CH-23 State and Local Taxes – McGraw-Hill’s Taxation of Individuals and Business Entities 2021 : Book Guide

Chapter 23 State and Local Taxes 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 any combination of 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 critical, but of lesser importance, because it is used to determine constitutionality of statutory or administrative law. In contrast, judicial law is of critical importance in state law because of its role in interpreting the Commerce Clause which places limits on state taxing authority. 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 required varies based on the type of tax and the business’ activities. For example, any physical presence in a state will create sales tax nexus as will more than a de minimis amount of economic nexus for online sellers. Economic nexus is defined by the Wayfair decision as a company having either more than $100,000 of sales or 200 sales transactions within a state during a year. The income tax nexus standard is primarily established by physical presence, but an increasing number of states are starting to assert economic nexus standards. However, unlike sales tax, sellers of tangible personal property are exempted from either nexus standard if they meet the standards established under Public Law 86-272. 4. [LO 1] What is the difference, if any, between the state of a business’s 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 business’s 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 some 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 and hotel receipts too. 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 income tax nexus standard in more than one state (which chooses to assert its sovereign right to tax), and is unprotected by P.L. 86-272, the business will be subject to business taxes in multiple states. However, businesses subject to tax in more than one state have the right or 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 sales tax liability at all. 8. [LO 2] Discuss reasons why restaurant meals, rental cars, and hotel receipts are often taxed at a higher-than-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 often consume a significant proportion of these services and states capture additional revenue which allows for a tax reduction for residents. 9. [LO 2] Compare and contrast general sales tax nexus rules under the Quill and Wayfair decisions. The general sales tax nexus rule 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. Additionally, the Wayfair decision in 2018 allows states to impose sales tax nexus on online sellers that have either more than $100,000 in sales revenue or more than 200 transactions with in-state customers during a year. The Wayfair decision was broadly adopted (all states that assess a sales tax with the exception of Florida and Missouri) within just a few months of the decision. Many states are applying both the physical presence and economic nexus standards to sales tax taxation to generate additional revenues. 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] Renée operates Scandinavian Imports, a furniture shop in Olney, Maryland that ships goods to customers in all 50 states. Scandinavian Imports also appraises antique furniture and has recently conducted in-home appraisals 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 tax nexus. Scandinavian Imports has sales tax nexus in Maryland--its state of commercial domicile. It also has sales tax nexus in the District of Columbia, Pennsylvania, and Virginia because it has physical presence that is created through personnel performing appraisals. After Wayfair, the online appraisals may create sales tax nexus if the online sales exceed $100,000 in total sales amount or 200 sales transactions within a state during a year. 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 on having the fastest download times in the industry. It 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 sales tax nexus in Nevada because of its commercial domicile. Because Web sells music in an intangible form, some states may not 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 tangible property, such as a server, creates sales tax nexus within the states where the property is located. Additionally, post-Wayfair, Web’s business model (an online seller) will create nexus in a state if the state has pass Wayfair like statutes once sales reach either $100,000 or it has 200 sales transactions within a state during a year. For a business like, Web they will likely reach 200 sales transactions because each separate music download would likely be a sales transaction. 13. [LO 2] Discuss possible reasons 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 state’s 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 and remit the tax to the state. The administrative burden is that they must calculate and collect the tax, and then comply by completing the sales tax returns and then remit the tax. 15. [LO 3] Compare and contrast the rules determining 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 return—assuming the state taxes income. A non-domiciliary must only file an income tax return if the income tax nexus standard is created. Sellers of tangible personal property are protected by Public Law 86-272 even when nexus exists. 