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Exam 24: Multistate Corporate Taxation

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Question 21

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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. -State income tax expense.

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

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

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Question 22

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General Corporation is taxable in a number of states. This year, General made a $100,000 sale from its State A headquarters to a customer in State B. General has not established nexus with State B. State A does not apply a throwback rule. In which state(s) will the sale be included in the sales factor numerator?

A) In all of the states, according to the apportionment formulas of each, as the U.S. government is present in all states.
B) $100,000 in State A.
C) $100,000 in State B.
D) $0 in State A and $0 in State B.

E) B) and D)
F) C) and D)

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Question 23

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In international taxation, we discuss income sourcing rules and the permanent establishment doctrine. In multistate taxation, an analogous term might be the ultimate destination concept. Define this term, and identify at least two of the most important exceptions to the general rule.

Valdez Corporation, a calendar year taxpayer, owns property in States M and O. Both states require that the average value of assets be included in the property factor. State M requires that the property be valued at its historical cost, and State O requires that the property be included in the property factor at its net depreciated book value. $\text { Account Balances at Beginning of Year }$ $\begin{array}{lrrr} & \text { State } M & \text { State } O & \text { Totals } \\\text { Inventories } & \$ 200,000 & \$ 300,000 & \$ 500,000 \\\text { Building \& machinery (cost) } & 700,000 & 300,000 & 1,000,000 \\\text { Accumulated depreciation } & (150,000) & (50,000) & (200,000) \\\text { Land } & \underline{400,000} & \underline{200,000} & \underline{600,000} \\\text { Totals } & \$ 1,150,000 & \$ 750,000 & \$ 1,900,000\end{array}$ $\text { Account Balances at Year-End }$ $\begin{array}{lrrr} & \text { State } M & \text { State } O & \text { Totals } \\\text { Inventories } & \$ 400,000 & \$ 100,000 & \$ 500,000 \\\text { Building \& machinery (cost) } & 800,000 & 500,000 & 1,300,000 \\\text { Accumulated depreciation } & (300,000) & (100,000) & (400,000) \\\text { Land } & \underline{400,000} & \underline{200,000} & \underline{600,000} \\\text { Totals } & \$ 1,300,000 & \$ 700,000 & \$ 2,000,000\end{array}$ Valdez's O property factor is:

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.

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

Flint Corporation is subject to a corporate income tax only in State X. The starting point in computing X taxable income is Federal taxable income which is $750,000. This amount includes a $50,000 deduction for state income taxes. During the year, Flint received $10,000 interest on Federal obligations. X tax law does not allow a deduction for state income tax payments. Flint's taxable income for X purposes is:

The most commonly used state income tax apportionment formula is:

Chipper Corporation realized $1,000,000 taxable income from the sales of its products in States X and Z. Chipper's activities establish nexus for income tax purposes only in Z, the state of its incorporation. Chipper's sales, payroll, and property among the states include the following: $\begin{array} { l r r r } & \text { State X } & \text { State Z } & \text { T otals } \\\text { Sales } & \$ 1,000,000 & \$ 2,000,000 & \$ 3,000,000 \\\text { Property } & 200,000 & 2,300,000 & 2,500,000 \\\text { Payroll } & 100,000 & 1,900,000 & 2,000,000\end{array}$ X utilizes a sales-only factor in its three-factor apportionment formula. How much of Chipper's taxable income is apportioned to X?

Hendricks Corporation sells widgets in two states. State A levies a 9% effective tax rate, and State B levies a 3% rate. A and B have adopted sales-factor-only apportionment formulas. To reduce overall multistate income tax liabilities, Hendricks should:

Match each of the following terms with the appropriate description in the state income tax formula. Apply the UDITPA rules in your responses. -Federal general business credit.

Match each of the following items with the appropriate description in determining whether sales/use tax typically must be collected. -Prescription drugs and medicines purchased by a consumer.

You are preparing to make a presentation to a client who has some familiarity with state corporate income tax rules. At a general level, list for the client the principles of multistate tax planning.

The use tax is designed to complement the sales tax. A use tax typically covers purchases made out of state and brought into the jurisdiction.

Hill Corporation is subject to tax only in State X. Hill generated the following income and deductions. State income taxes are not deductible for X income tax purposes. $\begin{array} { l r } \text { Sales } & \$ 5,000,000 \\\text { Cost of sales } & 2,000,000 \\\text { State X income tax expense } & 160,000 \\\text { Depreciation allowed for Federal tax purposes } & 1,000,000 \\\text { Depreciation allowed for state tax purposes } & 800,000 \\\text { Interest income on Federal obligations } & 50,000 \\\text { Interest income on X obligations } & 200,000 \\\text { Expenses related to carrying X obligations } & 10,000\end{array}$ a. The starting point in computing the State X income tax base is Federal taxable income. Derive this amount. b. Determine Hill's State X taxable income, assuming that interest on X obligations is exempt from State X income tax. c. Determine Hill's taxable income, assuming that interest on X obligations is subject to State X income tax.

Parent and Junior form a unitary group of corporations. Parent is located in a state with an effective tax rate of 3% and Junior's effective tax rate is 9%. Acting in concert to reduce overall tax liabilities, the group should:

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: $\begin{array}{lrrr}& \text { State D } & \text { State E } & \text { Total } \\\text { Sales of paper products } & \$ 4,500,000 & \$ 1,500,000 & \$ 6,000,000 \\\text { Property } & 3,500,000 & 2,500,000 & 6,000,000 \\\text { Payroll } & 1,500,000 & 1,000,000 & 2,500,000\end{array}$ 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.

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?

Provide the required information for Orange Corporation whose Federal taxable income totals $100 million. Orange apportions 70% of its business income to State C. Orange generates $10 million of nonbusiness income each year. Of that income, 40% is attributable to rentals of buildings located in C. Orange's business income this year totals $90 million. a. State C taxes how much of Orange's business income? b. State C taxes how much of Orange's nonbusiness income? c. Explain your results.

In states, a(n) election permits a multinational corporation to elect to limit the reach of the state's taxing jurisdiction to activities occurring within the boundaries of the United States.