ch24

COMPREHENSIVE VOLUME--CHAPTER

24--MULTISTATE CORPORATE TAXATION

Student: ___________________________________________________________________________

1. Roughly five percent of all taxes paid by businesses in the U.S. are to state, local, and municipal

jurisdictions.

True False

2. Usually a business chooses a location where it will build a new plant based chiefly on tax considerations.

True False

3. Politicians frequently use tax credits and exemptions to create economic development incentives.

True False

4. All of the U.S. states have adopted a tax based on the net taxable income of corporations.

True False

5. Most of the U.S. states have adopted an alternative minimum tax, similar to the Federal system, in taxing the

income of corporations.

True False

6. Typically, corporate income taxes constitute about 20 percent of a states annual tax collections. True False

7. Property taxes generally are collected by local taxing jurisdictions, not the state or Federal governments.

True False

8. State and local politicians tend to apply new and increased taxes to taxpayers who are visitors to the

jurisdiction, such as a tax on auto rentals, because the taxpayer cannot vote to reelect the lawmaker.

True False

9. A typical U.S. state piggybacks its collections of the corporate income tax, by letting the Federal government

collect and remit the corresponding tax to the state.

True False

10. Most states begin the computation of corporate taxable income with an amount from the Federal income tax

return.

True False

11. If a state follows Federal income tax rules, the states tax compliance and enforcement become easier to accomplish.

True False

A typical state taxable income subtraction modification is the interest income earned from another states bonds.

True False

A typical state taxable income addition modification is for the Federal income tax paid for the tax year.

True False

A state can levy an income tax on a business only if the business was incorporated in the state.

True False

Typical indicators of income-tax nexus include the presence of customers in the state.

True False

Under P.L. 86-272, the taxpayer is exempt from state taxes on income resulting from the mere solicitation of

orders for the sale of stocks and bonds.

True False

In most states, a taxpayers income is apportioned on the basis of a formula measuring the extent of business contact, and allocated according to the location of property owned or used.

True False

All of the U.S. states use an apportionment formula based on the sales, property, and payroll factors.

True False

Nonbusiness income receives tax-exempt treatment under all state corporate income taxes.

True False

Double weighting the sales factor effectively decreases the corporate income tax burden on taxpayers based in

the state, such as entities with in-state headquarters.

True False

An assembly worker earns a $50,000 salary and receives a fringe benefit package worth $15,000. The payroll

factor assigns $65,000 for this employee.

True False

A service engineer spends 80% of her time maintaining the employers productive business property and 20% maintaining the employers nonbusiness rental properties. This year, her compensation totaled $90,000. The payroll factor assigns $90,000 to the state in which the employer is based.

True False

The property factor includes land and buildings used for business purposes.

True False

The property factor includes business assets that the taxpayer owns, but also those merely used under a lease

agreement.

True False

A unitary business applies a combined apportionment formula, including data from operations of all of the

affiliates.

True False

By making a waters edge election, the multinational taxpayer can limit the reach of unitary principles to the apportionment factors and income of its U.S. and E.U. affiliates.

True False

A unitary group of entities files a combined return that includes all of the affiliates income and apportionment data.

True False

In most states, Federal S corporations must make a separate state-level election of the flow-through status.

True False

S corporations flow-through income amounts to its shareholders, and most states require a withholding of

shareholder taxes on the allocated amounts.

True False

An LLC apportions and allocates its annual taxable income in the same manner used by any other business

operating in the state.

True False

Almost all of the states assess some form of consumer-level sales/use tax.

True False

The use tax is designed to complement the sales tax. A use tax typically covers purchases made out of state and

brought into the jurisdiction.

True False

Most states consumer sales taxes are paid by the final purchaser of the taxable asset. True False

Typically included in the sales/use tax base is the purchase of tablet computers and cell phone equipment by a

large manufacturing firm, whose sales force uses the items.

True False

Typically exempt from the sales/use tax base is the purchase of prescription medicines by an individual.

True False

Typically exempt from the sales/use tax base is the purchase of lumber by a do-it-yourself homeowner, when

she builds a deck onto her patio. This exemption is known as the homestead rule. True False

Typically exempt from the sales/use tax base is the purchase by a symphony orchestra of printed music for its

players.

True False

Most states exempt consumer purchases of groceries from the collection of the local sales tax.

True False

Typically exempt from the sales/use tax base is the purchase of tools by a manufacturer to make the widgets

that it sells.

True False

Typically exempt from the sales/use tax base is the purchase of clothing from a neighbors garage sale. True False

The individual seller of a used auto should collect and remit sales tax to the state.

True False

The typical state sales/use tax falls on sales of both real and personal property.

True False

In most states, legal and accounting services are exempt from the sales/use tax base.

True False

The typical local property tax falls on both an investors principal residence and her stock portfolio. True False

Adams Corporation owns and operates two manufacturing facilities, one in State X and the other in State Y.

Due to a temporary decline in the corporations sales, Adams has rented 20% of its Y facility to an unaffiliated corporation. Adams generated $1,000,000 net rental income and $5,000,000 income from manufacturing.

Adams is incorporated in Y. For X and Y purposes, rental income is classified as allocable nonbusiness

income. By applying the statutes of each state, Adams determined that its apportionment factors are .65 for X

and .35 for Y.

Adamss income attributed to X is: A. $0.

B. $3,250,000.

C. $3,900,000.

D. $5,000,000.

E. $6,000,000.

Flint Corporation is subject to a corporate income tax only in State X. The starting point in computing X

taxable income is Federal taxable income. Flints Federal taxable income is $750,000, which includes a $50,000 deduction for state income taxes. During the year, Flint received $10,000 interest on Federal obligations. X tax

law does not allow a deduction for state income tax payments.

Flints taxable income for X purposes is: A. $810,000.

B. $800,000.

C. $790,000.

D. $750,000.

Ramirez Corporation is subject to tax only in State A. Ramirez generated the following income and deductions.

Federal taxable income $500,000

State A income tax expense 45,000

Depreciation allowed for Federal tax purposes 300,000

Depreciation allowed for state tax purposes 250,000

Federal taxable income is the starting point in computing A taxable income. State income taxes are not deductible for A tax purposes. Ramirezs A

taxable income is:

A. $495,000.

B. $500,000.

C. $545,000.

D. $595,000.

In determining a corporations taxable income for state income tax purposes, which of the following does not constitute a subtraction from Federal income?

A. Interest on U.S. obligations.

B. Expenses that are directly or indirectly related to state and municipal interest that is taxable for state

purposes.