16. [LO 3] Lars operates Keep Flying, Incorporated, an 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, and 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 income tax 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 the solicitation limit by salvaging parts off planes during their travels. 17. [LO 3] Explain changes in the U.S. economy that have made Public Law 86-272 partially obsolete. Provide an example of a company that Public Law 86-272 works well for and one 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 and most businesses made or sold tangible personal property. The statute was designed for traditional companies that produced tangible goods and sold them through traditional sales personnel. Today’s economy has shifted significantly toward intangibles and services. The rules designed for bricks and mortar type companies do not create a level playing field across businesses—there are winners and losers. 18. [LO 3] Climb Higher is a distributor of high-end climbing gear located in Paradise, Washington. Its 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 of new customers to reduce delivery time of first order of merchandise. • Check customer inventory for proper display and proper quantities. • Accept returns of defective goods. Identify which of Climb Higher’s sales activities are protected and unprotected activities 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 income tax nexus for Climb Higher. Because Climb Higher’s sales activities exceed the definition of solicitation it will not be protected by P.L. 86-272. 19. [LO 3] Describe a situation in which it would be advantageous for a business to establish income tax nexus in a state. While income tax nexus creates a potential income tax liability, it can be advantageous in two ways. First, creating income tax nexus in a state that chooses not to tax a business can create nowhere income (income that will go untaxed). Second, creating income tax 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 income tax nexus; provide at least one reason for and one against the validity of economic income tax 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 income tax nexus. As a result, businesses should compensate the state for creating the market. Income tax 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 income tax 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 member has income tax 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 income tax nexus with a given unitary state. 22. [LO 3] Explain the rationale for the factors (functional integration, centralization of management, and economies of scale) that 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 likely be non-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 the reasons 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 tax—as 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 ways a multi-state business divides business and non-business income among states. Business income (income related to the operation of the business) is apportioned or divided among the states in which the business has income tax nexus. The apportionment process allows each state where income tax 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] Contrast 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 weight of the sales factor for the apportionment of business income. What are some of the possible reasons for this change? 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. The firm is incorporated and headquartered in New York and sells to customers in Connecticut, Delaware, Massachusetts, New Jersey, New York, Ohio, and Pennsylvania. It has sales reps only where discussed in the scenarios below. Determine whether Crazy Eddie has sales tax nexus in each of the following states, assuming these states have adopted Wayfair: a) Crazy Eddie is incorporated and headquartered in New York. It also has property, employees, salespeople, and intangibles in New York. b) Crazy Eddie has a warehouse, personal property, and employees in Connecticut. c) Crazy Eddie has two customers in Delaware. Crazy Eddie receives orders over the phone and ships goods to its Delaware customers using FedEx. d) Crazy Eddie has independent sales representatives in Massachusetts who distribute baseball-related items for over a dozen companies. e) Crazy Eddie has salespeople who visit New Jersey. They follow procedures that comply with Public Law 86-272 by sending orders to New York for acceptance. The goods are shipped to New Jersey by FedEx. f) Crazy Eddie provides graphic design services to another manufacturer located in Ohio. While the services are performed in New York, Crazy Eddie’s designers visit Ohio at least quarterly to deliver the new designs and receive feedback. g) Crazy Eddie receives online orders from its Pennsylvania clients. Because the orders are so large, the goods are delivered weekly on Crazy Eddie’s trucks. a) Prior to 2018, Crazy Eddie would have sales tax nexus only in New York; because it lacks physical presence required in the other states where it has sales. Beginning in 2018, if Crazy Eddie’s sales exceed either $100,000 or 200 sales transactions in a state during a year then