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Exam 24: Multistate Corporate Taxation

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Question 1

Multiple Choice

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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 customer's inventory for specific product lines.
B) Using an independent contractor who acts as a manufacturer's 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.

E) B) and C)
F) A) and B)

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Question 2

Multiple Choice

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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.

E) B) and C)
F) All of the above

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Question 3

True/False

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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.

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

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.

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

The throwback rule requires that:

Match each of the following events, considered independently, to its likely effect on WillCo's various apportionment factors. WillCo is based in Q and has customers in Q, R, and S. To this point, WillCo has not established nexus with S. More than one choice may be correct. -WillCo completes the construction of production facilities in S.

Match each of the following items with the appropriate description, in determining whether sales/use tax typically must be collected. -Computer equipment purchased by a charity.

Garcia Corporation is subject to tax in States G, H, and I. Garcia's compensation expense includes the following. $\begin{array} { l r r r r } & \text { State C } & \text { State H } & \text { State I } & \text { Total } \\\text { Salaries and wages for nonoffioers } & \$ 600,000 & \$ 500,000 & \$ 500,000 & \$ 1,600,000 \\\text { Officers' salaries } & - 0 - & - 0 - & 800,000 & 800,000\end{array}$ 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.

P.L. 86-272 (does/does not) create nexus when the sales representative approves a sale at the customer's location.

Match each of the following items with the appropriate description, in applying the P.L. 86-272 definition of solicitation. -Making a decision as to the creditworthiness of customers.

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?

Zhao Company sold an asset on the first day of the tax year for $500,000. Zhao's 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 Zhao's Federal taxable income in determining the correct Taxable income for the typical state?

Match each of the following items with the appropriate description, in determining whether sales/use tax typically must be collected. -Textbook purchased by a State University student.

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

describe(s) the degree of business activity that must be present before a taxing jurisdiction has the right to impose a tax on an out­of­state entity's income.

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.

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

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.