaxable sale (assuming service not taxable)
Essence of the transaction
If the "essence of the transaction" is the sale of TPP, then transaction is taxable; If the "essence of the transaction" is the sale of service or intangible, then transaction is nontaxable (assuming service not taxable)
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
Throwback Sales
If the business does not have nexus in the destination state, sales are thrown back to the state from which the property is shipped
Are Tickets to Mardi Gras balls subject to sales tax?
If the price of the admission to a Mardi Gras ball includes entertainment such as a performance by a nationally know artist = taxable If not = not taxable
When might physical presence not create nexus for sellers of tangible personal property with regard to income tax?
If their activities within a state are limited to "protected" activities as described by Public Law 86-272
Pallets
If they don't go out with the final product =taxable
No. depends on individual state
If you file a federal consolidated return, will you file a consolidated tax return in all states (if you have nexus in all 50 states)?
FICA and Self Employment Tax for S Corp
If you receive a salary from an S Corp as well as income from being an owner the income allocation is not subject to FICA or self employment tax
Limitation on state income tax
If your only business within the state is soliciting for sales of tangible property (not services), then no state income tax in that state
Foreign Currency exchange gains and losses resulting from the normal course of business are
Ordinary (NOT CAPITAL)
Under Public Law 86-272, when are businesses protected from income tax nexus in a particular state?
If, and only if, all of the following apply: 1 - The tax is based on net income (not gross receipts or revenue) 2 - The taxpayer sells only tangible personal property in that state 3 - The taxpayer's in-state activities are limited to solicitation of sales 4 - The taxpayer participates in interstate commerce 5 - The taxpayer is nondomiciliary 6 - The taxpayer approves orders outside the state 7 - The taxpayer delivers goods from outside the state
National Bellas Hess vs. Dept. Rev of _______
Illinois
Property taxes
Imposed on real property (e.g., for individuals, this means your house - land and structure; for businesses - real property, warehouses, etc.); Many states also tax tangible personal property that is held for the production of income
Excise Tax
Imposed on the retail sale of specified goods and services
Use Tax
Imposed when a buyer does not pay state sales tax for an item bought from another state - responsibility of the buyer to pay
Difference between the tests
In virtually every transaction where you have the "inseparable mixed transaction" the "true object" is both the services or intangible content and the TPP (i.e., customer needs cannot be satisfied without having the benefit of both); so it makes little sense to identify the "true object" of the transaction
The transfer of assets from the US to a foreign country may trigger
Income
Wrigley focuses on this type of tax
Income
transactional test
Income arising from transactions and activities in the regular course of the taxpayer's trade or business
functional test
Income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations
These fees are charged for incorporating in a state or registering to do business in a state
Incorporation fees
The effect a shareholder's share of ordinary business income has on their stock basis.
Increase to basis
Individual shareholders
Individual shareholders receiving distributions from corporations pay the second tax on the dividends they receive, usually at a 15 percent tax rate. Also, taxpayers with modified AGI in excess of a threshold amount pay an additional 3.8 percent net investment income tax on dividends. The threshold amount is $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for all other taxpayers.
When it comes to Congress and its granting of authority to federal agencies, what does the Supreme Court require under its delegation of jurisprudence?
Intelligible principles
OHIO CAT exclusions
Interest, dividends, and capital gains taken away from CAT
Exclusively state
Intrastate activities that do not have a substantial affect on interstate commerce
investigating
Investigates activities and practices that may be illegal - gathr and compile information concerning the organization and business practices - -determines whether there has been in violation of any law - -may use subpoena power -require reports -examine Witnesses under oath Examin and copy documents -obtain information from other governmental offices -info given to an agency must be truthful
NW Cement Company was in this state
Iowa
How is payroll apportioned for state tax returns?
Payroll for each employee is apportioned to a single state - the state where they perform the majority of services
If any portion of penalty is attributable to transactions between 2 foreign corporations:
Penalty may be avoided
Income recognition method for tax for nonexempt long term contracts
Percentage-of-completion
Costs not required to be capitalized
Period expense
Sales Tax nexus
Physical presence of: 1. Sales personnel (or other employees) within the state 2. Independent agents acting on behalf of the taxpayer 3. Real or personal property within the state
Quill v. North Dakota 504 US 298 (1992)
Physical presence required to create sales tax nexus
Public Law 86-272
Places limits on state's power to impose income taxes on nondomiciliary businesses
Income treated as US-sourced income:
Pretty much anything that is related to US in any way
Which states are unitary return states?
Primarily states west of the Mississippi River, plus Illinois, Massachusetts, Michigan, New York, Ohio, Texas, Vermont, and Wisconsin
Real or tangible personal property produced by taxpayer for sale to his or her customers
Produced for sale
Real or tangible personal property produced by taxpayer for use in his or her trade or business
Produced for use
Zelinsky Facts
Professor performed some of his work at his home in Connecticut (Commutes in 3 days a week).
A distribution of appreciated property
Property Distribution
Annual rented or leased property value multiplied 8 is included when computing this factor.
Property Factor
This tax (ad valorem) is based on the value of real property (realty taxes) and personal property
Property Tax
Expense treatment for residence rented for 15 or more days
Prorated between personal and rental use
Pros/Cons to state conformity w/ IRC
Pros to conformity: - Simplicity - Reduction in compliance costs Cons to conformity: - Loss of control over tax revenues - Loss of control over policy making
___ along with property violates the PL 86-272 criteria and creates nexus
Providing services
The initial basis for a shareholder that purcahses stock from another shareholder is equal to this.
Purchase Price
___ are exempt from the sales tax
Purchases of inventory for resale
Adjudicating
Quasi judicial function -involves fact-finding and applying law to the factsand - violators receive fines or other penalties
Rule making
Quasi-legislative power -issues rules and regulations that have the force and effects of law - issue guidelines to supplement rules
Mail-Oder company who sold office supplies
Quill
Sales Tax --> physical presence will be required [Case]
Quill
This case led to the distinction between the levels of connection with the commerce and due process clauses
Quill
This case was to try and get Congress to pass a law, not the Supreme Court
Quill
Commerce Clause-Nexus-Sales and Use
Quill Corp. Substantial Nexus=Physical Presence
This case affirmed that an out-of-state business must have a physical presence in the state before the state may require a business to collect sales tax from in-state customers.
Quill Corporation v. North Dakota
Due Process Clause-Nexus
Quill-Purposefull availment
Marginal Rate
Rate that applies to the last dollar of the tax rate
Property Factor
Real and tangible personal property o Inventory o Owned property o Leased property Property must be rented and used by the taxpayer o Sourced to location of property Exclusions o Intangible property o Property producing non-business income In-state property/Total property
Shareholders that work as employees must be paid this for the services they perform.
Reasonable salary
Doctrine of Precedent
Reasoning from authority to authority through inductive/deductive process
Which states do not impose sales and use taxes?
Alaska, Delaware, Montana, New Hampshire, Oregon
States without Retail Sales Tax
Alaska, Delaware, Montana, New Hampshire, and Oregon
Partnerships liability
All general partners are ultimately responsible for the liabilities of the partnership
Sales Factor Includes
All gross business receipts net or returns Allowances Discounts
Nonbusiness Income
All income except for business income - generally investment income and rental income; Allocated to a specific state - usually the state of commercial domicile
Who is included on a unitary tax return?
All members meeting the unitary criteria - whether they have nexus or not
Personal Property Taxes
All property other than real property and value assessed by taxpayer - 41/50 states - Household, business, or intangible
Business Income
All revenues earned in the ordinary course of business; Sales less cost of goods sold and other expenses; Fairly apportioned across states with nexus
How is federal interest income treated for state tax returns?
All states require a negative adjustment (reduction in federal income in adjusting to state income) because states cannot tax federal interest income
Allocation and Apportionment: non-business income
Allocated entirely to HQ/state of incorporation
Assigning nonbusiness income to a state.
Allocation
soliciting sales and nexus
Allowed to solicit sales, maintain a sales office without creating nexus
What is the Administrative Procedures Act (APA)?
Allows agencies to adopt rules through: 1. Agency provision of public information 2. Agency operations 3. Judicial review
What power does the Commerce Clause grant?
Allows congress to regulate commerce among the states, with other nations, and with Native American tribes (a very broad power)
Entity-level taxes S-corp. Exceptions
Almost all states will conform to federal S election: treat as pass-through entity Exceptions: CA, IL, MA, LA, NH, TN, TX
7. Reasons for agencies
Almost every agency exist bc of recognized problems in society <the expectation that the agency may be able to help solve problems
This case focused on out of state internet retailers collection sales/use taxes
Amazon
Click-through nexus cases
Amazon and overstock
This online giant has been at the forefront of of many sales and use tax nexus debates.
Amazon.com
Federal/State Adjustments
Amounts added to or subtracted from federal taxable income when firms compute taxable income for a particular state
What is not included in payroll?
Amounts paid to independent contractors
Basis Computation Flow through
An owner's tax basis in a flow through entity interest is increased for contributions to the entity and income allocated from the entity to the owners. The tax basis of the interest is decreased by distributions to owners and losses allocated from the entity to the owner.
Tax Base
Any activity, item, or economic event with respect to which a tax is levied
11 standing to sue
Any party seeking the judicial review of any administrative agency decision - must prove
Taxpayer
Any person or organization required by law to pay a tax to government
Property tax: taxable prop
Anything realty. land, personal residences, apartment bld, offices, factories
Resale Exemption
Applies when you purchase otherwise taxable items that will be resold (e.g., not consumed and used) in ordinary course of business.
Business income is divided across states where the business has income tax nexus using this satutory formula.
Apportionment Formula
Allocation and Apportionment: business income
Apportionment factor: state property/total +state payroll/total +state sales/total /3
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.
McDonalds Case Facts
Are TPP happy meal toys taxable or are they subject to the resale exemption?
No
Are all state returns due on the same date as the federal return?
Equal Protection Clause
Armour; Nordinger Distinctions between different classes of taxpayers must be rationally relative to a legitimate government interest
[] Fed GOVT authority to regulate BIZ The commerce clause
Art 1 sect 8 of the us constitution-gives rise to the fed gvt power to reg BIZ activities " the Congress shall have power.... to regulate commerce with foreign nations and among the several states and with the Indian tribes
Avoiding penalties: §482 study based on allowable pricing methods:
As long as you tried to come up with uncontrolled pricing using allowable pricing methods, you will avoid the penalties
Facially Neutral
Assumption is it is C
Facially Discriminatory
Assumption is it is UNC, must prove law is necessary to achieve an important government purpose
OHIO CAT
At least 25% of the person's total property, payroll, or gross receipts is in Ohio, or domiciled in Ohio
Property Apportionment is computed as
Average Value of Property in State / Value of all Property
Property factor is computed as:
Average value of property in state/All property
Tyler Pipe focuses on this type of tax (not a regular type)
B&O
40. Which of the following sales is always subject to sales and use tax? A. Tax preparation services. B. Automobiles. C. Inventory. D. Food.
B. Automobiles. Automobiles are tangible personal property included in the sales tax base of every state which chooses to tax sales.
White
Boston jobs constitutional under DCC--to the extent that the City expended its own funds, it was a market participant
Wisconsin v. Wrigley (1992)
SCOTUS addressed what solicitation is 1. Any form of advertising 2. Carrying samples and promotional materials for display or distribution without charge 3. Passing inquiries or complaints to the home office 4. Checking customer's inventory for reorder 5. Maintaining a sample room for 2 weeks or less (trade show rule) 6. Recruiting, training, and evaluating salespeople using homes or hotels 7. Owning or furnishing personal property and autos used in sales activities
Northwestern States Portland Cement v. Minnesota (1959)
SCOTUS allowed Minnesota to tax an Iowa based business Resulted in Public Law 86-272
National Bellas Hess v. State of Illinois (1967)
SCOTUS held that an out of state mail order company did not have a sales tax collection responsibility because it lacked physical presence
Mobil Oil Corp v Vermont Tax Commissioner (1980)
SCOTUS held that the income of a multistate business can be apportioned if its intrastate and out of state activities form part of a unitary business
Complete Auto Transit v. Brady (1977)
SCOTUS provided 4 criteria for determining whether states can tax nondomiciliary companies and whether the tax imposed is discriminatory against nondomiciliary businesses
Quil v. North Dakota (1922)
SCOTUS reaffirmed that an out of state (nondomiciliarity) business must have a physical presence in the state before any state may require a business to collect sales tax from in-state customers
Reeves v. Stake
SD Cement Case govt participating in market , not bound by DCC
What is included in payroll?
Salaries, commissions, bonuses, and other forms of compensation
Retail Sale
Sale of TPP to a consumer or to any other person other than for resale
Sales Tax
Seller's state always has first dibs (always has the right to charge sales tax).
Solicitation
Selling activities or activities ancillary to selling that are protected under Public Law 86-272
Stock Sale
Selling equity or intangible property; LLC interest etc. Not subject to sales tax
Transfer Pricing
Selling inventory to a different branch of your own company because they have lower tax rates
Foreign subsidiary:
Separate legal entity from US corp, incorporated by foreign country
___ tax returns are subject to passive investment companies.
Separate return
___ tax returns are subject to the potential manipulation through related-entity transactions
Separate return
A state requiring only those businesses with nexus in the state to file an income tax return.
Separate return state
What is the primary difference between separate and unitary state?
Separate states tax the entire apportioned income of each separate business unit with nexus while unitary state tax the entire unitary group using a smaller apportioned percentage
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
Tax items that are treated differently from a shareholder's share of orginary business income (loss) for tax purposes.
Separately stated items
Who is not protected under Public Law 86-272?
Service providers, sellers of real property, or businesses licensing intangibles; These sellers establish nexus through physical presence of sales personnel or property
Family members and their estates count as one of these.
Shareholder
Shareholder tax
Shareholders generally pay the second tax immediately when they receive dividends or in the future when they sell their stock and pay capital gains tax. For individual shareholders, the tax rate applicable to both dividend income and long-term capital gain is generally 15 percent under current tax law.
Import Duties
Shipment from overseas = taxable
3 major movements in MTS towards:
Single Sales Factor Combined reporting to avoid shifting tax consequences Market sourcing
Flat Rate
Single percentage
long term contract exemptions
Small contractors and home construction contractors
LLC liability
Solely responsible
Use Tax
States can always impose a use tax on state residents for purchases in other states. If seller has substantial nexus with in state buyer's state, the seller has to collect tax. (Substantial nexus: retail outlet, warehouses, substantial amount of employees).
What can states require of controlled parties within the same state?
States can require related parties to file consolidated return if this will better reflect the actual business activity in the state
Nonresident income tax
States generally impose personal income tax on "nonresidents" only with respect to income derived from sources within the state (not ALL income earned from everywhere, like residents)
Resident income tax
States generally impose personal income tax on all income of their "residents," regardless of where earned or sourced
Power of states to tax personal income of residents
States have the power to tax residents on all personal income regardless of it's source under the Due Process Clause
Federal administrative procedure act does not provide judicial review for
Statues precluding judicial review agency action is committed to agency discretion by law
Statutory Law
Statutory provision is the rule of law
Partner-level apportionment: steps
Step 1: combine distributive share of partnership income with partner's other apportionable income Step 2: combine partner's share of partnership factors with the partner's other factors Step 3: apportion income by: Combined Income X Combined apportionment % = income apportioned to state
unfunded mandates reform act
Stop congress from burdening states with responsibilities without providing adequate funding
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
Jusitifcation needed for tax -the nexus TCC
Sufiicent: contact connect Tie link Between the biz and state -must be sufficient local activities < in a constitutional sense -if the state gives anything for which it can reasonably expect payment than the state has sufficient nexus <access to parks Parking Schools Employee etc
Constitutional restrictions on nexus
Supremacy Clause, Equal Protection Clause, Privileges and Immunities Clause, Due Process Clause, Commerce Clause
Wisconsin Department of Revenue v. William Wrigley, Jr., Co. (1992) 505 US 214
Supreme Court held that "solicitation" includes not only actual requests for purchases; but also other activities that are entirely ancillary to the request
TAXATION OF FOREIGN INCOME
TAXATION OF FOREIGN INCOME
What is a sales tax imposed on generally?