economic nexus would exist as well. b) Crazy Eddie would have sales tax nexus in Connecticut because it has physical presence through its warehouse, personal property, and employees It may also exceed the economic nexus thresholds. c) Crazy Eddie does not have the physical presence to create sales tax nexus in Delaware because it ships the goods using a common carrier. However, if the total sales exceed either $100,000 or 200 separate sales transactions it would have economic sales tax nexus with Delaware. d) Crazy Eddie may have sales tax nexus in Massachusetts if the independent representatives represent only 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. Crazy Eddie would have economic sales tax nexus with Massachusetts if the total sales exceeds either $100,000 or 200 separate sales transactions. e) Crazy Eddie would have sales tax nexus in New Jersey. While P.L. 86-272 would protect Crazy Eddie from income tax nexus in New Jersey, the presence of sales personnel creates sales tax nexus. f) Crazy Eddie would have sales tax nexus in Ohio; the presence of Crazy Eddie’s personnel in Ohio will create physical presence and sales tax nexus. g) Crazy Eddie would have sales tax nexus in Pennsylvania; the use of Crazy Eddie’s trucks in Pennsylvania creates physical presence and sales tax nexus. Additionally, because Pennsylvania sales are large, they likely exceed the $100,000 in annual sales for economic sales tax nexus. 29. [LO 2] Brad Carlton operates Carlton Collectibles, a rare coin shop in Washington, D.C., that ships coins to collectors in all 50 states. Carlton also provides appraisal services 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 in Maryland and Virginia. Determine the jurisdictions in which Carlton Collectibles has sales tax nexus assuming these states have enacted Wayfair legislation. Carlton Collectibles would have sales tax nexus in the District of Columbia, Maryland, and Virginia because Brad’s appraisal work creates sales tax nexus in Maryland and Virginia. Carlton would have a sales tax collection requirement in the District of Columbia because it has commercial domicile there. Additionally, if Carlton Collectibles sales exceed $100,000 or 200 sales transactions in any state during a year then economic Nexus will exist because of the Wayfair decision. 30. [LO 2] Melanie operates Mel’s Bakery in Foxboro, Massachusetts with retail stores in Connecticut, Maine, Massachusetts, New Hampshire, and Rhode Island. Mel’s Bakery also ships specialty breads nationwide upon request. Determine Mel’s Bakery sales tax collection responsibility and calculate the sales tax liability for Massachusetts, Connecticut, Maine, New Hampshire, Rhode Island, and Texas using the following information: 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) Mel’s 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 served by a restaurant for consumption on or off the premises to be a meal. e) Mel’s Bakery Rhode Island stores earn $300,000 in sales. The Rhode Island sales tax rate is 7 percent and its restaurant surtax is 1 percent. Rhode Island considers Mel’s Bakery to be a restaurant because its retail store has seating. f) One of Mel’s Bakery best customers relocated to Texas, which imposes an 8.25 percent state and local sales tax rate but exempts bakery products. This customer entertains guests regularly made 10 orders totaling $15,000 of food items this year. a) Mel’s Bakery would have no liability in Massachusetts. This is because Massachusetts exempts food products from sales tax. However, if the definition of food products didn’t include prepared bakery goods or specialty breads, Mel’s Bakery would pay $25,000 ($500,000 x 5 percent) in Massachusetts’ sales tax. b) Mel’s Bakery 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) Mel’s Bakery 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 takeout purchases. d) Mel’s Bakery 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 Mel’s Bakery would be exempt. e) Mel’s Bakery would have a $24,000 ($300,000 x 8 percent) sales tax liability in Rhode Island. This is because the state taxes Mel’s Bakery as a restaurant and places a one percent surtax on top of the regular rate. f) Mel’s Bakery would have no sales tax nexus in Texas because it lacks physical presence and has less than $100,000 sales and 200 sales transactions. Additionally, the Mel’s Bakery 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 8.0 percent. Determine the state, local, and transit (a local transportation district) portions of the rate. You can find resources on the State of Ohio website, including the following link: https://www.tax.ohio.gov/Portals/0/tax_analysis/tax_data_series/sales_and_use/salestaxmap.pdf The total rate is 8 percent. The county tax rate is 1.25 percent; the transit tax rate is 1.00 percent. Thus the state tax rate is 5.75 percent. 