Boot Corporation is subject to income tax in States A and B.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?

Question

Boot Corporation is subject to income tax in States A and B.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?

Quizplus · Accepted Answer

Using an equally-weighted three-factor apportionment formula:

State A: 
Sales = $100,000 x (50%)
Property = $200,000 x (50%)
Payroll = $120,000 x (50%)

Apportionment Fraction = [(50,000 + 100,000 + 60,000) / (100,000 + 200,000 + 120,000)] / 2 = 0.5

Taxable Income in State A = $200,000 x 0.5 = $100,000

Using a formula with a double-weighted sales factor:

State A: 
Sales = $100,000 x (100%)
Property = $200,000 x (50%)
Payroll = $120,000 x (50%)

Apportionment Fraction = [(100,000 + 100,000 + 60,000) / (100,000 + 200,000 + 120,000)] / 2.5 = 0.4

Taxable Income in State A = $200,000 x 0.4 = $80,000

The difference in taxable income subject to State A income tax is $100,000 - $80,000 = $20,000. However, the question asks for the difference in taxes due to the change in apportionment formula, not the difference in taxable income. Since we know that State A has a tax rate of 6%, we can calculate the difference in taxes as follows:

Difference in Taxes = ($100,000 x 6%) - ($80,000 x 6%) = $6,000 - $4,800 = $1,200

Therefore, the correct answer is D) ($16,100).

Boot Corporation Is Subject to Income Tax in States a and B.Boot's