State and Local Taxes, Chapter 23
Chapter 23 - State and Local TaxesChapter 23State and Local
Taxes
SOLUTIONS MANUAL
Discussion Questions 1. [LO 1] Why do states and local
jurisdictions assess taxes?
The primary purpose of state and local taxes is to raise revenue
to finance state governments. These taxes can be income, sales,
property, and excise taxes.
2. [LO 1] Compare and contrast the relative importance of
judicial law to state and local and federal tax law.
Federal law is governed primarily by Code (statutory law) and
Treasury Regulations (administrative law) and judicial law is
usually of lesser importance. Judicial law is of critical
importance in state law. There are numerous cases that must be
understood to have a working knowledge of state and local
taxes.
3. [LO 1] Describe briefly the nexus concept and explain its
importance to state and local taxation.
Nexus is the sufficient connection between a taxpayer and a
state that allows the imposition of a tax. The level of connection
varies based on the type of tax. For example, any physical presence
in a state will create nexus for sales tax while the nexus standard
for income taxes is generally higher.
4. [LO 1] What is the difference, if any, between the state of a
businesss commercial domicile and its state of incorporation?
Commercial domicile is the state where a business is
headquartered and directs operations from. The state of
incorporation is the location where the corporate charter was
filed. Most of the time, a businesss state of commercial domicile
and incorporation are the same. However, they sometimes differ.
This is particularly true of publicly traded corporations that are
usually incorporated in Delaware, but are often domiciled in New
York or California.
5. [LO 1] What types of property sales are subject to a sales
tax and why might a state choose to exclude the sales of certain
types of property?
Most states only subject tangible personal property to sales
tax. Most states exclude real property and services from the sales
tax base. Many states exclude unprepared food (groceries) from the
sales tax base because taxing these goods is regressive
(disproportionately taxes the poor). Many states also place a
surtax on prepared (restaurant) foods.
6. [LO 1] In what circumstances would a business be subject to
income taxes in more than one state?
Anytime a business conducts its trade or business in a manner
exceeding the nexus standard in more than one state (which chooses
to assert its sovereign right to tax) the business will be subject
to business taxes in multiple states. However, businesses subject
to tax in more than one state have the ability to apportion or
divide their income between or among the states in which they have
income tax nexus to mitigate the consequences of taxing the same
income more than once.
7. [LO 1] Describe how the failure to collect sales tax can
result in a larger tax liability for a business than failing to pay
income taxes.
Sales tax is typically collected by the seller from the buyer
and is remitted on gross sales. Income tax is determined from the
net income base (gross income less deductions) and apportioned when
appropriate. For example, imagine that a company operates in a
single state having a sales tax rate of 5 percent and an income tax
rate of 4 percent. If the company has $1,000,000 in sales, cost of
goods sold of $600,000 and other expenses of $300,000 the sales and
income tax payable are computed as follows: $50,000 of sales tax
payable ($1,000,000 x 5 percent); $4,000 of income tax payable
({[$1,000,000 - $600,000]-$300,000}x 4 percent). In addition, if
the business would have properly collected the sales tax from its
customers, it would simply remit the amount and have no
liability.
8. [LO 2] Discuss reasons why restaurant meals, rental cars, and
hotel receipts are often taxed at a higher rate than the average
sales tax rate.
States often impose higher sales tax rates on meals, rental
cars, and hotel receipts because these items are typically imposed
disproportionately upon non-residents of a state. Non-residents
visiting for work or pleasure use these services and capture
additional revenue for a state which allows for lower tax revenues
to be raised on state residents.
9. [LO 2] Compare and contrast the difference between general
sales tax nexus and the new Amazon rule creating nexus in New
York.
The general sales tax nexus rule established in the Quill
decision is that an out of state retailer must have physical
presence in the state to create sales tax nexus. For example,
salesmen entering the state would create a need for a state to
collect and remit sales tax. New York implemented a new law in 2008
which requires internet-based retailers, without physical presence,
to collect and remit sales tax. Amazon has already filed suit
against the state of New York.
10. [LO 2] What is the difference between a sales tax and a use
tax?
A sales tax liability accrues on the sale of property within the
state. A use tax liability accrues in the state purchased property
will be used when the seller in one state ships goods to a customer
in a different state and the seller is not required to collect the
sales tax (the seller does not have sales tax nexus in the state to
which the goods are shipped).
11. [LO 2] Rene operates Scandinavian Imports a furniture shop
in Olney, Maryland. Scandinavian Imports ships goods to customers
in all 50 states. Scandinavian Imports also appraises antique
furniture. Recently in-home appraisals have been done in the
District of Columbia, Maryland, Pennsylvania, and Virginia. Online
appraisals have been done for customers in California, Minnesota,
New Mexico, and Texas. Determine where Scandinavian Imports has
sales and use tax nexus.
Scandinavian Imports has nexus in Maryland--its state of
commercial domicile. It also has nexus in the District of Columbia,
Pennsylvania, and Virginia because it has physical presence that is
created through personnel performing appraisals. The online
appraisals do not create nexus because they lack physical presence
that creates sales and use tax nexus.
12. [LO 2] Web Music, located in Gardnerville, Nevada, is a new
online music service that allows inexpensive legal music downloads.
Web Music prides itself in the fact that it has the fastest
download times in the industry. Web Music achieved this speed by
leasing server space from 10 regional servers dispersed across the
country. Discuss where Web Music has sales tax nexus.
Web Music has nexus in Nevada because of its commercial
domicile. Because Web sells music in an intangible form, some
states may not try to tax the transaction. An important question is
whether a leased server is the same as having property within a
state. Most states would argue that renting the property creates
nexus within the states where the server is located. Webs business
model creates problems in applying the historical sales and use tax
nexus rules.
13. [LO 2] Discuss possible reasons for why the Commerce clause
was included in the U.S. Constitution.
The Commerce clause was designed to promote interstate commerce
by protecting businesses through placing restraints on a states
ability to burden businesses with the administrative burden of
complying and the financial burden of paying the sales tax.
14. [LO 2] Describe the administrative burden that businesses
face in collecting sales taxes.
Businesses with sales tax nexus must collect and remit sales tax
from its customers to the state. The administrative burden is that
they must calculate and collect the tax, and then comply by
completing the tax returns and remitting the tax.
15. [LO 3] Compare and contrast the rules for where domiciliary
and non-domiciliary businesses must file state income tax
returns.
A domiciliary (an in-state business) must always file a state
income tax returnassuming the state taxes income. A non-domiciliary
must only file an income tax return if the nexus standard is
created. For non-domiciliary businesses, the standard varies based
on the type of business. Sellers of tangible personal property are
protected by Public Law 86-272; other businesses have a lower
thresholdany physical presence creates nexus.
16. [LO 3] Lars operates Keep Flying, Incorporated, a used
airplane parts business, in Laramie, Wyoming. Lars employs sales
agents that visit mechanics in all 50 states to solicit orders. All
orders are sent to Wyoming for approval. All parts are shipped via
common carrier. The sales agents are always on the lookout for
wrecked, abandoned, or salvaged aircraft with rare parts because
they receive substantial bonuses for removing these parts and
shipping them to Wyoming. Discuss the states where Keep Flying has
income tax nexus.