32. [LO 2] Kai operates the Surf Shop in Laie, Hawaii, which designs, manufacturers, and customizes surf boards. Hawaii has a hypothetical 4 percent excise tax 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 percent of the sales price. Determine the sales tax liability the Surf Shop must collect and remit - or the use tax liability that the customer must pay - for each of the following orders: a) Kalani, 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 6.85 percent. b) Nick, an Alabama resident, comes to the retail shop on vacation and has a $2,000 custom board made. Nick uses the board on vacation and then has the Surf Shop ship it to Tuscaloosa, Alabama where the sales tax rate is 9 percent. c) Jim, a Michigan resident, places an order for a $2,000 custom board at the end of his vacation. Upon completion, the board will be shipped to Ann Arbor, Michigan, where the sales tax rate is 6 percent. d) Scott, a Nebraska resident, sends his current surfboard 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 7.25 percent. a) Kai’s would have no sales tax liability. Kalani would have a $69 ($1,000 x 6.85 percent) use tax liability in Utah. b) Kai’s would have an $83 ($2,000 x 4.166 percent) sales tax liability. Nick would have an $97 ([$2,000 x 9 percent] - $83 paid to HI) use tax liability in Alabama. c) Kai’s would have no sales tax liability assuming Michigan sales are under $100,000 or 200 sales transactions. Jim would have a $120 ($2,000 x 6 percent) use tax liability in Michigan. d) Kai’s would have no sales tax liability because Hawaii doesn’t tax services. Scott would have no Nebraska use tax liability because it doesn’t tax services. 33. [LO 2] Last year, Reggie, 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 footballs as tangible personal property subject to an 8.25 percent sales tax. Answer for California. b) California treats the autographed footballs 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 (10.25 percent) or Wyoming (5 percent). Answer for New York and Wyoming. d) TV has Reggie deliver a few footballs to fans in Arizona (5.6 percent sales tax rate) 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 TV’s Arizona sales tax liability? a) TV would have an $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 tax liability in New York or Wyoming because TV lacks physical presence that creates sales tax nexus in those states and assuming it has less than $100,000 or 200 transactions in these 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 Reggie (TV’s agent) deliver them then no sales or use tax liability would be accrued by TV. TV’s customers would still have an Arizona state use tax liability. 34. [LO 2] LeMond Incorporated, a Wisconsin corporation, runs bicycle tours in several states. LeMond also has a Wisconsin retail store and an Internet store that ships to out-of-state customers. The bicycle tours operate in Colorado, North Carolina, and Wisconsin where LeMond has employees and owns and uses tangible personal property. LeMond has real property only in Wisconsin and logs the following sales: LeMond Sales State Goods Services Total Arizona $34,194 $0 $34,194 California 110,612 0 110,612 Colorado 25,913 356,084 381,997 North Carolina 16,721 225,327 242,048 Oregon 15,431 0 15,431 Wisconsin 241,982 877,441 1,119,423 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 Wisconsin (5 percent). How much sales tax must LeMond collect and remit, assuming all of these states, except California, have adopted Wayfair legislation? LeMond has sales tax nexus in Wisconsin (domicile), Colorado, and North Carolina. Sales tax nexus is created in Colorado and North Carolina because of the physical presence of LeMond’s employees who provide services there. Additionally, LeMond has economic sales tax nexus in California because annual sales exceed $100,000—this should be monitored in future years to see if sales fall below the threshold. As a result, LeMond has sales and use tax liability of $12,099 in Wisconsin, $8,572 in California, $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 nexus and a corresponding sales tax liability, the calculation is based on the goods sold within each state. Under the 2018 Wayfair decision, Arizona and Oregon would lack economic sales tax nexus because sales are under $100,000—assuming that the total sales transactions are under 200. For California, sales exceed the $100,000 threshold—however, California has not yet adopted the Wayfair standard. The calculations are as follows: State Goods Rate Liability Colorado 25,913 8.00% $2,073 North Carolina 16,721 6.75% $1,129 Wisconsin 241,982 5.0.0% $12,099 $284,616 $15,301 35. [LO 3] Kashi Corporation is the U.S. distributor of fencing (sword fighting) equipment imported from Europe. It is incorporated in Virginia and headquartered in Arlington, Virginia; it ships goods to all 50 states. Kashi’s 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, salespeople, and intangibles in Virginia. Determine whether Kashi has income tax nexus in Virginia. b) Kashi has employees who live in Washington, DC and Maryland but perform all their employment-related activities in Virginia. Does Kashi have income tax nexus in Washington D.C. and Maryland? c) Kashi has two customers in North Dakota. It receives their orders over the phone and ships goods to them using FedEx. Determine whether Kashi has income tax nexus in North Dakota. d) Kashi has independent sales representatives in Illinois who distribute fencing and other sports-related items for many companies. Does Kashi have income tax nexus in Illinois? e) Kashi has salespeople who visit South Carolina for a regional fencing competition