Question 1

Troy, an S corporation, is subject to tax only in State A. On Schedule K of its Federal Form 1120S, Troy reported ordinary income of $2,000,000 from its business, municipal bond interest of $150,000, taxable interest of $150,000, and charitable contributions of $300,000. A does not recognize S status, but it does follow the Federal provisions with respect to the determination of taxable income for a corporation. Determine Troy's A taxable income.

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Question 2

A number of court cases in the last several decades have involved the application of a state's nexus rules
concerning a business taxpayer. What is the significance of the term nexus when discussing state income taxation?

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Question 3

Compost Corporation has finished its computation of Federal taxable income. In State Q, the derivation of state corporate taxable income starts with the Federal amount and makes a number of modifications. List at least five such modifications that Compost is likely to encounter. In this regard, follow the general UDITPA rules, and list both addition and subtraction modifications.

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Question 4

Bobby and Sally work for the same employer, Wooster Manufacturing, which makes brushes for artists and painters. Bobby spends one­half of his time managing the company's speculative investment portfolio, and the other half working with the corporate treasurer in securing cash flow for manufacturing payrolls. Sally is a foreman in the brush factory.
How are the salaries paid to Bobby and Sally treated in computing Wooster's payroll factor? Apply the general UDITPA rules.

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Question 5

Kim Corporation, a calendar year taxpayer, has manufacturing facilities in States A and B. A summary of Kim's
property holdings follows.
Beginning of Year
 $$\begin{array} { l r r r } 
& \text { State } A & \text { State } D & \text { Total } \
\text { Inventory } & \$ 300,000 & \$ 200,000 & \$ 500,000 \
\text { Plant and equipment } & 2,200,000 & 1,500,000 & 3,700,000 \
\text { Accumated depreciation: } & & & \
\text { plant and equipment } & ( 1,200,000 ) & ( 500,000 ) & ( 1,700,000 ) \
\text { Land } & 500,000 & 600,000 & 1,100,000 \
\text { Rental property* } & 900,000 & 300,000 & 1,200,000 \
\text { Accumulated depreciation: } & & & \
\text { rental property } & ( 200,000 ) & ( 50,000 ) & ( 250,000 )
\end{array}$$ 
End of Year
 $$\begin{array} { l c c c } 
& \text { State } A & \text { State } B & \text { Total } \
\text { Inventory } & \$ 400,000 & \$ 100,000 & \$ 500,000 \
\text { Plant and equipment } & 2,500,000 & 1,200,000 & 3,700,000 \
\text { Accumated depreciation: } & & & \
\text { plant and equipment } & ( 1,500,000 ) & ( 450,000 ) & ( 1,950,000 ) \
\text { Land } & 600,000 & 400,000 & 1,000,000 \
\text { Rental property* } & 900,000 & 300,000 & 1,200,000 \
\text { Accumulated depreciation: } & & & \
\text { rental property } & ( 300,000 ) & ( 100,000 ) & ( 400,000 )
\end{array}$$ 
*Unrelated to Kim's regular business and operations.
Determine Kim's property factors for the two states. A's statutes provide that the average historical cost of business property is to be included in the property factor. B's statutes provide that the property factor is based on the average depreciated basis of in-state business property.

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Question 6

In international taxation, we discuss income sourcing rules and the permanent establishment doctrine. In multistate taxation, an analogous term might be the "ultimate destination concept." Define this term, and identify at least two of the most important exceptions to the general rule.

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Question 7

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.

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Question 8

Mercy Corporation, headquartered in State F, sells wireless computer devices, including keyboards and bar code readers. Mercy's degree of operations is sufficient to establish nexus only in States E and F. Determine its sales factor in those states.
State E applies a throwback rule to sales, while State F does not. State G has not adopted an income tax to date. Mercy reported the following sales for the year. All of the goods were shipped from Mercy's F manufacturing facilities.
 $$\begin{array} { l c r } 
\text { Customer } & \text { Customer's Loention } & \text { This Year's Sales } \
\text { NorCo } & \text { E } & \$ 60,000,000 \
\text { Tools, Inc. } & F & 20,000,000 \
\text { UniBell } & \text { G } & 50,000,000 \
\text { U.S. Department of Defense } & \text { All 50.S. States } & 20,000,000 \
\text { Total } & & \$ 150,000,000
\end{array}$$

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Question 9

Identify some state/local income tax issues facing pass-through entities such as S corporations, partnerships, and LLCs.