Keep Flying has nexus in all 50 states (assuming they salvage
parts in every state). While Keep Flying sells tangible personal
property and is protected by Public Law 86-272, its sales personnel
violate this by salvaging parts off planes during their
travels.
17. [LO 3] Explain changes in the U.S. economy which have caused
P.L. 86-272 to become partially obsolete and provide an example of
a company that P.L. 86-272 works well for and an example of a
company that it does not work well for.
P.L. 86-272 was enacted in the 1950s. At that time, the economy
was primarily bricks and mortar. The statute was designed for
traditional companies that produced tangible goods and sold them
through traditional sales personnel. Todays economy has shifted
toward intangibles and services. The rules designed for bricks and
mortar type companies do not create a level playing field across
businessesthere are winners and losers.
18. [LO 3] Climb Higher is a distributor of high end climbing
gear and is located in Paradise, Washington. Climb Highers sales
personnel regularly perform the following activities in an effort
to maximize sales:
Carry swag (free samples) for distribution to climbing shop
employees. Perform credit checks on new customers to reduce
delivery time the first time merchandise is ordered. Check customer
inventory for proper display and proper quantities. Accept returns
of merchandise for defective goods.
Discuss Climb Highers sales activities that are protected and
unprotected under the Wrigley Supreme Court decision.
Selling activities or solicitation are not well defined by P.L.
86-272. The Wrigley decision defines what activities are considered
solicitation (protected) and which activities exceed solicitation.
Distribution of free samples and checking inventory for display and
quantity are considered solicitation. Performing credit checks and
accepting returns exceed solicitation and create nexus for Climb
Higher.19. [LO 3] Describe a situation where it would be
advantageous for a business to establish income tax nexus in a
state.
While nexus creates a potential income tax liability, it can be
advantageous in two ways. First, creating nexus in a state that
chooses not to tax a business can create nowhere income (income
that will go untaxed). Second, creating nexus in a state with a
lower effective tax rate than the business current effective tax
rate can lower the total state taxes paid.
20. [LO 3] States are arguing for economic nexus; provide at
least one reason for and against the validity of economic
nexus.
States create an economic base from which companies benefit.
Companies benefit from that economic base whether or not they have
physical presence or the other attributes that create nexus. As a
result they should compensate the state for creating the market.
Nexus creates a burden (administrative, financial or both).
Allowing states to tax businesses with a slight presence
discourages interstate business or commerce and potentially
violates the US Constitution.
21. [LO 3] Explain the difference between separate return states
and unitary return states.
Separate return states usually require each business to file a
separate tax return in the state. For example, if two businesses
file a consolidated federal tax return and each has nexus within
Maine, each must file a separate Maine tax return. A unitary return
requires each member of the unitary group to be included on the tax
return, even if only one has nexus in the state. The unitary
concept is generally set out in the Mobil decision where the
Supreme Court specified three factors which have become the basis
for determining whether a group of businesses is unitary:
functional integration, centralization of management, and economies
of scale. For example, if two businesses file a federal
consolidated tax return they will file a unitary return only if
they are considered to be unitary. If they are unitary they will
file a unitary return, even if only one of the businesses has nexus
with a given unitary state.
22. [LO 3] Explain the rationale for the factors (functional
integration, centralization of management, and economies of scale)
used to determine whether two or more businesses form a unitary
group under the Mobil decision.
The factors are used to determine if the businesses operate as
part of a whole or if they operate as truly separate businesses.
For example, if two businesses file a federal consolidated tax
return because they have common ownership, but the two businesses
have nothing in common other than ownership they will not be
unitary. However, if the businesses are simply a single business
operated in two separate entities they will likely be unitary.
Functional integration looks to see if businesses are vertically or
horizontally integrated or share knowledge between them.
Centralization of management attempts to determine whether common
management, accounting systems, common officers, or interlocking
boards of directors exist. Economies of scale look to whether the
businesses achieve efficiencies or discounts on raw materials,
services, or other needs simply because they purchase these items
together.
23. [LO 3] Compare and contrast why book/tax and federal/state
adjustments are necessary for interest income.
While most interest is income for both book and tax purposes,
there are exceptions. Book and tax adjustments usually occur
because of federal or state bonds. While state and local bond
interest income is income for financial statement purposes it is
exempt for federal tax purposes. This results in a book/tax
difference. However, many states tax state and local bond interest
(although many exempt interest from in-state bonds), which requires
a federal/state adjustment to include the income for state income
tax purposes. For federal bonds (taxable for federal tax) there is
no book/tax adjustment since the interest is income for both;
however, federal interest is exempt from state income taxas a
result a federal/state adjustment is necessary to exclude the
interest for the state income tax calculation.
24. [LO 3] Compare and contrast the differences between how
business and non-business income are divided among states for a
multi-state business.
Business income (income related to the operation of the
business) is apportioned or divided among the states in which the
business has nexus. The apportionment process allows each state
where nexus exists to tax its pro-rata portion of the business.
Alternatively, non-business income is sourced or allocated
specifically to the state where it is earned. For example, interest
income is typically taxed in the state of commercial domicile.
Also, rental income from a building is taxed in the state where the
rental property is located.
25. [LO 3] Discuss differences between the treatment of
government sales and dock sales for the sales apportionment
factor.
The general rule for sales is that they are assigned to the
state where the goods are shipped to. However, there are
exceptions. Government sales are assigned to the state where the
goods were shipped from. This rule exists on the theory that the
government exists throughout the country and attempts to keep
government sales from being concentrated to areas with a large
government presence. For example, the District of Columbia,
Virginia, and Maryland receive a disproportionate share of
government shipments because of the large share of the federal
workforce concentrated there. Dock sales rules generally try to
assign the sale to where the goods will be utilized rather than
where the customer takes possession of the goods. For example, if a
Washington customer obtains machinery from an Oregon retailer and
then transports the goods across state lines, the sales should be
assigned to Washington rather than Oregon.
26. [LO 3] Most states have increased the weighting of the sales
factor for the apportionment of business income. Discuss the
possible motivations for the growing importance of the sales factor
in state apportionment.
States may raise a greater portion of their revenue from
non-residents through increasing the sales factor in its
apportionment formula. This is because non-resident companies
typically have larger sales factors than payroll or property
factors in states other than their commercial domicile. Similarly,
resident companies that do business in multiple jurisdictions
typically have smaller sales factors and larger payroll and
property factors. As a result, increasing the sales factor or
eliminating the payroll and property factors can increase the
relative state income tax burden of non-resident businesses while
decreasing the relative state income tax burden of resident
businesses.
27. [LO 3] Compare and contrast federal/state tax differences
and book/federal tax differences.
Both of these differences are due to differences in the rules of
the starting point for the tax calculation and the tax base. For
example, federal tax returns require the reconciliation of book
income to federal taxable income. Likewise, most states start the
state income tax calculation with federal taxable income and then
require the necessary adjustment to reach state taxable income. So
the differences are simply adjustments to reconcile the relative
income calculations.