C. Federal corporate income taxes paid.

D. The amount by which the Federal depreciation deduction exceeds the corresponding state amount.

In determining state taxable income, all of the following are adjustments to Federal income except:

A. Federal net operating loss.

B. Federal income tax expense.

C. Fringe benefits paid to officers and executives.

D. Dividends received from other U.S. corporations.

Zhao Company sold an asset on the first day of the tax year for $500,000. Zhaos Federal tax basis for the asset was $300,000. Because of differences in cost recovery schedules, the state regular-tax basis in the asset was

$350,000. What adjustment, if any, should be made to Zhaos Federal taxable income in determining the correct taxable income for the typical state?

A. $0.

B. ($50,000).

C. $50,000.

D. $150,000.

Federal taxable income is used as the starting point in computing the states income tax base, but numerous state adjustments or modifications generally are required to:

A. Reflect differences between state and Federal tax statutes.

B. Remove income that a state is constitutionally prohibited from taxing.

C. Allow for all of the states to use the same definition of taxable income.

D. a. and b.

E. All of the above.

Under P.L. 86-272, which of the following transactions by itself would create nexus with a state?

A. Order solicitation for a plot of real estate, approved and filled from another state.

B. Order solicitation for a computer, approved and filled from another state.

C. Order solicitation for a machine, with credit approval from another state.

D. The conduct of a training seminar for sales personnel as to how to install and operate a new software

product.

Under P.L. 86-272, which of the following transactions by itself would create nexus with a state?

A. Inspection by a sales employee of the customers inventory for specific product lines. B. Using an independent contractor who acts as a manufacturers representative for the taxpayer through a sales office in the state.

C. Executing a sales campaign, using an advertising agency acting as an independent contractor for the

taxpayer.

D. Maintenance of inventory in the state by an independent contractor under a consignment plan.

Which of the following is not immune from state income taxation, even if P.L. 86-272 is in effect?

A. Sale of office equipment that is used in the taxpayers business. B. Sale of office equipment that constitutes inventory to the purchaser.

C. Sale of a warehouse used in the taxpayers business. D. All of the above are protected by P.L. 86-272 immunity provisions.

Marquardt Corporation realized $900,000 taxable income from the sales of its products in States X and Z.

Marquardts activities establish nexus for income tax purposes in both states. Marquardts sales, payroll, and property among the states include the following.

State X State Z Totals Sales $1,000,000 $3,000,000 $4,000,000

Property 2,000,000 0 2,000,000 Payroll 1,000,000 0 1,000,000

Z utilizes an equally weighted three-factor apportionment formula. Marquardt is incorporated in X. How much of Marquardts taxable income is

apportioned to Z?

A. $0.

B. $225,000.

C. $675,000.

D. $3,000,000.

Jos Corporation realized $900,000 taxable income from the sales of its products in States X and Z. Joss activities in both states establish nexus for income tax purposes. Joss sales, payroll, and property among the states include the following.


Property 500,000 0 500,000 Payroll 2,000,000 0 2,000,000

Z utilizes a double-weighted sales factor in its three-factor apportionment formula. How much of Joss taxable income is apportioned to Z?

A. $1,000,000.

B. $900,000.

C. $180,000.

D. $0.

Jos Corporation realized $900,000 taxable income from the sales of its products in States X and Z. Joss activities in both states establish nexus for income tax purposes. Joss sales, payroll, and property among the states include the following.


Property 500,000 0 500,000 Payroll 2,000,000 0 2,000,000

X utilizes an equally weighted three-factor apportionment formula. How much of Joss taxable income is apportioned to X?

A. $120,000.

B. $450,000.

C. $780,000.

D. $900,000.

Chipper Corporation realized $1,000,000 taxable income from the sales of its products in States X and Z.

Chippers activities establish nexus for income tax purposes only in Z, the state of its incorporation. Chippers sales, payroll, and property among the states include the following.


Property 200,000 2,300,000 2,500,000

Payroll 100,000 1,900,000 2,000,000

X utilizes a sales-only factor in its three-factor apportionment formula. How much of Chippers taxable income is apportioned to X?

A. $0.

B. $333,333.

C. $500,000.

D. $1,000,000.

Helene Corporation owns manufacturing facilities in States A, B, and C. A uses a three-factor apportionment

formula under which the sales, property and payroll factors are equally weighted. B uses a three-factor

apportionment formula under which sales are double-weighted. C employs a single-factor apportionment factor,

based solely on sales.

Helenes operations generated $1,000,000 of apportionable income, and its sales and payroll activity and average property owned in each of the three states is as follows.

State A State B State C Totals Sales $400,000 $800,000 $300,000 $1,500,000

Payroll 100,000 150,000 50,000 300,000

Property 200,000 200,000 200,000 600,000

Helenes apportionable income assigned to A is:

A. $0.

B. $266,667.

C. $311,100.

D. $1,000,000.

Simpkin Corporation owns manufacturing facilities in States A, B, and C. A uses a three-factor apportionment




Simpkins operations generated $1,000,000 of apportionable income, and its sales and payroll activity and average property owned in each of the three states is as follows.


Payroll 100,000 150,000 50,000 300,000

Property 200,000 200,000 200,000 600,000

Simpkins apportionable income assigned to B is:

A. $1,000,000.

B. $533,333.

C. $475,000.

D. $0.

Cruz Corporation owns manufacturing facilities in States A, B, and C. A uses a three-factor apportionment




Cruzs operations generated $1,000,000 of apportionable income, and its sales and payroll activity and average property owned in each of the three states is as follows.


Payroll 100,000 150,000 50,000 300,000

Property 200,000 200,000 200,000 600,000

Cruzs apportionable income assigned to C is:

A. $1,000,000.

B. $273,333.

C. $200,000.

D. $0.

Boot Corporation is subject to income tax in States A and B. Boots operations generated $200,000 of apportionable income, and its sales and payroll activity and average property owned in each of the states is as

follows.

State A State B Totals Sales $200,000 $600,000 $800,000

Payroll 100,000 50,000 150,000

Property 200,000 50,000 250,000

How much more (less) of Boots income is subject to A income tax if, instead of using an equally-weighted three-factor apportionment formula, A

uses a formula with a double-weighted sales factor?

A. ($50,000).

B. $50,000.

C. $16,100.

D. ($16,100).

General Corporation is taxable in a number of states. This year, General made a $100,000 sale from its A

headquarters to an agency of the U.S. government. State A applies a throwback rule. In which state(s) will the

sale be included in the sales factor numerator?

A. $0 in A.

B. $50,000 in A, with the balance exempted from other states sales factors under the Colgate doctrine. C. $100,000 in A.

D. In all of the states, according to the apportionment formulas of each, as the U.S. government is present in all

states.


headquarters to a State B office of an agency of the U.S. government. General has not established nexus with B.