TPP
10. Many states are expanding the types of services subject to sales tax. T/F
TRUE
11. Businesses must collect sales tax only in states where it has sales and use tax nexus. T/F
TRUE
13. The National Bellas Hess decision held that an out-of-state mail-order company did not have sales tax collection responsibility because it lacked physical presence. T/F
TRUE
14. The Quill decision reaffirmed that out-of-state businesses must have physical presence within a state before the state may require the collection of sales taxes from in-state customers. T/F
TRUE
15. Businesses must pay income tax in their state of commercial domicile. T/F
TRUE
17. Public Law 86-272 protects certain business activities from creating nexus. T/F
TRUE
18. Public Law 86-272 protects only companies selling tangible personal property. T/F
TRUE
19. Delivery of tangible personal property through common carrier is a protected activity. T/F
TRUE
2. Commercial domicile is the location where a business is headquartered and directs its operations from. T/F
TRUE
20. Giving samples and promotional materials without charge is a protected solicitation activity. T/F
TRUE
21. Several states are now asserting economic nexus. T/F
TRUE
22. Separate return states require each member of a consolidated group with nexus to file their own state tax return. T/F
TRUE
24. The Mobil decision identified three factors to determine whether a group of companies are unitary. T/F
TRUE
25. Business income includes all income earned in the ordinary course of business. T/F
TRUE
27. A state's apportionment formula usually relies on some variation of sales, payroll, and property factors. T/F
TRUE
28. Most services are sourced to the state where the services were performed. T/F
TRUE
30. The property factor is the average of beginning and ending property values. T/F
TRUE
32. Historically, most states used an equally weighted three-factor apportionment formula. T/F
TRUE
34. Interest and dividends are allocated to the state of commercial domicile. T/F
TRUE
36. Public Law 86-272 does not apply to nexus for non-income based taxes. T/F
TRUE
4. Use tax liability accrues in the state where purchased property will be used when the seller is not required to collect sales tax. T/F
TRUE
5. The state tax base is computed by making adjustments to federal taxable income. T/F
TRUE
6. Businesses subject to income tax in more than one jurisdiction have the right to apportionment. T/F
TRUE
9. Purchases of inventory for resale are typically exempt from sales and use taxes. T/F
TRUE
1. All states employ some combination of sales and use tax, income or franchise tax, or property tax. T/F
TRUE—
Alabama Reg.
Targets out of state retailers with substantial sales in the state Sellers without an Alabama presence must pay state tax when making retail sales of tangible personal property into the state - must exceed $250,000 and perform "certain activities" AL trying to push back, contradicts physical presence requirements in Quill Corp. North Dakota
Abatement
Tax exemption granted for only a limited period of time to lure commercial enterprises into the jurisdiction
Corporate Income Tax
Tax on net income attributable to the state (piggybacking on federal income tax) -45/50 states
Ohio Commercial Activity Tax
Tax on the privilege of doing business in Ohio Gross receipts tax Not an income or sales tax
Use Tax
Tax paid for the use, consumption, distribution or storage for use, consumption, or distribution within the taxing authority, or TPP
Personal Income Tax
Tax the income of individuals who reside in the state and nonresidents who earn income in the state (piggybacking on federal income tax) - 43/50 states
Expedite Charges
Taxable
Portable Toilets
Taxable
Pollution Control Devices
Taxable at local level but are not taxable to the state of La
Accounting method for taxable corp
Taxable corps are required to use accrual method but can use cash method if annual gross receipts do not exceed 5 million for the three previous tax years
Unincorporated entities with more than one owner tax rule
Taxed as partnerships - form 1065
Unincorporated entities with only one individual owner
Taxed as sole proprietorship - schedule C form 1040
Foreign branch: treatment of income/loss
Taxed by foreign country Included in US corp income/loss - taxed when earned
Foreign subsidiary: treatment of income/loss
Taxed by foreign country Not taxed by US until brought back into US as a dividend Passive income taxed immediately
Average Tax Rate =
Taxpayer's tax liability / taxable income
Gamble vs. SC
Taxpayers claimed they were owed a refund of $14,172 due to their status as nonresidents. The department determined that the taxpayers were residents of SC for the 2012 pursuant to SC Code Section 12 which states that a "resident individual" is an "individual domiciled in the state". Concluded the taxpayers are residents of the state of SC fro the tax year 2012 because ti was their state of domicile
Does a one-time sales activity violation create income tax nexus?
Technically, but under the de minimis activities rule, it may be excluded
Other Taxes
Texas margin tax, Michigan biz tax, New Hampshire biz enterprise tax
Supremacy Clause
The " constitution, and the laws on the unites states, shall be the supreme law of the land"
Nexus
The sufficient (or minimum) connection between a business and a state that subjects the business to the state's tax system; The requirement for establishing nexus with a state depends on whether the tax is a sales and use tax, an income tax, or a nonincome-based tax
How is state taxable income calculated for states in which the business has nexus?
The sum of the business income apportioned to that state plus the nonbusiness income allocated to that state
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
T/F: the following activities meet the definition of solicitation and are protected under Public Law 86-272 under the Supreme Court: making repairs, collecting delinquent accounts, training and evaluating sales reps using homes or hotels, securing deposits, maintaining an office other than home, repossessing property, checking customers inventory for reorder
True
True or false: nondomiciliary businesses are subject to tax only where they have nexus
True
US TPers are taxed on usually all income all over the world (T/F)
True
regulated federalism
a federal system dominated by the national government; tightly controlled grants and unfunded mandates are key elements of regulated federalism
new federalism
a federal system guided by a policy of returning power to the state and local governments; block grants are a key element of new federalism
Unincorporated entities with only one corporate owner
Typically a single member LLC - Disregarded for tax purposes - income reported as if it had originated from a division of the corporation and is reported directly on the single member corporation's return
dual federalism
a federal system with a fairly strict division of powers between the national and state governments; also called "layer cake" federalism
cooperative federalism
a federal system with considerable sharing of powers among national, state, and local governments; also known as "marble cake" federalism
quorum
a fixed number of people, often a majority, who must be present for an organization to conduct business
commission system (CITY GOV'T)
a form of city government led by a group of professional commissioners chosen for their skills and expertise; became popular in the early 1900s
federal system
a governmental system in which a national government coexists with the government of each state.
special purpose district
a local government district established for a specific purpose, such as providing school or fire services; these districts operate independently of other local units of government
unfunded mandates
a regulation or policy imposed by the national government on state and local governments without adequate federal funds to carry out the policy
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.
Use tax only occurs when
a seller in one state ships good to a customer in a diff state and the seller is not required to collect the sales tax
MTC definition of unitary business
a single economic enterprise made up of either separate parts of a single business entity or of a commonly controlled group of business entities that are interdependent, integrated, and interrelated through their activities, so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts
For an item to be deductible by either an individual or a business, there must be either...
a specific provision or a general category in the Internal Revenue Code that permits the deduction
privileges and immunities clause
a state cannot discriminate against residents of other states or give its own residents special privileges
council-manager system (CITY GOV'T)
a system of city government in which an elected city council makes policy decisions but leaves the daily task of running the government to a hired city manager; most common form of city gov't in the U.S.
mayor-council system (CITY GOV'T)
a system of city government in which voters elect both city council members and a mayor; the mayor may have either weak or strong executive powers
Estate Tax
a wealth transfer tax that applies to transfers of property as a result of the owner's death
Business income is subject to _____________, while nonbusiness income is subject to _________________
apportionment, allocation
Business income is subject to ________ among the states where ____exists , based on the extent of the business' activities and property in various states
apportionment, nexus
Sales shipped from a Finnigan state to a Joyce state
are NOT included in the sales factor numerator of either state
Sales shipped from a Joyce state to a Finnigan state
are included in the sales factor numerator of BOTH states
Article III
article in which the judicial branch's powers are found.
Horizontal Equity
asserts that persons in similar circumstances should face similar tax burdens
Vertical Equity
asserts that persons with higher incomes should pay not only more tax but also higher percentages of their income as tax
Allocation
attempts to trace certain income to the state of its source and to include the item in full (100%) in the measure of that state's tax
Property is valued at...
average historical cost plus additions and improvements some states use net book value or adjusted basis
Valuation of owned property for property factor=
average of beginning and end of year UNDEPRECIATED cost
Franchise taxes are not...
based on income; "above-the-line" taxes (typically based on net worth, capital stock, or gross receipts)
Admin.agencies
boards bureau commissions and orgs that make up govt bureaucracy - involves agencies at all levels of govt -agencies have 1 or 2 types of regulatory authority y .1 quasi legislative 2 quasi judicial ' - the day to day legal Impact on a biz of the rules and regs adopted and enforced by reg agencies is probably greater than the impact of crts or other branches of govt -create and enforce majority of all laws constituting the legal environment of biz - the Admin process at the state or local level regs almost .every biz activity
subtract
bonus depreciation modification
General state modifications
bonus depreciation, state income taxes, section 199, etc
Property taxes are assessed on...
both realty and personalty
Converting partnerships/sole proprietorships to Corps
Typically, converting entities taxed as partnerships and sole proprietorships can be accomplished in a tax-deferred transaction without any special tax elections. For this reason, many businesses that plan to eventually go public will operate for a time as entities taxable as partnerships to receive the associated tax benefits and the convert to C Corporations when they finally decide to go public.
Wrigley v. Wisconsin
U.S. Supreme Court defined "solicitation" De minimis level of non-solicitation activity establishes only a trivial connection with the taxing state-does not forfeit protection of P.L. 86-272
____________ makes rules for allocating nonbusiness income across states
UDITPA
A model law known to help to minimize differences among state tax laws
UDITPA (Uniform Division of Income for Tax Purposes)
Limits on SALT come from
US constitution; federal legislation; state constitutions
Passive Foreign Investment Company
US person invests in foreign corp with over 75% passive income or 50% of asset used to produce passive income - If CFC and PFIC, taxed as CFC
Transfer Pricing Situations are when:
US taxpayer: Transfers, sells, purchases, or leases tangible/intangible property, Enters into loan agreement or service contract, or Shares costs To/from/with an affiliate who: Is not subject to US income tax or Does not file a consolidated return with the company
Congressional Authorization Exception
Under the Commerce Clause, Congress has the power to permit states, cities, or counties to violate dormant commerce clause rules. It takes an express federal law permitting them to discriminate or impose unreasonable burdens. Permission is narrowly construed. (ex: allowing discrimination against banks does not allow discrimination against investment advisors).
This tax is levied on taxable wages with a limit per employee
Unemployment Tax
Most state constitutions contain what type of clause?
Uniformity and Equality Clause
Functional integration, Centralization of management, Economies of scale
Unitary Business
A tax return group that includes all members meeting certain criteria - whether they have nexus or not.
Unitary Group
Zelinsky Holding
Upheld the challenged tax
due process clause and commerce clause
Us constitution prohibits a state from taxing a person unless both of what are met?
Inter Jurisdictional transaction
Use Tax
This tax is levied on the use of tangible personal property not purchased in state
Use Tax
Use Tax
Use tax imposed at the same rate as the sales tax, and is designed to be "complimentary" to the sales tax; imposition of tax equal to sales tax that would have been imposed had the sale occurred in the subject state
__________ accrues in the state where purchased property will be used when no sales tax was paid
Use tax liability
Business Income- 2 tests
Used for apportionment Transactional Test- Income arising from transaction and activities in the regular course of the taxpayer's trade or business Functional Test-Income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations
Amazon/overstock holding
Valid. Links were like an in-state sales force, therefore physical presence by way of attribution. (Due process also satisfied)
Non- Corp income tax
WA, NV, OH, SD, WY
Tax Commissioner of WV s. MBNA
WV's imposition of its business franchise and corporation net income tax on MBNA for 1998 and 1999 did not violate the commerce clause based on substantial nexus and economic precedes test (empowers states to tax corporations that conducted business within the state without having physical presence)
Typer Pipe Industries vs. ______ (state)
Washington
B&O tax
Washington state gross receipts tax; no city east of the cascades impose a B&O tax; service and other is highest tax classification at 1.5%
[] judicial review of agency deciosions
What alternatives are available to a person business or industry unhappy with either rules and regulations that have been adopted or with quasi judicial decisions what are the powers of Courts and reviewing decisions of administrative agencies what chance does a party upset with an agency's decision have in obtaining a reversal of the decision how much difference is given to an agency's decisions
What is positive commerce power?
When Congress acts (uses the power)
Distributions Taxable Corp and S Corp
both taxable and S corporations recognize gain when they distribute appreciated property to shareholders. However, they are not allowed to recognize loss when they distribute property with a value less than its basis (depreciated property). shareholders of taxable corporations generally recognize dividend income in the amount of the fair market value of the distributions they receive. Distributions to S corporation shareholders are treated as a nontaxable return of capital to the extent of the owner's basis.
A ___________ ____________ has 1 tax entity only
branch operation
B&O stands for
business and occupation
C Corporation
business entity formed under state law on which the income tax is levied directly
State tax base is divided between....
business income and nonbusiness income
For states in which the business has nexus, state taxable income is the sum of
business income apportioned to that state + nonbus income allocated to that state
Member of unitary group apportions business income by multiplying
business income of ALL members * (in-state factors of ONLY the taxpaying member / factors everywhere of ALL members)
How does sales and use tax nexus work?
business is required to collect sales tax from customers in a state only if it has sales and use tax nexus with that state Example - if you buy a book on Amazon, you will not pay sales tax unless you live in Washington (Amazon's state of commercial domicile) or in a state where Amazon has nexus through a distribution center (such as Maryland)
Only the corporation doing _____________ in the state must ____________ and ___________ its ______________ to that state (territorial answer for most states)
business, allocate & apportion, income
Nonbusiness income is all income except ____________ income - generally _____________ income
business, investment
The state tax base is divided into ______________and ________________ income
business, nonbusiness
The state taxable base of an interstate business is separated into ___________ and ___________ income
business, nonbusiness
Non-domiciliary businesses
businesses not domiciled in a state Subject to tax only where they have nexus
Nondomicilary business
businesses not domiciled or headquartered in a state; subject to tax only where they have nexus
Interstate business must separate its ______ from its ____
buusiness income, nonbusiness income
How do we know if Congress meant to preempt the field?
by express language of the federal statute or not....
contractor to fabricate & install
considered a contract of "real property" and the purchaser will not be responsible of the tax. The contractor is responsible for the local tax on any materials or parts used in his job w/ you.
Partnership
consists of two or more individuals who agree to carry on a business jointly
A taxpayer may be subject to both...
corporate income tax and franchise tax in the same jurisdiction
Corporate taxpayers are ___ but not ___
corporate taxpayers are persons, but NOT citizens, therefore corporations are entitled to the Equal Protection clause, but NOT Privileges and Immunities
-all or nothing -prorata
cost of performance 2 rules
Marbury v. Madison
court case that established judicial review
McCulloch v. Maryland
creation of a national bank, the court made it clear that federal laws take precedent over state laws when the two came into conflict.
If the seller does not have nexus, the ____________ is responsible for remitting a ________ __________ to the state in which the property is used
customer, use tax
Partnership-level apportionment
entity theory; use if activities of the partnership and the partner are NOT unitary
Historically, most states have used an ______ apportionment formula. This method adds together the ______,_______, and _______ factors and divides the total by _______ to arrive at the apportionment factor for each state
equally weighted three factor, sales, payroll, and property, three
Ability to pay concept
equity would also require that persons with higher-income pay a greater proportion of their income than lower-income persons - basis for progressive tax system
Who in the school is required to register with the department of revenue
every school board must register with the department of rev for the purpose of remitting the sales tax collected by the schools withing their district. Each school board is required to submit an excel file containing the board's name and withholding account number
Transfer tax
excise tax on change in ownership of bonds, notes, certificates, and deeds
Sales and use taxes
excise taxes levied on the sale or use of tangible personal property within a state
80/20 Companies for Water's Edge
exclude group members if 80%or more of its property and payroll is located abroad regardless of country of incorporation
Control of the branches of govt over admin process
exec branch -appoints tyop officials <gets advice and consent of legislative branch -makes bdgt rewcommendations to legislature -has veto power over its statues legislature --can review and control admin activity <abolishin the agency <enaciting soecific laws contrary to rule adopted by by agency -difines limits on agnecy activities -provides additional procedurla requirements for agency adjudication-limits appropotinments of funds
subtract
exempt interest income:US gov interest modification
T/F: interest and dividends are NOT an allocable income item
false, they are - allocated to domicile state (no throwback)
fed reg but No preemption-
fed regulation of a subject matter is not sufficient to preempt a field - state regulations is permitted -if state regulations are inconsistent or conflict irreconcilably with the fed statue it is void -if compliance with both is reasonably possible dual compliance must t be required <bizs must meet compliance with the law having the greatest burden - -state have the powers to regulate matters of legitimate local concerns even tho interstate commerce may be affected <police powers
What is the most significant tax assessed by the U.S. government?
federal income tax
_____ is generally the starting point for computing state taxable income
federal income taxable
Public Law 86-272
federal law passed by Congress that provides additional protection for sellers of tangible personal property against income tax nexus.
