Deck 24: Multistate Corporate Taxation

Question 1

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

Answer 1

False

Question 2

A typical state taxable income subtraction modification is the interest income earned from another state's bonds.

Answer 2

False

Question 3

All of the U.S. states use an apportionment formula based on the sales, property, and payroll factors.

Answer 3

False

Question 4

Typically, sales/use taxes constitute about 20 percent of a state's annual tax collections.

Question 5

In most states, a taxpayer's income is apportioned on the basis of a formula measuring the extent of business contact, and allocated according to the location of property owned or used.

Question 6

All of the U.S. states have adopted a tax based on the net taxable income of corporations.

Question 7

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.

Question 8

A typical U.S. state piggybacks its collections of the corporate income tax, by letting the Federal government collect and remit the corresponding tax to the state.

Question 9

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

Question 10

Property taxes generally are collected by local taxing jurisdictions, not the state or Federal governments.

Question 11

Under P.L. 86-272, the taxpayer is exempt from state taxes on income resulting from the mere solicitation of orders for the sale of stocks and bonds.

Question 12

Typical indicators of income-tax nexus include the presence of customers in the state.

Question 13

Most states begin the computation of corporate taxable income with an amount from the Federal income tax return.

Question 14

An assembly worker earns a $50,000 salary and receives a fringe benefit package worth $15,000. The payroll factor assigns $65,000 for this employee.

Question 15

If a state follows Federal income tax rules, the state's tax compliance and enforcement become easier to accomplish.

Question 16

Double weighting the sales factor effectively decreases the corporate income tax burden on taxpayers based in the state, such as entities with in-state headquarters.

Question 17

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

Question 18

A state can levy an income tax on a business only if the business was incorporated in the state.

Question 19

Usually a business chooses a location where it will build a new plant based chiefly on tax considerations.

Question 20

A typical state taxable income addition modification is for the state's NOL allowed the taxpayer for the tax year.

Question 21

Most states exempt consumer purchases of groceries from the collection of the local sales tax.

Question 22

An LLC apportions and allocates its annual taxable income in the same manner used by any other business operating in the state.

Question 23

Typically included in the sales/use tax base is the purchase of tablet computers and cell phone equipment by a large manufacturing firm, whose sales force uses the items.

Question 24

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

Question 25

A unitary group of entities files a combined return that includes all of the affiliates' income and apportionment data.

Question 26

Typically exempt from the sales/use tax base is the purchase of tools by a manufacturer to make the widgets that it sells.

Question 27

S corporations flow-through income amounts to its shareholders, and most states require a withholding of shareholder taxes on the allocated amounts.

Question 28

The use tax is designed to complement the sales tax. A use tax typically covers purchases made out of state and brought into the jurisdiction.

Question 29

The property factor includes business assets that the taxpayer owns, but also those merely used under a lease agreement.

Question 30

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.

Question 31

In most states, Federal S corporations must make a separate state-level election of the flow-through status.

Question 32

Typically exempt from the sales/use tax base is the purchase of clothing from a neighbor's "garage sale."

Question 33

Typically exempt from the sales/use tax base is the purchase by a symphony orchestra of printed music for its players.

Question 34

Typically exempt from the sales/use tax base is the purchase of lumber by a do-it-yourself homeowner, when she builds a deck onto her patio. This exemption is known as the "homestead rule."

Question 35

The individual seller of shares of stock in Facebook is liable for sales tax on the transaction.

Question 36

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

Question 37

A taxpayer has nexus with a state for sales and use tax purposes if it has a physical presence in the state.

Question 38

A unitary business applies a combined apportionment formula, including data from operations of all of the affiliates.

Question 39

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

Question 40

Almost all of the states assess some form of consumer-level sales/use tax.

Question 41

Sales/use tax in most states applies to a restaurant meal.

Question 42

The typical local property tax falls on both an investor's principal residence and her stock portfolio.

Question 43

Zhao Company sold an asset on the first day of the tax year for $500,000. Zhao's Federal tax basis for the asset was $300,000. Because of differences in cost recovery schedules, the state regular-tax basis in the asset was $350,000. What adjustment, if any, should be made to Zhao's Federal taxable income in determining the correct taxable income for the typical state?

A) $0
B) ($50,000)
C) $50,000
D) $150,000

Question 44

Under P.L. 86-272, which of the following transactions by itself would create nexus with a state?

A) Order solicitation for a plot of real estate, approved and filled from another state.
B) Order solicitation for a computer, approved and filled from another state.
C) Order solicitation for a machine, with credit approval from another state.
D) The conduct of a training seminar for sales personnel as to how to install and operate a new software product.