State A does not apply a throwback rule. In which state(s) will the sale be included in the sales factor

numerator?

A. In all of the states, according to the apportionment formulas of each, as the U.S. government is present in all

states.

B. $100,000 in A.

C. $100,000 in B.

D. $0 in both A and B.


headquarters to a customer in B. This activity is not sufficient for General to create nexus with B. State A

applies a throwback rule, but State B does not. In which state(s) will the sale be included in the sales factor

numerator?

A. $0 in both A and B.

B. $100,000 in A.

C. $100,000 in B.

D. In both A and B, according to the apportionment formulas of each.


headquarters to a customer in B. This activity is not sufficient for General to create nexus with B. State B

applies a throwback rule, but State A does not. In which state(s) will the sale be included in the sales factor

numerator?

A. $0 in both A and B.

B. $100,000 in A.

C. $100,000 in B.

D. In both A and B, according to the apportionment formulas of each.

Britta Corporations entire operations are located in State A. Eighty percent ($800,000) of Brittas sales are made in A and the remaining sales ($200,000) are made in State B. B has not adopted a corporate income tax. If

A has adopted a throwback rule, the numerator of Brittas A sales factor is: A. $0.

B. $200,000.

C. $800,000.

D. $1,000,000.

The throwback rule requires that:

A. Sales of tangible personal property are attributed to the state where they originated, if the taxpayer is not

taxable in the state of destination.

B. Sales of tangible personal property are attributed to the sellers state, even if the taxpayer is not taxable in the state of destination.

C. Sales of services are attributed to the state of commercial domicile.

D. Capital gain/loss is attributed to the state of commercial domicile.

Given the following transactions for the year, determine Comp Corporations D payroll factor denominator. State D has adopted the principles of UDITPA.

Compensation of sales force $ 600,000

Compensation paid to independent contractors 300,000

Compensation paid to managers of nonbusiness rental property 100,000

Total compensation $1,000,000

A. $1,000,000.

B. $900,000.

C. $700,000.

D. $600,000.

Ting, a regional sales manager, works from her office in State W. Her region includes several states, as

indicated in the sales report below. Determine how much of Tings $300,000 compensation is assigned to the payroll factor of State W.

State Sales Generated Tings Time Spent There U $ 1,000,000 15%

V 5,000,000 55%

W 4,000,000 30%

$10,000,000 100%

A. $0.

B. $90,000.

C. $120,000.

D. $300,000.

Trayne Corporations sales office and manufacturing plant are located in State X. Trayne also maintains a manufacturing plant and sales office in State W. For purposes of apportionment, X defines payroll as all

compensation paid to employees, including elective contributions to 401(k) deferred compensation plans.

Under the statutes of W, neither compensation paid to officers nor contributions to 401(k) plans are included

in the payroll factor. Trayne incurred the following personnel costs.

State X State W Totals Wages and salaries for employees other

than officers $ 500,000 $300,000 $ 800,000

Salaries for officers 300,000 150,000 450,000

Contributions to 401(k) plans 200,000 50,000 250,000

Totals $1,000,000 $500,000 $1,500,000

Traynes payroll factor for State X is:

A. 100.00%.

B. 66.67%.

C. 62.50%.

D. 50.00%.

Net Corporations sales office and manufacturing plant are located in State X. Net also maintains a manufacturing plant and sales office in State W. For purposes of apportionment, X defines payroll as all

compensation paid to employees, including contributions to 401(k) deferred compensation plans. Under the

statutes of W, neither compensation paid to officers nor contributions to 401(k) plans are included in the

payroll factor. Net incurred the following personnel costs.

State X State W Totals Wages and salaries for employees other

than officers $ 500,000 $300,000 $ 800,000

Salaries for officers 300,000 150,000 450,000

Contributions to 401(k) plans 200,000 50,000 250,000

Totals $1,000,000 $500,000 $1,500,000

Nets payroll factor for State W is:

A. 50.00%.

B. 37.50%.

C. 33.33%.

D. 0.00%.

Bert Corporation, a calendar-year taxpayer, owns property in States M and O. Both M and O require that the

average value of assets be included in the property factor. M requires that the property be valued at its historical

cost, and O requires that the property be included in the property factor at its net depreciated book value.

Account Balances at

Beginning of Year

State M State O Totals

Inventories $200,000 $300,000 $ 500,000

Building & machinery (cost) 700,000 300,000 1,000,000

Accumulated depreciation (150,000) (50,000) (200,000)

Land 400,000 200,000 600,000

Totals $1,150,000 $750,000 $1,900,000

Account Balances at

Year-End


Inventories $ 400,000 $100,000 $ 500,000



Land 400,000 200,000 600,000

Totals $1,300,000 $700,000 $2,000,000

Annual rent payments $ 50,000 $ 25,000

Berts M property factor is:

A. 75.0%.

B. 66.7%.

C. 64.9%.

D. 64.5%.

Valdez Corporation, a calendar-year taxpayer, owns property in States M and O. Both M and O require that the

average value of assets be included in the property factor. M requires that the property be valued at its historical

cost, and O requires that the property be included in the property factor at its net depreciated book value.

Account Balances at

Beginning of Year


Inventories $ 200,000 $300,000 $ 500,000



Land 400,000 200,000 600,000

Totals $1,150,000 $750,000 $1,900,000

Account Balances at

Year-End


Inventories $ 400,000 $100,000 $ 500,000



Land 400,000 200,000 600,000

Totals $1,300,000 $700,000 $2,000,000

Valdezs O property factor is:

A. 35.0%.

B. 37.2%.

C. 39.5%.

D. 53.8%.

In the broadest application of the unitary theory, the U.S. unitary business files a combined tax return using

factors and income amounts for all affiliates:

A. Organized in the U.S.

B. Organized in NAFTA countries.

C. Organized anywhere in the world.

D. As dictated by the tax treaties between the U.S. and the other countries.

A taxpayer wishing to reduce the negative tax effects of the application of the unitary theory might:

A. Affiliate with a service division that shows an operating loss, like one in research and development.

B. Acquire a unitary affiliate in a country with a high wage structure.

C. Add a profitable entity to the unitary group.

D. a. and b.

In most states, a limited liability company (LLC) is subject to the state income tax:

A. As though it were a C corporation.

B. As though it were a unitary business.

C. As a flow-through entity, similar to its Federal income tax treatment.

D. LLCs typically are exempted from state income taxation.

A state sales tax usually falls upon:

A. Sales of groceries.

B. Sales of widgets made to out-of-state customers.

C. Sales of widgets made to the ultimate consumer of the product or service.

D. Sales of real estate.

A state sales tax usually falls upon:

A. The sale of a used dinette set sold at a rummage sale.

B. The sale of a dinette set by the manufacturer to a furniture retailer.

C. The sale of a case of Bibles by the publisher to a church bookstore.

D. The sale of a Bible to a member of the church.

E. All of the above are exempt transactions.

A use tax applies when a State A resident purchases:

A. A new automobile from a State A dealership.

B. A used automobile from the web site of a State A dealership.

C. A new automobile from a State B dealership, then using the car back at home.

D. A new automobile that is purchased from an online seller.

In conducting multistate tax planning, the taxpayer should:

A. Review tax opportunities in light of their effect on the overall business.

B. Exploit inconsistencies among the taxing statutes and formulas of the states.

C. Consider the tax effects of the plan after accounting for any new compliance and administrative costs that it

generates.