Calculating state taxable income requires you to identify _____/__________ adjustments
federal/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
Unity without imposing on uniformity
federalism allows states to pass laws that reflect the needs and goals of their citizens while still remaining part of the union of states (BENEFIT OF FEDERALISM)
tyranny of the majority
federalism makes it difficult for a misguided majority to trample the rights of a minority (BENEFIT OF FEDERALISM)
encourages political participation
federalism provides an opportunity for people to be involved in the political process closer to home than the nation's capital (BENEFIT OF FEDERALISM)
Businesses must calculate state taxable income for each state in which they must __________ a _________ _________
file a tax return
Why does nexus standard vary
fin and admin burdens vary across taxes
Contribution of dependency test
focuses on whether the enterprise in state business operations depend on the the enterprise of out-of-state operations
Many states exempt _____ because it is considered to be a _______ tax - imposes higher tax burden on lower income people who spend higher proportion of income on this
food, regressive
The Medicare tax pays...
for medical insurance for individuals who are elderly or disabled
Tax
forced payment made to a governmental unit that is unrelated to the value of goods or services received
____________ ____________ - vertical or horizontal integration or knowledge transfer
functional integration
unitary business characteristics
functional integration, central management, economies of scale (based on MOBIL OIL case)
Factors of Profitability Test
functional integration, centralized management, economies of scale.
grants-in-aid
funds given by the federal government to state and local governments for specific programs
block grants
funds given by the federal government to states without restrictions on how the money should be spent
Business income is apportioned across states using a __________ formula, while nonbusiness income is allocated to specific states using __________ rules
general, specific
if shipped to state - _______________ rule, if shipped from state ____________ throwback
general, throwback
Ownership threshold- combined unitary reporting
generally 50% or more
Losses generated by flow through entities
generally available to offset the owners' personal income. Note: The owner of a flow-through entity may only deduct losses from the entity to the extent of the owner's basis in the flow-through entity. In addition, deductibility of losses from flow-through entities may be further limited by the "at-risk" and passive activity loss limitations.
Property Factor
generally includes average value of real and tangible personal property owned or rented *Amount used in the state divided by all of corp's property owned or rented*
Subscriptions
generally not taxable UNLESS it is industry specific (not including subjects of politics, religion, social, or morals) then it is taxable
Judicial branch
generate case law
Sales tax is not imposed on
groceries or medicine; purchases for resale
Washington B&O tax
gross receipts tax 40 cities impose, no city east of cascades
Basic formula for net rental income
gross rental income + Prepaid rent + Rent cancellation payment + Improvement-in-lieu of rent - rental expenses
Phillips vs. NY
had little supporting evidence to confirm the fact that his home office was a necessity, his compensation was omission or salary and the location of the transaction (argued all commissions from years were based on sales to customers located out of NY but there is not proof)
In a progressive individual income system, the marginal tax rate is always (higher or lower) than the average tax rate
higher
US constituion
highest authority on state tax law
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
all of it
if a company operates in more than one state, how much of its total income is taxed in each state?
laboratories for policy experiments
if a state tries a new idea and succeeds, other states will follow suit, if an experimental policy fails, the problems that result will be limited to that one state (BENEFIT OF FEDERALISM)
Throwback Rule
if adopted by state, requires that out-of-state sales not be subject to tax in destination state be pulled back into origination state sales are treated as in-state sales of origination state
Joyce, Inc.
if an out-of-state member of the unitary group does not separately have nexus in a state, any sales that member ships to that state customers are not included in the states sales factor.
New York v. United States
if congress authorizes the discrimination, then does not violate DCC
cost of performance
if income producing activity occurs in multiple states, assign sales to state where greater % of IPA occurs, based on what?
Joyce state
if out-of-state member of the unitary group does not ITSELF have nexus in a state, any sales of that member to that state are not included in that state's sales factor numerator
How to treat income and apportionment percentages for unitary basis
if partner and pship act on unitary basis, combine income and apportionment percentage, if not pship level apportionment- 2 levels
Throwback rule is
if state doesnt have nexus in destination state, sales are thrown back to the state property was shipped from
Are meal plans sold to college and university students as part of bed and board subject to state sales tax?
if the meal is included with tuition/fees then it is considered to be part of the educational services provided = not taxable - sales of single meals to students that aren't a part of tuition will be taxed
pass-through entities
if the partner and partnership operate as unitary then it is partner-level apportionment; if not unitary then it's a partnership level apportionment
Throwback rule
if the state does not have nexus the sales are taken back to the states where the property was shipped
new york
if you spend 182 days or more in new york and have a place of abode you are considered a resident
General counsel
important in many agencies - require Senate approval - made up of chief law officer and legal adviser - represents the agency in court -makes a decision to file suit or pursue other remedies -significant impact on policies - as powerful as commissioner and board
Franchise Tax
imposed for the privilege of doing business within state
Sales tax is imposed on ___ and remitted by ___
imposed on consumer; remitted to the state by seller
Use Tax
imposed on property to be used in one state but purchased in another state if no sales tax was paid in the state of purchase - self-assessed and usually at the same rate as the tales tax
sales tax
imposed on retail sales of tangible personal property and certain enumerated services in the state
Sales Tax
imposed on retail transactions of tangible personal property or taxable services
Use Tax
imposed on the privilege of ownership, possession, use, storage, or consumption of tangible personal property or taxable services in a state to the extent of sales tax
"Dormant" Clause
imposing an implicit restriction on ability of states to regulate interstate commerce
form 1040N or individual income tax return
in nebraska where do consumers use tax get reported?
Ad valorem
in proportion to the estimated value of the goods or transaction concerned
Tangible Personal Property Sales are sourced
in the destination state
Dock sales are sourced
in the destination state rather than the state where they are picked up by the customer
article 1
in which article are congress's enumerated powers
NW States vs. Minnesota focuses on this type of tax
income
UDITPA definition of "business income"
income arising from transactions and activity in the regular course of the TP's business (transactional test) and includes income from property, if the acquisition, management, and disposition of property constitute integral parts of the TP's regular business (functional test)
Costs of performance rule applies when....
income producing activity occurs in 2 or more states
The Quill physical presence test does NOT apply to...
income taxes
Payroll does NOT include amounts paid to _____________ ______________
independent contractors
Contacts sufficient for nexus example
independent contractors take orders, remit money, in-kind compensated types of employee not significant make contact with personnel on ground any presence no chance of exposure to other markets?
full faith and credit clause
insists that states recognize honor, and enforce one another's public actions
Exclusions from property factor denominator
intangibles and property used to generate nonbusiness income
Businesses engaged in ___ must also deal with income tax related issues.
interstate commerce
Purchases of ____________ are exempt from the _____ tax
inventory for resale, sales
Use Tax
is a complimentary tax to sales tax that is imposed on movable or TPP imported into the parish. Required to be paid on TPP that is used, consumed, distributed, or stored for use w/in the parish in lieu of a sales tax
nonbusiness income
is apportioned or allocated to the state in which the income-producing asset is located
Foregin tax credit
is available only for income taxes, foregin excise, value-added, sales, property, and transfer taxes are not creditable. It can not exceed specific percentage of precredit U.S. tax for the year
Sales Tax
is tax charged on the sale of movable or TPP
executive orders
issued by the president to carry out executive functions of the government
"mixed" transactions
it may be possible to "unbundle" the transaction into the separate components, which are taxable and non-taxable in their own right
What is an example of an instrumenality of interstate commerce?
Regulating activities at airports, train stations, and cargo storage areas (even though the threat may only come from intrastate activities)
The cost to bizs
Regulation is a form of taxation. It directly increases the cost of government. But these direct costs of regulation are only a small fraction of the indirect costs. Regulation significantly adds to the cost of doing business, and these costs are passed on to the tax-paying, consuming public. The consumer, for whose protection many regulations are adopted, pays both the direct cost of regulation (in taxes) and the indirect cost (when purchasing products and services)
Request for Competent Authority
Request that IRS and foreign tax authority ascertain appropriate transfer price so that taxpayer is not taxed twice on same income
Commerce Clause
Requires that taxpayers' activities have a "substantial nexus" with the taxing state. "physical presence" Also prohibits favoring companies in your state... treat everyone equally)
Community Property States
Residents spouse in community property state is taxed on his/her community half of out-of-state income.
Interstate Mobility of Persons
Restrictions to interstate mobility are per se invalid because they violate the Privileges and Immunities Clause (and the Commerce Clause).
Two issues that need to be address for standing to sue
Review ability aggrieved party
Jurisdiction
Right of a particular government to levy a tax on a specific taxpayer
8. Functions of agencies 4
Rule making adjudicating advising investigating -Some agencies primarily focus on one function over the other - most agencies perform all of these functions to some degree and carrying out their
Common Law
Rules of law are inductively determined from the body of case law and deductively applied to future similar issues
Income/ loss allocation
S - allocated based on stock ownership percentages
Only 100 members are allowed for this type of legal entity
S Corporation
Bibb v. Navajo Freight Lines
SC stirkes down IL splash guard law due to burden on interstate movement of trucks benefit v. burden case
The physical presence requirement is a ___________ of the Commerce Clause of the U.S. Constitution which gives _________ the power to ______________.
judicial interpretation, Congress, regulate interstate commerce
______ law plays a an important role in _____ tax law than _________ tax law
judicial, state, federal
Use tax federal limitation
jurisdiction to tax; "Nexus"
Property included in Property Factor
land, buildings, machinery, inventory, etc. may include CIP, offshore property, outer space property, partnership property if leased property is included it is valued at 8x annual rental payments
State of Minnesota v. Clover Leaf Creamery
law banning plastic milk containers not a "clearly excessive burden" on out of state milk incidental burden on IC--not excessive
Nexus is determined on a _________ ___________ basis
legal entity
Foreign tax credit: allowable credit
lesser of limit or foreign income for that category
Real Property Tax
levied on individuals and businesses that own real property (land and buildings) an dis assed on the fair market value of the property
Wealth Transfer Taxes
levied when all or part of an individual's wealth is transferred to another person
Leanin' Tree, Inc Facts
licensing agreements with independent artists under which it borrowed the artists' artwork and received the exclusive right to reproduce and publish the images in its products. Leanin' Tree got the original piece, a photographic negative of the original artwork, or a digital image. Leanin' tree then altered and added to the original and returned the original.
South Carolina Highway Dept. v. Barnwell Brothers
limit weight and width of trucks does not violate DCC subject of local concern
Limits of the commerce clause PIS
limits: Property taxes Income taxes Sale or use taxes levied by the state and local govt on interstate commerce <interstate commerce is not exempt from state and local taxes
C&A Carbone v. Town of Clarkstown
local ordinance requiring all waste to be processes at local transfer station not allowed state govts may not favor local enterprise by prohibiting out-of-state competitors to participate
domicile
location where a person has the most settled and permanent connection; where the individual intends to return when they are absent
Capital gains/losses on realty are allocated to...
location where utilized
capital gains/losses on realty are allocated to...
location where utilized; if company is not subject to tax in state where property is utilized, source to commercial domicile
Patents and copyright loyalties are allocated to
location where utilized; if income cannot be allocated or accounting procedures do not reflect the state of utilization, source to commercial domicile
Rental income is allocated to...
location where utilized; if not subject to tax there, source to commercial domicile
JC Penney Case Facts
mail catalogs included customers from Mass. However, all of the mailing, printing, and ordering process were done outside of Mass. (catalogs were sent from a location in another state and orders were made by return mail or phone calls to location our of Mass). The state of Mass ordered JCP to pay a use-tax for mailing its catalogs to state residents
Payroll for employees who work in more than one state is sourced to the state where they perform the ____________________ of services
majority
State tax base is computed by....
making adjustments to federal income taxable income
We compute the state tax base by
making adjustments to federal taxable income
The income reported on separate tax returns is potentially subject to _______ through ______
manipulation, related entity transactions
What normally provides the lowest tax liability for any given amount of taxable income?
married filing a joint return schedule
Note about interest expense
may be itemized if mortgage interest or investment interest is paid
Limited parter...
may or may not be unitary, therefore may or may not have nexus
Apportionment
means by which business income is dividend among state in which it conducts business (has nexus) corporate determines net income for the company as a whole based on each state's income tax rues, the apportions some to each state, according to a mandated formula
Partner's Basis Account
measure of the partner's investment in the partnership at any given time
Allocation
method used to directly assign specific components of a corporations income, net of related expenses, to a specific state typically income (loss) is removed from corporate net income before the state's apportionment formula is applied
Dean Milk Co. v. Madison, WI
milk 65-85 miles away not allowed geograprahic limitation is discriminatory on face, violated DCC
Geoffrey, Inc holding
minimum connection required by due process met by trademarks and tradenames, intangible property. focus on broad use of intangibles
Uniform Division of Income for Tax Purposes (UDITPA)
model law (1957) relating to assignment of income among state for multistage corporations many states have adopted by joining Multi-state Tax Compact or meddling their law
Social Security pays...
monthly retirement benefits to qualified individuals
How are mortgage interest and real estate taxes treated on residence rented for fewer than 15 days?
mortgage interest (first or second home) and real estate taxes can be itemized
Selected excise tax
motor, fuels, utilities, tabacco, alcohol
How does a business compute its state tax liability for a particular state
multiplying STI by state tax rate
add
muni interest modification
interstate commerce
must also deal with income-tax related issues. if a business meets certain requirements creating income tax nexus.
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
Provisions for S Corps
must have a valid S corp election at federal level to get S corp treatment in states
Forced Extractions
must pay but have no direct benefit from them
subtract
net operating loss modification
Losses generated by taxable C Corps
net operating losses (NOLs). While NOLs provide no tax benefit to a corporation in the current year the corporation experiences the NOL, they may be used to reduce corporate taxes in other years. Taxable C corporations with a NOL for the current year can carry back the loss to offset the taxable income reported in the 2 preceding years and carry it forward for up to 20 years. Losses from taxable corporations are not available to offset their shareholders' personal income.
streamlined sales tax (SST)
new york never joined it
Separate return states require only those businesses with ___________ to file an income tax return
nexus
Tyler Pipe: State won on issue of _____
nexus
New Mexico Taxation vs. barnesandnoble.com
nexus was sustained in NM because bn.com's competitors did not receive customer date, gift cards were usable online/in stores; loyalty programs were used by both; trademarks and logos were used; etc.
Businesses wishing to ______ for taxes based on _______ must sell only _________________ within the state
nexus, net income, tangible personal property
The seller with _____ will collect the customer's __________. If the seller does not have _________, the customer is responsible for ______________ to the state in which the property is______.
nexus, sales tax liability, nexus, remitting a use tax (at the same rate as the sales tax), used
For states in which the business has _____,________ is the sum of apportioned business income and allocated nonbusiness income for each _____ where nexus exists
nexus, state taxable income, state
commerce clause
no state tax may be applied unless the taxpayer has "substantial nexus"; Congress has the power to regulate interstate commerce among the states and may authorize state actions that burden interstate commerce; The Congress shall have the power...to regulate Commerce with foreign nations, and among the several states, and with the Indian tribes
Hunt v. Washington State Apple Advertising Commission
not facially discrim, but discrim in effect state interest in preventing apple fraud
Approving or accepting orders
not protected PL 86-272
Carrying samples for sale, exchange or distribution in any manner for consideration or other value
not protected PL 86-272
Collecting current or delinquent accounts, whether directly or by third parties, through assignment or otherwise
not protected PL 86-272
Conducting training courses, seminars or lectures for personnel other than personnel involved only in solicitation
not protected PL 86-272
Consigning stock of goods or other tangible personal property to any person, including an independent contractor, for sale
not protected PL 86-272
Entering into franchising or licensing agreements; selling or otherwise disposing of franchises and licenses; or selling or otherwise transferring tangible personal property pursuant to such franchise or license by the franchisor or licensor to its franchisee or licensee within the state
not protected PL 86-272
Hiring, training, or supervising personnel, other than personnel involved only in solicitation
not protected PL 86-272
Installation or supervision of installation at or after shipment or delivery
not protected PL 86-272
Investigating credit worthiness
not protected PL 86-272
Investigating, handling, or otherwise assisting in resolving customer complaints, other than mediating direct customer complaints when the sole purpose of such mediation is to ingratiate the sales personnel with the customer
not protected PL 86-272
Maintaining a sample or display room in excess of two weeks (14 days) at any one location within the state during the tax year
not protected PL 86-272
Owning, leasing, using or maintaining personal property for use in the employee or representative's "in-home" office or automobile that is solely limited to the conducting of protected activities. Therefore, the use of personal property such as a cellular telephone, facsimile machine, duplicating equipment, personal computer and computer software that is limited to the carrying on of protected solicitation and activity entirely ancillary to such solicitation or permitted by this Statement under paragraph IV.B. shall not, by itself, remove the protection under this Statement
protected PL 86-272
Passing orders, inquiries and complaints on to the home office
protected PL 86-272
Criteria for including an affiliate: combined unitary reporting
ownership test AND integrated business operation
Hidden Taxes
paid but are not specifically itemized as part of the payment
Aggregate Theory
partner and partnership are treated as a single business thus it should combine income and factors Step 1: Combine Distributive share of partnership income with partners other income Step 2: Combine Partner's share of partnership's factor with partners other factors
Entity theory of partnership
partnership and its partners are separate entities
Aggregate theory of partnership
partnership is only the totality of its partners
Separate taxpaying entities
pay tax on their own income
In-state businesses tend to have higher _____ and _______ factors relative to their sales factor in the state, and out of state businesses tend to have higher _______ factors than payroll and property factors
payroll and property, sales
resident
pays tax on worldwide income irrespective of the source of the income
Basic idea of equity
persons with similar incomes will face similar faxes
Businesses create sales tax nexus when they have a __ in the state
physical presence
Establishing income tax nexus for non-protected activities and nexus for non-income based taxes requires _____ just like establishing sales and use tax nexus
physical presence
Residency
physical presence
business create sales tax nexus when they have a ___________ ____________ in the state
physical presence
10th amendment
powers not specifically delegated to the national government are reserved for the states
concurrent powers
powers shared by the national and state government (SHARED POWERS)
reserved powers
powers specifically granted to the state government (STATE POWERS)
MBNA holding
presence requirement does not extend to business taxes (franchise and corporate)
What is a resident
present for a purpose that is not temporary
Chair
presiding officer at agency meetings -belong to the same political party as president -someone more important than others +Due and visibility and the power to appoint staff
tangible person property
presumed to have sales tax unless otherwise there is an exception (food)
services
presumed to not have sales tax unless otherwise there is an exception (repair services)
Complete Auto Transit focuses on this type of tax (not a regular type)
privilege
Special cost of performance rule for personal services...
pro-rate receipts among state sin which activity occurs
Understanding when a business has nexus can be extremely important for __________, ____________ ___________, and ____________
profitability, business modeling, compliance
PL 86-272
prohibits states from imposing income taxes if only activity is solicitation of orders for sales of tangible personal property which are filled outside the state.
