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Exam 24: Multistate Corporate Taxation

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Question 21

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

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Question 22

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Overall tax liabilities typically (increase/decrease) if the members of a unitary group begin to include affiliates that generate net operating losses.

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Question 23

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Dott Corporation generated $300,000 of state taxable income from selling its mapping software in States A and B. For the taxable year, the corporation's activities within the two states were as follows. $\begin{array}{lrrr} & \text { State A } & \text { State B } & \text { Total } \\\text { Sales } & \$ 500,000 & \$ 1,500,000 & \$ 2,000,000 \\\text { Property } & 250,000 & -0- & 250,000 \\\text { Payroll } & 200,000 & 300,000 & 500,000\end{array}$ 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 Dott's state income tax liability.

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 corporation's 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. Adams's income attributed to X is:

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

A service engineer spends 80% of her time maintaining the employer's productive business property and 20% maintaining the employer's 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.

Net Corporation's 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. $\begin{array}{lrrr}&\text {State X}&\text {State W}&\text {Totals}\\\text { Wages and salaries for employees other }\\\text { than officers } & \$ 500,000 & \$ 300,000 & \$ 800,000 \\\text { Salaries for officers } & 300,000 & 150,000 & 450,000 \\\text { Contributions to } \S 401(\mathrm{k}) \text { plans } &200,000&50,000&250,000\\\text { Totals } & \$ 1,000,000 & \$ 500,000 & \$ 1,500,000\end{array}$ Net's payroll factor for State W is:

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:

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

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

An ad valorem property tax is based on the asset's current .

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.

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

Trayne Corporation's 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. $\begin{array}{lrrr}&\text {State X}&\text {State W}&\text {Totals}\\\text { Wages and salaries for employees other }\\\text { than officers } & \$ 500,000 & \$ 300,000 & \$ 800,000 \\\text { Salaries for officers } & 300,000 & 150,000 & 450,000 \\\text { Contributions to } \S 401(\mathrm{k}) \text { plans } &200,000&50,000&250,000\\\text { Totals } & \$ 1,000,000 & \$ 500,000 & \$ 1,500,000\end{array}$ Trayne's payroll factor for State X is:

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.

A(n) business operates in concert with its affiliated companies. As a result, the affiliates' data are included in the parent's apportionment computations.

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 construction business.

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?

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.