D. All of the above are true.

Parent and Junior form a unitary group of corporations. Parent is located in a state with an effective tax rate of

3%, while Juniors effective tax rate is 9%. Acting in concert to reduce overall tax liabilities, the group should: A. Execute an intercompany loan, such that Junior pays deductible interest to Parent.

B. Have Parent charge Junior an annual management fee.

C. Shift Parents high-cost assembly and distribution operations to Junior. D. All of the above are effective income-shifting techniques for a unitary group.

E. None of the above is an effective income-shifting technique for a unitary group.

Parent and Minor form a non-unitary group of corporations. Parent is located in a state with an effective tax

rate of 3%, while Minors effective tax rate is 9%. Acting in concert to reduce overall tax liabilities, the group should:

A. Have Parent charge Minor an annual management fee.

B. Shift Parents high-cost assembly and distribution operations to Minor. C. Execute an intercompany loan, such that Minor pays deductible interest to Parent.

D. All of the above are effective income-shifting techniques for a non-unitary group.

E. None of the above is an effective income-shifting technique for a non-unitary group.

Hendricks Corporation sells widgets in two states. State A levies a 9% effective tax rate, and State B levies a

3% rate. A and B have adopted sales-factor-only apportionment formulas. To reduce overall multistate income

tax liabilities, Hendricks should:

A. Move its home office from B to A.

B. Remove all stored inventory from A.

C. Establish a personal training center in A.

D. Convert to employee status the independent contractors that it uses to sell widgets in A.

For most taxpayers, which of the traditional apportionment factors yields the greatest opportunities for tax

reduction?

A. Payroll.

B. Property.

C. Sales (gross receipts).

D. Unitary.

Hopper Corporations property holdings in State E are as follows.

Item Property factor

valuation ($M)

Manufacturing equipment 100

Land held for potential appreciation 25

Manufacturing equipment that is not currently needed and sits idle 15

Manufacturing equipment that is not currently needed and is leased to another taxpayer 20

Compute the numerator of Hoppers E property factor.

A. $100 million.

B. $135 million.

C. $140 million.

D. $160 million.

The starting point in computing state taxable income generally is ____________________.

________________________________________

In determining taxable income for state income tax purposes, interest income from Federal bonds typically

constitutes a(n) ____________________ modification.

________________________________________

In determining taxable income for state income tax purposes, interest income from another states bonds typically constitutes a(n) ____________________ modification.

________________________________________

____________________ describe(s) the degree of business activity that must be present before a taxing

jurisdiction has the right to impose a tax on an entitys income. ________________________________________

Under Public Law 86-272, a state is prohibited from taxing a business if the only connection with the state is

the _____________________ of orders for sales of tangible personal property that are sent outside the state for

approval or rejection.

________________________________________

P.L. 86-272 ____________________ (does/does not) create nexus when the sales representative approves a

sale at the customers location. ________________________________________

P.L. 86-272 ____________________ (does/does not) create nexus when the seller inserts advertising flyers

into the Sunday newspaper that is sold in the state.

________________________________________

Apportionment is a means by which a corporations _________________________ income is divided among the states in which it conducts business.

________________________________________

Allocation is a method under which a corporations _________________________ income is directly assigned to the specific states where the income is derived.

________________________________________

Although apportionment formulas vary among jurisdictions, most states use the same three factors in the

formula. The factors are ____________________, ____________________, and ____________________.

________________________________________

In the apportionment formula, most states assign more than a one-third weight to the ____________________

factor.

________________________________________

State Q has adopted sales-factor-only apportionment for its corporate income tax. As a result, a

____________________ (larger/smaller) percentage of an out-of-state corporations income is assigned to tax in the state.

________________________________________

Under the UDITPAs ____________________ concept, sales are assumed to take place at the point of delivery, as opposed to the location at which the shipment originates.

________________________________________

When a _________________________ is in effect, out-of-state sales that are not subject to tax in the

destination state are pulled back into the sales factor numerator of the origination state.

________________________________________

Typically, the states payroll factor ____________________ (does/does not) include the salaries and bonuses paid to its corporate executives.

________________________________________

In computing the property factor, property owned by the corporation typically is valued at its

____________________, but without adjusting for depreciation.

________________________________________

Leased property, when included in the property factor, usually is valued at ____________________ times its

annual rental, even though the taxpayer does not own the asset.

________________________________________

A(n) ____________________ business operates in concert with its affiliated companies. As a result, the

affiliates data are included in the parents apportionment computations. ________________________________________

In ____________________ states, a(n) ____________________ election permits a multinational corporation to

elect to limit the reach of the states taxing jurisdiction to activities occurring within the boundaries of the United States.

________________________________________

Overall tax liabilities typically ____________________ (increase/decrease) if the members of a unitary group

begin to include affiliates that generate net operating losses.

________________________________________

In some states, an S corporation must withhold Federal income tax for the proportionate flowthrough income of

its shareholders who ____________________ (are/are not) state residents.

________________________________________

Several states allow the S corporation to file a(n) ____________________ income tax return, usually in the

form of a state-by-state spreadsheet, on behalf of its out-of-state shareholders.

________________________________________

Almost all of the states allow ____________________ treatment to an LLC for income tax purposes.

________________________________________

Typically, a sales/use tax is applied to a retail sale of ____________________ property.

________________________________________

A state sales/use tax is designed to be collected by the ____________________ (seller/purchaser) of the

product and then remitted to the state.

________________________________________

A ____________________ tax is designed to complement the local sales tax structure, to prevent the consumer

from making no- or low-tax purchases in another state, outside the U.S., or online, and then bringing the asset

into the state.

________________________________________

The sale of groceries to an individual probably is exempt from sales/use tax under the

_________________________ rule.

________________________________________

The ____________________ tax usually is applied at the city or county level, as its main source of revenue.

________________________________________

An ad valorem property tax is based on the assets current ____________________. ________________________________________

Compute Still Corporations State Q taxable income for the year.