Under PL 86-272, solicitation of tangible personal property is
protected
Carrying samples and promotional materials only for display or distribution without charge or other consideration
protected PL 86-272
Checking of customers' inventories without a charge therefor (for re-order, but not for other purposes such as quality control)
protected PL 86-272
Coordinating shipment or delivery without payment or other consideration and providing information relating thereto either prior or subsequent to the placement of an order
protected PL 86-272
Furnishing and setting up display racks and advising customers on the display of the company's products without charge or other consideration
protected PL 86-272
Maintaining a sample or display room for two weeks (14 days) or less at any one location within the state during the tax year
protected PL 86-272
Providing automobiles to sales personnel for their use in conducting protected activities
protected PL 86-272
Mediating direct customer complaints when the purpose thereof is solely for ingratiating the sales personnel with the customer and facilitating requests for orders
protected PL 86-272
Missionary sales activities; i.e., the solicitation of indirect customers for the company's goods. For example, a manufacturer's solicitation of retailers to buy the manufacturer's goods from the manufacturer's wholesale customers would be protected if such solicitation activities are otherwise immune
protected PL 86-272
Recruiting, training or evaluating sales personnel, including occasionally using homes, hotels or similar places for meetings with sales personnel
protected PL 86-272
Soliciting of orders by an in-state resident employee or representative of the company, so long as such person does not maintain or use any office or other place of business in the state other than an "in-home" office as described in IV.A.18. above
protected PL 86-272
Soliciting orders for sales by any type of advertising
protected PL 86-272
If an out-of-state corporation uses independent agents...
protection under PL 86-272 is expanded to cover "making sales" and maintaining an in-state office
Annual Louisiana Second Amendment Weekend Holiday Act
provides a state and local sales and use tax exemption on any consumer purchase of firearms, ammunition, and hunting supplies. This exemption does not apply to business or commercial purchases
Use tax is remitted to the state by the...
purchaser
Tax Bracket
range of income subject to a specific tax rate
Inclusions in property factor denominator
real and tangible property (owned or rented) and used to generate BUSINESS income
Property Factor
real and tangible property owned or rented, and used to generate business income -average of beginning and end of year un-depreciated cost
Most common wealth tax
real property tax
Political Subdivisions depend on...
real property taxes and personal property taxes
Most states also exempt sales of ___________
real property, intangible property, and services Many states are expanding the types of services subject to sales tax in order to increase their sales tax revenue
Property generally includes both ___________ and ________ ___________ property, but not ______________ property
real, tangible personal, intangible
throwout
realizes substantial gross receipts from occasional sale of fixed assets; intangible income that cannot be sourced
-states attack intracompany royalties 1. deny intercompany deductions 2. redistribute income or expense between related parties 3. force companies to file consolidated 4. Assert jurisdiction over a filing entity based on related party attributes instate
related party deduction issues:
Rental use expenses are deductible only to the extent of
rental income (no losses allowed)
Which allocable income items (4) have a throwback rule
rents/royalties from personal property, CG/CL from tangible personal property, patent/copyright royalties
Sales/Use Tax Nexus
require suppliers to collect sales tax and remit it to the state
Due Process Clause
requires "minimal connection " between taxpayers' interstate activities and the taxing state
due process clause
requires some minimal connection/rational relationship in taxing state
Police powers
requiring state legislation and regulation to protect the public's health sfatey morals and general welfare
Kassel
restricted the length of trucks traveling on its highways to a maximum of 60 feet. Other states allowed 65 feet. IA did this for safety reasons. However, it turns out that 60 feet are more dangerous than 60 feet. Holding: Unconstitutional. The law substantially burdens the interstate flow of goods by truck. The benefit here is not great, and may be non-existent, there may be more trucks on the road if the trucks are smaller.
Sales tax is imposed on
retail transactions of tangible personal property and taxable services
welfare reform act
returned control of welfare systems to state governments
market sourcing
revenue sourced to state where benefit of the service is received
cost of performance
revenue sourced to state where the service was performed
market based sales factor *more states move to this because it helps measure customer base and attracts companies and employees
rule that looks at where services are received
[] state and local GOVT authority to regulate BIZ Police power
sState and local GOVT power arises from police power
South Pacific v. Arizona
safety measures (AZ train limit law) yet puts burden on IC is unconstitutional
Payroll includes
salaries, commissions, bonuses, and other forms of compensation
common sales tax exemptions
sale for resale, casual or occasional sales, donations, essential items, real property repairs and improvements, sales of machinery or equipment
Sales and use tax are imposed on...
sale or use of tangible personal property within a state
Equally weighted three-factor apportionment formula =
sales + payroll + property factors/ 3
Businesses with _____________ in a state are responsible for remitting the ________ even when they fail to collect it
sales an use tax nexus, sales tax
Large companies often must file _______________ in all 45 states that have sales and use taxes
sales and use tax returns
Businesses remit their ____________ liability on a monthly, quarterly, or annual basis depending on the _______ of the ___________ and the state law thresholds
sales and use tax, size, liability
3 primary revenue sources of states
sales and use taxes, income or franchise taxes, property taxes
Double-weighted sales factor formula =
sales factor * 2 + payroll + property factors / 4
Throwback sales
sales of tangible personal property are included in this state if the property is shipped from within this state and the taxpayer is not taxable in the state of the purchaser
Throwout sales
sales of tangible personal property are sourced to a state where the taxpayer is protected from taxation under PL 86-272 are thrown out of the denominator if the state does not impose corporate income or franchise taxes
Sales tax nexus 3
sales personnel, independent agents acting on behalf of TP, real or personal property
Most common form of a consumption tax in the U.S.
sales tax
seller-privilege
sales tax imposed on seller and can elect to impose on consumer (AZ and HI)
consumer-based
sales tax imposed upon buyer and duty is on seller to collect and remit
Typically. sellers with nexus collect customer's ____ _____ _________
sales tax liabilities
_______ ___________ ____________ - the sufficient connection with a state that requires them to collect sales tax
sales tax nexus
coupons
sales tax should be charged to the sales price before the deduction of the coupon amount
If the buyer is charged a __________ in another state, the buyer will have ______________ for an ___________ amount if the state where the property is used has a higher sales tax rate.
sales tax, a use tax liability, incremental
Increasing the weight of the ______ factor in the apportionment formula tends to ____ taxes on in-state businesses and ____ taxes on out of state busineses
sales, decrease, increase
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
Most states rely on three apportionment factors: ________________. For each state in which it establishes income tax nexus, the business determines the factors as the ratio of_____
sales, payroll, and property; 1. Total sales, payroll, or property in a specific state to 2. Total sales, payroll, or property everywhere
Business income is apportioned using some variation of ________, __________, and _________ factors
sales, payroll, property
Quill focuses on this type of tax
sales/use
Sales Tax
selling of tangible personal property
Result for separate corporation
separate accounting TI numbers - no dividing if each operates in only one state (potential for abuse?)
A ____________ ____________ has 2 tax entities
separate corporation
Nexus can be limited by creating a _____________ __________ ____________
separate legal entity
Some states require a ________ for each entity with ______ in the state while others require a ________ for a group of related entities
separate tax return, income tax nexus, unitary
Some states require a __________ return for each entity with nexus, while others require a ___________ return for a group of related entities, as long as one has established nexus in the state
separate, single (unitary)
Physical presence creates income tax nexus for ___________ ___________, sellers of ________________ property, and businsesses licensing _______________
service providers, real, intangibles
Physical presence creates income tax nexus for ____
service providers, sellers of real property, and businesses licensing intangibles
PL 86-272 does not protect
service providers, sellers of real property, or business licensing intangibles or businesses from nonincome-based taxes
Public Law 86-272 does not protect....
service providers, sellers of real property, or businesses licensing intangibles does not protect businesses from non-income based taxes
4 prong test: fairly related to _____ provided by the state
services
Services and sales tax
services are presumed not taxable unless there is a specific statutory provision that imposes sales tax on the subject service
Mobil Oil test
set up factors of probability test for unitary business- functional integration, centralized management, economies of scale
S Corp basis computation
shareholders of S corporations are not allowed to increase the basis in their S corporation stock by liabilities of the S corporation. receive nontaxable distributions to the extent of the basis in their ownership interest, and they are not allowed to deduct losses allocated to them in excess of their tax basis.
conformity with federal
simplicity and reduction in compliance costs; but also can incur loss of control over taxing authority
A unitary answer to multi-corporation taxpayers impacts returns filed - ___________ _____________ vs _________ ___________
single corp, combined return
Payroll for each employee is apportioned to a ____________ _____________
single state
allocable income - income specifically allocated to a __________ _________
single state
Some states moved to a _______ weighted sales factor that eliminates the ______ and ________ factors altogether
single, payroll, property
PL 86-272: simply for ______
solicitation
Flow of Value Test
some sharing or exchange of value is required beyond the mere flows that arise of of passive investment.
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
sourced to states generally based on destination
sourcing of sales of tangible personal property
domicile evidence
spouse and children, drivers license, property tax deduction, etc.
State Personal Income Tax
starting point is federal income tax and adjusted for common state modifications
Payroll apportionment factor =
state "comp" "paid" / total comp paid
Even if CG has not acted
state and local laws can be challenged as unduly impeding ISC
Tentative state income tax =
state apportioned income + allocated income = state income tax base * state income tax rate
Residency Principle
state in which a corporation is organized has the right to impose an income tax on that corporation
How do you find total income eligible for apportionment?
state income tax base - allocable income
Rents/royalties from real properties are allocated to
state of property location (no throwback)
Capittal gains and losses from real property allocated to
state of property location @ time of sale (throwback - domicile state)
Rents/royals from personal property allocated to
state of use by payer (throwback - domicile state)
patent/copyright royalties allocated to
state of use by payer (throwback - domicile state)
% sales apportion factor
state sales / total sales (if shipped to customer in state or shipped from that state)
Most common example of a proportional tax
state sales tax - fixed percentage of the amount spent
___ administer the law and promulgate regulations for their particular state
state tax agencies
Compute _________ _________ __________ by making adjustments to FTI
state tax base
Firms adjust federal taxable income to arrive at their _________ __________ ____________
state taxable base
Jurisdiction
state's power to impose a tax
Dormant Commerce Clause
states are allowed to make laws in order to comply with their police powers but they just cannot interfere with interstate commerce
Foreign dividends
states cannot discriminate against foreign commerce (KRAFT case; violation of Commerce Clause)
supremacy clause
stipulates that valid federal laws are always supreme to conflicting state laws.
A single transaction may NOT be....
subject to both sales and use tax
Those that affirmative discriminate against such transactions
subject to more demanding scrutiny -the state must prove that the law has a legitimate purpose the - state must prove that the purpose can not be achieved by non discriminatory means - if the state is pure economic protectionism the courts apply a virtual per se <automatic rule of invadility
4 prong test: ______ nexus
substantial
Use Tax
substitution for sales tax for online retailers that do not collect sales tax
Most states say that a corporate partner's ownership interest in a partnership is....
sufficient to create nexus under the aggregate theory of partnership
State Taxation of Non-Residents
supreme court asserted states' right to tax nonresidents on income from property owned within the state and their business, trade, or profession carried on in the state Issues with professional athletes, work from home, interstate transport, and reciprocity agreements
Asset sale
tables, furniture, fixtures, TPP
Ultimate Destination Concept
tangible asset sales are assumed to take place at point of deliver, not where shipping originates
PL 86-272: must be the sale of ______ ____ property
tangible personal
Sellers of what are protected from creating nexus simply through physical presence
tangible personal property
Physical presence DOES NOT create nexus for sellers of ...
tangible personal property if their activities within the state are limited to protected activities as described in Public Law 86-272
Businesses wishing to avoid nexus for taxes based on net income must sell only
tangible personal property within the state
When a business sells _________ in a state, it must collect ________ on a periodic basis if it has _______ in that state
tangible personal property, sales tax, nexus
Physical presence does not necessarily create income tax nexus for sellers of ________ _________ property id their activities within a state are limites to "____________" activities described by Public Law 86-272
tangible personal, "protected"
If you company goes to the vendor's location to pick up the item
tax is due at the vendor's place of business
Progress payments on contracts (fab & deliver)
tax is due when the property is received by the customer. Most of the time for the big pieces of equipment, the vendor will bill you in progress payments
West Lynn Creamery v. Healy
tax on all milk sales, proceeds distributed to in-state milk producers unconstitutionally discriminatory
When a business operates as more than one legal entity, how it files its _______ becomes an issue
tax return
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
Bottled water or water delivered by truck
taxable
Hardware
taxable
Routine Maintenance
taxable
Geoffrey v. South Carolina Tax Commission
taxation of Geoffrey's royalty income is not prohibited by the due process clause or the commerce clause of the US constitution Geoffrey must be taxed and must pay the corporate license fee
Printing/copying services
taxed as either: - Sale of TPP -Sale of a service
Income taxes
taxes based on *net* income
Tariffs
taxes levied on goods and materials brought into a country
Selective Sales Tax
taxes on specific items not as visible as retail sales tax including alcohol, tobacco, and gasoline
Equality and uniformity clauses only apply to...
taxes, not fees
Equal Protection Clause
taxpayer may not be taxed differently unless the state can show a legitimate reason for the distinction; USSC granted "presumption of constitutionality" of state's classification scheme
Regressive Tax System
taxpayers pay a decreasing proportion of their income as their income increase - as the taxzery's income goes from one bracket to another, his or her average tax on total income decreases as does the marginal tax rate
state income tax liability =
tentative state income tax - tax credits
Nonresidents are generally taxed on a....
territorial basis; income sourced to state
federal government's
the Constitution acts to limit the ______ powers.
Preemption
the Federal Law does not permit state laws to exist in this area
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
A tax meets the criterion of economy when...
the amount of revenue it raises is at an optimum level after the costs of administration and compliance are considered
Sales ta burden is on...
the buyer
the president
the chief executive of the United States
Equal Protection Clause
the clause has been invoked to determine whether the tax treats different person's equally
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.
nexus
the degree of business activity which must be present before a state can impose tax on an out-of-state entity's income
Nexus
the degree of contact which gives a state the right to impose tax on an out-of-state corporation
Sales factor numerator is determined based on...
the destination test: sales of tangible personal property are considered to be in that state if the property is delivered or shipped to a customer in that state
apportionment
the distribution of seats in a legislature according to law
gerrymandering
the drawing the boundaries of a legislative district with the intent of giving one party or group a significant advantage
Who pays an inheritance tax
the estate normally pays but the tax paid reduces the value of the property transferred to the heir
Use
the exercise of any right or power over TPP incident ownership. Means to use or to consume.
Apportionment among states is based on
the extent of the business's activities and property in various states
bill of rights
the first ten amendments of the constitution
branches of government
the first three articles of the constitution establish the three coequal ______
UDITPA formula for income apportionment attempts to assign income to a state relative to....
the income producing factors in that state (property, payroll, sales)
jurisdiction
the legal authority of the court to decide a specific case.
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
The determination of whether the business has established income tax nexus with a state depends on ___________
the nature of the business activities in the state
judicial review
the notion that federal courts have the right to invalidate state or federal laws that are inconsistent with the the constitution.