Question 45

Multistate income tax planning can be effective for the taxpayer because:

A) Different states use different definitions of taxable income.
B) State income tax rates generally are steeply progressive.
C) Both a. and b.
D) Neither a. nor b.

Question 46

Some of the states use, in determining whether an out-of-state entity has income tax nexus:

A) A factor-presence test.
B) An economic presence test.
C) Both a. and b are used by certain states.
D) Neither a. nor b is used by the states.

Question 47

In the context of Federal and state corporate income taxation:

A) Many states collect their taxes using a "piggyback" on the Federal return.
B) Most state require that the taxpayer report to the state taxing agency the changes made to a return in a Federal audit.
C) Both a. and b.
D) Neither a. nor b.

Question 48

In determining a corporation's taxable income for state income tax purposes, which of the following does not constitute a subtraction from Federal income?

A) Interest on U.S. obligations.
B) Expenses that are directly or indirectly related to state and municipal interest that is taxable for state purposes.
C) The amount by which the state depreciation deduction exceeds the corresponding Federal amount.
D) The amount by which the Federal depreciation deduction exceeds the corresponding state amount.

Question 49

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:

A) $0.
B) $3,250,000.
C) $3,900,000.
D) $5,000,000.
E) $6,000,000.

Question 50

Flint Corporation is subject to a corporate income tax only in State X. The starting point in computing X taxable income is Federal taxable income. Flint's Federal taxable income is $750,000, which includes a $50,000 deduction for state income taxes. During the year, Flint received $10,000 interest on Federal obligations. X tax law does not allow a deduction for state income tax payments. Flint's taxable income for X purposes is:

A) $810,000.
B) $800,000.
C) $790,000.
D) $750,000.

Question 51

A capital stock tax usually is structured as an excise tax imposed on a corporation's "net worth," using financial statement data to compute the tax.

Question 52

Federal taxable income is used as the starting point in computing the state's income tax base, but numerous state adjustments or modifications generally are required to:

A) Reflect differences between state and Federal tax statutes.
B) Remove income that a state is constitutionally prohibited from taxing.
C) Allow for all of the states to use the same definition of taxable income.
D) a. and b.

Question 53

Which of the following is not immune from state income taxation, even if P.L. 86-272 is in effect?

A) Sale of office equipment that is used in the taxpayer's business.
B) Sale of office equipment that constitutes inventory to the purchaser.
C) Sale of a warehouse used in the taxpayer's business.
D) All of the above are protected by P.L. 86-272 immunity provisions.

Question 54

Under P.L. 86-272, which of the following transactions by itself would create nexus with a state?

A) Inspection by a sales employee of the customer's inventory for specific product lines.
B) Using a manufacturer's representative for the taxpayer through a sales office in the state.
C) Executing a sales campaign, using an advertising agency acting as an independent contractor for the taxpayer.
D) Maintenance of inventory in the state by an independent contractor under a consignment plan.

Question 55

The typical state sales/use tax falls on sales of both real and personal property.

Question 56

The model law relating to the assignment of income among the states for corporations is:

A) Public Law 86-272.
B) The Multistate Tax Treaty.
C) The Multistate Tax Commission (MTC).
D) The Uniform Division of Income for Tax Purposes Act (UDITPA).

Question 57

Ramirez Corporation is subject to income tax only in State a. Ramirez generated the following income and deductions.
Federal taxable income is the starting point in computing A taxable income. State income taxes are not deductible for A tax purposes. Ramirez's A taxable income is:

A) $495,000.
B) $500,000.
C) $545,000.
D) $595,000.

Question 58

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

Question 59

In determining state taxable income, all of the following are adjustments to Federal income except:

A) Federal net operating loss.
B) State income tax expense.
C) Fringe benefits paid to officers and executives.
D) Dividends received from other U.S. corporations.

Question 60

A city might assess a recording tax when a business takes out a mortgage on its real estate.

Question 61

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.
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?

A) ($50,000)
B) $50,000
C) $16,100
D) ($16,100)

Question 62

In the income tax apportionment formula, market-sourcing the sales factor means that:

A) Sales are sourced to the state of the seller.
B) Sales are sourced to the state of the customer.
C) Sales are sourced to the state of the seller's corporate headquarters, i.e., where the marketing department works.
D) Sales are sourced to the state(s) where the customer will use the product, i.e., to the customers markets.

Question 63

General Corporation is taxable in a number of states. This year, General made a $100,000 sale from its A headquarters to a customer in B. This activity is not sufficient for General to create nexus with B. State B applies a throwback rule, but State A does not. In which state(s) will the sale be included in the sales factor numerator?

A) $0 in A and $0 in B.
B) $100,000 in A.
C) $100,000 in B.
D) In both A and B, according to the apportionment formulas of each.