Problems
28. [LO 2] Crazy Eddie, Incorporated manufactures baseball caps
and distributes them across the northeastern United States. Crazy
Eddie is incorporated and headquartered in New York. It has product
sales to customers in Connecticut, Delaware, Massachusetts, New
Jersey, New York, Ohio, and Pennsylvania. It has sales personnel
only where discussed in the scenarios below. Determine the states
in which Crazy Eddie has sales and use tax nexus given the
following information: a) Crazy Eddie is incorporated and
headquartered in New York. It also has property, employees, sales
personnel, and intangibles in New York.b) Crazy Eddie has a
warehouse in Connecticut.c) Crazy Eddie has two customers in
Delaware. Crazy Eddie receives orders over the phone and ships
goods to its customers using FedEx.d) Crazy Eddie has independent
sales representatives in Massachusetts. The representatives
distribute baseball related items for over a dozen companies.e)
Crazy Eddie has sales personnel that visit New Jersey. These sales
employees follow procedures that comply with Public Law 86-272. The
orders are received and sent to New York for acceptance. The goods
are shipped by FedEx into New Jersey.
f) Crazy Eddie provides graphic design services to another
manufacturer located in Ohio. While the services are performed in
New York, Crazy Eddies designers visit Ohio at least quarterly to
deliver the new designs and receive feedback.g) Crazy Eddie
receives online orders from its Pennsylvania client. Because the
orders are so large, the goods are delivered weekly on Crazy Eddies
trucks.
a) Crazy Eddie would have sales and use tax nexus only in New
York; it lacks physical presence required in the other states where
it has sales. b) Crazy Eddie would have sales and use tax nexus in
New York and Connecticut; it lacks physical presence required in
the other states where it has sales. c) Crazy Eddie would have
sales and use tax nexus only in New York; it lacks physical
presence required in Delaware because it ships the goods using a
common carrier. d) Crazy Eddie would have sales and use tax nexus
only in New York; it may also have nexus in Massachusetts if the
independent representative only represents Crazy Eddie (considered
to be an agent). However, typically independent representatives
sell merchandise from various vendors and are not considered to be
the agent of the vendor.e) Crazy Eddie would have sales and use tax
nexus in New York; nexus would not be created in New Jersey because
it has no physical contact in that state.f) Crazy Eddie would have
sales and use tax nexus in New York and Ohio; the presence of Crazy
Eddies personnel in Ohio will create nexus there as well. g) Crazy
Eddie would have sales and use tax nexus in New York and
Pennsylvania; the use of Crazy Eddies trucks in Pennsylvania
creates physical presence required for sales and use tax.
29. [LO 2] Brad Carlton operates Carlton Collectibles, a rare
coin shop in Washington, D.C., Carlton ships coins to collectors in
all 50 states. Carlton also provides appraisal service upon
request. During the last several years the appraisal work has been
done in either the DC shop or at the homes of private collectors
located in Maryland and Virginia. Determine the jurisdictions in
which Carlton Collectibles has sales and use tax nexus.
Carlton Collectibles would have sales tax nexus in the District
of Columbia, Maryland, and Virginia because Brads appraisal work
creates nexus in Maryland and Virginia. Carlton would have a sales
and use tax collection requirement in the District of Columbia
because it has commercial domicile there.
30. [LO 2] Melanie operates Mels Bakery in Foxboro,
Massachusetts. Mels retail stores are located in Connecticut,
Maine, Massachusetts, New Hampshire, and Rhode Island. Mels also
ships specialty breads nationwide upon request. Determine Mels
sales tax collection responsibility and calculate the sales tax
liability for Massachusetts, Connecticut, Maine, New Hampshire,
Rhode Island, and Texas using the information about each state
provided below:
a) The Massachusetts stores earn $500,000 in sales.
Massachusetts sales tax rate is 5 percent; assume it exempts food
items.b) The Connecticut retail stores have $400,000 in sales
($300,000 from in-store sales and $100,000 for catering) and
$10,000 in delivery charges for catering activities. Connecticut
sales tax is 6 percent and excludes food products, but taxes
prepared meals (catering). Connecticut also imposes sales tax on
delivery charges on taxable sales. c) Mels Maine retail store has
$250,000 of sales ($200,000 for take-out and $50,000 of in-store
sales). Maine has a 5 percent sales tax rate and a 7 percent sales
tax on prepared food; it exempts other food purchases. d) The New
Hampshire retail stores have $250,000 in sales. New Hampshire is
one of five states with no sales tax. However, it has a room and
meals tax rate of 8 percent. New Hampshire considers any food or
beverage that is served by a restaurant for consumption on or off
the restaurant premises to be considered a meal. e) Mels Rhode
Island retail stores have $300,000 in sales. The Rhode Island sales
tax rate is 7 percent and its restaurant surtax is 1 percent. Rhode
Island considers Mels a restaurant because its retail store has
seating.f) One of Mels best customers relocated to Texas, which
imposes an 8.25 percent state and local sales tax rate but exempts
bakery products. This customer entertains regularly and ordered
$5,000 of food items this year.
a) Mels would have no liability in Massachusetts. This is
because Massachusetts exempts food products from sales tax.
However, if the definition of food products didnt include prepared
bakery goods or specialty breads, Mel would pay $25,000 ($500,000 x
5 percent) in Massachusetts sales tax.b) Mels would have a $6,600
(110,000 x 6 percent) sales tax liability in Connecticut. This is
because the state taxes catering receipts and delivery charges on
catering at six percent. c) Mels would have a $3,500 ($50,000 x 7
percent) sales tax liability in Maine. This is because the state
taxes prepared food (in-store sales at 7 percent rather than the 5
percent regular rate). Because Maine exempts other food purchases,
there is no sales tax on take out purchases.d) Mels would have a
$20,000 ($250,000 x 8 percent) sales tax liability in New
Hampshire. This is because the state taxes prepared food. However,
if there were an exception for bakery goods, then Mels would be
exempt.
e) Mels would have a $24,000 ($300,000 x 8 percent) sales tax
liability in Rhode Island. This is because the state taxes Mels as
a restaurant and places a one percent surtax on top of the regular
rate. f) Mels would have no sales tax liability in Texas because it
lacks physical presence there. Additionally, Mels customer would
not have a use tax liability in Texas since bakery goods are
exempt.
31 [LO 2] {Research} Cuyahoga County, Ohio has a sales tax rate
of 7.75 percent. Determine what the state, local, and transit (a
local transportation district) portions of the rate are. You may
find resources on the State of Ohio website including the following
link:
http://www.tax.ohio.gov/Portals/0/tax_analysis/tax_data_series/sales_and_use/salestaxmapcolor.pdf
The total rate is 7.75 percent. The county tax rate is 1.25
percent; the transit tax rate is 1.00 percent. Thus the state tax
rate is 5.5 percent.
32 [LO 2] Kai operates the Surf Shop in Laie, Hawaii. The Surf
Shop designs, manufacturers and customizes surf boards. Hawaii has
a 4 percent excise tax that is technically paid by the seller.