27
the number of amendments of the constitution
Dell, Inc Holding
the optional service contracts were not taxable. The service contracts were not tangible personal property and were not part of the sale of computers, but a separate object of the transaction at a readily ascertainable value.
preemption
the power granted by the supremacy clause to override a state law
expressed powers
the powers given specifically to the national government by the U.S. Constitution; also known as enumerated or delegated powers; (FEDERAL POWERS)
DCC
the principle that the state and local laws are UNC if they place an undue burden on ISC
Use tax is imposed on...
the privilege of ownership, possession, use, storage, or consumption of tangible personal property or taxable services in a state to the extent sales tax is imposed on similar property or services when purchased from a vendor in the state
redistricting
the process of redrawing the geographic boundaries of legislative districts after a census to reflect population changes
What types of laws can't be passed if there has been no previous Federal Laws?
the state laws cannot discriminate against interstate commerce in favor of intrastate commerce AND state laws can't unduly burden interstate commerce
Commercial domicile
the state where a business is HQ and directs its operations
Commercial domicile
the state where a business is headquartered and directs its operations
Commercial domicile
the state where a business is headquartered and directs its operations (not necessarily where company is incorporated) Must always collect sales tax and pay income tax in the state where domiciled
Under the cost of performance rule, assign income to....
the state where the greater % of income-producing activity occurs, based on "costs of performance" (direct costs)
Nexus
the sufficient (or minimum) connection between a business and a state that subjects the business to the state's tax system
Nexus
the sufficient or minimum connection between a business and a state that subjects the business to the state's tax system
Nexus
the sufficient/minimum connection between a business and a state that subjects the business to the state's tax system
Article VI
the supremacy clause is found in which article?
Cons of liquidating Corp
the taxes imposed on liquidating corporations with appreciated assets can be very punitive. Liquidating corporations are taxed on the appreciation in the assets they distribute to their shareholders as part of the liquidation. Further, shareholders of liquidating corporations are also taxed on the difference between the fair market value of the assets they receive form the liquidating corporation and their basis in their stock.
Income tax is is owed and paid by...
the taxpayer earning the income
county seat
the town or city in which a county government is based
devolution
the transfer of power from a central government to a regional or local government
Apportionment
there is no attempt to trace items of income 100% to the state in which the income was generated (which is what allocation seeks to do) Instead, apportionment involves a formula to arrive at what is thought to be an adequate approximation
JC Penney Holding
there was a "taxable use" from the distribution of the catalogs to MA residents. The economic and commercial reality of the taxpayer's distribution of the catalogs clearly warrants the conclusion that the taxpayer made a taxable "use" of the catalogs in Massachusetts.
What are the two limitations to Police Powers?
these laws may not be unreasonable (Due Process) these laws may not interfere with Interstate Commerce (Dormant Commerce Clause)
checks and balances system
this was used in the constitution to prevent one branch of government from exceeding authority.
channels of commerce (railways, highways), vehicles, and articles of commerce
three main assets of commerce that congress controls
Apportionment Factors
three-factor formula that equally weights sales, property, and payroll states may modify formula where sales favor receives a larger weight
Composite Returns
to alleviate compliance burden of non-resident partner having to file a return and pay tax in every state the partnership has nexus, most states allow partnerships to file composite returns on behalf of all non-resident partners
The primary purpose of state and local taxes
to raise revenue
Primary purpose of state and local taxes
to raise revenue to finance state governments
South-Central Timber Development v. Wunnicke
too far downstream alaska timber
Payroll is generally defined as _________ _____________ paid to employees
total compensation
State apportioned income =
total income eligible for apportionment * state apportionment %
interstate commerce
trade that takes place between two states or among several states (FEDERAL POWER)
intrastate commerce
trade that takes place within the borders of a state (STATE POWER)
heart of atlanta motel v. US; katzenbach v. mcclung
two court cases that made the civil rights act fall under the commerce clause
income tax and sales/use tax (lower threshold than income tax)
two types of nexus
Nexus
type and degree of connection between a business and a state necessary for the state to impose a tax
_____________ answer - commonly-controlled corporate group alloc and apportion income to that state even if only one corporation does business in the state
unitary
States west of Mississippi are generally _______ states
unitary return
General parter is typically
unitary with the partnership; creates nexus
-taxable for federal purposes and not taxable in most states
us gov interest is taxable?
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
__________ ___________ liability accrues in the state where purch property will be used when no sales tax paid
use tax
"purchased for use" statues
use tax applies only when taxable items purchased with intent for use in the subject state; Thus, no use tax on items purchased with intent for use in other states but subsequently brought into the subject state for some other reason
If seller has no nexus in state of buyer, buyer has a _________ ____________ ______________ to their state
use tax liability
Pricing method: Comparable uncontrolled transaction
used for intangible property only
Pricing method: Comparable uncontrolled price
used for tangible property only
If a taxable good has no nexus, what happens to buyer
used tax accrues to buyer, who remits use tax on sales tax return or entities income tax return
Nonbusiness income (__________), is subject to _______ (assignment) directly to the businesses' state of commercial domicile
usually investment income, allocation
Quill and Commerce Clause
violated dormant commerce clause and bellas hess
Compensation included in Payroll Factor
wages, salaries commissions EXCLUDES: amounts paid to independent contractors; some states exclude amounts paid to corporate officers Some states require deferred compensation amounts be included
How to opt out of including foreign income in in combined return for four states that include it
water's edge election
Gift Tax
wealth transfer tax that is imposed on a donor who makes a gratuitous lifetime transfer of property - to avoid double taxation, the recipient is not subject to income tax on gifted or inherited property
-tangible personal property -net income based taxes (not sales or franchise) -activities limited to solicitation of orders
what does public law 86-272 apply to?
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
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
Lock-In Effect
when capital gains rates are high, taxpayers tend to keep their appreciated but no-long-profitable assets to avoid the tax
Marriage penalty
when higher income spouses each earn approximately the same income, their combined incomes are taxed at higher rates on a joint return than they would have been if they could have reported their separate incomes as single individuals on single returns
How can it be possible for dual regulation?
when the state law does not conflict with the federal law... for example minimum wage laws, and EPA
Source Principle
whenever a business has an economic connection to a state (derives income from assets or activities located within a state), it has the right to tax the business
the requirement for establishing nexus with a state depends on ...
whether the tax is sales and use tax, income tax, or nonincome-based tax
Residents are generally taxed on a...
worldwide basis
A convenient tax is one that...
would be readily determined and paid with little effort
Proportional "Flat" Tax System
would require all income to be taxed the same regardless of the amount of type of the taxpayer's income - marginal and average tax rates would be identical over all ranges of income
can you be a resident of more than one state?
yes
If vendor delivers purchase in his truck to your location
your location is where the tax is due
Criteria for including an affiliate: consolidated return
ownership test
Adam Smith's Wealth of Nations Standards for Taxes
- Equitable or fair - Certain - Convenient - Efficient - Sufficient
Due Process Clause
" prohibits state from depriving any person of life, liberty or property, without due process of law" - requires minimal connection between taxpayer's activities and the taxing state -physical presence is sufficient
Privileges and Immunities Clause
" the citizens of each state shall be entitled to all privileges and immunities of citizens of the several states"
Water's edge combinations generally include all group members except....
"80/20 companies"- 80% or more of its property and payroll are located abroad
What are the Tests that can be used if Congress passed a law w/ Preemption?
"Did Congress intend to preempt the field" if yes, the state law is invalid if not dual regulation is permitted
What are the three tests that can be used if a state passes a law the Federal government hasn't put Preemption on?
"Do the two laws have irreconcilable conflicts" (can i obey the state law and disobey the federal at the same time) If YES, the state law in invalid If NO, both laws can stand + "Does the state law discriminate against interstate commerce"? if YES the state must prove the law has a legitimate purpose that can't be achieved by nondiscriminatory means If NO, does the state law create an undue burden on Interstate Commerce? if no then the law is valid if yes, the state must prove that the benefits of the law outweigh the burdens
What are the two tests that can be used if the State passes a law w/ no need for Dual Regulation?
"Does the state law discriminate against interstate commerce"? if YES the state must prove the law has a legitimate purpose that can't be achieved by nondiscriminatory means If NO, does the state law create an undue burden on Interstate Commerce? if no then the law is valid if yes, the state must prove that the benefits of the law outweigh the burdens
____ 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"
Granholm v. Heald holding
"We hold that the laws in both States discriminate against interstate commerce in violation of the Commerce Clause, Art. I, ß8, cl. 3, and that the discrimination is neither authorized nor permitted by the Twenty-first Amendment."
Due process clause requires....
"minimum connection" between a taxpayer and the state in order to impose a tax
SCOTUS Quil decision created doubt on the standards for income tax nexus because in defining sales tax nexus the Court stated that _________________ which the states have interpreted as meaning that ________ may not be required for other types of taxes
"nexus for other taxes may be different", physical presence
Property apportionment factor =
"property" in state / total property (use COST, compute avg BOY & EOY prop, cap leased property at 8 * annual lease, exclude property that produces allocable income
Movable Property
- EVERYTHING that is NOT REAL property is MOVABLE -aka TPP - Movable property can become immovable -- building materials & manufactured home by declaration -Immovable can become movable -- timber -- items removed from the real property
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
Sales Factor
*Corp's sales in the state divided by corp's total sales* everywhere must follow UDIPA's "ultimate destination" concept
Payroll Factor
*compensation paid within a state divided by total compensation paid by the corporation*
Common State Income Modifications
- Depreciation (IRC Sec 179) - Domestic Production Activities Deduction-Sec 199 - State Income Taxes-IRC Sec. 164 - Dividends received deduction-IRC Sec 243 - NOL carryback/carryforward - Section 78 Gross Up - Subpart F Income - Interest on Federal Obligations - Federally Tax Exempt Interest - Intangible and Interest Expense incurred with related entity transactions - Fed. int. income - Fed. income taxes
Domicile vs. Residency
- Domicile is your permanent establishment - residency is the physical presence which creates taxation.
4 Criteria for Determining Whether States can Tax Nondomiciliary Businesses
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 - The tax cannot be constructed to discriminate against nonresident businesses 4 - The taxes paid must be fairly related to the services the state provides
5 Rules for Allocating Common Types of Nonbusiness Income
1 - Allocate interest and dividends to the state of commercial domicile (except interest on working capital, which is business income) 2 - Allocate rental income to the state where the property generating the rental income is located 3 - Allocate royalties to the state where the property is used 4 - Allocate capital gains from investment property to the state of commercial domicile 5 - Allocate capital gains from selling rental property to the state where the rental property was located
3 Factors to Determine Whether a Group of Businesses is Unitary
1 - Functional integration - vertical or horizontal integration or knowledge transfer 2 - Centralization of management - interlocking directors, common officers, or rotation of management between companies 3 - Economies of scale - group discounts or other efficiencies due to size
4 Questions to Determine State Income Tax Liability
1 - In which states does it have nexus? 2 - If the business is related to other entities, should it file separate state tax returns, or should it include the activities of the related entities on its state tax returns? 3 - What adjustments to federal taxable income must the business make to determine state taxable income for each state in which it is required to file? 4 - If income is taxable (nexus exists) in more than one state, how is income divided among the various state in which the business is required to file tax returns?
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
What are the 3 primary factors in determining apportionment?
1 - Sales 2 - Payroll 3 - Property
3 Primary Revenue Sources for State Governments
1 - Sales and use tax 2 - Income or franchise tax 3 - Property tax
5 General Rules for Determining the Amount of Sales to Include in the Sales Factor Calculation
1 - Sales of tangible personal property are sourced (included) to the destination state 2 - 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 3 - Dock sales should be sourced to the good's ultimate destination 4 - Sales of services are sourced in the state where the services are performed 5 - Government sales are sourced in the state from which they were shipped
2 Ways a Business May Have Physical Presence in a State
1 - Salespeople enter a state to obtain sales 2 - Tangible property is located within a state
5 General Rules for Determining Property Factors
1 - Use the average property values for the year [(beg+end)/2] 2 - Value property at historical cost rather than adjusted basis 3 - Include property in transit (such as inventory) in the state of destination 4 - Include only business property (values of rented investment properties are excluded) 5 - Include rented or leased property by multiplying the annual rent by 8 and adding this value to the average owned-property factor
5 reasons why agencies are essential to the regulatory process RePSS
1 providing specificity 2. providing expertise 3. Providing protectioN 4 providing regulation 5 providing service
4 Prong Test of Commerce Clause
1) activities taxed must have substantial nexus in the taxing state 2) tax must be fairly apportioned 3) state tax must not discriminate against interstate commerce 4) the tax must be fairly related to the services provided by the state -came about from Complete Auto Transit v. Brady
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
What are the 4 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' income. Businesses must be able to divide or apportion income among the states where nexus exists. 3. The tax cannot be constructed to discriminate against nonresident businesses. Example - States cannot impose a higher tax rate on nondomiciliary businesses 4. The taxes paid must be fairly related to the services the state provides. Example - businesses must have access to a state's court system and infrastructure.
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.
Common types of nonbusiness income and the general rules for allocating them to specific states
1. Allocate interest and dividends to the state of commercial domicile 2. Allocate rental income to the state where the property generating the income is located 3. Allocate royalties to the state where the property is used(if the business has nexus in the state) Otherwise, allocate royalties to the state of commercial domicile 4. Allocate capital gains from investment property to the state of commercial domicile
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
What are instances of positive commerce power?
1. Channels of interstate commerce (banks) 2. Instrumentalities of interstate commerce (person or things) 3. Substantial effect of interstate commerce (tricky) 4. Can't force people into commerce (ACA)
To retain limited liability protection for shareholders
1. Create, update, and comply with bylaws 2. Have a BOD and hold regular Board meetings 3. Annual shareholder meeting 4. Issue shares of stock to owners 5. Comply with annual filing requirements specified by the state of incorporation 6. Pay any required corporate taxes
procedures
1. Delay in the decision-making process is quite common. There often is no reason to expedite decisions, and a huge backlog of cases is common in agencies such as EEOC. 2. The administrative process is overwhelmed with paperwork and with meetings. 3. Rules and regulations are often written in complex legal language—"legalese"—which laypeople cannot understand. 4. There is often a lack of enforcement procedures to follow up on actions taken to ensure compliance. 5. The administrative process can be dictatorial; there may be too much discretionary power, often unstructured and unchecked, placed in many bureaucratic hands. Formal as well as informal administrative action can amount to an abuse of power.
State Taxation of Interstate Commerce
1. Discriminatory state taxes 2. Non-discriminatory (even handed) state taxes
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
best way to influence a qusi legilative decision
<particpate in the process of adoption -write letter to agencies <direct to members of comgress
2 objectives accomplished by making tax-deductible payments to shareholders
1. It shifts income away from (relatively) high tax rate corporations to (relatively) lower tax rate shareholders. 2. The deduction shields income from the corporate level tax. Strategies that shift income from corporations to shareholders include: • Paying salaries to shareholders (salaries are deductible to the extent they are reasonable) • Paying fringe benefits to shareholders (common fringe benefits include medical insurance, group-term insurance, dependent care assistance, tuition benefits). • Leasing property from shareholders • Paying interest on loans from shareholders.
Golden Rules
1. Just about anything done to TPP is taxable unless it is specifically excluded 2. Just about anything done to real property (immovable) is NOT taxable 3. All services are excluded from tax unless specifically enumerated in the statutes 4. The point of tax incidence is where change of title and or possession occurs or where the taxable service is performed
If state treats out-of-state commerce differently because it is actually different
1. Law must actually advance a legitimate policy reason for discriminating. 2. If facts do not support state's justification, then apply virtually per se invalid rule.
Examples of Discrimination against Interstate Commerce
1. Law: no out of state milk. - State interest: protecting WI milk quality. - Court bought claim, but McG does not. 2. Law: AZ cantaloupes must be packed in AZ. - State interest: protecting reputation of AZ cantaloupes. - Failed balancing test because reputation not actually advanced by packing. 3. Law: no importation of out of state cattle. - State interest: protecting in state cattle from disease. - Court bought claim, but it did not know that in state cattle were already diseased. Therefore, we would decide that the law fails balancing test. 4. Law: refineries could not sell their own franchises. - State interest: protecting independent gas stations. - Court upheld law because state interest outweighed harm to commerce.
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.
SCOTUS held that the following activities DO NOT meet the definition of solicitation, and therefore create income tax nexus with the state in which they take place
1. Making repairs 2. Collecting delinquent accounts 3. Investigating creditworthiness 4. Installing or supervising the installation of property 5. Providing training for employees other than sales reps 6. Approving or accepting orders 7. Repossessing property 8. Securing deposits 9. Maintaining an office (other than an in-home office)
Complete Auto 4 Part Test for Commerce Clause
1. Must have substantial nexus between taxpayer and the state 2. Must not discriminate against interstate commerce 3. Must be fairly divided between states (dead law) 4. Must have a fair relationship to the services provided by the state
Payroll is generally defined as total compensation paid to employees. The payroll factor is calculated as follows...