Addition modifications $70,000

Allocated income total $80,000 Allocated income State Q $60,000 Allocated income State P $20,000 Apportionment percentage State Q 40% Federal taxable income $500,000

State tax credits $11,000

Subtraction modifications $30,000

Tax rate 5%

Hill Corporation is subject to tax only in State X. Hill generated the following income and deductions. State

income taxes are not deductible for X income tax purposes.

Sales $5,000,000

Cost of sales 2,000,000

State X income tax expense 160,000

Depreciation allowed for Federal tax purposes 1,000,000

Depreciation allowed for state tax purposes 800,000

Interest income on Federal obligations 50,000

Interest income on X obligations 200,000

Expenses related to carrying X obligations 10,000

a. The starting point in computing the X income tax base is Federal taxable income. Derive this amount.

b. Determine Hills X taxable income, assuming that interest on X obligations is exempt from X income tax.

c. Determine Hills taxable income, assuming that interest on X obligations is subject to X income tax.

Provide the required information for Orange Corporation, whose Federal taxable income totals $100 million.

Orange apportions 70% of its business income to State C. Orange generates $10 million of nonbusiness income

each year. Forty percent of that income is attributable to rentals of buildings located in C. Oranges business income this year totals $90 million.

a. State C taxes how much of Oranges business income? b. State C taxes how much of Oranges nonbusiness income? c. Explain your results.

Condor Corporation generated $450,000 of state taxable income from selling its product in States A and B. For

the taxable year, the corporations activities within the two states were as follows.

State A State B Total Sales $800,000 $200,000 $1,000,000

Property 300,000 0 300,000 Payroll 200,000 800,000 1,000,000

Condor has determined that it is subject to tax in both A and B. Both states utilize a three-factor apportionment formula that equally weights sales,

property, and payroll. The rates of corporate income tax imposed in A and B are 5% and 3%, respectively. Determine Condors state income tax

liability.

Milt Corporation owns and operates two facilities that manufacture paper products. One of the facilities is

located in State D, and the other is located in State E. Milt generated $1,200,000 of taxable income, comprised

of $1,000,000 of income from its manufacturing facilities and a $200,000 gain from the sale of nonbusiness

property located in E. E does not distinguish between business and nonbusiness property. D apportions business

income. Milts activities within the two states are outlined below.

State D State E Total Sales of paper products $4,500,000 $1,500,000 $6,000,000

Property 3,500,000 2,500,000 6,000,000

Payroll 1,500,000 1,000,000 2,500,000

Both D and E utilize a three-factor apportionment formula, under which sales, property, and payroll are equally weighted. Determine the amount of

Milts income that is subject to income tax by each state.

Dott Corporation generated $300,000 of state taxable income from selling its mapping software in States A and

B. For the taxable year, the corporations activities within the two states were as follows.

State A State B Total Sales $500,000 $1,500,000 $2,000,000

Property 250,000 0 250,000 Payroll 200,000 300,000 500,000

Dott has determined that it is subject to tax in both A and B. Both states utilize a three-factor apportionment formula which equally weights sales,

property, and payroll. The rates of corporate income tax imposed in A and B are 7% and 10%, respectively. Determine Dotts state income tax

liability.

Flip Corporation operates in two states, as indicated below. All goods are manufactured in State A. Determine

the sales to be assigned to both states to be used in computing Flips sales factor for the year. Both states follow the UDITPA and the MTC regulations in this regard.

State A State B Gross sales to purchasers in state $400,000 $350,000

Sales returns 9,000 11,000

Discounts allowed 21,000 31,000

Carrying charges collected back from customers, separately stated 20,000 10,000

Rental income 60,000* 25,000**

* Excess warehouse space, seasonal rental to a competitor.

** Land held for speculation.

Determine Driesers sales factors for States K, M, and N.

Drieser Corporations manufacturing facility, distribution center, and retail store are located in State K. Drieser sells its products to residents located in States K, M, and N.

Sales to residents of K are conducted through a retail store. Sales to residents of M are obtained by Driesers sales representative, who has the authority to solicit, accept, and approve sales orders. Residents of N can

purchase Driesers product only if they place an order online and arrange to take delivery of the product at Driesers shipping dock.

Driesers sales this year were reported as follows.

Sales to residents of State K $1,000,000

Sales to residents of State M 600,000

Sales to residents of State N 900,000

Total $2,500,000

Driesers activities within the three states are limited to those described above. All of the states have adopted a throwback provision and utilize a

three-factor apportionment formula under which sales, property, and payroll are equally weighted. K sources dock sales to the destination state.

Mercy Corporation, headquartered in F, sells wireless computer devices, including keyboards and bar code

readers. Mercys degree of operations is sufficient to establish nexus only in E and F. Determine its sales factor in those states.

State E applies a throwback rule to sales, while State F does not. State G has not adopted an income tax to date.

Mercy reported the following sales for the year. All of the goods were shipped from Mercys F manufacturing facilities.

Customer Customers Location This Years Sales NorCo E $ 60,000,000

Tools, Inc. F 20,000,000

UniBell G 50,000,000

U.S. Department of Defense All 50 U.S. States 20,000,000

Total $150,000,000

Garcia Corporation is subject to tax in States G, H, and I. Garcias compensation expense includes the following.

State G State H State I Total Salaries and wages for nonofficers $600,000 $500,000 $500,000 $1,600,000

Officers salaries 0 0 800,000 800,000

Officers salaries are included in the payroll factor for G and H, but not for I. Compute Garcias payroll factors for G, H, and I.

Kim Corporation, a calendar year taxpayer, has manufacturing facilities in States A and B. A summary of

Kims property holdings follows.

Beginning of Year State A State B Total

Inventory $ 300,000 $ 200,000 $ 500,000

Plant and equipment 2,200,000 1,500,000 3,700,000

Accumulated depreciation:

plant and equipment (1,200,000) (500,000) (1,700,000)

Land 500,000 600,000 1,100,000

Rental property* 900,000 300,000 1,200,000


rental property (200,000) (50,000) (250,000)

End of Year State A State B Total

Inventory $ 400,000 $ 100,000 $ 500,000

Plant and equipment 2,500,000 1,200,000 3,700,000


plant and equipment (1,500,000) (450,000) (1,950,000)

Land 600,000 400,000 1,000,000

Rental property* 900,000 300,000 1,200,000


rental property (300,000) (100,000) (400,000)

*Unrelated to Kims regular business and operations.

Determine Kims property factors for the two states. As statutes provide that the average historical cost of business property is to be included in the

property factor. Bs statutes provide that the property factor is based on the average depreciated basis of in-state business property.