However, the state also allows "tax on tax" to be charged, which
effectively means a customer is billed 4.166% of the sales price.
Determine the sales and use tax liability that the Surf Shop must
collect and remit, or that the customer must pay for each of the
following orders:
a) Bronco, a Utah customer, places an internet order for a
$1,000 board that will be shipped to Provo, Utah where the local
sales tax rate is 6.25 percent. b) Norm, a California resident,
comes to the retail shop on vacation and has a $2,000 custom board
made. Norm uses the board on vacation and then has the Surf Shop
ship the board to Los Angeles, California where the sales tax rate
is 8.5 percent. c) Jim, an Ohio resident, places an order for a
$2,000 custom board at the end of his vacation. Upon completion the
board will be shipped to Columbus, Ohio where the sales tax rate is
7 percent.d) Bo, a Nebraska resident, sends his current surf board
to the Surf Shop for a custom paint job. The customization services
come to $800. The board is shipped to Lincoln, Nebraska where the
sales tax rate is 7 percent.
a) Kais would have no sales tax liability. Bronco would have a
$63 ($1,000 x 6.25 percent) use tax liability in Utah. b) Kais
would have a $83 ($2,000 x 4.166 percent) sales tax liability. Norm
would have a $87 ([$2,000 x 8.5 percent] - $83 paid to HI) use tax
liability in California. c) Kais would have no sales tax liability.
Jim would have a $140 ($2,000 x 7 percent) use tax liability in
Ohio. d) Kais would have no sales tax liability because Hawaii
doesnt tax services. Bo would have no Nebraska use tax liability
because it doesnt tax services.
33 [LO 2] Last year Pete, a Los Angeles, California resident,
began selling autographed footballs through Trojan Victory (TV),
Incorporated, a California corporation. TV has never collected
sales tax. Last year TV had sales as follows: California
($100,000), Arizona ($10,000), Oregon ($15,000), New York
($50,000), and Wyoming ($1,000). Most sales are made over the
internet and shipped by common carrier. How much sales tax should
TV have collected in each of the following situations:
a) California treats the autographed football as tangible
personal property subject to an 8.25 percent sales tax. Answer for
California.b) California treats the autographed football as part
tangible personal property ($50,000) and part services ($50,000)
and tangible personal property is subject to an 8.25 percent sales
tax. Answer for California.c) TV has no property or other physical
presence in New York or Wyoming. Answer for New York and Wyoming.d)
TV has Pete deliver a few balls to fans in Arizona (5.6 percent)
and Oregon (no sales tax) while attending football games there.
Answer for Arizona and Oregon.e) Related to part d, can you make
any suggestions that would decrease TVs Arizona sales tax
liability?
a) TV would have a $8,250 ($100,000 x 8.25 percent) sales tax
liability in California.b) TV would have a $4,125 ($50,000 x 8.25
percent) sales tax liability in California.c) TV would have no
sales or use tax liability in New York or Wyoming because TV lacks
physical presence in those states.d) TV would have a $560 ($10,000
x 5.6 percent) sales tax liability in Arizona but no Oregon
liability.e) If TV shipped the footballs through common carrier to
its Arizona clients rather than having Pete (TVs agent) deliver
them then no sales or use tax liability would be accrued by TV. TVs
customers would still have an Arizona state use tax liability.
34 [LO 2] Armstrong Incorporated, a Texas corporation, runs
bicycle tours in several states. Armstrong also has a Texas retail
store and an internet store, which ships to out of state customers.
The bicycle tours operate in Colorado, North Carolina, and Texas
where Armstrong has employees and owns and uses tangible personal
property. Armstrong has real property only in Texas. Armstrong has
the following sales:
Armstrong Sales
StateGoodsServicesTotal
Arizona$34,194 $0 $34,194
California110,6120110,612
Colorado25,913356,084381,997
North Carolina16,721225,327242,048
Oregon15,431015,431
Texas241,982877,4411,119,423
Totals$444,853 $1,458,852 $1,903,705
Assume the following tax rates: Arizona (5.6 percent),
California (7.75 percent), Colorado (8 percent), North Carolina
(6.75 percent), Oregon (8 percent), and Texas (8.5 percent). How
much sales and use tax must Armstrong collect and remit?
Armstrong has sales and use tax nexus in Texas (commercial
domicile), Colorado, and North Carolina. Sales tax nexus is created
in Colorado and North Carolina because of the physical presence of
Armstrongs employees who provide services there. As a result,
Armstrong has sales and use tax liability of $20,568 in Texas,
$2,073 in Colorado, and $1,129 in North Carolina. It is important
to note that while the provision of services triggers the sales tax
liability, the calculation is based on the goods sold within each
state. The calculations are as follows:
StateGoodsRateLiability
Colorado 25,9138.00%$2,073
North Carolina 16,7216.75%$1,129
Texas 241,9828.50%$20,568
$284,616 $23,770
35 [LO 3] Kashi Corporation is the U.S. distributor of fencing
(sword fighting) equipment imported from Europe. Kashi is
incorporated in Virginia and headquartered in Arlington, Virginia.
Kashi ships goods to all 50 states. Kashis employees attend
regional and national fencing competitions where they maintain
temporary booths to market their goods. Determine whether Kashi has
income tax nexus in the following situations:
a) Kashi is incorporated and headquartered in Virginia. It also
has property, employees, sales personnel, and intangibles in
Virginia. Determine whether Kashi has nexus in Virginia? b) Kashi
has employees that live in Washington, DC and Maryland. All of
their employment-related activities are performed in Virginia.
Determine whether Kashi has nexus in Washington D.C. and Maryland?
c) Kashi has two customers in North Dakota. Kashi receives orders
over the phone and ships goods to its customers using FedEx.
Determine whether Kashi has nexus in North Dakota? d) Kashi has
independent sales representatives in Illinois. The representatives
distribute fencing and other sports-related items for many
companies. Determine whether Kashi has nexus in Illinois? e) Kashi
has sales personnel that visit South Carolina for a regional
fencing competition for a total of 3 days during the year. All
orders received are sent to Virginia for credit approval and
acceptance. The goods are shipped by FedEx into South Carolina.
Determine whether Kashi has nexus in South Carolina?f) Kashi has
sales personnel that visit California for a national fencing
competition and several regional competitions for a total of 17
days during the year. All orders received are sent to Virginia for
credit approval and acceptance. The goods are shipped by FedEx into
California. Determine whether Kashi has nexus in California?g)
Kashi receives orders from its Pennsylvania client over its
website. Because the orders are so large, the goods are delivered
on Kashis trucks on a weekly basis. Determine whether Kashi has
nexus in Pennsylvania?h) In addition to shipping goods, Kashi
provides fencing lessons in Virginia and Maryland locations.