1. Payroll includes salaries, commissions, bonuses, and other forms of compensation 2. Payroll does not include amounts paid to independent contractors 3. Payroll to each employee is apportioned to a single state (payroll for employees who work in more than one state is sourced to the state where they perform the majority of services)
Commerce Clause-Compensatory Taxes
1. Point to specific tax on local activity that interstate actors do not pay 2. Must approximate but not exceed other tax 3. Events taxed must be substantially similar
Most states conform to the federal tax law in some way Exceptions...
1. Positive adjustment: state and local taxes - most states do not allow businesses to deduct sate income taxes 2. Positive adjustment: muncicpal bonds interest - most states tax municipal bond interest earned outside the state 3. Negative adjustment: US Obligation Interest - because states cannot tax federal interest income (such as interest from Treasury notes), all states require a negative adjustment for federal interest income
National Geographic
1. Presence of employees unrelated to mail order business establishes taxing jurisdiction 2. Any physical presence, even of unrelated companies, will suffice.
Business meal and entertainment expense
50% Deductible
Ohio sales tax rate is __%
6
Valuation of rented property for property factor=
8 times annual net rental rate
California
800 min tax, LLLC tax, combined unitary reporting, 1 of 4 states where as default you include foreign companies in combined return
New Deal
A group of government programs and policies established under President Franklin D. Roosevelt in the 1930s; the New Deal was designed to improve conditions for persons suffering in the Great Depression. (ushered in cooperative federalism)
Tax
A means of distributing the burden of the cost of government
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.
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
Bellas Hess Holding
A seller whose only connection with customers in the state is by common carrier or the US mail lacked the requisite minimum contacts with the state.
Discrimination as to In-State Resources
A state cannot prefer itself for its resources (per se invalid). (Example: prohibiting out of state waste). A state can discriminate if there is an actual, valid state concern: 1. If state alleges a legitimate state interest, use balancing test. 2. Cannot place entire burden of state concern on other states. 3. More likely to be valid if there are in state regulations advancing the state concern (ex: in state water regulation laws when it burdens other states). Reciprocal agreements are per se invalid. Exception: state can prefer itself over over states if it is a market participant. (ex: state can choose to buy only from in state manufacturers).
Separate Tax Return
A state tax return methodology requiring that each related entity with nexus files a separate tax return
Unitary Tax Return
A state tax return methodology requiring the activities of a group of related entities to be reported on a single tax return. The criteria for determining whether a group of entities must file a unitary tax return are functional integration, centralization of management, and economies of scale
Use Tax
A tax imposed on the retail price of goods owned, possessed, or consumed within a state that were not purchased within the state
Sales Tax
A tax imposed on the retail sales of goods (plus certain services); Retailers are responsible for collecting and remitting the tax; Typically collected at the point of sale
48. Roxy operates a dress shop in Arlington, Virginia. Lisa, a Maryland resident, comes in for a measurement and purchases a $1,500 dress that is shipped to her Maryland residence using a common carrier. Assuming that Virginia's sales tax rate is 5 percent and that Maryland's sales tax rate is 7 percent, what is Roxy's sales and use tax liability? A. $0. B. $75 to Virginia. C. $75 sales tax to Virginia and $15 use tax to Maryland. D. $90 to Maryland.
A. $0. Since the dress is shipped to Maryland, Roxy owes no tax. Lisa will owe Maryland use tax.
51. Mahre, Incorporated, a New York corporation, runs ski tours in a several states. Mahre also has a New York retail store and an Internet store which ships to out of state customers. The ski tours operate in Maine, New Hampshire, and Vermont where Mahre has employees and owns and uses tangible personal property. Mahre has real property only in New York. Mahre has the following sales: State Goods Services Total Alaska $23,194 $0 $23,194 Colorado $10.612 $0 $10.612 Maine $35,913 $156,084 $181,997 New Hampshire $26,721 $325,327 $352,048 New York $65,431 $0 $65,431 Vermont $41,982 $277,441 $319,423 Totals $203,853 $758,852 $962,705 Assume the following tax rates: Alaska (6.6 percent), Colorado (7.75 percent), Maine (8.5 percent), New Hampshire (6.75 percent), New York (8 percent), and Vermont (5 percent). How much sales and use tax must Mahre collect and remit? A. $10.386 B. $12,190 C. $14,543 D. $26,733 E.. $61,289
A. $10.386 ($35,913 × 8.5 percent) + (65,431 × 8 percent) + ($41,982 × 5 percent). The sales tax is only collected on goods sold. New Hampshire does not impose a sales tax.
5 states with no sales or use tax
Alaska, Delaware, Montana, New Hampshire and Oregon
49. What was the Supreme Court's holding in National Bellas Hess? A. An out-of-state mail-order company did not have a sales tax collection responsibility because it lacked physical presence. B. Reaffirmed that an out-of-state business must have physical presence in the state before the state may require the business to collect sales tax from in-state customers. C. Spelled out four criteria for determining whether states may subject nondomiciliary companies to an income tax. D. Defined solicitation for purposes of Public Law 86-272.
A. An out-of-state mail-order company did not have a sales tax collection responsibility because it lacked physical presence.
39. Which of the following is true regarding apportionment? A. Applies to only business income. B. Applies to only nonbusiness income. C. Applies to both business and nonbusiness income. D. Investment income is subject to apportionment.
A. Applies to only business income. Non-business income, including investment income, is allocated rather than apportioned.
41. Which of the following businesses is likely to have taxable sales for purposes of sales and use tax? A. Campus bookstore selling textbooks and university apparel. B. An online retailer of textbooks. C. A local accounting firm. D. Mail order clothing company.
A. Campus bookstore selling textbooks and university apparel. Campus bookstores have both physical presence and merchandise (apparel) subject to sales and use tax.
Commerce Clause-Set up
A. Complete Auto B. Nexus Cases C. Contacts Sufficient? Insufficient?
Unitary Business Principle
A. Functional Integration B. Centralization of Management C. Economies of Scale
45. Which of the following is not one of the Complete Auto Transit's criteria for whether a state can tax nondomiciliary companies? A. Protected activities are exempt. B. A sufficient connection exists. C. Only a fair portion of income can be taxed. D. Tax cannot discriminate against nondomiciliary businesses.
A. Protected activities are exempt. Protected activities are outlined by P.L. 86-272.
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
Due Process Clause Set-Up
A. requires minimum contacts B. Purposeful availment suffices C. Physical Presence not required D. Are they targeting the state for sales?
Non-Sales & use tax
AK, DE, MT, NH, OR
Non-personal income tax
AK, FL, NH, NV, SD, TN, TX, WA, WY
Seller's Privilege Tax
AZ HI
Advisin
Accomplished by making rePort to the president or congress - reports information to the general public that should be known in the public interest - -publish advisory opinions
These are typically made at the S Corporation (entity) level.
Accounting elections
Farming income inventory is used and maintained when using
Accrual basis
Unlike a shareholder's stock basis, this corporate-level account may have a negative balance but cannot go negative as a result of distributions.
Accumulated Adjustments Account
Real or tangible property acquired by the taxpayer for resale
Acquired for resale
Who proposed the concept of the 4 canons of taxation?
Adam Smith
Arm's Length Standard
Adjustments that ensure that controlled transaction prices are the same as they would be with an uncontrolled group
Guidelines
Administrative interpretations of statues that the agency is responsible for enforcing - help businesses determine whether certain practices may or may not be viewed as legal - do not have the same Force of laws as rules and regulations do
Quasi judicial staff
Administrative law judges - performs adjudicate a fact-finding functions -protected from liability for damages based on their decisions +immunity - must exercise independent judgment on the evidence presented -must be free from pressure asserted by parties - hear cases of alleged law violations <apply laws to the f act -separate from the rest of the agency <maintains impartiality of the quais judicial funtio- uses precedents -must follow procedural rules of the agency and policy directives
Quasi judicial
Agencies can make decisions like a court
Which 5 states do not impose sales and use taxes?
Alaska Delaware Montana New Hampshire Oregon
States without Individual Income Tax
Alaska (oil), Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming
44. Mighty Manny, Incorporated manufactures ice scrapers and distributes them across the midwestern United States. Mighty Manny is incorporated and headquartered in Michigan. It has product sales to customers in Illinois, Indiana, Iowa, Michigan, Minnesota, Wisconsin, and Wyoming. It has sales personnel only where discussed. Determine the state in which Mighty Manny does not have sales and use tax nexus given the following scenarios: A. Mighty Manny has sales personnel that visit Minnesota. These sales employees follow procedures that comply with Public Law 86-272. The orders are received and sent to Michigan for acceptance. The goods are shipped by FedEx into Minnesota. B. Mighty Manny's trucks drive through Nebraska to deliver goods to Mighty Manny's Wyoming customers. C. Mighty Manny provides design services to another manufacturer located in Wisconsin. While the services are performed in Michigan, Mighty Manny's designers visit Wisconsin at least quarterly to deliver the new designs and receive feedback. D. Mighty Manny receives online orders from its Illinois client. Because the orders are so large, the goods are delivered weekly on Mighty Manny's trucks.
B. Mighty Manny's trucks drive through Nebraska to deliver goods to Mighty Manny's Wyoming customers. Driving through Nebraska does not create nexus in Nebraska.
61. Carolina's Hats has the following sales, payroll and property factors: North Carolina South Carolina Sales 75.03% 22.51% Payroll 68.62% 21.28% Property 78.45% 14.56% What is Carolina's Hats North and South Carolina apportionment factors if North Carolina uses an equally-weighted three-factor formula and South Carolina uses a double-weighted sales factor formula? A. North Carolina 74.03 percent, and South Carolina 19.45 percent. B. North Carolina 74.03 percent, and South Carolina 20.22 percent. C. North Carolina 74.28 percent, and South Carolina 19.45 percent. D. North Carolina 74.28 percent, and South Carolina 22.51 percent.
B. North Carolina 74.03 percent, and South Carolina 20.22 percent. [(75.03 + 68.62 + 78.45)/3], [(22.51 + 22.51 + 21.28 + 14.56)/4].
50. What was the Supreme Court's holding in Quill? A. An out-of-state mail-order company did not have a sales tax collection responsibility because it lacked physical presence. B. Reaffirmed that an out-of-state business must have physical presence in the state before the state may require the business to collect sales tax from in-state customers. C. Spelled out four criteria for determining whether states may subject nondomiciliary companies to an income tax. D. Defined solicitation for purposes of Public Law 86-272.
B. Reaffirmed that an out-of-state business must have physical presence in the state before the state may require the business to collect sales tax from in-state customers.
62. Which of the following is not a general rule for allocating nonbusiness income? A. Interest and dividends to the state of commercial domicile. B. Rental income for investment property to state of commercial domicile. C. Rental income for business property to state where property is located. D. Capital gains from rental property to state where property is located.
B. Rental income for investment property to state of commercial domicile. Rents are generally allocated to state where the property is located.
42. Which of the following activities will create sales tax nexus? A. Advertising using television commercials. B. Salesmen who only take orders. C. Delivery of sales by UPS. D. Electronic delivery of software.
B. Salesmen who only take orders. Salesmen create the physical presence required for nexus.
37. Which of the following statements regarding income tax commercial domicile is incorrect? A. The location where a business is headquartered B. The location where a business is incorporated C. The location from which a business directs its operations D. None of these
B. The location where a business is incorporated The place of incorporation isn't a necessary condition for commercial domicile.
38. Which of the items is correct regarding a use tax? A. Use taxes are imposed by every state. B. Use taxes only apply when the seller is not required to collect the sales tax. C. Amazon collects use taxes for all of its customers. D. States choose to implement either a sales tax or a use tax.
B. Use taxes only apply when the seller is not required to collect the sales tax. Sales and use taxes are complimentary; use taxes only accrue when the seller does not have the nexus required to collect the sales tax.
A typical formula for apportionment =
BIstate = BI * (%propstate + %payrollstate + %salesstate)/3
MBNA facts
Bank with no employees or property in WV; only credit cards via mail and phone solicitation. WV statute said if the "sum of gross receipts equals or exceeds 100k dollars"
Employment Taxes
Based on annual wage paid by employers and on net income earned by self-employed to pay for Social Security and Medicare
Unemployment Taxes
Based on the annual compensation paid to employees to provide for unemployed
Ad Valorem Tax
Based on the fair market value as determined by the taxing government itself
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.
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
How can nexus be limited?
Because nexus is determined on a legal entity basis, nexus can be limited by creating a separate legal entity
Why is food often exempt from sales tax?
Because taxing food is considered to be regressive; that is, it imposes a proportionally higher tax burden on lower-income taxpayers that spend a greater proportion of their income on food and other necessities
Nexus Cases
Bellas Hess, Script, National Geographic, Quill
Balancing Test
Benefits to local interest versus burdens on ISC, consider approach that is less restrictive fact dependent
Advanced Pricing Agreement Program
Binding agreement with IRS that they will not seek transfer pricing adjustment if taxpayer files return consistent with the agreed transfer pricing method
2 Exceptions
CG Authorization NY trash case Market Participant Doctrine
63. Della Corporation is headquartered in Carlisle, Pennsylvania. Della has a Pennsylvania state income tax base of $425,000. Of this amount, $75,000 was nonbusiness income. Della's Pennsylvania apportionment factor is 28.52 percent. The nonbusiness income allocated to Pennsylvania was $61,000. Assuming a Pennsylvania corporate tax rate of 7.75 percent, what is Della's Pennsylvania state tax liability? A. $8,821 B. $9,084 C. $12,464 D. $13,549
C. $12,464 {[($425,000 - $75,000) × 28.52 percent] + $61,000} × 7.75 percent.
47. Roxy operates a dress shop in Arlington, Virginia. Roxy also ships dresses nationwide upon request. Roxy's Virginia sales are $1,000,000 and out of state sales are $200,000. Assuming that Virginia's sales tax rate is 5 percent, what is Roxy's Virginia sales and use tax liability? A. $0. B. $10,000. C. $50,000. D. $60,000.
C. $50,000. $1,000,000 × 5 percent.
53. Public Law 86-272 protects solicitation from income taxation. Which of the following activities exceeds the solicitation threshold? A. Any form of advertising. B. Distribution of samples without charge. C. Accepting a down payment. D. Checking a customer's inventory.
C. Accepting a down payment. The acceptance of a down payment or deposit is not solicitation.
58. Which of the following is not a general rule for calculating the payroll factor? A. Includes salaries, commissions, and bonuses. B. Excludes compensation to independent contractors. C. Allocates compensation for employees working in more than one state. D. Assigns the payroll of each employee to a single state.
C. Allocates compensation for employees working in more than one state.
59. Which of the following is not a general rule for calculating the property factor? A. Uses the average property values for the year. B. Values property at historical cost. C. Excludes property in transit from the calculation. D. Includes rented property at eight times the annual rent.
C. Excludes property in transit from the calculation.
56. Which of the following is not a typical federal/state adjustment? A. Dividends received deduction. B. Depreciation. C. Meals and entertainment. D. US obligation interest income.
C. Meals and entertainment. Meals and entertainment is a typical book/federal tax adjustment rather than a federal/state adjustment.
57. Which of the following is not a general rule for calculating the sales factor? A. Tangible personal property sales are sourced to the destination state. B. If the business does not have nexus in the destination state, the sales are thrown back to the state where the goods were shipped from. C. Services are sourced to the destination state. D. Government sales are sourced to the state where they were shipped from.
C. Services are sourced to the destination state. Services are generally sourced where performed.
60. What was the Supreme Court's holding in Complete Auto Transit? A. An out-of-state mail-order company did not have a sales tax collection responsibility because it lacked physical presence. B. Reaffirmed that an out-of-state business must have physical presence in the state before the state may require the business to collect sales tax from in-state customers. C. Spelled out four criteria for determining whether states may subject nondomiciliary companies to an income tax. D. Defined solicitation for purposes of Public Law 86-272.
C. Spelled out four criteria for determining whether states may subject nondomiciliary companies to an income tax.
52. Which of the following is not a requirement of Public Law 86-272? A. The tax is based on net income. B. The taxpayer sells only tangible personal property. C. The taxpayer is an intrastate business. D. The taxpayer is nondomiciliary.
