Deck 16: Multistate Corporate Taxation

Question 1

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

Answer 1

True

Question 2

A typical state taxable income addition modification is the interest income from U.S. Treasury bonds.

Answer 2

False

Question 3

States collect the most tax dollars from the corporate income tax.

Answer 3

False

Question 4

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

Question 5

Nonbusiness income includes dividends received from investment securities.

Question 6

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

Question 7

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

Question 8

State and local politicians tend to apply new and increased taxes to taxpayers who are visitors to the jurisdiction and cannot vote to reelect the lawmaker.

Question 9

A state cannot levy a tax on a business unless the business was incorporated in the state.

Question 10

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 11

A typical state taxable income addition modification is the Federal net operating loss (NOL) deduction.

Question 12

Most of the U.S. states have adopted an alternative minimum tax, similar to the Federal system.

Question 13

A state or local tax on a corporation's income might be called a franchise tax or a business privilege tax.

Question 14

Double weighting the sales factor effectively increases the tax burden on taxpayers based in the state, such as corporations with in-state headquarters.

Question 15

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

Question 16

The corporate income tax provides about 5 percent of the annual tax revenues for the typical U.S. state.

Question 17

Politicians use tax devices to create economic development incentives.

Question 18

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 in-state realty.

Question 19

All of the U.S. states use the same apportionment formula and factors.

Question 20

Typical indicators of nexus include the presence of employees based in the state, and the ownership or lease of realty there.

Question 21

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

Question 22

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

Question 23

Most states waive the collection of sales tax on groceries.

Question 24

A service engineer spends 60% of her time maintaining the employer's productive business property and 40% maintaining the employer's nonbusiness rental properties. This year, her compensation totaled $90,000. The payroll factor assigns $54,000 to the state in which the employer is based.

Question 25

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

Question 26

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

Question 27

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

Question 28

Most states' consumer sales taxes apply directly to the final purchaser of the taxable asset, but the seller remits the tax to the state treasury.

Question 29

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

Question 30

A unitary business is treated as a single entity for state tax purposes, with a combined apportionment formula including data from all of the operations of the business.

Question 31

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

Question 32

Typically included in the sales/use tax base is the purchase of computer and cell phone equipment by a large consulting firm that is incorporated in the state.

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

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

Question 35

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.

Question 36

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 37

A few states recognize an entity's S corporation status, such that taxable income flows through directly to shareholders, but they also assess a state-level tax on the entity.

Question 38

S corporations must withhold taxes on the portions of the entity's income allocated to its out-of-state shareholders.

Question 39

An assembly worker earns a $30,000 salary and receives a fringe benefit package worth $15,000. The payroll factor assigns $30,000 for this employee.

Question 40

By making a water's edge election, the multinational taxpayer can limit the reach of the unitary theory to U.S.-based factors and income.

Question 41

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

Question 42

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 an independent contractor who acts as 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 43

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

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

Question 44

Wailes Corporation is subject to a corporate income tax only in State X. The starting point in computing X taxable income is Federal taxable income. Wailes' Federal taxable income is $750,000, which includes a $75,000 deduction for state income taxes. During the year, Wailes received $20,000 interest on Federal obligations. X tax law does not allow a deduction for state income tax payments. Wailes' taxable income for X purposes is:

A) $825,000.
B) $805,000.
C) $750,000.
D) $680,000.

Question 45

Norman 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, Norman has rented 20% of its Y facility to an unaffiliated corporation. Norman generated $1,000,000 net rental income and $2,000,000 income from manufacturing. Norman is incorporated in Y. For X and Y purposes, rental income is classified as allocable nonbusiness income. By applying the statutes of each state, Norman determined that its apportionment factors are .65 for X and .35 for Y.
Norman's income attributed to X is:

A) $0.
B) $1,000,000.
C) $1,300,000.
D) $2,000,000.
E) $3,000,000.

Question 46

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

Question 47

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 48

Use tax would be due if an individual purchased an auto in State A and used it at his home in State
B.

Question 49

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 50

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 Federal deduction for depreciation exceeds the depreciation deduction permitted for state tax purposes.
D) The amount by which the state loss from the disposal of assets exceeds the Federal loss from such disposal.

Question 51

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

Question 52

Kurt Corporation realized $900,000 taxable income from the sales of its products in States X and Z. Kurt's activities establish nexus for income tax purposes in both states. Kurt's sales, payroll, and property among the states include the following. Z utilizes an equally weighted three-factor apportionment formula. Kurt is incorporated in X. How much of Kurt's taxable income is apportioned to Z?

A) $0.
B) $150,000.
C) $900,000.
D) $2,000,000.

Question 53

In most states, medical services are exempt from the sales/use tax base.

Question 54

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

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

Question 55

Perez Corporation is subject to tax only in State
A) $400,000.

A) Perez 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. Perez's A taxable income is:
B) $450,000.
C) $600,000.
D) $650,000.

Question 56

Sales/use tax nexus is established for the taxpayer by the sales-solicitation activities of an independent contractor acting on the taxpayer's behalf.

Question 57

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

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

Question 58

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

Question 59

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

A) Order solicitation for a computer, approved and filled from another state.
B) Order solicitation for a marketable security, 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 customers as to how to install and operate a new software product.

