Question 1

The sales factor in the UDITPA state income tax apportionment formula equals in-state sales divided by total sales.

Accepted Answer

This is correct according to the Uniform Division of Income for Tax Purposes Act (UDITPA), which is a formula used by many states to apportion business income for tax purposes. The sales factor is calculated by dividing in-state sales by total sales.

Question 2

A corporation is usually subject to tax by any state in which it engages in any business transactions.

Accepted Answer

False

Question 3

If Gamma Inc. is incorporated in Ohio and has its commercial domicile in Cleveland, the state of Ohio has jurisdiction to tax 100% of Gamma's business income.

Accepted Answer

False

Question 4

In the United States, corporations are subject only to taxes imposed by the federal government.

Accepted Answer

Corporations are subject to taxes imposed by both the federal government and state governments.

Question 5

All states assessing an income tax use the same formula for apportionment purposes.

Accepted Answer

While all states that assess an income tax use some form of apportionment to allocate income earned across state lines, the formulas used can vary widely. Some states use a formula based solely on the percentage of sales made within the state, while others consider a combination of sales, payroll, and property values. Additionally, the specific formula used can change from year to year as states adjust their tax codes.

Question 6

Non-resident firms selling tangible goods to in-state residents can use P.L. 86-272 to avoid having income tax nexus in a state.

Accepted Answer

P.L. 86-272 is a federal law that provides a safe harbor for certain activities that do not create state income tax nexus. One of these activities is the solicitation of orders for tangible personal property that is shipped from outside of the state to in-state customers. Therefore, non-resident firms that sell tangible goods to in-state residents may use P.L. 86-272 to avoid having income tax nexus in that state.

Question 7

Article 1 of the U.S. Constitution, referred to as the commerce clause, prohibits state governments from using a tax to discriminate against interstate commerce.

Accepted Answer

The commerce clause of the U.S. Constitution prohibits state governments from using a tax to discriminate against interstate commerce, as it is considered a violation of the Constitution's Commerce Clause. This has been established through various court rulings, including the landmark Supreme Court case of Gibbons v. Ogden in 1824.

Question 8

Luttrix Inc. does business in Nebraska (6% tax rate) and Colorado (3% tax rate). All other factors being equal, Luttrix will minimize state taxes if it constructs a new manufacturing plant in Colorado.

Accepted Answer

Colorado has a lower tax rate of 3% compared to Nebraska's tax rate of 6%, meaning that constructing a new manufacturing plant in Colorado will result in lower state taxes for Luttrix Inc.

Question 9

The sales factor in the UDITPA state income tax apportionment formula equals out-of-state sales divided by total sales.

Accepted Answer

The sales factor in the UDITPA (Uniform Division of Income for Tax Purposes Act) state income tax apportionment formula equals in-state sales divided by total sales.

Question 10

The payroll factor in the UDITPA state income tax apportionment formula always includes executive compensation.

Accepted Answer

The payroll factor in the UDITPA state income tax apportionment formula typically includes all compensation paid to employees, not just executive compensation.

Question 11

The UDITPA formula for apportioning income among states is based on four equally weighted factors.

Accepted Answer

The UDITPA (Uniform Division of Income for Tax Purposes Act) formula typically uses three equally weighted factors: property, payroll, and sales, to apportion income among states.

Question 12

Article 1 of the U.S. Constitution, referred to as the commerce clause, prohibits a state from charging an extra 10 cent tax per gallon on gasoline sold to trucks with out-of-state license plates.

Accepted Answer

Article 1 of the U.S. Constitution, also known as the commerce clause, gives Congress the power to regulate interstate commerce and prohibits states from discriminating against out-of-state businesses. Charging an extra tax on gasoline sold to trucks with out-of-state license plates would be a form of discrimination and a violation of the commerce clause.

Question 13

BiState Inc. conducts business in North Carolina and South Carolina. If BiState's apportionment percentage in North Carolina is 63%, its apportionment percentage in South Carolina can be no more than 37%.

Accepted Answer

The answer of BiState Inc. conducts business in North Carolina...

Question 14

International tax treaties generally allow a government to tax a non-resident firm that maintains a permanent residence in the treaty country.

Accepted Answer

This is the principle of "permanent establishment" which is a standard provision in most international tax treaties. If a non-resident firm has a permanent establishment in a treaty country, that country has the right to tax the income attributable to that establishment.

Question 15

Multi-State, Inc. does business in two states. Its apportionment percentage in state A is 63%. Its apportionment percentage in the other state can be no more than 37%.

Accepted Answer

The question does not provide any information on the minimum apportionment percentage in the other state, so we cannot assume that it is less than or equal to 37%. Therefore, it is false to say that "its apportionment percentage in the other state can be no more than 37%."

Question 16

The federal income tax deduction allowed for state income taxes paid decreases the cost of the state taxes.

Accepted Answer

The federal income tax deduction for state income taxes reduces the taxpayer's taxable income, thereby decreasing the overall cost of the state taxes.

Question 17

The UDITPA formula for state income tax apportionment consists of three factors: sales, payroll, and profit.

Accepted Answer

The UDITPA (Uniform Division of Income for Tax Purposes Act) formula for state income tax apportionment traditionally consists of three factors: sales, payroll, and property, not profit.

Question 18

According to Public Law 86-272, the sale of tangible goods to residents of a state is not sufficient to establish nexus in that state.

Accepted Answer

Public Law 86-272 established that the mere sale of tangible goods to residents of a state is not sufficient to establish nexus in that state. This law provides a safe harbor for out-of-state businesses engaged solely in the solicitation of sales of tangible personal property.

Question 19

If a corporation with a 35% marginal federal income tax rate pays $20,000 state income tax, the after-tax cost of the state tax is $13,000.

Accepted Answer

The after-tax cost of the state tax can be calculated as follows:

State tax paid: $20,000 
Federal tax savings: $20,000 x 0.35 = $7,000 
After-tax cost of state tax: $20,000 - $7,000 = $13,000

Therefore, the statement is true.

Question 20

Supplies, Inc. does business in Georgia (6% tax rate) and Alabama (5% tax rate). All other factors being equal, the company will minimize state taxes if it increases the compensation paid to its employees in Alabama.

Accepted Answer

Since Alabama has a lower tax rate than Georgia, increasing employee compensation in Alabama would result in lower state taxes for Supplies, Inc. overall.

Quiz 13: Jurisdictional Issues in Business Taxation