Chapter 12 Flashcards by Daisy Daubert

What type of laws regulate state taxation?

Legislative Law
Administrative Law
Judicial Law

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What is included in legislative law in relation to state taxation?

state constitution
state tax code

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What is included in administrative law in relation to state taxation?

regulations
ruling

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What is included in judicial law in relation to state taxation?

State tax cases
Federal tax cases

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Commercial domicile

State where a business is headquartered and directs operations
Not necessarily where it is incorporated

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Nexus in relation to taxation

The sufficient (or minimum) connection between a business and a state that subjects the business to the state’s tax system.

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What is included in state and local taxes?

sale and use taxes
income taxes
property taxes

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Businesses are subject to state taxes if:

The state is the commercial domicile of the business
or
The taxpayer has nexus

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Causes sales tax nexus

Any physical presence in the state
Wayfair decision

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What is the Wayfair decision

Business must collect sales tax and remit it to the state (has sales tax nexus) if they have at least $100,000 in sales or at least 200 transactions a year in that state.

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What is sales tax on?

Tangible personal property, not services

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Who pays use tax

The buyer when they buy an item in another state that has a lower tax than the state they use the item in and the seller did not collect the additional tax, or the seller did not collect any tax due to lack of nexus in the case of online dealers.

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What criteria did the Supreme Court spell out for whether states can tax the income of non-domiciliary companies and to what extent they can tax them.

Sufficient connection or nexus
Only a fair portion of business income
Cannot discriminate against non-resident businesses
Fairly related to the services the state provides the business

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Public Law 86-272

Protects sellers of tangible personal property from income tax nexus if and only if:
1. Tax is based net income (not gross receipts or revenue)
2. Only sells tangible personal property in state (no services)
3. Activities in state are limited to the solicitation of sales
4. Orders are approved outside the state
5. Delivers goods from outside the state via common carrier

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Supreme Court determination of activities that constitute solicitation in Public Law 86-272

Any form of advertising
Carrying samples and promotional material for display or distribution without charge
Passing inquiries or complaints to home office
Checking customer’s inventory for reorder
Maintaining a sample room for two weeks or less (trade show rule)
Recruiting, training, and evaluating salespeople in home office or hotels
Owning or furnishing personal property and autos used in sales activities

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Supreme Court determination of activities that do not constitute solicitation in Public Law 86-272

Making repairs for customers
Collecting delinquent accounts
Investigating credit worthiness
Installing or supervising the installation of sold property
Training employees other than sales representatives
Approving or accepting orders
Repossessing property
Securing deposits
Maintaining and office other than a home office

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Multi-state Tax Commission (MTC) Factor Presence Nexus Standard for economic nexus for income tax

$50,000 of property or payroll in the state
$500,000 of sales
or
25% of total property, payroll, or sales

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Separate tax return state requirements

Require only those businesses/entities with nexus in the state to file an income tax return, even when a group of companies file a consolidated return

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Unitary tax return state requirements

Even companies not filing a federal consolidated return can be unitary for state tax purposes.
Include all members meeting the unitary criteria–whether they have nexus or not

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What did the Supreme Court identify as factors to determine if a group of businesses in unitary for tax purposes?

Functional integration (vertical or horizontal integration or knowledge transfer)
Centralization of management
Economies of scale (group discounts or other efficiencies due to size)

What does is mean to say unitary concept pervades activities in the entire income tax system?

Includes computing taxable income, computing apportionment percentages, and determining tax return filing requirements

State tax base equals

Federal taxable income +/- State tax adjustments

State (x) taxable income equals

State tax base x (percent apportioned + percent allocated)

Is business income apportioned or allocated?

apportioned

Is nonbusiness income apportioned or allocated?

allocated

Common positive adjustments from federal to state taxable income

1. state and local income taxes 2. state and local bond interest income from bonds in other states 3. Federal dividends-received deductions 4. Federal income tax refunds (in state that allow federal tax deductions) 5. Intercompany expenses associated with related persons (for separate-return states) 6. MACRS depreciation over state depreciation 7. Federal bonus depreciation

Common negative adjustments from federal to state taxable income

1. U.S. obligation interest income (T-bills, notes, and bonds) 2. State dividends-received deduction 3. Foreign dividends gross-up 4. State income tax refunds included on federal return 5. State depreciation over federal depreciation

Which positive adjustments to federal taxable income are used in most states?

State and local income taxes State and local bond interest income from bonds in other states Federal dividends-received deduction Federal bonus depreciation

Which negative adjustment to federal taxable income is used in all states?

U.S. obligation interest income

What do states base their apportionment formula for income on?

Sales Payroll and/or Property Ratio of sales, payroll, and/or property in state to total sales, payroll, and/or property everywhere

What does the sales factor in the apportionment formula for income by state include?

All gross business receipts net of returns, allowances and discounts

In determining sales factor in apportionment formula for income by state, where is tangible personal property sales sourced?

In the destination state or where the customer takes the property in dock sales if the company has nexus in those states. Otherwise, "thrown back" to state where the property is shipped/picked up.

In determining sales factor in apportionment formula for income by state, where is government sales sourced?

The state from which they were shipped.

In determining sales factor in apportionment formula for income by state, where service sales sourced?

The state where the services are performed excepted for California and Illinois.

In determining payroll factor in apportionment formula for income by state, what is included and excluded?

Includes: salaries, commissions, bonuses, and other forms of compensation Does not include amounts paid to independent contractors

In determining the payroll factor in apportionment formula for income by state, what if a worker works in more than one state?

Compensation is apportioned to state where the majority of that employee's work in performed

In determining the property factor in apportionment formula for income by state, what is included?

Real and tangible personal property--Not intangible property Only business property--Not rented investment property Property in transit in the state of destination Rented or leased business property (annual rent * 8)

In determining the property factor in apportionment formula for income by state, what values are used?

Average property values for the year in that state [(beginning + ending)/2] Property value at historical cost rather than adjusted basis

What is the model tax compact (MTC) apportionment formula for income by state?

add sales, payroll and property factors together and divide by 3 also called 3-factor

What is the double-weighted sales factor apportionment formula for income by state?

double sales factor then add to payroll and property factors and divide total by 4 also called 4-factor

What is the single- weighted sales factor apportionment formula for income by state?

Just use sales factor

To which state are interest and dividends allocated?

State of commercial domicile unless it is interest on working capital, which is business income.

To which state is rental income allocated?

The state where the property generating the rental income is located

To which state are royalties allocated?

The state where the property is used (if the business has nexus in that state; if not "throw-back"

To which state are capital gains from investment property allocated?

The state of commercial domicile

To which state are capital gains from the sell of rental property allocated?

The state where the rental property was located

Examples of nonincome-based taxes

Texas margin tax (lesser of gross margin or receipts) Washington Business & Occupation Tax (gross receipts)

Does having independent sales representatives in a state give the company sales tax nexus? Why or why not?

No, unless the independent representatives only represent that company. Usually independent representatives sell merchandise from various vendors and are not considered to be the agent of the vendor,

Does having sales people in a state create income tax nexus?

Yes. But they may be protected by Public Law 86-272 from having income tax liability.