Question 60

Bulky Company sold an asset on the first day of the tax year for $500,000. Bulky'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 $375,000. What adjustment, if any, should be made to Bulky's Federal taxable income in determining the correct taxable income for the typical state?

A) $75,000.
B) $25,000.
C) ($75,000).
D) $0.

Question 61

Simpkin Corporation owns manufacturing facilities in States A, B, andC. 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) $611,100. B. $600,000.
C) $500,000.
D) $458,300.
E) $444,400.

Question 62

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 63

José Corporation realized $600,000 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) $600,000.
B) $120,000.
C) $80,000.
D) $0.

Question 64

Valdez Corporation, a calendar-year taxpayer, owns property in States M and O. Both M and O require that the average value of assets be included in the property factor. M requires that the property be valued at its historical cost, and O requires that the property be included in the property factor at its net depreciated book value. Valdez's O property factor is:

A) 35.0%.
B) 37.2%.
C) 39.5%.
D) 53.8%.

Question 65

In the broadest application of the unitary theory, the U.S. unitary business files a combined tax return using factors and income amounts for all affiliates:

A) Organized in the U.S.
B) Organized in NAFTA countries.
C) Organized anywhere in the world.
D) As dictated by the tax treaties between the U.S. and the other countries.

Question 66

Judy, a regional sales manager, has her office in State X. Her region includes several states, as indicated in the sales report below. Determine how much of Judy's $200,000 compensation is assigned to the payroll factor of State X.

A) $0.
B) $66,667.
C) $80,000.
D) $200,000.

Question 67

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 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 68

Given the following transactions for the year, determine Comp Corporation's D payroll factor denominator. State D has adopted the principles of UDITPA.

A) $700,000.
B) $800,000.
C) $900,000.
D) $1,000,000.

Question 69

General Corporation is taxable in a number of states. This year, General made a $100,000 sale from its A headquarters to a State B office of an agency of the U.S. government. 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 both A and B.

Question 70

The throwback rule requires that:
A) Sales of tangible personal property are attributed to the state where they originated, if the taxpayer is not taxable in the state of destination.
B) Sales of tangible personal property are attributed to the seller's state, even if the taxpayer is not taxable in the state of destination.
C) Sales of services are attributed to the state of commercial domicile.
D) Capital gain/loss is attributed to the state of commercial domicile.

A) Sales of tangible personal property are attributed to the state where they originated, if the taxpayer is not taxable in the state of destination.
B) Sales of tangible personal property are attributed to the seller's state, even if the taxpayer is not taxable in the state of destination.
C) Sales of services are attributed to the state of commercial domicile.
D) Capital gain/loss is attributed to the state of commercial domicile.

Question 71

Boot Corporation is subject to income tax in States A andB. 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 72

Cruz Corporation owns manufacturing facilities in States A, B, andC. 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. $430,542.
C) $333,333.
D) $200,000.
E) $0.

Question 73

Bert Corporation, a calendar-year taxpayer, owns property in States M and O. Both M and O require that the average value of assets be included in the property factor. M requires that the property be valued at its historical cost, and O requires that the property be included in the property factor at its net depreciated book value. Bert's M property factor is:

A) 75.0%.
B) 66.7%.
C) 64.9%.
D) 64.5%.

Question 74

Net Corporation's sales office and manufacturing plant are located in State X. Net also maintains a manufacturing plant and sales office in State W. For purposes of apportionment, X defines payroll as all compensation paid to employees, including contributions to § 401(k) deferred compensation plans. Under the statutes of W, neither compensation paid to officers nor contributions to § 401(k) plans are included in the payroll factor. Net incurred the following personnel costs. Net's payroll factor for State W is:

A) 50.00%.
B) 28.57%.
C) 26.32%.
D) 20.00%.
E) 0%.

Question 75

Helene Corporation owns manufacturing facilities in States A, B, andC. 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) $422,200.
B) $333,333.
C) $322,200.
D) $316,500.

Question 76

Mandy Corporation realized $1,000,000 taxable income from the sales of its products in States X and Z. Mandy's activities establish nexus for income tax purposes only in Z. Mandy'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 Mandy's taxable income is apportioned to X?

A) $0.
B) $333,333.
C) $543,333.
D) $1,000,000.

Question 77

General Corporation is taxable in a number of states. This year, General made a $100,000 sale from its A headquarters to an agency of the U.S. government. State A applies a throwback rule. In which state(s) will the sale be included in the sales factor numerator?

A) $100,000 in A.
B) $50,000 in A, with the balance exempted from other states' sales factors under the Colgate doctrine.
C) $0 in A.
D) In all of the states, according to the apportionment formulas of each, as the U.S. government is present in all states

Question 78

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 79

Trayne Corporation's sales office and manufacturing plant are located in State X. Trayne also maintains a manufacturing plant and sales office in State W. For purposes of apportionment, X defines payroll as all compensation paid to employees, including elective contributions to § 401(k) deferred compensation plans. Under the statutes of W, neither compensation paid to officers nor contributions to § 401(k) plans are included in the payroll factor. Trayne incurred the following personnel costs. Trayne's payroll factor for State X is:

A) 100.00%.
B) 80.00%.
C) 73.68%.
D) 71.43%.
E) 50.00%.

Question 80

José Corporation realized $600,000 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) $600,000.
B) $520,200.
C) $200,000.
D) $79,800.