Multijurisdictional Tax Issues

Question 1

State Income Taxes

Answer 1

Starting point is usually federal taxable income and then adjustments are made

Question 2

Sales Taxes

Answer 2

Levied on tangible personal property and some services; exemptions vary by state but usually include items bought for resale and that are used in manufacturing

Question 3

Use Taxes

Answer 3

Levied on the use of tangible personal property that was NOT purchased in the state

Question 4

Property Taxes

Answer 4

ad valorem taxes based on the value of real property (realty taxes) and personal property (personalty taxes)

There are usually exemptions for property such as inventory

A few states ALSO tax intangible property, usually levied for property owned at a specific date

Question 5

Franchise Tax

Answer 5

Levied on the privilege of doing business in a state. Based on the value of the capital used in the jurisdiction (common stock, pic, and re)

Question 6

Excise Tax

Answer 6

Levied on the quantity of an item or sales price.

E.g. includes tax on gasoline, cigarettes, and alcohol

Can be charged to manufacturer or consumer

Question 7

Unemployment Tax

Answer 7

Levied on taxable wages with a per employee limit (typically 7,000)

The rate varies based on experience of the employer

Incorporation fees are charged for incorporating in a state or registering to do business in a state

Question 8

Domestic Corporation

Answer 8

entities incorporated under the laws of a particular state

foreign - corp incorporated in another state

Question 9

Complete Auto Transit V. Brady

Answer 9

Four tests for determining jurisdiction to tax

1. Activity must have substantial NEXUS in state
2. Fairly apportioned
3. NOT discriminate against interstate commercey
4. Fairly related to services that the state provides

Question 10

Nexus

Answer 10

*Does a state have the authority to levy a tax on a companies operation, if they do the co has created nexus in such state

NEXUS for taxing a corps income does NOT exist IF an activity in the state is limited to:

• Soliciting sales of tangible personal property, approver/shipped outside the state
• Advertising
• Determining reorder needs
• Furnishing autos to sales staff

Question 11

State Taxable Income

Answer 11

Starting point is federal TI

Adjustments (PLUS)

• Dividends rec. deduction
• Expenses related to US bonds interest
• State income taxes
• Depreciation in excess of state allowance
• Municipal interest

Adjustments (MINUS)

• Federal income taxes paid
• Expenses related to municipal interest income
• Interest on US bonds
• Depreciation in addition to that allowed for federal purposes

Question 12

Business Income

Answer 12

apportioned among all the states in which the corporation does business

• Generated from businesses regular operations (transactional test)
• Generated from sale of property that is integral part of business (functional test)
• investment income generated by regular business operations

Question 13

Non-Business Income

Answer 13

is apportioned ONLY to the corp’s HOME state or the state in which the income was earned

Generally includes INVESTMENT income and income from transactions not part of regular operations

Question 14

Apportionment of Business Income

Answer 14

Among the states in which the income was earned usually based on factors such as SALES, PROPERTY, & PAYROLL

• Some states only use one
• *Different factors used for financial institutions and service businesses

Question 15

Pass-Thorugh Entities

Answer 15

Some states do NOT recognize SCorp election; tends to be those that do not have personal income tax

Some tax partnerships at entity level and do NOT flow through

Question 16

Treaties

Answer 16

Between the US and other countries generally override the tax provision in the US tax law or foreign tax law

Question 17

Foreign Taxpayers

Answer 17

Usually taxed only on US source income

Question 18

US Taxpayers

Answer 18

Taxed on ALL income earned anywhere in the world

Question 19

Earned Income

Answer 19

IS foreign source if EARNED in a foreign country and US source if earned domestically

Question 20

Unearned Income

Answer 20

IS foreign source IF received from a foreign resident or for property that is used in a foreign country

Question 21

Interest Income

Answer 21

US source if recieved from

• US Gov’t
• Non-Corp US residents
• Domestic Corps

Question 22

Dividend Income

Answer 22

US Source IF
from US corps

Foreign if from foreign corp

Question 23

CFC - Controlled Foreign Corporations

Answer 23

A foreign corp for which more than 50% of the voting power or value of stock is owned by US shareholders on any day of the tax year of the foregn corp

US shareholder may be taxed on CFC income as a constructive dividend

• Main types of income taxed constructively =
  1. Not connected economically to the country in which it is organized
  2. Income from insuring the risk of loss from outside the country in which it is organized

Question 24

Prevention of Double Taxation

Answer 24

1. Foreign income taxes paid are an itemized deduction for individuals
2. A credit may be claimed for foreign taxes paid
3. Certain individuals can elect to exclude foreign-earned income (bona-fide resident of foreign country or home lived in for 330days)

Question 25

Foreign Tax Credit

Answer 25

= [US tax on WW Income * Foreign TI]/WW TI

Carried back 1 year, forward 10 years
***Usually preferred from deduction