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Exam 16: Multistate Corporate Taxation

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Question 1

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Match each of the following items with the appropriate description in applying the P.L. 86-272 definition of solicitation. -Purchasing ads that appear on search-result screens of internet browsers.

A) More than solicitation, creates nexus
B) Solicitation only, no nexus created

C) A) and B)
D) undefined

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Question 2

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Match each of the following terms with the appropriate description in the state income tax formula. Apply the UDITPA rules in your responses. -Treasury bond interest income.

A) Addition modification
B) Subtraction modification
C) No modification

D) A) and C)
E) None of the above

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Question 3

Multiple Choice

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Match each of the following terms with the appropriate description in the state income tax formula. Apply the UDITPA rules in your responses. -Federal depreciation deduction in excess of state amount.

Almost all of the states allow__________ treatment to an LLC for income tax purposes.

In most states, a taxpayer's income is apportioned on the basis of a formula measuring the extent of business contact and allocated according to the location of property owned or used.

Guilford Corporation is subject to franchise tax in State Z. The tax is imposed at a rate of 2.5% of the taxpayer's net worth that is apportioned to the state by use of a two-factor sales and property equally weighted) formula. The property factor includes real and tangible personal property valued at net book value at the end of the taxable year. Of Guilford's sales, 60% are attributable to State Z, and $200,000 of the net book value of it's tangible personal property is located in State Z. Determine the State Z franchise tax payable by Guilford this year given the following end-of-the year balance sheet:

Milt Corporation owns and operates two facilities that manufacture paper products. One of the facilities is located in State D, and the other is located in State E. Milt generated $1,200,000 of taxable income, composed of $1,000,000 of income from its manufacturing facilities and a $200,000 gain from the sale of nonbusiness property located in State E. State E does not distinguish between business and nonbusiness property. State D apportions business income. Milt's activities within the two states follow: $\begin{array}{lrrr}&\text { State } \mathbf{D} & \text { State } \mathbf{E} & \text { Total }\\\text { Sales of paper products } & \$ 4,500,000 & \$ 1,500,000 & \$ 6,000,000 \\\text { Property } & 3,500,000 & 2,500,000 & 6,000,000 \\\text { Payroll } & 1,500,000 & 1,000,000 & 2,500,000\end{array}$ Both States D and E utilize a three-factor apportionment formula, under which sales, property, and payroll are equally weighted. Determine the amount of Milt's income that is subject to income tax by each state.

Under P.L. 86-272, which of the following transactions by itself would create nexus with a state?

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: $\begin{array} { l r r r } & \text { State X } & \text { State Z } & \text { T otals } \\\text { Sales } & \$ 1,500,000 & \$ 1,000,000 & \$ 2,500,000 \\\text { Property } & 500,000 & - 0 - & 500,000 \\\text { Payroll } & 2,000,000 & - 0 - & 2,000,000\end{array}$ X utilizes an equally weighted three-factor apportionment formula. How much of José's taxable income is apportioned to X?

Identify some state/local income tax issues facing pass-through entities such as S corporations, partnerships, and LLCs.

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.

In most states, legal and accounting services are exempt from the sales/use tax base.

In computing the property factor, property owned by the corporation typically is valued at its___________, but without adjusting for depreciation.

Drieser Corporation's manufacturing facility, distribution center, and retail store are located in State K. Drieser sells its products to residents located in States K, M, and N. Sales to residents of K are conducted through a retail store. Sales to residents of M are obtained by Drieser's sales representative, who has the authority to solicit, accept, and approve sales orders in State M. Residents of N can purchase Drieser's product only if they place an order online and arrange to take delivery of the product at Drieser's shipping dock. Drieser's sales this year were reported as follows: $\begin{array}{lr}\text { Sales to residents of State K } & \$ 1,000,000 \\\text { Sales to residents of State M } & 600,000 \\\text { Sales to residents of State N } & 900,000\\\text { Total }&\$ 2,500,000\end{array}$ Drieser's activities within the three states are limited to those described above. All of the states have adopted a throwback provision and utilize a three-factor apportionment formula under which sales, property, and payroll are equally weighted. State K sources dock sales to the destination state. Determine Drieser's sales factors for States K, M, and N.

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 states) will the interest income create an income tax liability?

P.L. 86-272__________ does/does not) create income tax nexus when the seller inserts advertising flyers into the Sunday newspaper that is sold in the state.

A state sales/use tax is designed to be collected by the__________ seller/purchaser) of the product and then remitted to the state.

Match each of the following items with the appropriate description in applying the P.L. 86-272 definition of solicitation. -Checking the customer's inventory to determine whether a reorder is needed.

Anders, a local business, wants your help in making a decision about a large capital investment. To assist your client, list several tax and nontax implications of the decision.

A state might levy an)________ tax when an investor sells shares of stock.