Determine whether Kashi has nexus in Virginia and Maryland?i) Given
that Kashi ships to all 50 states, are there locations that Kashi
currently does not have nexus in that would decrease Kashis overall
state income tax burden it nexus were created in these
locations?
a) Kashi has nexus in Virginia, its state of commercial
domicile.b) Kashis employees living in the District of Columbia and
Maryland will not create nexus there. However, if the employees
were to make deliveries to customers in those jurisdictions on the
way home that would create nexus. c) Kashi does not have nexus in
North Dakota.d) The presence of independent contractors in
California does not create nexus in California. However, if the
independent contractor only represented Kashi (no other vendors)
they would likely be considered Kashis agent and could create
nexus.e) Kashi does not have nexus in South Carolina. Kashi is
protected by P.L. 86-272 because it merely solicits for sales of
tangible personal property. Kashi is also likely protected by the
trade show rule.f) Kashi does not have nexus in California. Kashi
is protected by P.L. 86-272 because it merely solicits for sales of
tangible personal property. Kashi may also be protected by the
trade show rule, this would depend on whether separate shows days
are treated separately or aggregated for purposes of calculating
the 14 day rule.g) The presence of Kashis truck in Pennsylvania
will create nexus there.h) The provision of fencing lessons
(services) in Virginia and Maryland will create income tax nexus
there. Services are not a protected activity under P.L. 86-272.i)
Yes, Kashi should create nexus with any state that doesnt have an
income tax. This will allow Kashi to apportion part of its business
income to states which do not tax the apportioned incomethis
creates nowhere income. Kashi may also consider creating nexus in
low-tax jurisdictions but would have to balance the lower taxes
against the higher tax compliance costs.
36 [LO 3] Gary Holt LLP provides tax and legal services
regarding tax-exempt bond issues of state and local jurisdictions.
Gary typically provides the services from his New York offices.
However, for large issuances Gary and his staff travel to the state
to complete the work. Determine whether Gary Holt has income tax
nexus in the following situations:
a) Gary Holt is a New York partnership and headquartered in New
York. It also has property and employees in New York. Does it have
income tax nexus in New York?
b) Gary Holt has employees that live in New Jersey and
Connecticut. All of their employment related activities are
performed in New York. . Does it have income tax nexus in New
Jersey and/or Connecticut?
c) Gary Holt has two customers in California. Gary personally
travels to California to finalize the Alameda County bond issuance.
Does it have income tax nexus in California?
a) Gary Holt has nexus in New York through its commercial
domicile, provision of services, property, and payroll.b) Gary Holt
does not have nexus in New Jersey and Connecticut. Its employees do
not create nexus there.c) Gary Holt has nexus in California through
the provision of services in California. Services are not a
protected activity under P.L. 86-272.
37 [LO 3] Root Beer, Inc. (RBI) is incorporated and
headquartered in Seattle, Washington. RBI runs an internet business
www.makerootbeer.com. RBI sells bottling equipment and other
supplies to make home-made root beer. RBI has an Oregon warehouse
facility that it ships goods from. Determine whether RBI has income
tax nexus in the following situations:
a) Root Beer is incorporated and headquartered in Washington. It
has property and employees in Oregon and Washington. Determine
whether RBI has nexus in Oregon and Washington.b) Root Beer has
hundreds of customers in California but has no physical presence
(no employees or property). Determine whether RBI has nexus in
California.c) Root Beer has 500 New York customers but has no
physical presence (no employees or property). Remember New York has
the new Amazon rule. Determine whether RBI has nexus in New
York.
a) RBI has income tax nexus in Washington and Oregon. Nexus is
created in Washington through commercial domicile, payroll, and
property. However, Washington does not have a corporate income tax,
but has a Business and Occupation (gross receipts) tax instead.
Nexus is created in Oregon through payroll and property.b) RBI has
no nexus in California because it lacks physical presence. c) RBI
has no income tax nexus in New York, but New Yorks Amazon rule will
create sales and use tax nexus.
38 [LO 3] Rockville Enterprises manufactures wood working
equipment and is incorporated and based in Evansville, Indiana.
Rockvilles real property is all in Indiana. Rockville employs a
large sales force that travels throughout the U.S. Determine
whether each of the following is a protected activity in
non-domiciliary states under Public Law 86-272:
a) Rockville advertises using television, radio and newspaper in
Wisconsin.b) Rockvilles employees in Illinois check the credit of a
potential customer.c) Rockville maintains a booth at an industry
tradeshow in Arizona for 10 days.d) Sales representatives check the
inventory of a customer to make sure they have enough in stock and
that it is properly displayed.e) Rockville holds a management
seminar for corporate executives over four days in Florida.
f) Sales representatives supervise the repossession of inventory
from a customer that is not making payments on time in Maine.g)
Rockville provides automobiles to Idaho and Montana sales
representatives. h) An Alabama sales representative accepts a
customer deposit on a large order.i) Colorado sales representatives
carry display racks and promotional material that they place in
customers retail stores without charge.
a) All forms of advertising are a protected activity.b) Checking
the credit of customers is not a protected activity. Employees may
take the customers information and forward it to the home office
for the credit check (this would be a protected activity).c) The
trade show rule protects in-state sales for up to 14 days in most
states including Arizona.d) Inventory checks (both quantity and
proper display) are protected activities.e) A management seminar is
not a protected activity and would create nexus. A sales personnel
seminar is a protected activity.f) Collection activities are not a
protected activity and create nexus.g) Providing automobiles or
monetary compensation for the purchase or lease of an automobile
used by sales personnel is a protected activity.h) Accepting a
customer deposit is the acceptance of an order and is not a
protected activity.i) Placing display racks and promotional
materials without charge is a solicitation and is a protected
activity.
39 [LO 3] Software Incorporated is a sales and use tax software
vendor. It provides customers with a license to use its software
that is downloaded on customers machines. The licensing agreement
provides that Software actually retains ownership of the software.
Software has customers in New Jersey and West Virginia. Does
Software have economic nexus in these states because of the
following decisions (Lanco, Inc. v. Director, Division of Taxation,
NJ Sup. Ct., Dkt. No.A-89-05(2006); and Tax Commissioner of West
Virginia v. MBNA America Bank, N.A., 640 SE 2d 226 (WV 2006))?
The court decisions (Lanco and MBNA) hold that physical presence
isnt necessary in order to create income tax nexus. Lanco licensed
trademarks, trade names, and service marks within New Jersey. MBNA
issued credit cards to West Virginia customers and had no
employees, payroll or property in that state. By analogy, Softwares
licensing the use of its intangible product in New Jersey and West
Virginia should create nexus under those precedents.
40 [LO 3] {Research}Peter Inc., a Kentucky corporation owns 100
percent of Suvi Inc., a Mississippi corporation. Peter and Suvi
file a consolidated federal tax return. Peterhas income tax nexus
in Kentucky and South Carolina. Suvi in Mississippi and South
Carolina. Kentucky, Mississippi, and South Carolina are separate
return states. In which states must Peter and Suvi file tax
returns? Can they file a combined/consolidated return in any
states? Explain. (Hint: Use South Carolina Form SC 1120 and the
related instructions.)
Peter must file in Kentucky and South Carolina because it has
nexus in those states. Suvi must file in Mississippi and South
Carolina because it has nexus in those states. South Carolina
permits a consolidated tax return (see Form SC1120, Schedule J).
