Deck 16: Multistate Corporate Taxation

Question 1

States use a common apportionment formula and set of factors,known as the Streamlined Sales Tax Method.

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

Politicians use tax devices to create economic development incentives.

Question 5

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

Question 6

A typical state taxable income addition modification is the income tax paid to the state for the year.

Question 7

All but a few states have adopted a tax based on net taxable income.

Question 8

A typical state taxable income addition modification is the Federal income tax expense.

Question 9

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

Question 10

Only a few states have adopted an alternative minimum tax,similar to the Federal system.

Question 11

States collect the most tax dollars from the sales/use tax.

Question 12

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

Question 13

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

Question 14

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 15

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

Question 16

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

Question 17

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 tangible personal property in the state.

Question 18

The corporate income tax provides about one-half of the annual tax revenues for the typical U.S.state.

Question 19

Nonbusiness income includes rentals of investment property.

Question 20

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

Question 21

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

Question 22

The property factor includes assets that the taxpayer owns,but not those merely used under a lease agreement.

Question 23

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 24

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 25

The property factor includes real property and construction in progress.

Question 26

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

Question 27

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 28

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 29

Typically exempt from 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 30

Typically exempt from the sales/use tax base is the purchase of seed and feed by a farmer.

Question 31

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 $90,000 to the state in which the employer is based.

Question 32

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

Question 33

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

Question 34

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

Question 35

Only a few states require that Federal S corporations make a separate state-level election of the flow-through status.

Question 36

Most states waive the collection of sales tax on groceries.

Question 37

Typically exempt from the sales/use tax base is the purchase by a church of printed music for its choir.

Question 38

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

Question 39

An assembly worker earns a $30,000 salary and receives a fringe benefit package worth $15,000.The payroll factor assigns $45,000 for this employee.

Question 40

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 41

The throwback rule requires that:

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

Question 42

Dough Company sold an asset on the first day of the tax year for $500,000.Dough'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 Federal taxable income in determining the correct taxable income for the typical state?

A)($50,000).
B)$35,000.
C)$50,000.
D)$0.

Question 43

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 44

Kurt Corporation realized $600,000 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)$2,000,000.
B)$600,000.
C)$300,000.
D)$100,000.
E)$0.

Question 45

Under most local property tax laws,the value of an asset is fixed after an appraisal by the taxing jurisdiction.

Question 46

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

A)Sale of a share of corporate stock.
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 47

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 48

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

A)Net operating loss.
B)Federal income tax expense.
C)Cost of goods sold.
D)State income tax refunds.

Question 49

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)$1,000,000.
B)$600,000.
C)$120,000.
D)$80,000.
E)$0.

Question 50

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

Question 51

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 .75 for X and .25 for Y.
Norman's income attributed to X is:

A)$0.
B)$1,000,000.
C)$1,500,000.
D)$2,000,000.
E)$3,000,000.

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

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 double-weighted sales factor in its three-factor apportionment formula.How much of Mandy's taxable income is apportioned to X?

A)$1,000,000.
B)$543,333.
C)$490,000.
D)$0.

Question 54

The typical state sales/use tax falls on sales of both products and services.

Question 55

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

Question 56

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.

Question 57

A city might assess a professional occupation tax on an architect.

Question 58

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 59

Typically exempt from the sales/use tax base is the purchase of inventory from a competitor who is closing down a long-lived business.

Question 60

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

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

Question 61

In most states,a limited liability company (LLC)is subject to the state income tax:

A)As though it were a C corporation.
B)As though it were a business trust.
C)As a flow-through entity,similar to its Federal income tax treatment.
D)LLCs typically are exempted from state income taxation.

Question 62

In conducting multistate tax planning,the taxpayer should:

A)Review tax opportunities in light of their effect on the overall business.
B)Consider additional administrative costs generated by the plan.
C)Exploit inconsistencies among the statutes and formulas of the states.
D)Recognize that minimizing state tax costs may not always be prudent.
E)All of the above are true.