Question 64

General Corporation is taxable in a number of states. This year, General made a $100,000 sale from its A headquarters to the State B office of the FBI, the Federal Bureau of Investigation. In which state(s) will the sale be included in the sales factor numerator?

A) $0 in A and $0 in B.
B) $50,000 in A, with the balance exempted from other states' sales factors under the Colgate doctrine.
C) $100,000 in A.
D) $100,000 in B.

Question 65

The most commonly used state income tax apportionment formula is:

A) Sales factor only.
B) Sales factor double-weighted.
C) Sales factor equally weighted with property and payroll.
D) Payroll factor only.

Question 66

Typically, state taxable income includes:

A) Apportionable income only.
B) Different terms are used in the computation.
C) Both a. and b.
D) Neither a. nor b. Different terms are used in the computation.

Question 67

Generally, a taxpayer's business income is:

A) Apportioned.
B) Allocated.
C) Both a. and b.
D) Neither a. nor b.

Question 68

Simpkin 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. Simpkin'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.

Simpkin's apportionable income assigned to B is:

A) $1,000,000.
B) $533,333.
C) $475,000.
D) $0.

Question 69

Chipper Corporation realized $1,000,000 taxable income from the sales of its products in States X and Z. Chipper's activities establish nexus for income tax purposes only in Z, the state of its incorporation. Chipper's sales, payroll, and property among the states include the following.
X utilizes a sales-only factor in its three-factor apportionment formula. How much of Chipper's taxable income is apportioned to X?

A) $0
B) $333,333
C) $500,000
D) $1,000,000

Question 70

General Corporation is taxable in a number of states. This year, General made a $100,000 sale from its A headquarters to a customer in B. General has not established nexus with B. State A does not apply a throwback rule. In which state(s) will the sale be included in the sales factor numerator?

A) In all of the states, according to the apportionment formulas of each, as the U.S. government is present in all states.
B) $100,000 in A.
C) $100,000 in B.
D) $0 in A and $0 in B.

Question 71

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.
Z utilizes a double-weighted sales factor in its three-factor apportionment formula. How much of José's taxable income is apportioned to Z?

A) $1,000,000
B) $900,000
C) $180,000
D) $0

Question 72

Generally, nonapportionable income includes:

A) Sales of products manufactured by the taxpayer.
B) License fees for intangible assets collected by the taxpayer.
C) Both a. and b.
D) Neither a. nor b.

Question 73

Marquardt Corporation realized $900,000 taxable income from the sales of its products in States X and Z. Marquardt's activities establish nexus for income tax purposes in both states. Marquardt's sales, payroll, and property among the states include the following.

Z utilizes an equally weighted three-factor apportionment formula. Marquardt is incorporated in X. How much of Marquardt's taxable income is apportioned to Z?

A) $0
B) $225,000
C) $675,000
D) $3,000,000

Question 74

Britta Corporation's entire operations are located in State a. Eighty percent ($800,000) of Britta's sales are made in A and the remaining sales ($200,000) are made in State B. B has not adopted a corporate income tax. If A has adopted a throwback rule, the numerator of Britta's A sales factor is:

A) $0.
B) $200,000.
C) $800,000.
D) $1,000,000.

Question 75

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.
X utilizes an equally weighted three-factor apportionment formula. How much of José's taxable income is apportioned to X?

A) $120,000
B) $450,000
C) $780,000
D) $900,000

Question 76

In applying the typical apportionment formula:

A) The aggregate of state taxable incomes equals Federal taxable income.
B) The aggregate of state taxable incomes may not equal Federal taxable income.
C) When Federal taxable income is negative, all states' taxable incomes are negative.
D) When Federal taxable income is negative, aggregate state taxable incomes total to zero.

Question 77

Public Law 86-272:

A) Was written by the Multistate Tax Commission.
B) Provides nexus definitions for sales of stocks and bonds.
C) Provides nexus definitions for the sale of medical and legal services.
D) Was adopted by Congress.

Question 78

Helene 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. Helene'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.

Helene's apportionable income assigned to A is:

A) $0.
B) $266,667.
C) $311,100.
D) $1,000,000.

Question 79

General Corporation is taxable in a number of states. This year, General made a $100,000 sale from its A headquarters to a customer in B. This activity is not sufficient for General to create nexus with B. State A applies a throwback rule, but State B does not. In which state(s) will the sale be included in the sales factor numerator?

A) $0 in both A and B.
B) $100,000 in A.
C) $100,000 in B.
D) In both A and B, according to the apportionment formulas of each.

Question 80

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.

Cruz's apportionable income assigned to C is:

A) $1,000,000.
B) $273,333.
C) $200,000.
D) $0.