for a total of three days during the year. They send all orders to Virginia for credit approval and acceptance, and Kashi ships the goods into South Carolina by FedEx. Determine whether Kashi has income tax nexus in South Carolina. f) Kashi has sales reps who visit California for a national fencing competition and several regional competitions for a total of 17 days during the year. They send all orders to Virginia for credit approval and acceptance. The goods are shipped by FedEx into California. Does Kashi have income tax nexus in California? g) Kashi receives online orders from its Pennsylvania client. Because the orders are so large, the goods are delivered weekly on Kashi’s trucks. Does Kashi have income tax nexus in Pennsylvania? h) In addition to shipping goods, Kashi provides fencing lessons in Virginia and Maryland locations. Determine whether Kashi has income tax nexus in Virginia and Maryland. i) Given that Kashi ships to all 50 states, are there locations that would decrease Kashi’s overall state income tax burden if income tax nexus were created there? a) Kashi has income tax nexus in Virginia, its state of commercial domicile. b) Kashi’s employees living in the District of Columbia and Maryland will not create income tax nexus there. However, if the employees were to make deliveries to customers in those jurisdictions on the way home that would create income tax nexus. c) Kashi does not have income tax nexus in North Dakota. d) The presence of independent contractors in Illinois does not create income tax nexus in Illinois. However, if the independent contractor only represented Kashi (no other vendors) they would likely be considered Kashi’s agent and could create income tax nexus. e) Kashi has income tax nexus in South Carolina, but Kashi is protected from an income tax liability 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 has income tax nexus in California, but Kashi is protected from an income tax liability 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 physical presence of Kashi’s truck in Pennsylvania will create income tax nexus there. Additionally, because Pennsylvania sales are large, they likely exceed the $100,000 in annual sales for economic sales tax nexus. 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 income tax nexus with any state that doesn’t have an income tax. This will allow Kashi to apportion part of its business income to states which do not tax the apportioned income—this creates nowhere income. Kashi may also consider creating income tax 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 the firm has income tax nexus in the following situations: a) Gary Holt LLP 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 LLP has employees who live in New Jersey and Connecticut and perform all of their employment related activities in New York. Does it have income tax nexus in New Jersey and/or Connecticut? c) Gary Holt LLP 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 LLP has income tax nexus in New York through its commercial domicile, provision of services, property, and payroll. b) Gary Holt LLP does not have income tax nexus in New Jersey and Connecticut. Its employees residing in these states does not create income nexus there. c) Gary Holt LLP has income tax 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, makerootbeer.com, and sells bottling equipment and other supplies for making homemade root beer. It also has an Oregon warehouse from which it ships goods. Determine whether RBI has income tax nexus in the following situations: a) RBI is incorporated and headquartered in Washington and has property and employees in Oregon and Washington. Determine whether RBI has income tax nexus in Oregon and Washington. b) RBI has hundreds of customers in California but no physical presence (no employees or property). Does it have income tax nexus in California? c) RBI has 500 New York customers but no physical presence (no employees or property). Determine whether RBI has income tax nexus in New York. a) RBI has income tax nexus in Washington and Oregon. Income tax 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. Income tax nexus is created in Oregon through payroll and property. b) RBI has no income tax nexus in California because it lacks physical presence. However, California imposes economic nexus under the factor presence test—so RI would need to monitor it sales to determine if economic income tax nexus exists. c) RBI has no income tax nexus in New York, but New York’s Amazon rule will create sales tax nexus. 