C. The taxpayer is an intrastate business. The taxpayer must be an interstate business.
States that include worldwide income in combined income
CA, ID, MT, ND
Net income taxes Exception
CA, IL, MA, LA, NH, TN, & TX
Reverse Credit States
CA, OR, VA, AZ, Indiana
This case led to the 4-prong test
CAT
Anti-deferral rules: controlled foreign corporation (CFC)
CFC: 50% of stock owned by US shareholders (each must own 10% of stock) at any time in the year Must immediately recognize subpart F income from controlled foreign corporation (CFC)
Corporate shareholders
Corporate shareholders receiving dividends are not entitled to the reduced dividend tax rate (15 percent) available to individual shareholders. Rather, the dividends are subject to the corporate shareholder's ordinary rates. Further, dividends received by a corporation are potentially subject to another (third) level of tax when the corporation receiving the dividend distributes its earnings as dividends to its shareholders. This potential for more than two levels of tax on the same earnings prompted Congress to allow corporations to claim the dividends received deduction (DRD). A corporation receiving a dividend is allowed to deduct a certain percentage of the dividend from its taxable income to offset the potential for additional layers of taxation on the dividend when the corporation distributes the dividend to its shareholders. The dividends received deduction percentage is 70, 80 or 100 percent depending on the extent of the recipient corporation's ownership in the dividend paying corporation. Thus, the DRD partially mitigates the tax burden associated with more than two levels of tax on corporate income.
Corporation liabilities
Corporation is solely liable
Legal classifications of a business entity
Corporation, limited liability company, general partnership, limited partnership, sole proprietorship under state law
Foreign Corporation
Corporations incorporated in another state
Compensation for labor performed in the US
Could be exempt if performed by nonresident alien in country less than 90 days and paid under $3,000
Griffith v. ConAgra
Court held that the licensing of intangible trademarks and trade names did not cause nexus in WV. Distinguished from MBNA and Geoffrey.
Bellas Hess
Court held that, for Due Process Clause and the Commerce Clause, physical presence was necessary to force collection.
Doctrine of Stare Decisis
Courts refer to prior decisions from itself or higher courts (court may overrule its own prior decisions)
Foreign branch: tax credit
Credit is allowed for lesser of amount taxed by foreign country or credit limit
55. Which of the following is not a criteria used to determine whether a unitary relationship exists? A. Functional integration. B. Centralized management. C. Economies of scale. D. Consolidated return status.
D. Consolidated return status. Consolidated return isn't a criteria used to determine whether a unitary relationship exists.
Quill Issue
Is physical presence within a state a prerequisite to the legitimate exercise of state power
Two issues in litigation challenging the validity of a rule made by administrative agencies
Is the delegation valid has the agency exceeded its Authority
consent order
Issued by agencies -requires that the organization or individual Accused admit to the jurisdiction of the agency -waive all right to speak of judicial review - business does not admit to guilty activity
irreconcilably conflicts
It is not possible for a BIZ to comply with both statues -the state law must fall under the supremacy clause and the commerce clause
Authority exceeded
It is unlikly thata court will find a deligation invalid because of indefinitely or lack of standard - if an analysis of legislative intent confirm the view that the agency has gone beyond the intent + the courts will hold that agency exceedes its Authority + does not matter how Noble its purpose Maybe
What if a school doesn't remit taxes?
It will owe the sales tax itself
Foreign Commerce Clause
Japan Lines 1. Compete Auto Test 2. Must look for enhanced risk of double taxation 3. whether the tax impairs uniformity or prevents feds from speaking with one voice in foreign affairs
Dual regulation
Joint regulation is permissible between the 2 extremes
Joyce vs. Finnegan state
Joyce: (TX & OR) separate entity approach- each corp. in the unitary group is evaluated separately when determining whether it is taxable in each state Finnegan: (AZ & CA) Combined group approach- each unitary group evaluated as a whole, if one corp. in a group entire unitary business is taxable for apportionment
__ law plays a significantly more important role in state tax law than in federal tax law
Judicial
Policy
Not expressly declared but inferred from the grant of power to CG to regulate ISC, therefore it limits state and local power
Nexus
connection between a business and a state that subjects the business to the state's tax system
13. Review of adjudication procedural aspects
Judicial review of agencies is limited -Authority is given to agencies because of their expertise and knowledge -courts exercise restraint and resolve doubtful issues in favor of agencies -administrative agencies are frequently called on to interpret the statute governing an agency -administrative agencies develop their own rules of procedures + unless otherwise stated by an act or legislature - must decide issues expeditiously -agencies are usually the accuser prosecutor judge and jury -must remain alert -must observe accepted standards of fairness -administrators are familiar with the industries they regulate + are in better position than courts or legislative bodies to design procedure rules adapted to the peculiarities of the industry and tasks involved
Gross receipts taxes
KY, MI (2008-2011), NV, OH, WA
This tax can be paid in four equal annual installments
LIFO Recapture Tax
Privilege and Immunities Clause
Landing v. N.Y.-Only applies to real people. 1. Substantial reason for discrimination between residents and non-residents 2. Discrimination itself has to be substantially related to the reason for the differential treatment.
Accrual basis start date for long term contracts
Later of date on which contractor incurs costs or date contractor has incurred at least 5% of total estimated costs
Discrimination against Interstate Commerce on Exam
Lead with per se invalid, but then recognize that the Court has balancing test when state offers justification for discrimination. Court tends to accept state's justification. Factors to balance: 1. state interest (law must actually advance that interest); 2. harm to interstate commerce; 3. degree to which burden falls in-state or out-of-state; 4. reasonable, adequate alternatives; 5. direct/indirect impact on interstate commerce; 6. danger of multiple state regulations.
Taxable Corporations
Least restrictive ownership requirements - can have between 1 and infinity shareholders
Limited liability companies (LLC)
Legal entities separate from owners (members)
true object test
Legal memo - transfer of tangible personal property (i.e. paper) but the true object is obtaining legal services; California—water conditioning units plus services (merely incidental); Photograph - generally the true object is the picture, rather than the photographer's skill
12 review of rule making
Legislative in character -legislators usually create administrative agencies or quasi-legislative power to the agency - must proposed rules and regulations within the confines of its Grant of power +Court will find the rule void + once have found the rule constitutional they will not inquire into its effectiveness
B. Use Taxes
Levied on the use of tangible personal property that was not purchased in the state
Use tax
Liability accures in the state where purchased property will be used when no sales tax was paid
Limited partners liability
Limited partners are not responsible for liabilities but they also cannot participate in the activities of a business
What is negative commerce power?
Limiting states to unfairly regulate or tax out of state businesses without written expression from congress
Nexus
Linkage between the government and the taxpayer
The only type of distribution that will allow a shareholder loss recognition.
Liquidating Distribution
Facially Discriminatory 2 types
Literally and As Applied
Commerce Clause-Nexus-Other Taxes
MBNA, Geoffrey Significant Economic Presence required
White
MPD buyer of labor, market will regulate
Timber
MPD fails b/c regulates beyond the sale Subsidy is hidden can't be protected by PP
Reeves
MPD seller of cement, market will regulate
Commonwealth Edison v. Brady
MT severance tax on coal; constitutional even though most of the tax was shipped out of the state because the tax was fairly related to services performed by state
Test used to determine Economic Nexus
MTC Factor Test
Can corporations avoid the second level of tax entirely by not paying dividends?
No for 2 reasons 1. Corporations that retain earnings may be required to pay a penalty tax in addition to income tax on their earnings. Unless corporations have a business reason to retain earnings, they are subject to a 20 percent accumulated earnings tax on the retained earnings. Also, personal holding companies (closely held corporations) are subject to a 20 percent personal holding company tax on their undistributed income. These penalty taxes remove the tax incentives for corporations to retain earnings. 2. shareholders also pay a second level of tax when corporations retain their after-tax earnings. Shareholders should experience an increase in the value of their shares to reflect any undistributed earnings (increase in assets). Individual shareholders pay the second tax at capital gains rates on this undistributed income when they realize appreciation in their stock by selling their shares. These long-term capital gains are generally taxed at 15 percent. Taxpayers with modified AGI in excess of a threshold amount pay an additional 3.8 percent net investment income tax on dividends. The threshold amount is $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for all other taxpayers. Because shareholders defer paying this second tax until they sell their shares, taxes on capital gains must be discounted to reflect their present value.
contacts insufficient for nexus example
No formal contract relationship not employees parents of children are in same boat as teachers are they employees?
Equal Protection
No state shall deny to any person within its jurisdiction the equal protection of law Supreme Court - state tax classifications require only a rational basis to satisfy and in taxation legislator possesses greater freedom in classifications laws that discriminate in favor of non-residence are allowed but laws that favor residents violate
Is sales tax imposed on purchases of inventory for resale?
No, inventory is exempt
taxes gross receipts
Non-income based taxes: Ohio (CAT)
gross receipts tax not considered an income tax for purposes of financial statements
Non-income based taxes: Washington B&O
gross margin based tax. Considered income tax
Non-income based taxes: texas
Allocation
Nonbusiness income
Bad debt expense of cash basis taxpayer
Nondeductible
Charitable contributions
Nondeductible
Federal income tax
Nondeductible
Personal portion of Health insurance of sole proprietor
Nondeductible
Personal portion of SALT
Nondeductible
Personal portion of automobile, travel, and vacation expense
Nondeductible
Personal portion of interest expense
Nondeductible
Personal portion of meals and entertainment expense
Nondeductible
Salaries paid to sole proprietor
Nondeductible
Jock tax
Nonresident athletes generally apportion compensation to the state based on the ratio of "duty days" spent within the state rendering services for the team over the total number of duty days during the year
Fifth Amendment
Nor shall any person...be deprived of life, litter or property without due process of law
Fourteenth Amendment
Nor shall any state deprive any person of life, liberty, or property without due process of law Supreme Court - state cannot assert personal jurisdiction over someone unless that person has "minimum contacts" with the state
Commerce Clause-Fair apportionment
Norfolk v. Western RR-assesed total property not just property in the state. -Must bear a rational relationship to property values within the taxing state.
Quill v. ________ (state)
North Dakota
Foreign branch
Not a separate entity from its US corp, not incorporated in foreign country, viewed as an extension of US corp (branch off the tree of the corp)
Sole proprietorships
Not considered separate legal entity from owner
Transportation Restrictions
Not discriminatory if it actually improves safety. (ex: mudflaps improved safety, but outweighed by harm to interstate commerce).
Advisory
Not employed by agency -interested in its Mission - experts in certain areas
Limited partnerships
Organized by written agreement and must file a certificate of limited partnership to be recognized by state law
Finnigan, Corp.
Out of state members sales to state are included in states sales factor numerator if ANY group member has nexus in that state
Nexus triggered in state if:
Own/lease property Send employees for training or work Solicit sales (unless this is your only activity in the state) Provide maintenance/ installation for customer, even through third party Accept/reject sales orders
Flow through entity tax year
Owner's tax year
Shareholders
Owners of a company - separate legal entity from corporation
Basis computation partnership
Owners of entities taxed as a partnership are allowed to increase the tax basis in their ownership interest by their share of the entity's liabilities. receive nontaxable distributions to the extent of the basis in their ownership interest, and they are not allowed to deduct losses allocated to them in excess of their tax basis.
Real Property Taxes
Ownership of land and what is physically attached to land and valued by tax assessor - Ad valorem tax - All 50 states
This public law provides a list of "protected" activities for sellers of tangible personal property
P.L. 86-272
Agency Nexus
P.l. 86-272 protects independent contractors activities, if limited to soliciting or making sales, or maintaining an in-state office - if merely an affiliate, it does not create nexus (SFA Folio Sup. CT)
Quill Corp v. North Dakota
PHYSICAL PRESENCE FOR SALES AND USE TAX; Quill was a mail-order vendor with no other physical presence in ND; court ruled that taxpayer must have PHYSICAL PRESENCE in a a state to require collection of sales or use tax for purchases made by in-state customers because the number of separate jurisdictions would restrict interstate commerce
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
Entity Theory
Partner and Partnership are separate and do not combine income - Income is apportioned solely on partnerships factors
Two approaches of of apportioning partners share of partnership income
Partner-level (aggregate theory) Partnership-level (entity theory)
Temporary purpose of residency
Passing through, vacation,
This rule requires material participation for a loss to be deductible.
Passive Activity Loss Rule
Foreign tax credit: categories
Passive income Income not included in other categories Income from activities in sanctioned countries Certain income resourced by treaty Pension plan distribution from a foreign source
Suppart F income
Passive income - rent, royalties, dividends, interest, annuities, gains on sale of passive assets Earned by the foreign company but not connected to the foreign country
General rule for taxation of tangible property vs. sale of services
Sale of tangible personal prop subject to sales tax unless exempt Sale of services presumed to be exempt unless identified as taxable
3 Factors for Apportionment
Sales Payroll Property
This factor can be single, double or triple weighted depending on the state in question.
Sales Factor
Intra jurisdictional transaction
Sales Tax
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)
Apportionment formula
Sales factor, payroll and property = total sales in state x/ total sales in all states
Throwout Sales
Sales of tangible personal property sourced to a state where the taxpayer is protected from taxation by P.L. 86-272 are thrown-out of the denominator if the state does not impose corporate income or franchise tax
sales tax and nexus
Sales tax can still apply - only applies to income tax
throwback rule
Sales to nontaxable states 'thrown back' to shipping state
State Governments depend on...
Sales, excise, and income taxes
National Bellas Hess focuses on this type of tax
Sales/Use
Where are charitable contributions reported as itemized deductions?
Schedule A
Where is personal portion of SALT reported as itemized deduction?
Schedule A
Where is business income recorded on tax return?
Schedule C or C-EZ
Rental income
Schedule E passive activity
Farming income reported on
Schedule F
Farm income averaging is reported on
Schedule J
This form reports a shareholder's share of current year income, deductions, credits and other items
Schedule K-1
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
income-producing activity approach used by many states
Sourcing of sales other than tangible personal property
Geoffrey vs. _______ (state)
South Carolina
Who won Geoffrey
South Carolina
add
State and local income tax modification
Exceptions to Dormant Commerce Clause
State can discriminate or impose unreasonable burdens on interstate commerce if: 1. it is a market participant; or 2. there is congressional authorization.
Federal taxable income +/- modifications= total taxable income. Then take apportionable business income x apportionment percentage= business income apportioned to state or state taxable income
State income tax base calculation
State Income Tax
State may impose income tax on any interstate business as long as it is fairly apportioned. - Determine ratio of goods and services rendered in state vs. out of state.
Capital gains from investment property are generally allocated to this state.
State of commercial domicile
What is an example of negative commerce power by way of regulation?
State or local governments regulating out of state businesses (allowed unless it unfairly discriminates against out of state businesses)
What is an example of negative commerce power by way of taxation?
State or local governments taxing the an out of state business (allowed unless it unfairly discriminate against out of state businesses)
Protecting Local Business (Quarantine Laws)
State quarantine and inspection laws are allowed as long as the burden on interstate commerce is outweighed by valid health and safety reasons. Balance state's alleged interest against reasonable adequate alternatives and harm to interstate commerce. Triggered when state does not accept out of state goods. Difficult to determine if they're actually discriminating.
When federal depreciation doesn't match state depreciation, this is the result.
State return modification
Discriminatory State Taxes
State taxation laws that discriminate against interstate commerce are per se invalid. ex: MD had county tax that gave credit to in state people but not out of state people. This is discriminatory, thus per se invalid. Out of state people were being taxed more because they're out of state. ex: tax rebates to only in state manufacturers.
Capital gains from selling rental property are generall allocated to this state
State where rental property was located
Jurisdiction
State's power to impose a tax
Discriminatory Law is Virtually Per Se Invalid
States are allowed to treat out-of-state commerce differently if it is actually different. However, states cannot impose customs duties for goods imported from other states.
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
Supremacy Clause
The Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every state shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.
Review ability
The action or decision of the agency subject to judicial review - not all administrative decisions are reviewable
[] regulatory process administrative agencies
The actual regulatory activity is performed by administrative agencies
What happens if a buyer is charged sales tax in another state?
The buyer will have a use tax liability for an incremental amount if the state where the property is used has a higher sales tax rate
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
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
Vertical Equity
The economic pain associated with the payment of tax
State Tax Base
The federal taxable income plus or minus required state tax adjustments
Due Process
The government must act fairly and in accord with established rules in all that it does
dormant commerce clause
The implication of the Commerce Clause, under this doctrine, is that the power to regulate commerce rests with the Congress and not the states. As such, states are prohibited from passing legislation that improperly burdens or discriminates against interstate commerce
Inclusions in payroll factor denominator
employee compensation that is taxable for federal income tax purposes
Who is required to pay taxes on school events?
The individual who is paying for the admission to the athletic or entertainment event will pay the state sales tax due on the ticket/admission charge. The public school should collect the state sales tax along with the money paid for a ticket or admission Individuals attending a sporting or entertainment event are the "taxpayers" who are liable for paying the tax. The school board and its public school hosting the events are "dealers" and are responsible for collecting and remitting the state sales taxes to the La Dept of Rev. If a public school or school board requires a student attend a school function then there is no sales tax due on the price of admission, bc the school/board are exempt from state sales tax
Quill Corp. v. North Dakota
The lack of a physical nexus in a state is sufficient grounds to exempt a corporation from having to pay sales and use taxes to a state.