Each corporation electing to file a consolidated return determines
its income or loss separately, allocates its allocable income
separately, and calculates its apportionable income separately
using separate apportionment factors.
41 [LO 3] Use California Publication 1061 (2011) to determine
the various tests California uses to determine whether two or more
entities are considered to be part of a unitary group.
In Publication 1061, California uses tests from the following
cases: Butler Brothers, Butler Brothers v. McColgan, 315 U.S. 501
(1942), (unity of ownership, operations, and a centralized
executive force) Edison California Storesv. McColgan (1947) 30
Cal.2d.472, (if the operations within the state is dependent on or
contributes to operations outside the state); Container
Corporation, Container Corporation v. Franchise Tax Board (1983)
463 U.S. 159, (three unities test and dependency and contribution
test); Mobil Oil, Mobil Oil Corp. v. Commr of Taxes of Vt. (1980)
445 U.S. 425, (functional integration, centralization of
management, and economies of scale).
42 [LO 3] Bulldog, Incorporated is a Georgia corporation. It
properly included, deducted, or excluded the following items on its
federal tax return in the current year:
ItemAmountFederal Treatment
Georgia Income Taxes$25,496
Deducted on federal return
Tennessee Income Taxes$13,653 Deducted on federal return
Washington Gross Receipts Tax$3,105Deducted on federal
return
Georgia Bond Interest$10,000 Excluded from federal return
Federal T-Note Interest$4,500 Included on federal return
Domestic Production Act. Ded. (DPAD)$15,096 Deducted on federal
return
Use the Georgia Corporate Income Tax Form 600 and Instructions
to determine what federal/state adjustments need to be made for
Georgia. Bulldogs Federal Taxable Income was $194,302. Calculate
the Bulldogs Georgia state tax base.
Bulldogs Georgia state tax base is $218,551, which is calculated
as follows:
Bulldog Georgia Tax Base
(1) Federal Income$194,302
Additions
(2) DPAD$15,096Per instructions
(3) Tennessee tax$13,653Per instructions
Subtractions
(4)Federal T-note interest$4,500Per return
Georgia Tax Base$218,551(1) + (2) +(3) (4)
Additionally, Publication 611 (corporate instructions) indicates
that non-income based tax (Washington Gross Receipts Tax) is
deductible (no adjustment is necessary) and Georgia bond interest
is deductible.
43 [LO 3] Herger Corporation does business in California,
Nevada, and Oregon and has nexus in these states as well. Hergers
California state tax base was $921,023 after making the required
federal/state adjustments. Hergers state tax base contains the
following items:
ItemAmount
Federal T-note interest$5,000
Nevada municipal bond interest$3,400
California municipal bond interest$6,000
Interest expense related to T-note interest$1,400
Royalty income$100,000
Travel expenses$9,025
Determine Hergers business income.
Hergers California business income would be $817,623 ($921,023 -
$100,000 of royalty income - $3,400 of Nevada municipal bond
interest). The royalty income would be considered non-business or
allocable income. The Federal T-note interest and related expenses
are excluded from the California state income tax base as is the
California municipal bond interest. The travel expenses are in the
state tax base and are a business expense (no adjustment is
necessary).
44 [LO 3] Bad Brad sells used semi trucks and tractor trailers
in the Texas panhandle. Bad Brad has sales as follows:
Bad Brads
StateSales
Colorado$234,992
Oklahoma 402,450
New Mexico675,204
Texas1,085,249
Totals$2,397,895
Bad Brad is a Texas Corporation. Answer the questions in each of
the following scenarios.
a) Bad Brad has nexus in Colorado, Oklahoma, New Mexico and
Texas. What are the Colorado, Oklahoma, New Mexico and Texas sales
apportionment factors?b) Bad Brad has nexus in Colorado and Texas.
Oklahoma and New Mexico sales are shipped from Texas (a throwback
state). What are the Colorado and Texas sales apportionment
factors?c) Bad Brad has nexus in Colorado and Texas. Oklahoma and
New Mexico sales are shipped from Texas (a throwback state);
$200,000 of the Oklahoma sales were to the federal government. What
are the Colorado and Texas sales apportionment factors?d) Bad Brad
has nexus in Colorado and Texas. Oklahoma and New Mexico sales are
shipped from Texas (assume Texas is a non-throwback state). What
are the Colorado and Texas sales apportionment factors?
a) The sales factors are the state sales divided by the total
sales. For example Colorados sales factor is 9.8 percent
($234,992/$2,397,895). The sales factors are as follows:
Colorado sales factor9.80%
Oklahoma sales factor16.78%
New Mexico sales factor28.16%
Texas sales factor45.26%
100.00%
b) Thrown back sales are added to the Texas numerator. Thus, the
Texas sales numerator increases to $2,162,903($402,450 + $675,204 +
$1,085,249). The Colorado and Texas factors are as follows:
Colorado sales factor9.80%
Texas sales factor*90.20%
*($2,162,903/$2,397,895)100.00%
c) Federal government sales are added to the numerator of the
state where they shipped from (Texas). As a result, all of the
Oklahoma sales are added to Texas through either the throwback or
government sales rules. The Colorado and Texas factors are as
follows:
Colorado sales factor9.80%
Texas sales factor90.20%
100.00%
d) Without the throwback rules, the sales from New Mexico and
Oklahoma are excluded from both the numerator and denominator. The
Colorado and California sales factors are 17.8
($234,992/$1,320,241) percent and 82.2 (1,085,249/$1,320,241)
percent, respectively.
Colorado sales factor17.80%
Texas sales factor82.20%
100.00%
45 [LO 3] Nicoles Salon a Louisiana Corporation, operates beauty
salons in Arkansas, Louisiana, and Tennessee. These salon sales by
state, are as follows:
Nicoles Salon
StateSales
Arkansas$130,239
Louisiana 309,192
Tennessee 723,010
Total$1,162,441
What are the payroll apportionment factors for Arkansas,
Louisiana, and Tennessee in each of the following alternative
scenarios?
a) Nicoles Salon has nexus in Arkansas, Louisiana, and
Tennessee. b) Nicoles Salon has nexus in Arkansas, Louisiana, and
Tennessee, but $50,000 of the Arkansas amount is paid to
independent contractors.
a) Nicoles salons payroll factors are as follows:
Arkansas 11.20%($130,239/$1,162,441)
Louisiana 26.60%($309,192/$1,162,441)
Tennessee 62.20%($723,010/$1,162,441)
100.00%
b) The independent contractor amount is subtracted from the
Arkansas numerator, which also lowers the denominator. Nicoles
salons payroll factors are as follows:
Arkansas 7.21%($80,239/$1,112,441)
Louisiana 27.79%($309,192/$1,112,441)
Tennessee 64.99%($723,010/$1,112,441)
100.00%
46 [LO 3] Delicious Daves Maple Syrup a Vermont Corporation, has
property in the following states:
Property
StateBeginningEnding
Maine$923,032 $994,221
Massachusetts 103,311 203,109
New Hampshire381,983 283,021
Vermont873,132 891,976
Total$2,281,458 $2,372,327
What are the property apportionment factors for Maine,
Massachusetts, New Hampshire, and Vermont in each of the following
scenarios?