38. [LO 3] Rockville Enterprises manufactures woodworking equipment and is incorporated and based in Evansville, Indiana. All of its real property is 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 nondomiciliary states under Public Law 86-272: a) Rockville Enterprises advertises in Wisconsin using television, radio and newspapers. b) Rockville Enterprises’ employees in Illinois check the credit of a potential customer. c) Rockville Enterprises maintains a booth at an industry tradeshow in Arizona for 10 days. d) Sales representatives check the inventory of a Tennessee customer to make sure it has enough in stock and that the stock is properly displayed. e) Rockville Enterprises holds a management seminar executive retreat for corporate executives over four days in Florida. f) Sales representatives supervise the repossession of inventory from a customer in Maine that is not making payments on time. g) Rockville Enterprises provides automobiles to Idaho and Montana sales representatives. h) An Alabama sales representative accepts a customer deposit on a large order. i) Colorado sales reps 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 customer’s 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 income tax nexus. A sales personnel seminar is a protected activity. f) Collection activities are not a protected activity and create income tax 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 resulting in income tax nexus. 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 that provides customers with a license to download and use its software on their machines. Software retains ownership of the software. It has customers in New Jersey and West Virginia. Does Software have economic income tax nexus in these states because of the following decisions. Lanco, Inc. v. Director, Division of Taxation, 188 N.J. 380, 908 A. 2nd 176 (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 isn’t 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, Software’s licensing the use of its intangible product in New Jersey and West Virginia should create income tax 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. Peter has income tax nexus in Kentucky and South Carolina. Suvi has an income tax nexus 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 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 income tax nexus in those states. Suvi must file in Mississippi and South Carolina because it has income tax 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 (2017) to determine the various tests California uses to determine whether two or more entities are 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 Stores v. 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. Comm’r 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: Item Amount Federal Treatment Georgia Income Taxes $25,496 Deducted on federal return Tennessee Income Taxes $13,653 Deducted on federal return Washington Gross Receipts Tax $3,105 Deducted on federal return Georgia Bond Interest $10,000 Excluded from federal return Federal T-Note Interest $4,500 Included on federal return Bonus Depreciation $15,096 Deducted on federal return Use Georgia’s Corporate Income Tax Form 600 and Instructions to determine what federal/state adjustments Bulldog needs to be made for Georgia. Bulldog’s federal taxable income was $194,302. Calculate its Georgia state tax base. Complete Schedule 1, Page 1, of Form 600 for Bulldog. Bulldog’s Georgia state tax base is $218,551, which is calculated as follows: Bulldog Georgia Tax Base (1) Federal Income $194,302 Additions (2) Bonus Depreciation $15,096 Per instructions (3) Tennessee tax $13,653 Per instructions Subtractions (4)Federal T-note interest $4,500 Per 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 income tax nexus in these states as well. Herger’s California state tax base was $921,023 after making the required federal/state adjustments. Herger’s federal tax return contains the following items: Item Amount Federal T-note interest income $5,000 Nevada municipal bond interest income $3,400 California municipal bond interest income $6,000 Interest expense related to T-note interest income $1,400 Royalty income $100,000 Travel expenses $9,025 Determine Herger’s business income. Herger’s 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 State Sales Colorado $234,992 Oklahoma 402,450 New Mexico 675,204 Texas 1,085,249 Totals $2,397,895 Bad Brad is a Texas Corporation. Answer the questions in each of the following scenarios. a) Bad Brad has income tax nexus in Colorado, Oklahoma, New Mexico and Texas. What are the Colorado, Oklahoma, New Mexico and Texas sales apportionment factors? b) Bad Brad has income tax 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 income tax 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 income tax nexus in Colorado and Texas. Oklahoma and New Mexico sales are shipped from Texas (assume Texas is a no 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, Colorado’s sales factor is 9.8 percent ($234,992/$2,397,895). The sales factors are as follows: Colorado sales factor 9.80% Oklahoma sales factor 16.78% New Mexico sales factor 28.16% Texas sales factor 45.26% 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 factor 9.80% 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 factor 9.80% Texas sales factor 90.20% 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 Texas sales factors are 17.8 percent ($234,992/$1,320,241) and 82.2 percent (1,085,249/$1,320,241), respectively. Colorado sales factor 17.80% Texas sales factor 82.20% 100.00% 45. [LO 3] Nicole’s Salon, a Louisiana Corporation, operates beauty salons in Arkansas, Louisiana, and Tennessee. The salon’s payroll by state, are as follows: Nicole’s Salon State Payroll 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) Nicole’s Salon has income tax nexus in Arkansas, Louisiana, and Tennessee. b) Nicole’s Salon has income tax nexus in Arkansas, Louisiana, and