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Question 10

Anders, a local business, wants your help in making a decision about a large capital investment. To assist your client, list several tax and non-tax implications of the decision.

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Question 11

Discuss how a multistate business divides up its corporate taxable income among the states in which it operates.
Hint: use the terms allocation and apportionment in your comments.

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Question 12

Garcia Corporation is subject to tax in States G, H, and I. Garcia's compensation expense includes the following.
 $$\begin{array} { l r r r r } 
& \text { State C } & \text { State H } & \text { State I } & \text { Total } \
\text { Salaries and wages for nonoffioers } & \$ 600,000 & \$ 500,000 & \$ 500,000 & \$ 1,600,000 \
\text { Officers' salaries } & - 0 - & - 0 - & 800,000 & 800,000
\end{array}$$ 
Officers' salaries are included in the payroll factor for States G and H, but not for I. Compute Garcia's payroll
factors for G, H, and I.

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Question 13

You are preparing to make a presentation to a client who has some familiarity with state corporate income tax rules. At a general level, list for the client the principles of multistate tax planning.

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Question 14

The sales/use tax that is employed by most U.S. states does not fall on all retail transactions. Identify at least five sales/use tax exemptions that states often allow, eliminating certain transactions from the tax base.

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Question 15

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.

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Question 16

Pail Corporation is a merchandiser. It purchases overstock garments from various suppliers and sells the goods in its State L retail store. Determine the total sales that are subject to the L consumer sales tax.
 $\begin{array}{llr}
  \text { Sales to L residents } &\$600,000\
 \text {  Sales to homeless shelter operated by a local church} &80,000\
 \text {  Sales to residents who cross the border from nearby State M} &100,000\
 \text { Sales to a similar merchandiser located in another $ \mathrm{L} $ town } &20,000\
\end{array}$

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Question 17

You are completing the State A income tax return for Quaint Company, LLC. Quaint operates in various states, showing the following results.
 $\begin{array}{lc}
\text { Ordinary income } & \$ 800,000 \
\text { Net capital loss } & (60,000) \
\text { Interest income, IBM bond } & 40,000
\end{array}$ 
In A, all interest is treated as business income. A uses a sales­only apportionment factor. Compute Quaint's A
taxable income.
 $\begin{array}{lrcc} 
& \text { State A } & \text { All Other States } & \text { Total } \
\text { Sales } & \$ 800,000 & \$ 1,200,000 & \$ 2,000,000 \
\text { Property (average cost) } & 250,000 & 2,000,000 & 2,250,000 \
\text { Payroll } & 300,000 & 700,000 & 1,000,000
\end{array}$

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Question 18

Your supervisor has shifted your responsibilities from the Federal corporate income tax to a multistate corporate income tax practice. In what areas might your Federal income tax knowledge also be applicable in your new assignment?

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Question 19

List at least five items that are included in the payroll factor of a typical state. Consider all forms of compensation that an employee might receive. Apply the general UDITPA rules.

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Question 20

State Q wants to increase its income tax collections, but politically it would be unwise to raise taxes on in-state individuals or businesses. Q currently follows all UDITPA rules and employs an equally weighted three-factor apportionment formula. Q allocates nonbusiness income amounts.
Identify some changes to the income tax apportionment formula that would shift the scheduled income tax increases to out-of-state businesses.

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Quiz 24: Multistate Corporate Taxation

A number of court cases in the last several decades have involved the application of a state's nexus rules concerning a business taxpayer. What is the significance of the term nexus when discussing state income taxation?