Troy, an S corporation, is subject to tax only in State A. On Schedule K of its Federal Form 1120S, Troy

reported ordinary income of $2,000,000 from its business, municipal bond interest of $150,000, taxable interest

of $150,000, and charitable contributions of $300,000. A does not recognize S status, but it does follow the

Federal provisions with respect to the determination of taxable income for a corporation. Determine Troys A taxable income.

You are completing the State A income tax return for Quaint Company, LLC. Quaint operates in various states,

showing the following results.

Ordinary income $800,000

Net capital loss (60,000)

Interest income, IBM bond 40,000

In A, all interest is treated as business income. A uses a sales-only apportionment factor. Compute Quaints A taxable income.

State A All Other States Total Sales $800,000 $1,200,000 $2,000,000

Property (average cost) 250,000 2,000,000 2,250,000

Payroll 300,000 700,000 1,000,000

Pail Corporation is a merchandiser. It purchases overstock garments from various suppliers and sells the goods

in its State L retail store. Determine the total sales that are subject to the L consumer sales tax.

Sales to L residents $600,000

Sales to homeless shelter operated by a local church 80,000

Sales to residents who cross the border from nearby State M 100,000

Sales to a similar merchandiser, located in another L town 20,000

Indicate for each transaction whether a sales (S) or use (U) applies, or whether the transaction is nontaxable

(N). Where the laws vary among various states, assume that the most common rules apply. All taxpayers are

individuals.

a. A resident of State A purchases a computer in A.

b. A resident of State A purchases prescription medicine in A.

c. A resident of State B purchases a computer in A.

d. A church purchases office supplies in A.

e. A State A retailer purchases in B an item that will be in the inventory of its business.

f. A resident of State A purchases hardware from a retail home improvement store in A.

g. A business based in State A purchases vacant A land, to be held for a future expansion project.

h. A business based in State A purchases repair services from an A plumbing contractor.

Franz Corporation is based in State A (corporate income tax rate 10%). It sells its goods to customers in both A

and State B (corporate income tax rate 4%). Franzs state taxable income for the year is $1 million, 45% of which relates to B customers. Franzs level of activities in B is insufficient to create nexus there, but A has adopted a throwback rule as to multistate sales. Would Franz reduce its total state income tax liability by

creating nexus with B, say by allowing its sales force to make credit decisions? Elaborate.

Anders, a local business, wants your help in making a decision about a large capital investment. To assist your

client, list several tax and non-tax implications of the decision.

Your supervisor has shifted your responsibilities from the Federal corporate income tax to a multistate

corporate income tax practice. In what areas might your Federal income tax knowledge also be applicable in

your new assignment?

Compost Corporation has finished its computation of Federal taxable income. In State Q, the derivation of

state corporate taxable income starts with the Federal amount and makes a number of modifications. List at

least five such modifications that Compost is likely to encounter. In this regard, follow the general UDITPA

rules, and list both addition and subtraction modifications.

A number of court cases in the last several decades have involved the application of a states nexus rules concerning a business taxpayer. What is the significance of the term nexus when discussing state income

taxation?

Discuss how a multistate business divides up its corporate taxable income among the states in which it

operates. Hint: use the terms allocation and apportionment in your comments.

State Q wants to increase its income tax collections, but politically it would be unwise to raise taxes on in-state

individuals or businesses. Q currently follows all UDITPA rules and employs an equally weighted three-factor

apportionment formula. Q allocates nonbusiness income amounts.

Identify some changes to the income tax apportionment formula that would shift the scheduled income tax

increases to out-of-state businesses.

In international taxation, we discuss income sourcing rules and the permanent establishment doctrine. In

multistate taxation, an analogous term might be the ultimate destination concept. Define this term, and identify at least two of the most important exceptions to the general rule.

List at least five items that are included in the payroll factor of a typical state. Consider all forms of

compensation that an employee might receive. Apply the general UDITPA rules.

Bobby and Sally work for the same employer, Wooster Manufacturing, which makes brushes for artists and

painters. Bobby spends one-half of his time managing the companys speculative investment portfolio, and the other half working with the corporate treasurer in securing cash flow for manufacturing payrolls. Sally is a

foreman in the brush factory.

How are the salaries paid to Bobby and Sally treated in computing Woosters payroll factor? Apply the general UDITPA rules.

Identify some state/local income tax issues facing pass-through entities such as S corporations, partnerships,

and LLCs.

The sales/use tax that is employed by most U.S. states does not fall on all retail transactions. Identify at least

five sales/use tax exemptions that states often allow, eliminating certain transactions from the tax base.

You are preparing to make a presentation to a client who has some familiarity with state corporate income tax

rules. At a general level, list for the client the principles of multistate tax planning.

COMPREHENSIVE VOLUME--CHAPTER 24--MULTISTATE

CORPORATE TAXATION Key

1. FALSE

2. FALSE

3. TRUE

4. FALSE

5. FALSE

6. FALSE

7. TRUE

8. TRUE

9. FALSE

10. TRUE

11. TRUE

FALSE

FALSE

FALSE

FALSE

FALSE

TRUE

FALSE

FALSE

TRUE

TRUE

FALSE

TRUE

TRUE

TRUE

FALSE

TRUE

FALSE

FALSE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

FALSE

TRUE

TRUE

TRUE

TRUE

FALSE

FALSE

TRUE

FALSE

B

C

D

D

C

B

D

A

D

C

B

C

C

A

C

C

C

D

C

D

B

A

D

A

D

D

B

B

C

B

C

A

C

C

D

C

D

E

D

B

C

A

Federal taxable income

subtraction

addition

Nexus

solicitation

does

does not

business

nonbusiness

sales, property, payroll or property, payroll, sales or payroll, sales, property

sales

larger

ultimate destination

throwback rule

does

original cost or historical cost

eight or 8

unitary

unitary, water's edge

decrease

are not

composite or block

flow-through or pass-through or partnerships

tangible personal

seller

use

targeted item

property

value

State Q taxable income is computed as follows.

Federal taxable income $500,000

Addition modifications + 70,000

Subtraction modifications 30,000 State tax base $540,000

Allocated income total 80,000 Apportionable income $460,000

Apportionment percentage 40%

Apportioned income $184,000

Allocated income in-state + 60,000 State taxable income $244,000

Tax rate 5%

Gross income tax $ 12,200

Credits 11,000 Tax liability $ 1,200

a. Sales $5,000,000

Cost of sales 2,000,000 Cost recovery (Federal) 1,000,000 Interest income (Federal only) +50,000

X income tax expense 160,000 Federal taxable income $1,890,000

b. Federal taxable income $1,890,000

X income tax expense +160,000

Depreciation modification ($800,000 $1,000,000) +200,000 Interest income on Federal obligations 50,000 X taxable income $2,200,000

c. Federal taxable income $1,890,000

X income tax expense +160,000

Depreciation modification ($800,000 $1,000,000) +200,000 Interest income on Federal obligations 50,000 Interest income on X obligations +200,000

Expenses related to X obligations 10,000 X taxable income $2,390,000

a. $63,000,000 (70% $90 million).

b. $4,000,000 (40% $10 million).

c. Business income is apportioned to the state, using the apportionment formula. Nonbusiness income is allocated to the state using a

dollar-for-dollar assignment. In most states, business and nonbusiness income cannot be combined in applying the state income tax

formula.