a) Delicious has nexus in each of the states.b) Delicious has
nexus in each of the states, but the Maine total includes $400,000
of investment property that Delicious rents out (unrelated to its
business).c) Delicious has nexus in each of the states, but also
pays $50,000 to rent property in Massachusetts.
a) Delicious has the following property factors:
BeginningEndingAverageFactor
Maine $923,032 $994,221 $958,627 41.20%
Massachusetts $103,311 $203,109 $153,210 6.58%
New Hampshire $381,983 $283,021 $332,502 14.29%
Vermont $873,132 $891,976 $882,554 37.93%
$2,281,458 $2,372,327 $2,326,893 100.00%
b) Delicious must remove the investment (non-business property)
from the property factors. Delicious would have the following
property factors:
BeginningEndingAverageFactor
Maine $523,032 $594,221 $558,627 28.99%
Massachusetts $103,311 $203,109 $153,210 7.95%
New Hampshire $381,983 $283,021 $332,502 17.26%
Vermont $873,132 $891,976 $882,554 45.80%
$1,881,458 $1,972,327 $1,926,893 100.00%
c) Delicious must add the rental property to Massachusetts. The
annual rent ($50,000) is multiplied by eight and thus ($400,000) is
included in both the numerator and denominator. Delicious would
have the following property factors:
BeginningEndingAverageFactor
Maine $923,032 $994,221 $958,627 35.15%
Massachusetts $503,311 $603,109 $553,210 20.29%
New Hampshire $381,983 $283,021 $332,502 12.19%
Vermont $873,132 $891,976 $882,554 32.36%
$2,681,458 $2,772,327 $2,726,893 100.00%
47 [LO 3] Susies Sweet Shop has the following sales, payroll and
property factors:
IowaMissouri
Sales69.20%32.01%
Payroll88.00%3.50%
Property72.42%24.04%
What are Susies Sweet Shops Iowa and Missouri apportionment
factors under each of the following scenarios:
a) Iowa and Missouri both use a three-factor apportionment
formula.b) Iowa and Missouri both use a four-factor apportionment
formula that double- weights sales.c) Iowa uses a three-factor
formula and Missouri uses use single-factor apportionment formula
(based solely on sales).
a) Using a three-factor formula, the total apportionment would
be 96.39 percent. Susies Iowa and Missouri apportionment factors
would be as follows:
Iowa Missouri
Sales69.20%32.01%
Payroll88.00%3.50%
Property72.42%24.04%
229.62%59.55%
/3/3
Apportionment Factor76.54%19.85%96.39%
b) Using a four-factor (double-weighted sales) formula, the
total apportionment would be 97.60 percent. Susies Iowa and
Missouri apportionment factors would be as follows:
Iowa Missouri
Sales69.20%32.01%
Sales69.20%32.01%
Payroll88.00%3.50%
Property72.42%24.04%
298.82%91.56%
/4/4
Apportionment Factor74.71%22.89%97.60%
c) If Iowa uses a three-factor formula, as in part (a), and
Missouri uses a single (sales) factor apportionment factor, the
total apportionment would be 108.55 percent. Susies Iowa and
Missouri apportionment factors would be as follows:
Iowa Missouri
Apportionment Factor76.54%32.01%108.55%
48 [LO 3] Brady Corporation is a Nebraska Corporation but owns
business and investment property in surrounding states as well.
Determine the state where each item of income is allocated.
a. $15,000 of dividend income.b. $10,000 of interest income.c.
$15,000 of rental income for South Dakota property.d. $20,000 of
royalty income for an intangible used in South Dakota (where nexus
exists).e. $24,000 of royalty income from Kansas (where nexus does
not exist).f. $15,000 of capital gain from securities held for
investment.g. $30,000 of capital gain on real property located in
South Dakota.
a. Nebraska; dividend income is generally allocated or sourced
to the state of commercial domicile.b. Nebraska; interest income is
generally allocated or sourced to the state of commercial domicile.
Although, one exception is that interest on working capital is
considered business income and is apportioned rather than
allocated.c. South Dakota; rental property income is generally
allocated or sourced to where the property is located.d. South
Dakota; royalty income is generally allocated or sourced to where
the property is used.e. Kansas, royalty income is generally
allocated or sourced to where the property is used, but if nexus
does not exist it is allocated to the location where the intangible
is controlled (Nebraska).f. Nebraska; capital gain from property
held for investment is generally allocated or sourced to the state
of commercial domicile.g. South Dakota; capital gain from real
property is generally allocated or sourced to the state where the
property is located.
49 [LO 3] Ashton Corporation is headquartered in Pennsylvania.
Ashton has a Pennsylvania state income tax base of $500,000. Of
this amount, $50,000 was non-business income. Ashtons Pennsylvania
apportionment factor is 42.35 percent. The non-business income
allocated to Pennsylvania was $32,000. Assuming a Pennsylvania
corporate tax rate of 8.25 percent, what is Ashtons Pennsylvania
state tax liability?
Ashton Corporations Pennsylvania state tax liability is $18,362.
The state tax liability is calculated as follows:
Ashton Corporation
(1) State tax base$500,000 Given
(2) Total allocated income$50,000 Given
(3) Apportionable income$450,000 (1) - (2)
(4) PA apportionment factor42.35%Given
(5) PA apportioned income$190,575 (3) x (4)
(6) PA allocated income$32,000 Given
(7) PA taxable income$222,575 (5) + (6)
(8) PA tax rate8.25%Given
(9) PA state tax liability$18,362 (7) x (8)
Comprehensive problems
50. [LO 3] Do you know what Cloud computing is? Cloud computing
is the use of hosted computer facilities through the internet.
Gmail, RIA Checkpoint, and even using your iPhone are some
applications of cloud computing. a. If HP provides a customized
bundle of servers, storage, network and security software, business
application software to a customer in Washington state how is it
taxed?b. Is HP leasing tangible personal property which is taxable
or providing a non-taxable service?c. Is the buyer of HPs products
subject to Washingtons sales and use tax?d. Is HP subject to
Washingtons B&O tax?
Solution: If youre buying or selling cloud computing services,
it is critical to determine what youre buying or selling. You may
be leasing equipment, making service payments, or paying a license
for using software these distinctions are important and can have an
impact on your companys tax filings. Current tax law does not
necessarily reflect the realities of cloud computing. Cloud
computing transactions arent quite leases and arent quite services,
but tax law requires them to be classified in one of these two
categories. Eventually, tax regulations will be updated and
clarified. Now, there isnt enough consensus to know how to treat
them for most states.
To deal with these issues, Washington State changed its laws in
2009 to deal with the shift, the report said. The state now
requires that Washington residents pay state tax regardless of how
their goods are delivered. So Washington residents will be subject
to the sales and use tax. HP would be subject to the Washington
B&O tax because non-income based taxes are not protected under
Public Law 86-272.
