36 Questions
What is the general rule for determining the amount of sales to include in the sales factor calculation for tangible personal property?
The destination state where the property is delivered and used
What happens when a business does not have nexus in the destination state for tangible personal property sales?
The sales are generally thrown back to the state from which the property is shipped
What is included in the payroll factor for apportionment formulas?
Salaries, commissions, and bonuses, but not independent contractors
How is payroll for each employee apportioned to a state?
To the state where the employee performs the majority of services
How is property valued for the property factor in apportionment formulas?
At historical cost, but not adjusted basis
Where is property in transit, such as inventory, included in the property factor calculation?
In the state of origin
What is the factor used to allocate interest and dividends to a specific state?
State of commercial domicile
Which type of income is allocated to the state where the property is used, if the business has nexus in that state?
Royalties
In apportioning business income, which of the following factors is NOT used?
Residence
What is the purpose of the throwback rule in apportioning business income?
To allocate income to the state of commercial domicile
Which of the following income types is allocated to the state of domicile?
Investment income
What is the method of allocating business income based on a combination of sales, payroll, and property factors?
Formula apportionment
Which of the following activities is considered to create income tax nexus with a state?
Furnishing personal property and autos used in sales activities
What is the primary purpose of identifying federal/state differences in taxable income?
To compute state taxable income
Which of the following factors determines a unitary group?
Functional Integration, Centralization of Management, and Economies of Scale
Historically, which of the following factors has been used to determine the apportionment formula for income?
Sales, Payroll, and Property
What is the purpose of the apportionment formula?
To divide state tax base among states
Which of the following is NOT a factor in determining a unitary group?
Sales
If a company has a physical presence in a state but does not conduct any business activities, does it have a state income tax liability?
No, because it does not conduct any business activities in the state.
In which states must a company file a unitary tax return if it has nexus?
Only in states west of the Mississippi River, including Illinois.
What is the purpose of the unitary tax return?
To include all members of a unitary group in a single tax return.
What is the consequence of not having nexus in a state where tangible personal property is sold?
The company is exempt from income tax in that state.
What is the main requirement for a company to be included in a unitary group?
The company must meet the unitary criteria.
What is the primary purpose of determining state tax nexus?
To identify which businesses are subject to a state's income tax.
What is the reason for states requiring a negative adjustment for federal interest income?
Because states do not tax federal interest income
Where is all state taxable income taxed unless the business is taxable in more than one state?
State of commercial domicile
What is the purpose of separating business income from nonbusiness income for an interstate business?
To apportion business income among states
Why do most states require a positive adjustment for state income taxes?
Because states do not allow businesses to deduct state income taxes
What is the result of a business not having nexus in the destination state for tangible personal property sales?
The business is not required to file an income tax return
Why is it necessary to identify federal/state differences in taxable income?
To ensure fair taxation of interstate businesses
What is the criterion for allocating capital gains from investment property to a specific state?
State of commercial domicile
How is rented or leased property valued for the property factor in apportionment formulas?
By multiplying the annual rent by eight and adding it to the average owned-property factor
What is the basis for valuing property in the property factor for apportionment formulas?
Historical cost
Where is property in transit, such as inventory, included in the property factor calculation?
State of destination
How is rental income allocated to a specific state?
To the state where the property generating the rental income is located
What is the basis for allocating interest and dividends to a specific state?
State of commercial domicile
Study Notes
Activities Not Creating Income Tax Nexus
- Making repairs
- Collecting delinquent accounts
- Investigating customer complaints
- Installing or supervising the installation of property
- Training employees other than sales representatives
- Approving or accepting orders
- Repossessing property
- Securing deposits
- Maintaining an office (other than in-home)
Income Tax Returns
- Separate tax returns: required for each entity with income tax nexus in a state
- Unitary tax returns: required for members of a unitary group, reflecting the combined income of the unitary group
- Determining a unitary group: based on three factors - functional integration, centralization of management, and economies of scale
State Taxable Income
- Starting point for computing state taxable income: federal taxable income
- Identifying federal/state differences: for each specific state
Apportionment Formula
- Historically, most states used a three-factor test: sales, payroll, and property
- Most states have shifted to either a single-factor formula or a factor that super-weights the sales factor
- Calculating apportionment formula: total sales, payroll, or property in a specific state ÷ total sales, payroll, or property everywhere
Sales Factor
- Sourcing tangible personal property sales: destination state (where property is delivered and used)
- Throwback rule: if business does not have nexus in destination state, sales are sourced to the state from which the property is shipped
Payroll Factor
- Payroll includes: salaries, commissions, bonuses, and other forms of compensation
- Payroll does not include: amounts paid to independent contractors
- Apportioning payroll: sourced to the state where employees perform the majority of services
Property Factor
- Valuing property: at historical cost rather than adjusted basis
- Including property in transit: in the state of origin
- Including rented or leased property: by multiplying the annual rent by 8 and adding this value to the average owned-property factor
Nonbusiness Income
- Allocating interest and dividends: to the state of commercial domicile
- Allocating rental income: to the state where the property generating the rental income is located
- Allocating royalties: to the state where the property is used (if business has nexus in that state); otherwise, to the state of commercial domicile
- Allocating capital gains: from investment property to the state of commercial domicile; from selling rental property to the state where the rental property was located
This quiz covers the different formulas used by states to determine business taxes, including the single-factor formula and how to calculate the sales factor. Learn about the rules for sourcing tangible personal property sales and more. Test your knowledge of state taxation formulas!
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