Tennessee, but $50,000 of the Arkansas amount is paid to independent contractors. a) Nicole’s salon’s 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. Nicole’s salon’s payroll factors are as follows: Arkansas 7.21% ($80,239/$1,112,441) Louisiana 27.80% ($309,192/$1,112,441) Tennessee 64.99% ($723,010/$1,112,441) 100.00% 46. [LO 3] Delicious Dave’s Maple Syrup, a Vermont Corporation, has property in the following states: Property State Beginning Ending Maine $923,032 $994,221 Massachusetts 103,311 203,109 New Hampshire 381,983 283,021 Vermont 873,132 891,976 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 Dave’s has income tax nexus in each of the states. b) Delicious Dave’s has income tax 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 Dave’s has income tax nexus in each of the states, but also pays $50,000 to rent property in Massachusetts. a) Delicious has the following property factors: Beginning Ending Average Factor 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: Beginning Ending Average Factor 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: Beginning Ending Average Factor 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] Susie’s Sweet Shop has the following sales, payroll and property factors: Iowa Missouri Sales 69.20% 32.01% Payroll 88.00% 3.50% Property 72.42% 24.04% What are Susie’s Sweet Shop’s Iowa and Missouri apportionment factors under each of the following alternative 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. Susie’s Iowa and Missouri apportionment factors would be as follows: Iowa Missouri Sales 69.20% 32.01% Payroll 88.00% 3.50% Property 72.42% 24.04% 229.62% 59.55% /3 /3 Apportionment Factor 76.54% 19.85% 96.39% b) Using a four-factor (double-weighted sales) formula, the total apportionment would be 97.60 percent. Susie’s Iowa and Missouri apportionment factors would be as follows: Iowa Missouri Sales 69.20% 32.01% Sales 69.20% 32.01% Payroll 88.00% 3.50% Property 72.42% 24.04% 298.82% 91.56% /4 /4 Apportionment Factor 74.71% 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. Susie’s Iowa and Missouri apportionment factors would be as follows: Iowa Missouri Apportionment Factor 76.54% 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 intangibles used in South Dakota (where income tax nexus exists). e. $24,000 of royalty income from Kansas (where income tax 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 income tax 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 and has a state income tax base there of $500,000. Of this amount, $50,000 was non-business income. Ashton’s Pennsylvania apportionment factor is 42.35 percent. The nonbusiness income allocated to Pennsylvania was $32,000. Assuming a Pennsylvania corporate tax rate of 8.25 percent, what is Ashton’s Pennsylvania state tax liability? Ashton Corporation’s 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 factor 42.35% 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 rate 8.25% Given (9) PA state tax liability $18,362 (7) x (8) Comprehensive problems 50. (LO3) Cloud computing is the use of hosted computer facilities through the Internet. Gmail, RIA Checkpoint, and even 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 nontaxable service? c. Is the buyer of HP’s products subject to Washington’s sales tax? d. Is HP subject to Washington’s B&O tax? Solution: If you’re buying or selling cloud computing services, it is critical to determine what you’re 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 company’s tax filings. Current tax law does not necessarily reflect the realities of cloud computing. Cloud computing transactions aren’t quite leases and aren’t quite services, but the tax law requires them to be classified in one of these two categories. Eventually, tax regulations will be updated and clarified. Now, there isn’t enough consensus to know how to treat them for most states. To deal with these issues, Washington State changed its laws in 2009, the report said. The state now requires that Washington residents pay state sales tax regardless of how their goods are delivered. Therefore, Washington residents will be subject to the sales tax. HP would be subject to the Washington B&O tax because no income-based taxes are not protected under Public Law 86-272. 51. Sharon, Inc. is headquartered in State X and owns 100% of Carol, Josey, and Janice Corps, which form a single unitary group. 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 Corp Josey Corp Janice Corp Domicile State State X (throwback) State Y (throwback) State Z (non-throwback) State Z (non-throwback) Dividend income 1,000 200 300 500 Business income 50,000 30,000 10,000 10,000 Sales: State X 70,000 10,000 10,000 10,000 State Y 40,000 5,000 State Z 20,000 20,000 10,000 State A 20,000 State B 10,000 10,000 Property: State X 50,000 20,000 10,000 State Y 80,000 State Z 25,000 20,000 State A 50,000 Payroll: State X 10,000 10,000 State Y 40,000 State Z 3,000 10,000 State A 10,000 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 income tax nexus in State X because it has no property or payroll there (no physical presence). The State X tax liability is $6,798; calculated as follows: Sharon Carol Josey Janice No NEXUS Sales X 70,000 10,000 10,000 10,000 Total 100,000 70,000 