Question 63

Parent and Junior form a unitary group of corporations.Parent is located in a state with an effective tax rate of 3%,while Junior's effective tax rate is 9%.Acting in concert to reduce overall tax liabilities,the group should:

A)Execute an intercompany loan,such that Junior pays deductible interest to Parent.
B)Have Parent charge Junior an annual management fee.
C)Shift Parent's high-cost assembly and distribution operations to Junior.
D)All of the above are effective income-shifting techniques for a unitary group.
E)None of the above is an effective income-shifting technique for a unitary group.

Question 64

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 65

Parent and Junior form a non-unitary group of corporations.Parent is located in a state with an effective tax rate of 3%,while Junior's effective tax rate is 9%.Acting in concert to reduce overall tax liabilities,the group should:

A)Execute an intercompany loan,such that Junior pays deductible interest to Parent.
B)Have Parent charge Junior an annual management fee.
C)Shift Parent's high-cost assembly and distribution operations to Junior.
D)All of the above are effective income-shifting techniques for a non-unitary group.
E)None of the above is an effective income-shifting technique for a non-unitary group.

Question 66

A taxpayer wishing to reduce the negative tax effects of the application of the unitary theory might:

A)Affiliate with a service division that shows an operating loss,like one in marketing.
B)Disengage unitary operations with the most profitable affiliates.
C)Add a profitable entity to the unitary group.
D)a.and b.

Question 67

A use tax:

A)Applies when a State A resident purchases a new automobile from a State A dealership.
B)Applies when a State A resident purchases a new automobile from a State B dealership,then driving the car home.
C)Applies when a State A resident purchases groceries from a neighborhood store.
D)Applies when a State A resident purchases hardware from sears.com rather than at the Best Buy store at the local mall.

Question 68

When the taxpayer has exposure to a capital stock tax:

A)Expansions should be funded with retained earnings.
B)Subsidiary operations should be funded through direct capital contributions.
C)Dividends should be paid regularly to a parent based in a low-tax state.
D)Cost of sales should reflect no more than inflation increases.
E)None of the above is true.

Question 69

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

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

Question 70

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 anywhere in the world.
C)Organized in NAFTA countries.
D)Owned more than 50% by other affiliates in the group.

Question 71

The benefits of a passive investment company typically include:

A)Reduced state income taxes.
B)Isolation of the entity's portfolio income from taxation in other nonunitary states.
C)Exclusion of the subsidiary's portfolio income from the parent corporation's apportionment formula denominator in other nonunitary states.
D)All of the above are benefits.

Question 72

Peete Corporation is subject to franchise tax in State Z.The tax is imposed at a rate of 2% of the taxpayer's net worth that is apportioned to the state by use of a two factor (sales and property equally weighted)formula.The property factor includes real and tangible personal property,valued at net book value at the end of the taxable year.
Eighty percent of Peete's sales are attributable to Z,and $200,000 of the net book value of Peete's tangible personal property is located in Z.
Determine the Z franchise tax payable by Peete this year,given the following end-of-the year balance sheet.

A)$0,due to the negative retained earnings.
B)$20,000.
C)$7,200.
D)$4,860.

Question 73

A state sales tax usually falls upon:

A)The sale of a used dinette set sold at a rummage sale.
B)The sale of a dinette set by the manufacturer to the retailer.
C)The purchase of a Bible by a member at the church's bookstore.
D)The sale of a case of Bibles by the publisher to a church bookstore.
E)All of the above are exempt transactions.

Question 74

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 75

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 76

When the taxpayer operates in one or more unitary states:

A)Apportionment factors are computed on a group-wide basis.
B)The tax incentive of creating nexus in a low-tax state is enhanced.
C)The tax benefit of a passive investment subsidiary holding company is neutralized.
D)The use of a water's edge election should be considered.
E)All of the above are true.

Question 77

A state sales tax usually falls upon:

A)Sales of groceries.
B)Sales made to out-of-state customers.
C)Sales made to the U.S.Department of Education.
D)Sales made to the ultimate consumer of the product or service.

Question 78

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 79

For most taxpayers,which of the traditional apportionment factors yields the greatest opportunities for tax reduction?

A)Payroll.
B)Property.
C)Unitary.
D)Sales (gross receipts).

Question 80

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)$50,000.
C)$60,000.
D)$80,000.
E)$200,000.