Question 1

Purchases of inventory for resale are typically exempt from sales and use taxes.

Accepted Answer

This is generally true, as sales and use taxes are intended to be a tax on final consumption, not on intermediate inputs for production or resale. However, the specific rules and exemptions may vary by state or locality, so it's important to consult with local tax authorities and/or a tax professional.

Question 2

The primary purpose of state and local taxes is to raise revenue to finance state and local government.

Accepted Answer

State and local taxes are primarily used to generate revenue needed to fund public services and infrastructure at the state and local levels, such as education, public safety, and transportation.

Question 3

All 50 states impose a sales and use tax system.

Accepted Answer

Not all 50 states impose a sales and use tax; for example, Alaska, Delaware, Montana, New Hampshire, and Oregon do not have a statewide sales tax.

Question 4

State tax law is comprised solely of legislative authority.

Accepted Answer

State tax law is not solely comprised of legislative authority; it also involves regulations from state tax agencies, interpretations by courts, and sometimes voter-approved measures, making it a combination of legislative, executive, and judicial inputs.

Question 5

The Wayfair decision held that an out-of-state mail-order company did not have sales tax collection responsibility because it lacked physical presence.

Accepted Answer

The Wayfair decision actually overturned previous rulings, stating that states can require out-of-state sellers to collect and remit sales tax even if they do not have a physical presence in the state.

Question 6

The sales and use tax base varies from state to state.

Accepted Answer

Each state sets its own sales tax rates and decides which goods and services are subject to sales and use tax, resulting in variations in the tax base from state to state.

Question 7

Failure by a seller to collect and remit sales taxes often results in a larger tax liability than failure to pay income taxes.

Accepted Answer

Sales taxes are collected at the point of sale and failure to collect and remit them can result in penalties, interest, and a larger tax liability. Income taxes, on the other hand, are paid on the income earned by the taxpayer, so failure to pay them may result in penalties and interest, but not necessarily a larger liability than what is owed.

Question 8

Businesses subject to income tax in more than one jurisdiction have the right to apportionment.

Accepted Answer

Businesses subject to income tax in more than one jurisdiction have the right to apportionment, which allows them to allocate or divide their taxable income among the jurisdictions where they operate based on certain rules or formulas. This helps avoid double taxation and ensures that each jurisdiction taxes only the portion of the business's income that is earned within its borders.

Question 9

Nondomiciliary businesses are subject to tax everywhere they do business.

Accepted Answer

The answer of Nondomiciliary businesses are subject to tax everywhere...

Question 10

Wyoming imposes an income tax on corporations.

Accepted Answer

Wyoming does not impose an income tax on corporations.

Question 11

Use tax liability accrues in the state where purchased property will be used when the seller of the property is not required to collect sales tax.

Accepted Answer

Use tax is typically owed to the state where the purchased property is used, especially when the seller does not collect sales tax.

Question 12

All states employ some combination of sales and use tax, income or franchise tax, or property tax to fund their government operations.

Accepted Answer

All states have some form of taxation to generate revenue for government operations.

Question 13

The Wayfair decision reversed the Quill decision, which had affirmed that out-of-state businesses must have physical presence within a state before the state may require the collection of sales taxes from in-state customers.

Accepted Answer

The Wayfair decision did reverse the Quill decision, allowing states to require the collection of sales taxes from out-of-state businesses regardless of physical presence.

Question 14

Economic presence always creates sales tax nexus.

Accepted Answer

Economic presence alone does not create sales tax nexus. It depends on the specific state's laws and thresholds for economic nexus. Some states have economic nexus thresholds based on sales or transactions, while others may have different criteria such as the number of in-state employees or the amount of in-state property. It is important to review each state's laws to determine when sales tax nexus is triggered.

Question 15

Commercial domicile is the location where a business is headquartered and from whence it directs its operations.

Accepted Answer

Commercial domicile is indeed the location where a business is headquartered and from whence it directs its operations.

Question 16

Businesses engaged in interstate commerce are subject to income tax in every state in which they operate.

Accepted Answer

Businesses engaged in interstate commerce are only subject to income tax in the states where they have a physical presence or "nexus" such as an office or employees. This is based on the Supreme Court's decision in Quill Corp. v. North Dakota (1992). However, there are ongoing debates and legal challenges regarding whether this standard should be updated to reflect the digital economy and e-commerce.

Question 17

Business income is allocated to the state of commercial domicile.

Accepted Answer

The answer of Business income is allocated to the state...

Question 18

Many states are either starting to or are in the process of expanding the types of services subject to sales tax.

Accepted Answer

Many states have recently expanded the types of services that are subject to sales tax. For example, some states have started taxing digital goods and services, such as streaming services and online purchases, while others have expanded the tax to include certain personal services like haircuts and massages.

Question 19

Businesses must collect sales tax only in states where they have sales tax nexus.

Accepted Answer

Sales tax nexus refers to the connection between a business and a state that requires the business to collect and remit sales tax in that state. A business must have a physical presence, economic nexus, or other factors that establish a connection with the state in order to be required to collect sales tax. Therefore, businesses should only collect sales tax in states where they have sales tax nexus.

Question 20

The state tax base is computed by making adjustments to federal taxable income.

Accepted Answer

This is true. States typically use federal taxable income as a starting point for computing state income tax liability, but then make adjustments to this amount to reflect differences in state tax laws and deductions.

Quiz 12: State and Local Taxes