Condors total state income tax liability is determined as follows.

STATE A INCOME TAX LIABILITY

Taxable income $450,000

Apportionment formula

Sales $800,000/$1,000,000 = 80.00%

Property $300,000/$300,000 = 100.00%

Payroll $200,000/$1,000,000 = 20.00%

Total 200.00%

State A apportionment factor (200.00%/3) 66.67%

Taxable income apportioned to A $300,000

A tax rate 5.00%

A tax liability $ 15,000

STATE B INCOME TAX LIABILITY



Sales $200,000/$1,000,000 = 20.00%

Property $0/$300,000 = 0% Payroll $800,000/$1,000,000 = 80.00%

Total 100.00%

State B apportionment factor (100.00%/3) 33.33%

Taxable income apportioned to B $150,000

B tax rate 3.0%

B tax liability $ 4,500

Total State Tax Liability

A tax liability $15,000

B tax liability 4,500

Total tax liability $19,500

STATE D TAXABLE INCOME

Income subject to apportionment (business income only) $1,000,000


Sales $4,500,000/$6,000,000 = 75.00%

Property $3,500,000/$6,000,000 = 58.33%

Payroll $1,500,000/$2,500,000 = 60.00%

Total 193.33%

State D apportionment factor (193.33%/3) 64.44%

Taxable income apportioned to D $ 644,400

Plus: Income allocated to D* 0 D taxable income $ 644,400

*Since the property for which the $200,000 gain was derived was located in E, such income is not allocated to D.

STATE E TAXABLE INCOME

Income subject to apportionment (business and nonbusiness income) $1,200,000


Sales $1,700,000*/$6,200,000* = 27.42%

Property $2,500,000/$6,000,000 = 41.67%

Payroll $1,000,000/$2,500,000 = 40.00%

Total 109.09%

State E apportionment factor

(109.09%/3)

36.36%

E taxable income $ 436,320

*Includes $200,000 gain on sale of nonbusiness property.

STATE A INCOME TAX

LIABILITY



Sales $500,000/$2,000,000 = 25.00%

Property $250,000/$250,000 = 100.00%

Payroll $200,000/$500,000 = 40.00%

Total 165.00%

State A apportionment factor

(165.00%/3)

55.00%

Taxable income apportioned to A $165,000

A tax rate 7.00%

A tax liability $ 11,550

STATE B INCOME TAX

LIABILITY



Sales $1,500,000/$2,000,000 = 75.00%

Property $0/$250,000 = 0% Payroll $300,000/$500,000 = 60.00%

Total 135.00%

State B apportionment factor (135.00%/3) 45.00%

Taxable income apportioned to B $ 135,000

B tax rate 10.00%

B tax liability $ 13,500

Total State Tax Liability

A tax liability $11,550

B tax liability 13,500

Total tax liability $25,050

State A State B Gross sales to purchasers in state $400,000 $350,000

Sales returns (9,000) (11,000)

Discounts allowed (21,000) (31,000)

Carrying charges collected from customers, separately stated 20,000 10,000

Rental income 60,000* 0** In-state sales $450,000 $318,000

* Excess warehouse space, related to business activities.

** Land held for speculation, nonbusiness income.

Sales Factor for State K

Sales to residents of K $1,000,000

Sales thrown back to K 900,000* Sales attributed to K $1,900,000

Sales factor: $1,900,000/$2,500,000 = 76.00%

* The throwback rule is an exception to the ultimate destination test. This rule ensures the taxation of sales made in a destination state that does not

have sufficient nexus under which to tax the corporation. Since Drieser is not subject to tax in N (the destination state), dock sales made to residents

of N are treated as in-state sales of K (the origination state).

Sales Factor for State M

Sales to residents of M $600,000

Sales factor: $600,000/$2,500,000 = 24.00%

Driesers salesperson has the authority to accept and approve sales to customers located in M. Accordingly, the activities of the salesperson exceed that immune under Public Law 86-272, thereby creating nexus. Drieser is subject to tax in M.

Sales Factor for State N

Since Driesers connection with State N is limited to residents of that state taking delivery of Driesers product at Driesers shipping dock after placing an online order, insufficient nexus is established to subject Drieser to taxation in N. Accordingly, a zero sales factor is created for N.

Summary

Because K has adopted a throwback provision, sales to residents of N are attributed to K, and they are used in determining the K sales factor. The

sales factors total to 100 percent. Drieser has no nowhere sales.

Because F has not adopted a throwback rule, the sales to customers in G and to the U.S. government are not included in either states sales factor. Mercy creates $70 million in nowhere sales.

E Sales factor = $60 million/$150 million = 40.00%

F Sales factor = $20 million/$150 million = 13.33%

G Payroll factor $600,000/$2,400,000 = 25.00%

H Payroll factor $500,000/$2,400,000 = 20.83%

I Payroll factor $500,000/$1,600,000 = 31.25%

Total of payroll factors 77.08%

Kim Corporations property factor is 61.90% for State A, and its property factor for State B is 44.53%. Under the statutes of A and B, nonbusiness property (i.e., the rental property) is not taken into consideration in computing the property factor. The basis for determining the average property in

A is historical cost, whereas the value employed for B is depreciated cost.

HISTORICAL COSTEXCLUDING NONBUSINESS PROPERTY

Average Property in A

Beg. of yr End of yr Total Average Inventory $ 300,000 $ 400,000 $ 700,000 $ 350,000

Plant and equipment 2,200,000 2,500,000 4,700,000 2,350,000

Land 500,000 600,000 1,100,000 550,000

Total $3,250,000

Average Property in B



Land 600,000 400,000 1,000,000 500,000

Total $2,000,000

Property Factor for A

DEPRECIATED BASISEXCLUDING NONBUSINESS ASSETS

Average property in A




plant & equipment (1,200,000) (1,500,000) (2,700,000) (1,350,000)

Land 500,000 600,000 1,100,000 550,000

Total $1,900,000

Average property in B




plant & equipment (500,000) (450,000) (950,000) (475,000)

Land 600,000 400,000 1,000,000 500,000

Total $1,525,000

Property factor for B

Since A does not recognize S corporation elections, Troy is subject to corporate income tax in the same manner as a C corporation. Accordingly,

Troys A taxable income is determined as follows.

