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Exam 24: Multistate Corporate Taxation

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Question 31

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Roughly 5% of all taxes paid by businesses in the United States are to state, local, and municipal jurisdictions.

A) True
B) False

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Question 32

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

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B) False

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Question 33

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In the income tax apportionment formula, market-sourcing the sales factor means that:

Helene Corporation owns manufacturing facilities in States A, B, and C. State A uses a three-factor apportionment formula under which the sales, property, and payroll factors are equally weighted. State B uses a three-factor apportionment formula under which sales are double-weighted. State C employs a single-factor apportionment factor based solely on sales. Helene's 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: $\begin{array} { l r r r r } & \text { State A } & \text { State B } & \text { State C } & \text { Totals } \\\text { Sales } & \$ 400,000 & \$ 800,000 & \$ 300,000 & \$ 1,500,000 \\\text { Payroll } & 100,000 & 150,000 & 50,000 & 300,000 \\\text { Property } & 200,000 & 200,000 & 200,000 & 600,000\end{array}$ Helene's apportionable income assigned to State A is:

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.

Kim Corporation, a calendar year taxpayer, has manufacturing facilities in States A and B. A summary of Kim's property holdings follows: $\begin{array} { r r r } &\text { State A } & \text { State B } & \text { Total } \\\text { Inventory }&\$ 400,000 & \$ 100,000 & \$ 500,000\end{array}$ $\begin{array} { lr r r } \text { Plant and equipment}&2,500,000 & 1,200,000 & 3,700,000 \\ \text {Accumulated depreciation:}&\\ \text {plant and equipment}&( 1,500,000 ) & ( 450,000 ) & ( 1,950,000 ) \\ \text {Land}& 600,000 & 400,000 & 1,000,000 \\ \text {Rental property*}&900,000 & 300,000 & 1,200,000\\ \text {Accumulated depreciation:}\\ \text {rental property}&(300,000)&(100,000)&(400,000)\\ \text {*Unrelated to Kim's regular business and operations.} \end{array}$ Determine Kim's property factors for the two states. State A's statutes provide that the average historical cost of business property is to be included in the property factor. State B's statutes provide that the property factor is based on the average depreciated basis of in-state business property.

Pail Corporation is a merchandiser. It purchases overstock garments from various suppliers and sells the goods in its State L retail store. $\begin{array}{lr}\text { Sales to State L residents } & \$ 600,000 \\\text { Sales to homeless shelter operated by a local church } & 80,000 \\\text { Sales to residents who cross the border from nearby State M } & 100,000 \\\text { Sales to a similar merchandiser located in another State L town } & 20,000\end{array}$ Determine the total sales that are subject to the State L sales tax.

Match each of the following items with the appropriate description in applying the P.L. 86-272 definition of solicitation. -Checking the customer's inventory to determine whether a reorder is needed.

Match each of the following items with the appropriate description in determining whether sales/use tax typically must be collected. -Earthmoving equipment used by the purchaser in a construction business.

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: $\begin{array}{lr}\text { Sales to residents of State } \mathrm{K} & \$ 1,000,000 \\\text { Sales to residents of State } \mathrm{M} & 600,000 \\\text { Sales to residents of State } \mathrm{N} & 900,000 \\\text { Total } & \$ 2,500,000\end{array}$ 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. Determine Drieser's sales factors for States K, M, and N.

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. -Q adopts a sales-only apportionment formula.

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 corporation's income is assigned to tax in the state.

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

Given the following transactions for the year, determine Comp Corporation's D payroll factor denominator. State D has adopted the principles of UDITPA. $\begin{array}{lr}\text { Compensation of sales force } & \$ 600,000 \\\text { Compensation paid to independent contractors } & 300,000 \\\text { Compensation paid to managers of nonbusiness rental property } & 100,000 \\\text { Total compensation } & \$ 1,000,000\end{array}$

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 modification, if any, should be made to Zhao's Federal taxable income in determining the correct taxable income for the typical state?

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

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

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

The starting point in computing state taxable income generally is .

Sales/use tax in most states applies to a restaurant meal.