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Exam 24: Multistate Corporate Taxation

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Question 81

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Parent and Junior form a unitary group of corporations. Parent is located in a state with an effective tax rate of 3%, While Junior's effective tax rate is 9%. Acting in concert to reduce overall tax liabilities, the group should:

A) Execute an intercompany loan, such that Junior pays deductible interest to Parent.
B) Have Parent charge Junior an annual management fee.
C) Shift Parent's high­cost assembly and distribution operations to Junior.
D) All of the above are effective income-shifting techniques for a unitary group.
E) None of the above is an effective income-shifting technique for a unitary group.

F) A) and C)
G) A) and D)

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Question 82

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State and local politicians tend to apply new and increased taxes to taxpayers who are visitors to the jurisdiction, such as a tax on auto rentals, because the taxpayer cannot vote to reelect the lawmaker.

A) True
B) False

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Question 83

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Typically exempt from the sales/use tax base is the purchase of prescription medicines by an individual.

Several states allow the S corporation to file a(n) income tax return, usually in the form of a state-by-state spreadsheet, on behalf of its out-of-state shareholders.

José Corporation realized $900,000 taxable income from the sales of its products in States X and Z. José's activities in both states establish nexus for income tax purposes. José's sales, payroll, and property among the states include the following. $\begin{array}{lrrr} & \text { State X } & \text { State Z } & \text { Totals } \\\text { Sales } & \$ 1,500,000 & \$ 1,000,000 & \$ 2,500,000 \\\text { Property } & 500,000 & -0- & 500,000 \\\text { Payroll } & 2,000,000 & -0- & 2,000,000\end{array}$ Z utilizes a double­weighted sales factor in its three­factor apportionment formula. How much of José's taxable Income is apportioned to Z?

Match each of the following terms with the appropriate description, in the state income tax formula. Apply the UDITPA rules in your responses. -Federal general business credit.

Match each of the following terms with the appropriate description, in the state income tax formula. Apply the UDITPA rules in your responses. -Deduction for advertising expenditures.

Roughly five percent of all taxes paid by businesses in the U.S. are to state, local, and municipal jurisdictions.

Match each of the following items with the appropriate description, in determining whether sales/use tax typically must be collected. -A meal eaten at a restaurant while conducting business.

Politicians frequently use tax credits and exemptions to create economic development incentives.

Match each of the following terms with the appropriate description, in the state income tax formula. Apply the UDITPA rules in your responses. -Treasury Bond interest income.

By making a water's edge election, the multinational taxpayer can limit the reach of unitary principles to the apportionment factors and income of its U.S. and E.U. affiliates.

Match each of the following terms with the appropriate description, in the state income tax formula. Apply the UDITPA rules in your responses. -Federal depreciation deduction in excess of state amount.

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. $\begin{array}{lr}\text { Sales to residents of State K } & \$ 1,000,000 \\\text { Sales to residents of State M } & 600,000 \\\text { Sales to residents of State N } & 900,000 \\\text { Total } & \$ 2,500,000\end{array}$ 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.

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.

Although apportionment formulas vary among jurisdictions, most states use the same three factors in the formula. The factors are ____________________, ____________________, and ____________________.

Boot Corporation is subject to income tax in States A and B. Boot's operations generated $200,000 of apportionable Income, and its sales and payroll activity and average property owned in each of the states is as follows. $\begin{array}{lrrr} & \text { State A } & \text { State B } & \text { Totals } \\\text { Sales } & \$ 200,000 & \$ 600,000 & \$ 800,000 \\\text { Payroll } & 100,000 & 50,000 & 150,000 \\\text { Property } & 200,000 & 50,000 & 250,000\end{array}$ How much more (less) of Boot's income is subject to A income tax if, instead of using an equally weighted three­ Factor apportionment formula, A uses a formula with a double-weighted sales factor?

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

Given the following transactions for the year, determine Comp Corporation's D payroll factor denominator. State D Has adopted the principles of UDITPA. Compensation of sales force $ 600,000 Compensation paid to independent contractors 300,000 Compensation paid to managers of nonbusiness rental property 100,000 Total compensation $1,000,000

Almost all of the states allow treatment to an LLC for income tax purposes.