Ordinary business income $2,000,000

Interest income, taxable only 150,000

Charitable contributions (limited to 10% of taxable income before

the contribution) (215,000)

A taxable income $1,935,000

LLCs allocate and apportion state taxable income in the same manner as do other entities. No entity-level tax liability is assessed. Quaint members

with nexus to State A will report, as determined in the LLCs charter, the following amounts on the entitys Schedule K. The A apportionment percentage is 40% ($800,000/$2,000,000).

Ordinary income $320,000

Net capital loss (24,000)

Interest income 16,000

Pail must collect L sales tax on $700,000. No tax is collected from sales to charities, nor to other entities who will then re-sell the goods. The sales to

M residents actually create an M use tax, as the goods presumably are worn by the customers in M. M residents should file a return to pay the M

sales tax and then claim a credit for the payment actually made to L. Compliance with this cross-border result is very low. M might better enforce this

rule if its sales tax were applied at a higher rate than Ls, and then perhaps only on big-ticket items like automobiles.

a. S.

b. N. Probably exempt as a targeted item.

c. U.

d. N. Probably exempt because of charitable status.

e. N. Probably exempt under the resale rule.

f. S.

g. N, not tangible personal property.

h. N, not tangible personal property.

Creating nexus with B would be an effective multistate tax planning move.

If No Nexus with B If Nexus with B A income tax ($550,000 A taxable income + $450,000 B taxable

income after throwback) 10% tax rate = $100,000

$550,000 10% = $55,000

B income tax $0, no nexus $450,000 4% = $18,000

Total state income tax $100,000 $73,000

Businesses operating in a multistate environment seldom make critical decisions based on tax factors alone. The following events might bring up

important state and local tax issues.

Location of a plant expansion or distribution center.

Increases in spending for high-tech or other equipment.

Concentration of sales activities using catalog and Internet exposure.

One

must

examin

e the

implica

tions of

this

decisio

n on

Anders

s state and

local

corpora

te

income

taxes,

includi

ng the

payroll,

propert

y, and

sales

factors;

sales/us

e tax

obligati

ons and

collecti

on

respons

ibilities

;

propert

y tax

and

other

busines

s

license

s and

fees;

and

income

tax

effects

on its

employ

ees and

contrac

tors.

In

additio

n, the

invest

ment

might

bring

about

change

s as to

Anders

s market

share

for its

product

s; price

levels

for

wages

and

supplie

Interactions between state and Federal income tax laws can be found in the following.

Most state taxable income computations for a corporation begin with a taxable income amount from one of the lines on the Federal Form

1120.

States are allowed to piggyback their income tax collections with the Federal income taxing process.

Most tax accounting periods and methods for state income tax purposes follow those of the Federal return.

State income tax modifications include the following commonly encountered items. Every states rules are unique, so thorough research is needed to complete a final list for Composts location.

Addition modifications

Municipal bond interest, especially for out-of-state issuances.

Cost recovery deductions, where the Federal deduction exceeds the states.

State income tax expense.

Federal and out-of-state net operating losses.

Subtraction modifications

U.S. Treasury interest income.

Cost recovery deductions, where the Federal deduction is less than the states.

State income tax refunds.

Federal income tax expense.

A U.S. state cannot levy an income tax on an out-of-state entity unless that entity has conducted a significant degree of business activity within the

states borders. Each state defines differently the degree of nexus (connection) that is required before the right to tax the business arises. Typically, sufficient nexus is present when a corporation sells goods or services within the state, owns or leases in-state property, employs personnel in the state,

or holds physical or financial capital there.

Lacking sufficient nexus, the state cannot place an income tax on the business. A state may define nexus differently for sales/use tax purposes.

Generally, business income is apportioned by a formula to the state(s) in which the income is derived, and nonbusiness income is allocated to the

state(s) of its situs. These income assignments are made into states with which the taxpayer has established nexus. An apportionment formula

generally is an average of the relative sales, property, and payroll activities of the taxpayer in a particular state. Allocation usually is made with

respect to the rental income, interest, dividends, and capital gains of the taxpayer.

Over-weighting the sales factor.

Sales-factor only apportionment.

Apportioning nonbusiness income.

Special apportionment formula for targeted industries, e.g., telecommunications, airlines.

Adoption of a unitary approach to out-of-state affiliates.

Under the ultimate destination concept, a sale of a tangible asset is sourced only to the sales factor of the state of the point of delivery, not the

location where the shipment is initiated. Exceptions to the ultimate destination concept include the following.

Different rules apply for sales of intangible assets and real estate.

When a dock sale shipment is used, the sale is assigned to the purchasers state, regardless of the shipping patterns.

If a state has adopted the throwback rule, the sale is sourced to the sellers state, where the ultimate destination rule would not subject the sale to income taxation.

The following items, among others, are included in the payroll factor.

Wages

Salary

Commissions

Fees

Other forms of compensation for services

Lodging, board, and other benefits that constitute Federal gross income

All states exclude payments for services made to independent contractors

Many states exclude 401(k) deferrals and other retirement contributions

A few states exclude compensation paid to corporate officers

Only compensation that is related to the production of business (apportionable) income is included in the payroll factor. Where an employee

contributes services related to both business and nonbusiness income, the compensation is prorated. Here, one-half of Bobbys salary is excluded from the payroll factor numerator and denominator, as it relates to nonbusiness income items, and Sallys full salary is included in both the numerator and the denominator.

Does the owner have nexus with every state in which the entity conducts business?

Does the entity have nexus with every state in which an owner resides?

To which state(s) is income assigned when an owner takes a distribution, liquidating or nonliquidating?

Does the state require entity-level income tax withholding for nonresident owners?

Does the state levy any entity-level taxes?

Most state and local governments allow the following exemptions from a consumer sales/use tax base.

Sales of services, rather than of tangible personal property.

Sales for resale.

Casual or occasional sales.

Sales to tax-exempt organizations, including governments and charities.

Sales of targeted items, such as groceries, health care goods, and business equipment.

Sales of manufacturing equipment.

Packaging and shipping materials used by a manufacturer.

State and local tax planning often involves modifications in the legal, functional, or technical means by which the taxpayer conducts business,

but they should be undertaken only after considering their nontax effects.

Establishing nexus in a low- or no-tax state often optimizes the multistate tax liability, while eliminating nexus in high-tax, nonunitary states can

accomplish the same objective. Holding companies for investment assets can take advantage of the states exemptions for certain interest and dividend income.

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