State and Local Taxation

Question 1

State income taxes: how is it computed?

Answer 1

Starting with Federal taxable income and adjustments are made.

Question 2

Sales taxes: on what? Common example of exempt items?

Answer 2

On tangible personal property and some services.

Items bought for resale and that are used in manufacturing.

Question 3

What is use taxes?

Answer 3

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

Question 4

Property taxes: what is ad valorem taxes? Common exemption item? Re: intangible property?

Answer 4

• It is based on value of real property (realty taxes)
• Inventory.
• Some states tax intangible property, usually levied for property owned at a specific date.

Question 5

Franchise tax on what?

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, paid-in-capital, and retained earnings).

Question 6

What is Excise Tax? Examples? Applies only to consumer?

Answer 6

Levied on quantity of an item or sale price such as tax on gasoline, cigarettes, and alcohol.
Apply to both consumer and manufacturer.

Question 7

Unemployment tax? Limit? Rate varies on what?

Answer 7

Levied on taxable wages with a per employee limit (usually first $7,000).
Based on experience of employer.

Question 8

What are fees involved when incorporating in a state or registering to do business?

Answer 8

Incorporation fees.

Question 9

What is “domestic corporations”?

Answer 9

Corporations that are incorporated under the laws of a particular state.

Question 10

What is “foreign corporation”?

Answer 10

Corporations incorporated in another state.

Question 11

What is the supreme court case that provided 4 jurisdiction to tax tests?

Answer 11

Complete Auto Transit v. Brady.

Question 12

Jurisdiction to Tax: what are 4 tests?

Answer 12

1. Activity must have substantial nexus with state.
2. Fairly apportioned (state must be fair for the % of the activity in the state).
3. Not discriminate against interstate commerce.
4. Fairly related to services that the state provides.

Question 13

What are 4 criteria that result in nexus does not exist?

Answer 13

Activities are limited to;

• Soliciting sales of tangible personal property that are approved and shipped outside the state.
• Advertising
• Determining reorder needs of customers
• Furnishing autos to sales staff.

Question 14

What are examples of adjustments from Federal taxable income to compute state income tax? (every state has their specific rules. This is general rule).

Answer 14

• Dividends-received deduction
• Expenses related to interest earned on US bonds
• State income taxes
• Depreciation in excess of that allowed for state
• Municipal interest taxed for state purposes

Question 15

What are examples of items that decrease State taxable income?

Answer 15

Decreased by:

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

Question 16

Where is business income apportioned?

Answer 16

Among all states in which the corporations do business.

Question 17

Where is nonbusiness income is apportioned?

Answer 17

Only to the corporation’s home state (determined in various ways) or the state in which the income is earned.

Question 18

Business income is generally generated or from what? What are test that apply to each?

Answer 18

• Generated from business’ regular operations (transnational test) or
• From the sale of property that is an integral part of the business (functional test).

Question 19

What are nonbusiness income?

Answer 19

Generally include investment income and income from transactions not part of regular operations.

Question 20

Nonbusiness income: when investment income is generated from regular business operations, what is the classification?

Answer 20

Business income.

Question 21

Apportionment: business income: based on what? Do all state use same factors and weight each factor in the same way?

Answer 21

Apportions factors such as sales, property, and payroll.

No.

Question 22

Apportionment: business income: what are kind of businesses that different apportionment factors are used?

Answer 22

Financial institutions and service businesses.

Question 23

How is the sales factor computed? Property factor? Payroll factor?

Answer 23

• Sales: Total sales in state / Total sales.
• Property: Average value of property in state / All property.
• Payroll: Compensation paid or accrued in state / Total compensation paid or accrued.

Question 24

Question:
Corp has business in 5 states (A, B, C, D, E). Taxable income is $110,000 of which $10,000 is from income from specific transactions in A. Sales, property, and payroll are apportioned as 10%, 30%, 20%, 15%, and 25%, respectively.
How is taxable income apportioned among the states?

Answer 24

A: $10,000.
B: (110,000-10,000)x30%=30,000
C: 100,000x20%=20,000
D: 100,000x15%=15,000
E: 100,000x25%=25,000.

Question 25

What are pass-thru entities? What is the treatment of pass-thru entities in some states?

Answer 25

S corporations. Partnerships.

Do not recognize these entities and therefore, tax at the entity level (as C corporation).

Question 26

When a consolidated tax return is filed, which affiliated corporations should be included?

Answer 26

Only affiliated corporations that have nexus with the state.