35,000 30,000 Property X 50,000 20,000 0 10,000 Total 100,000 100,000 25,000 30,000 Payroll X 10,000 10,000 0 0 Total 10,000 50,000 3,000 20,000 Sales 0.70 0.1429 0.3333 Property 0.50 0.20 0.3333 Payroll 1.00 0.20 0.00 2.20 0.5429 0.6666 Apportionment Factor 0.7333 0.1810 0.2222 Income 50,000 30,000 10,000 Apportioned Income 36,665 5,430 2,222 Allocated Income 1,000 0 0 State Taxable Income 37,665 5,430 2,222 45,317 Taxable income 15% Tax rate 6,798 State tax liability 52. Happy Hippos (HH) is a manufacturer and retailer of New England crafts headquartered in Camden, Maine. HH provides services has sales, employees, property, and commercial domicile as follows: Happy Hippos In-State Activities State Sales Employees Property Services Commercial Domicile Connecticut    Maine      Massachusetts   New York  Rhode Island   Vermont     Happy Hippos sales of goods and services by state are as follows: Happy Hippos Sales State Goods Services Total Connecticut $78,231 $52,321 $130,552 Maine 292,813 81,313 374,126 Massachusetts 90,238 90,238 New York 129,322 129,322 Rhode Island 98,313 98,313 Vermont 123,914 23,942 147,856 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. Other relevant factors include: • Assume that the New York sales are to a single customer who is a retailer and can provide a valid New York re-seller's certificate. • Maine state depreciation for the year was $47,923, and Maine doesn’t allow deductions for state income taxes. • The employees present in Connecticut, Massachusetts, and Rhode Island are sales people who perform only activities protected by Public Law 86-272. • Assume that each of the states is a separate-return state. HH’s payroll is as follows: Payroll State Wages Connecticut $94,231 Maine 392,195 Massachusetts 167,265 Rhode Island 92,391 Vermont 193,923 Total $940,005 HH’s property is as follows: Property State Beginning Ending Rented Maine $938,234 $937,652 Vermont 329,134 428,142 $12,000 Total $1,267,368 $1,365,794 $12,000 a) Determine the states in which HH has sales tax nexus, assuming these states have passed Wayfair legislation. b) Calculate the sales tax HH must remit assuming the following sales tax rates: Connecticut (6 percent), Maine (8 percent), Massachusetts (7 percent), New York (8.875 percent), Rhode Island (5 percent), and Vermont (9 percent). c) Determine the states in which HH has income tax nexus. d) Determine HH’s state tax base for Maine assuming federal taxable income of $282,487. e) Calculate business and nonbusiness income. f) Determine HH’s Maine apportionment factors assuming an equally-weighted three-factor apportionment method (assume that Maine is a throwback state). g) Calculate HH’s business income apportioned to Maine. h) Determine HH’s allocation of nonbusiness income to Maine. i) Determine HH’s Maine taxable income. j) Calculate HH’s Maine 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. Beginning in 2018, HH will have economic sales tax nexus in New York because its sales exceed the $100,000 threshold established in Wayfair. However, assuming that HH is selling to customer engaged in retail trade they can obtain a reseller’s certificate from their customer and avoid having to collect and remit New York sales tax. b) HH sales tax remittance will be as follows: Connecticut Maine Massachusetts New York Rhode Island Vermont Taxable sales $78,231 $292,813 $90,238 $0 $98,313 $123,914 Sales tax rate 6.0% 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) HH’s Maine state tax base is $313,384 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) HH’s nonbusiness and business income is as follows: Maine state tax base $323,384 Allocable income Vermont rental income $12,000 Dividends $10,000 Nonbusiness income ($22,000) Business income $301,384 f) HH’s Maine apportionment factor is 59.81; the average of the sales, payroll and property factors. HH’s sales, payroll, and property factors are 71.31, 41.72, and 66.40 percent, respectively. HH’s Maine sales apportionment factor is 71.31% ($691,999/$970,407). New York, 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). Connecticut Maine Vermont 130,552 374,126 147,856 New York 129,322 Rhode Island 98,313 Massachusetts 0 90,238 0 Numerator 130,552 691,999 147,856 Denominator 970,407 HH’s Maine payroll factor is 41.72 ($392,195/$940,005) percent. HH’s 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 State Beginning Ending Average Maine $938,234 $937,652 $937,943 Vermont $425,134 $524,142 $474,638 Total $1,412,581 g) HH’s business income apportioned to Maine is $180,258. Total business income $301,384 ME apportionment 59.81% ME business income $180,258 h) HH’s nonbusiness income allocable to Maine is $10,000 ($10,000 of dividends). Investment income is typically allocated to the state of commercial domicile. i) HH’s Maine taxable income is $190,258. Maine ME business income $180,258 ME non-business income $10,000 ME taxable income $190,258 j) HH’s Maine tax liability is $9,513. Maine taxable income $190,258 Maine tax rate 5% Maine tax liability $9,513 Solution Manual for McGraw-Hill's Taxation of Individuals and Business Entities 2021 Brian C. Spilker, Benjamin C. Ayers, John A. Barrick, Troy Lewis, John Robinson, Connie Weaver, Ronald G. Worsham 9781260247138, 9781260432534