Definitions Jurisdiction

A State’s Power to Impose a Tax

Nexus A Taxpayer’s

Contact with a State

A State’s Authority to Impose Income Tax

Owning Property in the state Maintaining an office in the state Deriving income from sources

within the state Doing business within the state

General Observations

Nexus for Income Tax Purposes Office in taxing state Employee(s) in the taxing state Property in the taxing state—owned or leased.

Economic Presence Nexus issue of the 21st century Geoffrey, Inc. v South Carolina Tax Commission

(1993) was a landmark case in this area.

State C Corporation Income Tax Formula

Federal corporate income tax base± State adjustments= Total corporate income tax base - Non-business income= Total apportionable state incomeX State apportionment percentage= State apportioned business income+ Allocated non-business income= State income tax baseX Statutory Income tax rate= State income tax- Credits= Net State Tax

Key Conformity Issues

30% Bonus Depreciation State “soak up” estate taxes Adoption of ACRS and MACRS Foreign Tax Payments Gross-Up Interest Deductions Inter-company Payments

More Conformity Issues

Interest on Federal Obligations Deductions for State Income Tax

Payments Interest Income on State

Obligations Capital Gains and Losses Tax Credits and Incentives

What is Non-business income?

Presumption in some states—Investment income is business income.

Non-Business Income Interest Dividends Rentals Royalties Some Capital Gains

Apportionment Formulae for Business Income

Most states, three-factor equal weights Other states—various

CA,CT,FL,IL,MA, MN (75-12.5-12.5)NC,NY,WV,WI—Double weight sales (trend)IA—100% sales

Planning—non uniformity of formulae Avoid sales in states with double weighted

sales factors Avoid sales in states with throwback rules

Individual Taxation States with no individual income

tax Alaska, Florida, Texas, South Dakota,

Nevada, Washington & Wyoming

States with a limited individual income tax

New Hampshire, Tennessee

Individual Income Tax Rates

State income tax is a percentage of the Federal income tax (North Dakota)

Flat rates (Michigan) Most common approach

Progressive rates (Iowa, Minnesota)

State Scope of Taxing Power

Residents When does residence begin? Flow through income Computational Methods (Federal

Taxable Income/Federal AGI/Taxable Income Defined by State Law); Modifications, [Allocation and Apportionment],Exemptions

Part-Year Residents

State Scope of Taxing Power (Continued) Non residents

Due process clause Commuters, traveling sales

representatives Flow-through income Professional athletes Computational Methods

Non resident returns Composite (block) returns for non resident

partners and shareholders

Sales Tax Defined

Sales Tax Imposed on the retail sale of

tangible personalty or services within the taxing jurisdiction

Use Tax Defined

Use Tax Imposed on the possession, use,

storage, or consumption of tangible personal or services within the taxing jurisdiction

Use Tax Illustration

Doris O’Brien Resident of State A

Purchases $ 30,000 of goods Pays $ 1,200 sales tax (*)

$ 30,000 X 6.5%$ 1,950 (1,200)$ 750 net tax due

Retail Sales Tax – The Basics An Overview

Sale must take place within the territorial boundaries of the taxing jurisdiction

Sale must be of tangible personal property Intangibles, real property and services

generally excluded A planning issue for mixed activities

(property & services) If there is any doubt collect the tax If the issue is material, seek a letter ruling

from DOR

Measure of the Sales and Use Tax

Gross Receipts do not include: Cash discounts Returns and allowances Transportation charges—separately

stated Trade-ins Finance and service charges Bad debts

Administration of Sales and Use Taxes

Reporting Obligations Fiduciary Responsibilities to Report,

Collect and Remit the Taxes Reporting Obligations

Register Business File Tax Returns

Returns Due Dates—vary by jurisdiction and

amount Content

Administration of Sales and Use Taxes

Rates State Counties and Cities Definitions a key consideration in applying rates

Recordkeeping Regular books of accounts Invoices to document taxes paid Contracts and purchase orders Bills of lading Support for credit returns and bad debt write offs Exemption and resale certificates to support

exempt transactions

Administration of Sales and Use Taxes

Audits State agencies; audit may be industry

specific Block samples and Random samples 3 year Statute of Limitations

Property Taxes

The Property Tax Base Real property taxes

Imposed on land, buildings, and improvements on the land.

Value determined the county assessor based on one of three methods

Market value Percentage of market value Classified assessment level

Value remains constant unless there are changes in market value, modifications in size or quality, or there is a general revaluation

Property Taxes Tangible Personal Property

Valued annually as of a specific assessment date

Taxpayers file annual property tax reports which show by class of property, the original cost of the asset by year of acquisition.

Base value determined by comparables, adjusted to arrive at final value

Property Taxes Challenging the Assessment

Property is classified as real or personal based on the definitions provided by state statute. Process of differentiation is called cost segregation.

Taxpayers can challenge the assessment based on whether:

Property is properly classified Property is not specifically exempt from the

tax base Property is correctly valued

Property Taxes—Exempt Property Great variation among local jurisdictions in

terms of specific exemptions Common Exemptions

Agricultural land Government property Education and library property Health care property Religious property Cemeteries Property of widows, widowers, veterans,

homeowners, the elderly and disabled Various other not for profit organizations

Property Taxes--Valuation Important Issues

Assessor’s Identification of Property Self declaration or rendition prepared by

the business Review of government filings

Income tax returns Business license lists Airport & marina lists Charters and permits

Audits Desk, telephone, correspondence & physical

inspection

Property Taxes--Situs Important Issues

Stationary property taxed where located

Moveable property generally requires a permanent situs from which it operates in order to be taxed

In transit property moved by common carrier or private conveyance is excluded from taxation when not at the business premises.

Intangibles Tax Primarily assessed on the fair market

value of stocks and bonds Alabama Florida Kentucky Pennsylvania West Virginia (bonds only)

Or Deposits Kentucky Rhode Island

Administrative Issues Real Property—Generally No Reporting

Requirements Personal Property—Annual Tax Return

Based on the Values at the Assessment Date

Taxpayer may appeal to Assessor State Board of Equalization Courts

Unemployment Taxes—Basic Features

Federal Unemployment Tax 6.2% of the 1st $ 7,000

State Unemployment Tax Range between $ 7,000 and $ 25,800 Rates are determined through a rating

system (range of 0% to 11%) Rates increase based on unemployment

benefits claimed by former employees.

Special Tax Incentives Area Specific Incentives

Enterprise Zones Areas with higher than normal unemployment Tax credits and benefits

Sales and use tax credits for machinery purchases

Hiring credit NOL carry-forwards Expensing depreciable property Lender income deductions to zone businesses Preference points on state contracts Local and non tax incentives also important

Special Tax Incentives

Foreign Free Trade Zone Transactions occurring within the

zones are treated as if they occurred outside U.S. borders.

Sales/Use, Property Tax and Income Tax Adjustments and Credits

Example 8.2 provides an illustration.

Special Tax Incentives Employee-Related Incentives

Use in areas of high unemployment, often as part of enterprise zone incentives.

Work Opportunity Tax Credit, AFDC Credit, Welfare to Work Credit are examples.

Equipment Incentives Investment Credits (enterprise zone) Research and Development Credit

Building Restoration Incentives Restoration of old structures

Resource Related Credits Environment related

Privately Negotiated Incentives To encourage substantial investment in a new

location