Question 1

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%). Franz's state taxable income for the year is $1 million, 45% of which relates to B customers. Franz's 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.

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Question 2

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

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Question 3

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.

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Question 4

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 sales tax.

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Question 5

What is the significance of the term nexus when discussing state income taxation?

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Question 6

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.

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Question 7

Mercy Corporation, headquartered in State F, sells wireless computer devices, including keyboards and bar code readers. Mercy's degree of operations is sufficient to establish nexus only in States 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 Mercy's F manufacturing facilities.

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Question 8

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.

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Question 9

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.

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Question 10

Determine Drieser's sales factors for States K, M, and N.
Drieser Corporation's 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 Drieser's sales representative, who has the authority to solicit, accept, and approve sales orders in State M. Residents of N can purchase Drieser's product only if they place an order online and arrange to take delivery of the product at Drieser's shipping dock.
Drieser's sales this year were reported as follows.
  
Drieser's 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. State K sources dock sales to the destination state.

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Question 11

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?

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Question 12

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.

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Question 13

Hambone Corporation is subject to the State E capital stock tax. The tax is levied at 2% of the entity's net worth that is apportioned to E. Hambone conducts 30% of its operations in State E. Hambone's current book balance sheet is as follows, with amounts in millions. Compute Hambone's liability for the E capital stock tax.

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Question 14

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.

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Question 15

Kim Corporation, a calendar year taxpayer, has manufacturing facilities in States A and B. A summary of Kim's property holdings follows.
  
Determine Kim's property factors for the two states. A's statutes provide that the average historical cost of business property is to be included in the property factor. B's statutes provide that the property factor is based on the average depreciated basis of in-state business property.

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Question 16

Garcia Corporation is subject to tax in States G, H, and I. Garcia's compensation expense includes the following.
  
Officers' salaries are included in the payroll factor for States G and H, but not for I. Compute Garcia's payroll factors for G, H, and I.

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Question 17

You are completing the State A income tax return for Quaint Company, LLC. Quaint operates in various states, showing the following results.
  
In A, all interest is treated as apportionable income. A uses a sales-only apportionment factor. Compute Quaint's A taxable income.

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Question 18

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 Troy's A taxable income.

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Question 19

Sylvia spends time working at the offices of her employer as a consultant to clients who are located in three different U.S. states. To which state(s)' payroll factor(s) is Sylvia's compensation assigned? Apply the general UDITPA rules.

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Question 20

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.

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Quiz 24: Multistate Corporate Taxation