Apportionment
The method of dividing business income of an interstate business among the states where nexus exists, based on the extent of the business's activities and property in various states
Allocation
The method of dividing or sourcing nonbusiness income to specific states
What is the change in the law regarding admissions to school athletic/entertainment events and the sales of food and TPP
The new law imposes state sales tax on these events of schools, colleges, and universities at the following rates: 4/1/2016-6/30/2016 = 5% 7/1/2016-6/30/2018 = 3% 7/1/2018-3/31/2019 = 0% State sales tax should be charged upon the sales of concessions and other items of TPP as well
Washington Times Herald holding
The newspaper bought the CREATION of the artist and the right to reproduce it. The fiber matrices themselves are worthless. NO TPP!
Aggrieved party
The plaintiff must have been harmed by an administrative action or decision to have standing - a person who has suffered economic losses due to an agency's action has standing to sue
Comptroller v. Austin Multiple Listing Service, Inc.
The real estate listings change daily. all of what was provided for one week may be totally worthless the next week. Service.
Commercial Domicile
The state where a business is headquarted and directs its operations
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
____________ - among the states where nexus exists, based on extent of the bus activities and property in various states
apportionment
substance
There are so many agencies making rules and regulations directed at the business community that the rules and regulations often overlap and are in confl ict. 2. Some agencies are accused of "sweetheart regulations," or favoring the industry or industries they regulate over the public interest. This may arise as a result of the "revolving door" relationship. Regulators are often persons who had former high executive positions in the industries they regulate. The reverse is also true: people in high-paying jobs in certain industries often were regulators of those very industries. 3. Many actions for illegal conduct end only with consent orders. A business accused of a violation agrees not to violate the law in the future without admitting any past violation. Such actions have little deterrent effect on others, and little or no punishment is imposed for illegal conduct. 4. The volume of rules adopted by agencies is beyond the ability of the business community to keep up with and comply with. 5. Enforcement of some laws varies over time.
Rational Basis Test and Commerce Clause
There must be a rational basis for Congress to believe there is a substantial impact on interstate commerce, allowing Congress to intervene.
For there to be a taxable sale you must have
There must be: Sale of TPP; or Sale of "taxable service" And there must not be an exemption from 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
What is the political appeal for super-weighting the sales factor?
This creates a tax incentive to locate facilities in state and it shifts the tax from in-state corps to out-of state companies
2 categories of s. State statues
Those that burden interstate commerce incidentally Those that affirmative discriminate against such transactions
Tests for Unitary Business
Three Unities Test , Contribution and Dependence Test , Factors of Probability Test, Flow of Value Test , MTC Separate Business Test
How is sales tax nexus established?
Through physical presence of salespeople or property within a state
-dont include sales to state with nexus because pay tax in that state already -include us gov and states with no nexus
Throwback
This rule will assign sales made to a state where the business has no income tax nexus back to the state from which the property is shipped.
Throwback Rule
-purchaser is the US gov -taxpayer is not taxable in state of destination
Throwback rule: sales will be sourced to shipping origination point if either of the following are true:
Sales Apportionment is computed as
Total Sales in State/ Total Sales
Payroll Factor
Total amount paid for compensation: o Includes paid directly to employees or third party (leased employees) o Generally payments made to contractors are not included In-state payroll/Total payroll
Sales factor is computed as
Total sales in state/ total sales
Average Rate
Total tax divided by total tax base
Geoffrey, Inc Facts
Toys R Us case; "no where income" because of franchising structure
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: PL 86-272 doesn't apply to nexus for nonincome-based taxes such as gross receipts taxes or property taxes.
True.
Is the delegation ballad
Two constitutional limitations must be definite must be limited
Disparity of Tax Rates
Two or more states may tax the same cross border transaction which has been increase from technology and telecommunications
Legislative branch
enact revenue statutes
Contributions of Property and Services
When a business owner contributes appreciated property to an entity in exchange for an ownership interest, the business owner realizes a gain in the amount of the value of the ownership interest received in excess of the basis of the property transferred. Shareholders of taxable corporations and S corporations are allowed to defer this gain as long as the shareholders contributing property to the corporation "control" the corporation after the exchange (defined as 80 percent ownership). In contrast, members of LLCs and partners in partnerships are allowed to defer the gain no matter their level of ownership in the business entity.
Reducing the Corporate Level Tax
When a corporation's marginal tax rate exceeds its individual shareholder's marginal tax rates, the overall tax rate on corporate income will exceed the flow-through rate even if shareholders can defer the second level of tax indefinitely. In these situations, it makes sense for closely held corporations and their shareholders to consider strategies to shift income from the corporation to shareholders. These strategies are all designed to move earnings out of the corporation and to shareholders with payments that are deductible (dividends are not deductible payments) by the corporation.
When does use tax occur?
When a seller in one state ships goods to a customer in a different state and the seller is not required to collect sales tax (the seller does not have sales and use tax nexus in the state to which the goods are shipped)
-2014 switched to market sourcing state
When did Nebraska switch from cost of performance to market sourcing state
How do businesses create sales tax nexus?
When they have a physical presence in the state which requires ... 1. Salespeople (or independent contractors representing a business) enter a state to obtain sales, or 2. Tangible property (such as company owned delivery truck) is located within the state
Facially Neutral Pike Standard
Where the statute regulates even-handedly to effectuate a legitimate local public interest and its effects on ISC are only incidental, it will be upheld unless the burden imposed on commerce is clearly excessive in relation to the putative local benefits
Most important question a taxpayer must answer?
Whether it is subject to a state's taxing regime Depends on taxpayer's commercial domicile and whether the taxpayer has nexus
-encourages businesses to move to their state (reward)
Why have companies moved towards only the sales factor?
to discourage purchasers from going out-of state in order to avoid sales tax
Why was use tax implemented
Must be definite
Will violate due process if not delegation must be set forth with sufficient Clarity All concerned and reviewing courts will be able to determine the extent of the agencies Authority -include broad language
Granholm v. Heald Facts
Wine shipped directly; three tier distribution system for out of state wineries.
Who won Wrigley?
Wisconsin
______ Dept. of Revenue vs. Wrigley
Wisconsin
In this case the Supreme Court addresses the definition of "soliciatation"
Wisconsin v. Wrigley
Nonresident Alien Withholding
Withhold 30% of a foreign person's US-earned income to ensure it is paid
This case believed they were protected under PL 86-272 but the activities they were providing were not just "ancillary"
Wrigley
Partnership tax year
Year end consistent with the year end of partners
Can the IRS make an adjustment even if the affiliates file a consolidated return?
Yes
A shareholder's stock basis can never go below this amount.
Zero
nondomiciliary businesses
a business that is not domiciled or headquarter in a state ... are subject to tax only when they have nexus
PL 86-272: orders filled with inventory located ______ the state
outside
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
Cease and desist order
agencies orders Violator to stop objectionable activity and refrain from any further similar violations
Partner-level apportionment
aggregate theory; use if activities of the corporate partner and the partnership constitute a unitary business
Sales factor denominator generally includes...
all gross receipts from business transactions
Finnigan
all in-state sales of the unitary group are included in the unitary sales factor numerator - irrespective of nexus
A unitary tax return includes _______
all members meeting the criteria - whether they have nexus or not
Gross Income
all-inclusive term that includes income from all sources that are not specifically excluded
Most states require businesses to _____________ nonbusiness income
allocate
Must _______ its nonbusiness income to a specific state (usually state of commercial docile)
allocate
Nonbusiness income is....
allocated to the particular state in which the income-producing activity occurs
_____________ _____________ means to directly trace income to a specific state based on established rules
allocating income
______________ assignment directly to the business's state of commercial domicile
allocation
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
Hotel
any estab. or person who furnishes sleeping rooms to TRANSIENT guest at : -- a single business location -- a resident location -- this doesn't include anyone leasing an apartment -- consist of 2+ rooms -- doesn't have any hospitals, convalescent, nursing homes, or sanitarium -- is not a camp or retreat operated by a nonprofit organization
Capital Stock taxes
applied to in-state corporations for the right to exist as a corporation
Marginal Tax Rate
applies to the next dollar of taxable income (or deduction)
Business must fairly _______ its business income among the states in which it conducts business
apportion
4 prong test: ______ fairly
apportioned
Net business income is _________
apportioned
Business income is....
apportioned to each state with nexus
Business income is subject to ___ among states where nexus exists
apportionment
___________ means not directly traces, but indirectly apportioned via a mathematical formula
apportionment
Franchise tax
can be used instead of income or in addition to
Farm income averaging
can spread out income over past 3 years to avoid higher tax bracket
Maine v. Taylor
cant bring live baitfish to Maine SC upholds this discriminatory law because Maine had state interest in protecting its ecosystem
Hughes v. Oklahoma
cant ship minnows discriminatory
for payroll apportionment factor, paid comp is actual payment for ___________ basis taxpayer and expense for ___________ basis taxpayer
cash, accrual
Foreign tax credit: limit
category foreign income/total taxable income x total US tax liability
_____________ ___ ____________ - interlocking directors, common officers, or rotation management between companies
centralization of management
-royalties, interest expense, dividends
certain inter-company expenses (add) if not filing consolidated in a state
Secretary
check minutes of agency meeting - legal custodian of Records -signs order and official correspondence -responsible for publications of all actions in the Federal Register -coordinate the activities of a agency with others involved in regulatory process
Privileges and Immunities clause
citizens of a state are entitled to all privileges and immunities
National Bellas Hess was a mail-order ______ company
clothes
combined reporting shift
combat taxpayer from shifting income among subsidiaries (GEOFFERY)
Water's-edge
combination includes all members except for members incorporated in a foreign country
Worldwide
combination of all member regardless of their country of incorporation
Police Powers
comes from the 10th amendment and it means states have the power to enact legislation to protect the health, safety, morals and general welfare of the people
______________ _______________: economy focus - income allocated fairly and does not discriminate against insterstate trade
commerce caluse
The physical presence requirement is a judicial interpretation of the __________ _____________
commerce clause
Businesses must pay income tax in their state of __________ ___________-
commercial domicile
Interest and dividend income is allocated to...
commercial domicile
Businesses must pay income tax in their state of _________
commercial domicile (where they are headquartered)
-property -payroll -sales**
common 3 factors in apportionment
For PL 86-272 protection, accepted orders must be delivered by ___ to avoid creating nexus
common carrier (exceptions apply)
food and medical
common sales and use tax exemptions
Passive investment company strategy
company creates a subsidiary and transfers ownership of its trademarks and patents to a state that does not tax royalties, interest, and other types of intangible income. Then the PIC charges a royalty for the use of the intangible, which generates a deductible business expense in the state and creates income in a little or no taxed state like Delaware or Nevada - not available if the related entities are required to file a unitary return
use tax
complementary tax imposed on the storage, use or consumption of tangible personal property within the state (pay if seller doesn't charge sales tax). Imposed when purchased from out of state vendor and brought into state for use, storage, or consumption.
substantial economic effect
congress can regulate intrastate commerce as long as it has a _____ on interstate commerce
common defense and general welfare
congress can tax and spend gov money in any way that promotes_____
commerce
congress's broadest power
1. power to regulate commerce 2. power to tax citizens and businesses 3. power to regulate bankruptcy, patents, and copyrights 4. implied power to make all laws necessary for carrying out enumerated powers
congressional powers
PL 86-272: orders sent _____ for approval
outside
End date for long term contracts
date on which contract is complete or date that at least 95% of total estimated costs incurred
Residents for purposes of personal income tax
defined by different states as one or more of the following concepts: - domicile - presence in state for other than temporary or transitory purpose - presence in state for specified period of time - maintenance of permanent place of abode or a place of abode for a specified period of time - combination of the above
Requirement for establishing nexus with a state...
depends on whether the tax is sales and use tax or an income tax
____________ ____________ is the location where prop is delivered to and used in
destination state
Certainty
dictate that a taxpayer know with reasonable accuracy the tax consequences of a transaction at the time the transaction takes place
Why are the nexus requirements different under the due process clause and the commerce clause?
different goals; due process is focussed on the fundamental fairness of governmental activity; commerce clause focused on state regulation of national economy
-transportation -financial institutions -insurance companies -telecommunications
different rules for special industries
Taxpayers deal with single federal tax code but...
different tax codes for each state in which they are required to pay taxes
4 prong test: doesn't ______ against _____ commerce
discriminate interstate
Tyler Pipe: State lost on issue of ____
discrimination
United Haulers Assn v. Oneida
discrimination in favor of govt owned enterprises is constitutional laws that favor govt operations, but treat all private businesses equally, do not violate the DCC
Partnership-level apportionment: steps
distributive share of partnership income is apportioned based solely on partnership's factors: Distributive share of partnership income X Partnership's apportionment % = Income apportioned to state
Result for branch operation
divide 1 TI between states
PL 86-272
does not apply to anything but net income taxes (no Washington B&O, Ohio CAT, etc)
Consolidation returns include only
domestic income; foreign country subs are excluded
CG/CL from intang personal prop allocated to
domicile state (no throwback)
market sourcing/COP issue
double taxation can occur if states have different approaches
In recent years, many states have shifted to a ______ sales factor (doubling the sales facto, adding the payroll and property factors, and dividing the total by 4.
double weighted
Nexus is constrained by
due process clause and commerce clause
Many states currently assert a business without a physical presence in the state may establish income tax nexus if it has _______ in the state
economic presence
____________ ___ _______ - group discounts or other efficiencies due to size
economies of scale
Kraft v. Iowa
eliminated discriminatory taxation of foreign dividends
Maintaining, by any employee or other representative, an office or place of business of any kind (other than an in-home office located within the residence of the employee or representative that (i) is not publicly attributed to the company or to the employee or representative of the company in an employee or representative capacity , and (ii) so long as the use of such office is limited to soliciting and receiving orders from customers; for transmitting such orders outside the state for acceptance or rejection by the company; or for such other activities that are protected under Public Law 86-272 or under paragraph IV.B. of this Statement). However, the normal distribution and use of business cards and stationery identifying the employee's or representative's name, address, telephone and fax numbers and affiliation with the company shall not, by itself, be considered as advertising or otherwise publicly attributing an office to the company or its employee or representative. The maintenance of any office or other place of business in this state that does not strictly qualify as an "in-home" office as described above shall, by itself, cause the loss of protection under this Statement. For the purpose of this subsection it is not relevant whether the company pays directly, indirectly, or not at all for the cost of maintaining such in-home office.
not protected PL 86-272
Making repairs or providing maintenance or service to the property sold or to be sold
not protected PL 86-272
Owning, leasing, using or maintaining any of the following facilities or property in-state: a. Repair shop. b. Parts department. c. Any kind of office other than an in-home office as described as permitted under IV.A.18 and IV.B.2. d. Warehouse. e. Meeting place for directors, officers, or employees. f. Stock of goods other than samples for sales personnel or that are used entirely ancillary to solicitation. g. Telephone answering service that is publicly attributed to the company or to employees or agent(s) of the company in their representative status. h. Mobile stores, i.e., vehicles with drivers who are sales personnel making sales from the vehicles. i. Real property or fixtures to real property of any kind
not protected PL 86-272
Picking up or replacing damaged or returned property
not protected PL 86-272
Providing any kind of technical assistance or service including, but not limited to, engineering assistance or design service, when one of the purposes thereof is other than the facilitation of the solicitation of orders
not protected PL 86-272
Repossessing property
not protected PL 86-272
Securing deposits on sale
not protected PL 86-272
Using agency stock checks or any other instrument or process by which sales are made within this state by sales personnel
not protected PL 86-272
Calibration checks
not taxable UNLESS the check leads to actual repair. Then the whole thing is taxable
May apportion income to states even if the state does not impose income tax
nowhere income
Protected Activities- PL 86-272
o Soliciting orders for sales by any type of advertising. o Carrying samples and promotional materials only for display or distribution without charge or other consideration. o Providing cars to sales personnel for their use in conducting protected activities. o In-home office
Unprotected Activities- PL 86-272
oMaking repairs or providing maintenance or service to the property sold or to be sold. o Collecting current or delinquent accounts, even if using 3 rd party. o Installation or supervision of installation at or after shipment or delivery. o Training courses for personnel other than solicitation personnel. o Approving or accepting orders.
Payroll for each employee is apportioned to how many states?
one (majority of where they perform services)
No nexus if
only "connection" to state is solicitation for sale of tangible personal property, with orders sent outside state for approval and shipping to customer (Public Law 86-272)
enumerated powers
only powers specifically given to the federal government by the constitution
Joyce states
only those unitary corporations that have in-state nexus record their in-state sales in the unitary sales factor numerator
Unitary Taxation
operating divisions are interdependent so shouldn't be segregated into separate legal entities each unit is deemed to contribute to overall profits ignores separate legal existence of corporations
Public Law 86-272
out of state corporation whose only in-state activity is: - solicitation -by an employee or representative -on orders of tangible property -sent outside the state for approval -filled by shipment or delivery from a point outside the state
Finnigan state
out-of-state member's sales to a customer in a state are included in the sales factor numerator if ANY group member has nexus in that state