Question 1

Consigning property to an independent contractor will not create nexus under P.L.86-272.

Accepted Answer

P.L. 86-272 provides protection from state income tax for businesses whose only activity in a state is soliciting orders for tangible personal property. Consigning property to an independent contractor may create nexus as it involves more than mere solicitation.

Question 2

Corporations X and Y comprise a unitary business.Corporation X operates only in State A, while Corporation Y operates only in State B.Both states impose a state income tax and employ the unitary concept.A portion of Corporation X's income will be taxed in State B.

Accepted Answer

The unitary business concept allows for states to tax a portion of a corporation's income if it is deemed to be part of a larger overall business operation. In this case, since Corporations X and Y comprise a unitary business, a portion of Corporation X's income may be subject to taxation in State B.

Question 3

A corporation must own property within a state in order for nexus to exist.

Accepted Answer

Nexus can exist for a corporation even if it does not own property within a state. Other factors that may create nexus include employees, sales, or advertising within the state.

Question 4

Most states allow an exclusion for interest on U.S.government obligations in computing state taxable income.

Accepted Answer

This is generally true, although there may be some exceptions or limitations in certain states.

Question 5

States generally impose a capital based franchise tax in lieu of a tax based on net income.

Accepted Answer

States may impose both types of taxes: a franchise tax based on capital or net worth, and a separate tax based on net income. They are not mutually exclusive and can be applied in conjunction depending on the state's tax laws.

Question 6

P.L.86-272 is applicable only to state income taxes.

Accepted Answer

P.L.86-272 is a federal law that prohibits states from imposing taxes on certain business activities if the only activity within the state is solicitation of orders for sales of tangible personal property. This law only applies to state income taxes and does not provide protection from other state taxes such as sales, use or franchise taxes.

Question 7

For purposes of the payroll factor, "compensation" generally includes the fair value of nontaxable fringe benefits.

Accepted Answer

Compensation for payroll factor purposes typically includes wages, salaries, and other taxable benefits, but not the fair value of nontaxable fringe benefits.

Question 8

Furnishing a salesperson with a company car will generally not cause a foreign corporation to become taxable in the state in which the salesperson solicits orders.

Accepted Answer

Providing a company car to a salesperson for use in soliciting orders does not establish the minimum contacts necessary to create nexus with a state for tax purposes.

Question 9

Most states allow a deduction for state income taxes in computing state taxable income.

Accepted Answer

Most states do not allow a deduction for state income taxes paid when computing state taxable income because it would create a circular calculation where the deduction would reduce the tax base, which in turn would reduce the tax itself.

Question 10

Employee X spends one-half her time in State A and one-half her time in State B.For purposes of the payroll factor, her compensation should be allocated equally to States A and B.

Accepted Answer

The answer of Employee X spends one-half her time in...

Question 11

Business income is allocated whereas nonbusiness income is apportioned.

Accepted Answer

Business income is apportioned among various states based on formulas considering factors like sales, property, and payroll. Nonbusiness income is allocated to a specific state based on the nature of the income and relevant state laws.

Question 12

The property factor is generally calculated based on the net book value of property at year end.

Accepted Answer

The answer of The property factor is generally calculated based...

Question 13

X purchases goods for resale.X will generally be liable for sales tax on such purchases.

Accepted Answer

In most jurisdictions, X would not be liable for sales tax on purchases for resale because they can use a resale certificate to buy goods tax-free, intending to collect sales tax from the end consumer.

Question 14

Leased property is generally not taken into account in computing the property factor.

Accepted Answer

Leased property is included in the property factor calculation. The value of leased property is determined by dividing the annual rental amount by a capitalization rate, and the resulting value is then included in the property factor.

Question 15

Most states employ a two-factor apportionment formula based on sales and property.

Accepted Answer

Most states use a three-factor apportionment formula based on sales, property, and payroll to determine a corporation's income tax liability.

Question 16

Passive income, such as interest, dividends, rents, and royalties, always constitutes nonbusiness income.

Accepted Answer

Passive income can be classified as either business or nonbusiness income depending on the taxpayer's level of involvement and the nature of the activity generating the income. For example, rental income can be considered business income if the taxpayer actively participates in managing the property.

Question 17

Most states begin with federal taxable income (line 28 or 30 of page 1, Form 1120) as the starting point for computing state taxable income.

Accepted Answer

Most states do use federal taxable income as the starting point for computing state taxable income. However, there are some states that have their own method of calculating taxable income and may not begin with federal taxable income.

Question 18

Y Corp.ships goods from its manufacturing plant in State A to a customer in State B.Y Corp.is taxable in both States A and B.For purposes of the sales factor, the sales are attributed to State B.

Accepted Answer

Since the sales are shipped to State B, they are attributed to State B for the sales factor calculation, regardless of whether Y Corp. is taxable in both states.

Question 19

Property taxes are typically imposed based on the historical cost of assets.

Accepted Answer

Property taxes are typically imposed based on the current market value or assessed value of assets, not their historical cost.

Question 20

Y Corp.ships goods from its manufacturing plant in State A to a customer in State B.Y Corp.is taxable only in State A.State A employs a throwback rule For purposes of the sales factor, the sales are not attributed to either state.

Accepted Answer

Under a throwback rule, sales are attributed back to the state where the seller is located if the goods are shipped to a state where the seller is not taxable. Therefore, Y Corp.'s sales would be attributed to State A under the throwback rule.

Quiz 13: State and Local Taxation