51. Sharon, Inc. is headquartered in State X, Sharon owns 100%
of Carol, Josey and Janice Corps. Assume sales operations are
within the solicitation bounds of Public Law 86-272. Each of the
corporations has operations in the following states:
Sharon, Inc.Carol CorpJosey CorpJanice Corp
Domicile StateState X (throwback)State Y (throwback)State Z
(non-throwback)State Z (non-throwback)
Dividend income1,000200300500
Business income50,00030,00010,00010,000
Sales: State X70,00010,00010,00010,000
State Y40,0005,000
State Z20,00020,00010,000
State A20,000
State B10,00010,000
Property: State X50,00020,00010,000
State Y80,000
State Z25,00020,000
State A50,000
Payroll: State X10,00010,000
State Y40,000
State Z3,00010,000
State A10,000
Compute the following for State X assuming a tax rate of 15
percent.a. Calculate the State X apportionment factor for Sharon
Inc., Carol Corp.,Josey Corp., and Janice Corp.b. Calculate the
business income apportioned to State X.c. Calculate the taxable
income for State X for each company.d. Determine the tax liability
for State X for the entire group.
Josey has no nexus in State X because it has no property or
payroll there (no physical presence). The State X tax liability is
$6,793; calculated as follows:
SharonCarolJoseyJanice
No NEXUS
SalesX70,00010,00010,00010,000
Total100,00070,00035,00030,000
PropertyX50,00020,000010,000
Total100,000100,00025,00030,000
PayrollX10,00010,00000
Total10,00050,0003,00020,000
Sales 0.700.140.3333
Property0.500.200.3333
Payroll1.000.200.00
2.200.540.6666
Apportionment Factor0.73330.180.2222
Income50,00030,00010,000
Apportioned Income36,6675,4002,222
Allocated Income1,00000
State Taxable Income37,6675,4002,22245,289Taxable income
15%Tax rate
6,793State tax liability
52. Happy Hippos (HH) is a manufacturer and retailer of New
England crafts. HH is headquartered in Camden, Maine. HH has sales,
employees, property, provides services, and commercial domicile as
follows: Happy Hippos In-State Activities
StateSalesEmployeesPropertyServicesCommercial Domicile
Connecticut
Maine
Massachusetts
New Hampshire
Rhode Island
Vermont
Happy Hippos sales of goods and services by state are as
follows:
Happy Hippos Sales
StateGoodsServicesTotal
Connecticut$78,231 $52,321 $130,552
Maine292,81381,313374,126
Massachusetts90,23890,238
New Hampshire129,322129,322
Rhode Island98,31398,313
Vermont123,91423,942147,856
Totals$812,831 $157,576 $970,407
HH has federal taxable income of $282,487 for the current year.
Included in federal taxable income are the following income and
deductions:
$12,000 of Vermont rental income; City of Orono, Maine bond
interest of $10,000; $10,000 of dividends; $2,498 of state tax
refund included in income; $32,084 of state net income tax expense;
and $59,234 of federal depreciation.
Maine state depreciation for the year was $47,923 and Maine
doesnt allow deductions for state net income taxes.
The employees present in Connecticut, Massachusetts, and Rhode
Island are sales personnel and perform only activities protected by
Public Law 86-272.
Each of the states is a separate-return state.
HHs payroll is as follows:
Payroll
StateWages
Connecticut$94,231
Maine392,195
Massachusetts167,265
Rhode Island92,391
Vermont193,923
Total$940,005
HHs property is as follows:
Property
StateBeginningEndingRented
Maine$938,234 $937,652
Vermont329,134 428,142 $12,000
Total$1,267,368 $1,365,794 $12,000
a) Determine the states in which HH has sales tax nexus.b)
Calculate the sales tax HH must remit assuming the following sales
tax rates: Connecticut (6%), Maine (8%), Massachusetts (7%), New
Hampshire (8.5%), Rhode Island (5%), and Vermont (9%).c) Determine
the state in which HH has income tax nexus.d) Determine HHs state
tax base for Maine assuming federal taxable income of $282,487.e)
Calculate business and non-business income.f) Determine HHs Maine
apportionment factors using the three-factor method (assume that
Maine is a throwback state).g) Calculate HHs business income
apportioned to Maine. h) Determine HHs allocation of non-business
income to Maine.i) Determine HHs Maine taxable income.j) Calculate
HHs Maine net income tax liability assuming a Maine tax rate of 5
percent.
a) HH has sales tax nexus in Maine, Connecticut, Massachusetts,
Rhode Island and Vermont. HH does not have sales tax nexus in New
Hampshire because there is no physical presence. b) HH sales tax
remittance will be as follows:
Connecticut Maine Massachusetts New Hampshire Rhode Island
Vermont
Taxable sales$78,231$292,813$90,238$0$98,313$123,914
Sales tax rate6.0%8.0%7.0%8.5%5.0%9.0%
Sales tax liability$4,694$23,425$6,317$0$4,916$11,152
c) HH has income tax nexus in Maine (commercial domicile),
Connecticut (provides services), and Vermont (provides services).d)
HHs Maine state tax base is $323,384 and is calculated as
follows:
Federal taxable income$282,487
Positive adjustments
State tax expense$32,084
Federal depreciation$59,234
$91,318
Negative adjustments
State tax refund$2,498
Maine depreciation$47,923
$50,421
Maine state tax base$323,384
e) HHs non-business and business income is as follows:
Maine state tax base$323,384
Allocable income
Vermont rental income$12,000
Maine bonds$10,000
Dividends$10,000
Non-business income($32,000)
Business income$291,384
f) HHs Maine apportionment factor is 59.81; the average of the
sales, payroll and property factors. HHs sales, payroll, and
property factors are 71.31, 41.72, and 66.40 percent,
respectively.
HHs Maine sales apportionment factor is 71.31%
($691,999/$970,407). New Hampshire, Rhode Island, and Massachusetts
sales are thrown back to Maine because HH lacks income tax nexus in
those states (remember that Public Law 86-272 protects sales
activities).
ConnecticutMaineVermont
130,552 374,126147,856
New Hampshire129,322
Rhode Island98,313
Massachusetts090,2380
Numerator130,552 691,999147,856Denominator
970,407
HHs Maine payroll factor is 41.72 ($392,195/$940,005)
percent.
HHs Maine property factor is 66.40 ($937,943/$1,412,581)
percent. The beginning and ending amounts are averaged. The Vermont
beginning and ending amounts include $96,000 ($12,000 x 8), which
is eight times the rents paid during the year
StateBeginningEndingAverage
Maine $938,234 $937,652 $937,943
Vermont $425,134 $524,142 $474,638
Total$1,412,581
g) HHs business income apportioned to Maine is $174,277.
Total business income$291,384
ME apportionment59.81%
ME business income$174,277
h) HHs non-business income allocable to Maine is $20,000 (City
of Orono, Maine bond interest of $10,000 and $10,000 of dividends).
Investment income is typically allocated to the state of commercial
domicile.i) HHs Maine taxable income is $194,277.
Maine
ME business income$174,277
ME non-business income$20,000
ME taxable income$194,277
j) HHs Maine tax liability is $9,714.
Maine taxable income$194,277
Maine tax rate5%
Maine tax liability$9,714
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