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Exam 24: Multistate Corporate Taxation

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Question 91

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Dott Corporation generated $300,000 of state taxable income from selling its mapping software in States A and B. For the taxable year, the corporation's activities within the two states were as follows: $\begin{array} { l r r r } & \text { State A } & \text { State B } & \text { Total } \\\text { Sales } & \$ 500,000 & \$ 1,500,000 & \$ 2,000,000 \\\text { Property } & 250,000 & - 0 - & 250,000 \\\text { Payroll } & 200,000 & 300,000 & 500,000\end{array}$ Dott has determined that it is subject to tax in both A and B. Both states utilize a three-factor apportionment formula that equally weights sales, property, and payroll. The rates of corporate income tax imposed in States A and B are 7% and 10%, respectively. Determine Dott's total state income tax liability.

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Question 92

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Ting, a regional sales manager, works from her office in State W. Her region includes several states as indicated in the following sales report. Determine how much of Ting's $300,000 compensation is assigned to the payroll factor of State W. $\begin{array} { l r r } \text { State } & \text { Sales Generated } & \text { Ting's Time Spent There } \\\mathrm { U } & \$ 1,000,000 & 15 \% \\\mathrm {~V} & 5,000,000 & 55 \% \\\mathrm {~W} & { 4,000,000 } & { 30 \% }\\&\$10,000,000&100\%\end{array}$

A) $0.
B) $90,000.
C) $120,000.
D) $300,000.

E) All of the above
F) B) and C)

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Question 93

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José Corporation realized $900,000 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: $\begin{array} { l r r r } & \text { State X } & \text { State } \mathbf { Z } & \text { Totals } \\\text { Sales } & \$ 1,500,000 & \$ 1,000,000 & \$ 2,500,000 \\\text { Property } & 500,000 & - 0 - & 500,000 \\\text { Payroll } & 2,000,000 & - 0 - & 2,000,000\end{array}$ Z utilizes a double-weighted sales factor in its three-factor apportionment formula. How much of José's taxable income is apportioned to Z?

The benefits of a passive investment company employed in a nonunitary state typically include:

Compute Still Corporation's State Q taxable income and tax liability for the year. $\begin{array} { l r } \text { Addition modifications } & \$ 70,000 \\\text { Allocated income - total } & \$ 80,000 \\\text { Allocated income - State Q } & \$ 60,000 \\\text { Allocated income - State P } & \$ 20,000 \\\text { Apportionment percentage - State Q } & 40 \% \\\text { Federal taxable income } & \$ 500,000 \\\text { State tax credits } & \$ 11,000 \\\text { Subtraction modifications } & \$ 30,000 \\\text { Tax rate } & 5 \%\end{array}$

Under Public Law 86-272, a state is prohibited from income taxing the income of a business if the only connection with the state is the of orders for sales of tangible personal property that are sent outside the state for approval or rejection.

Under the UDITPA's concept, sales are assumed to take place at the point of delivery as opposed to the location at which the shipment originates.

Match each of the following terms with the appropriate description in the state income tax formula. Apply the UDITPA rules in your responses. -Deduction for advertising expenditures.

Mercy Corporation, headquartered in State F, sells wireless computer devices, including keyboards and bar code readers. Mercy's degree of operations is sufficient to establish income tax nexus only in States E and F. Determine its sales factor in those states. State E applies a throwback rule to sales, but State F does not. State G has not adopted an income tax to date. Mercy reported the following sales for the year. All of the goods were shipped from Mercy's F manufacturing facilities.

P.L. 86-272 (does/does not) create income-tax nexus when the sales representative approves a sale at the customer's location.

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: $\begin{array}{cccc} & \text { State A } & \text { State B } & \text { T otals } \\\text { Sales } & \$ 200,000 & \$ 600,000 & \$ 800,000\end{array}$ $\begin{array} { l l l l } \text { Payroll } & 100,000 & 50,000 & 150,000 \\\text { Property } & 200,000 & 50,000 & 250,000\end{array}$ How much more (less) of Boot's income is subject to State A income tax if, instead of using an equally weighted three-factor apportionment formula, State A uses a formula with a double-weighted sales factor?

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

Parent Corporation owns all of the stock of Junior Corporation, a Delaware passive investment company. Parent operates strictly in nonunitary State B, which levies a 9% income tax. This year, Junior earned $200,000 of portfolio interest income and paid a $150,000 dividend to Parent. In which state(s) will the interest income create an income tax liability?

Match each of the following terms with the appropriate description in the state income tax formula. Apply the UDITPA rules in your responses. -Dividend income from P & G stock held.

Match each of the following items with the appropriate description in determining whether sales/use tax typically must be collected. -Computing services purchased by a business.

State Q wants to increase its income tax collections, but politically it would be unwise to raise taxes on in-state individuals or businesses. State Q currently follows all UDITPA rules and employs an equally weighted three-factor apportionment formula. State Q allocates nonbusiness income amounts. Identify some changes to the income tax apportionment formula that would shift the scheduled income tax increases to out-of-state businesses.

What is the significance of the term nexus when discussing state income taxation?

Match each of the following events considered independently to its likely effect on WillCo's various apportionment factors. WillCo is based in Q and has customers in Q, R, and S. To this point, WillCo has not established nexus with S. More than one choice may be correct. -R adopts an increase in its statutory corporate income tax rates.

By making a water's edge election, a multinational taxpayer can limit the reach of unitary principles to the apportionment factors and income of its U.S. and E.U. affiliates.

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