State Taxation Formula
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Questions and Answers

What is the general rule for determining the amount of sales to include in the sales factor calculation for tangible personal property?

  • The state where the property is stored
  • The destination state where the property is delivered and used (correct)
  • The state where the order is received
  • The location where the property is manufactured

    • 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 (correct)
  • The sales are divided equally between the origin and destination states
  • The sales are sourced to the state where the property is manufactured
  • The sales are excluded from the sales factor calculation

    • What is included in the payroll factor for apportionment formulas?

  • Only salaries and commissions
  • Salaries, commissions, and bonuses, but not independent contractors (correct)
  • Salaries, commissions, and independent contractors, but not bonuses
  • Salaries, commissions, bonuses, and independent contractors

    • How is payroll for each employee apportioned to a state?

    <p>To the state where the employee performs the majority of services</p> Signup and view all the answers

    How is property valued for the property factor in apportionment formulas?

    <p>At historical cost, but not adjusted basis</p> Signup and view all the answers

    Where is property in transit, such as inventory, included in the property factor calculation?

    <p>In the state of origin</p> Signup and view all the answers

    What is the factor used to allocate interest and dividends to a specific state?

    <p>State of commercial domicile</p> Signup and view all the answers

    Which type of income is allocated to the state where the property is used, if the business has nexus in that state?

    <p>Royalties</p> Signup and view all the answers

    In apportioning business income, which of the following factors is NOT used?

    <p>Residence</p> Signup and view all the answers

    What is the purpose of the throwback rule in apportioning business income?

    <p>To allocate income to the state of commercial domicile</p> Signup and view all the answers

    Which of the following income types is allocated to the state of domicile?

    <p>Investment income</p> Signup and view all the answers

    What is the method of allocating business income based on a combination of sales, payroll, and property factors?

    <p>Formula apportionment</p> Signup and view all the answers

    Which of the following activities is considered to create income tax nexus with a state?

    <p>Furnishing personal property and autos used in sales activities</p> Signup and view all the answers

    What is the primary purpose of identifying federal/state differences in taxable income?

    <p>To compute state taxable income</p> Signup and view all the answers

    Which of the following factors determines a unitary group?

    <p>Functional Integration, Centralization of Management, and Economies of Scale</p> Signup and view all the answers

    Historically, which of the following factors has been used to determine the apportionment formula for income?

    <p>Sales, Payroll, and Property</p> Signup and view all the answers

    What is the purpose of the apportionment formula?

    <p>To divide state tax base among states</p> Signup and view all the answers

    Which of the following is NOT a factor in determining a unitary group?

    <p>Sales</p> Signup and view all the answers

    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?

    <p>No, because it does not conduct any business activities in the state.</p> Signup and view all the answers

    In which states must a company file a unitary tax return if it has nexus?

    <p>Only in states west of the Mississippi River, including Illinois.</p> Signup and view all the answers

    What is the purpose of the unitary tax return?

    <p>To include all members of a unitary group in a single tax return.</p> Signup and view all the answers

    What is the consequence of not having nexus in a state where tangible personal property is sold?

    <p>The company is exempt from income tax in that state.</p> Signup and view all the answers

    What is the main requirement for a company to be included in a unitary group?

    <p>The company must meet the unitary criteria.</p> Signup and view all the answers

    What is the primary purpose of determining state tax nexus?

    <p>To identify which businesses are subject to a state's income tax.</p> Signup and view all the answers

    What is the reason for states requiring a negative adjustment for federal interest income?

    <p>Because states do not tax federal interest income</p> Signup and view all the answers

    Where is all state taxable income taxed unless the business is taxable in more than one state?

    <p>State of commercial domicile</p> Signup and view all the answers

    What is the purpose of separating business income from nonbusiness income for an interstate business?

    <p>To apportion business income among states</p> Signup and view all the answers

    Why do most states require a positive adjustment for state income taxes?

    <p>Because states do not allow businesses to deduct state income taxes</p> Signup and view all the answers

    What is the result of a business not having nexus in the destination state for tangible personal property sales?

    <p>The business is not required to file an income tax return</p> Signup and view all the answers

    Why is it necessary to identify federal/state differences in taxable income?

    <p>To ensure fair taxation of interstate businesses</p> Signup and view all the answers

    What is the criterion for allocating capital gains from investment property to a specific state?

    <p>State of commercial domicile</p> Signup and view all the answers

    How is rented or leased property valued for the property factor in apportionment formulas?

    <p>By multiplying the annual rent by eight and adding it to the average owned-property factor</p> Signup and view all the answers

    What is the basis for valuing property in the property factor for apportionment formulas?

    <p>Historical cost</p> Signup and view all the answers

    Where is property in transit, such as inventory, included in the property factor calculation?

    <p>State of destination</p> Signup and view all the answers

    How is rental income allocated to a specific state?

    <p>To the state where the property generating the rental income is located</p> Signup and view all the answers

    What is the basis for allocating interest and dividends to a specific state?

    <p>State of commercial domicile</p> Signup and view all the answers

    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

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    Related Documents

    2024 Chapter 12 PPT.pptx
    2024 Chapter 12 Lecture Notes.docx

    Description

    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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