State and Local Taxation Flashcards
True or False: If a taxpayer has nexus for state income tax purposes, it means they have sufficient connection with a state to justify the state imposing income taxes on the person.
True.
True or False: If a taxpayer has nexus for state sales/use tax purposes, it means they have sufficient connection with a state to justify collecting sales tax on sales to customers in the state.
True.
True or False: Two US Supreme Court cases (i.e., National Bellas Hess and Quill) provide that physical presence of the taxpayer in the state is the nexus standard for income tax purposes.
False. National Bellas Hess and Quill addressed sales and use tax, not income tax.
True or False: If an employee works in certain states for a brief period of time (e.g., only a few days), it is possible the state may require (i) the employer to withhold that state’s income tax from the employee’s wages, and (ii) the employee may need to file an income tax return with the state.
True.
Assume Corporation X has no physical presence in State A, but is only selling services and/or intangible personal property to customers located in Sate A. Further assume that Corporation X has an affiliate (i.e., Corporation Y) that does have physical presence in State A. Given these facts, which one of the following statements is FALSE?
A) P.L. 86-272 is inapplicable to the Corporation’s assumed facts.
B) P.L. 86-272 provides special rules surrounding the collection of sales/use tax on sales to customers in State A.
C) If State A has an economic nexus law, the Corporation could be subject to income tax in State A.
D) In certain circumstances, Corporation Y’s physical presence in State A could be attributed to Corporation X.
B. P.L. 86-272 only provided a relatively bright line rule for income tax purposes and even then only for the sale of tangible personal property. It did not provide protection for sales/use tax or the sales of services or intangible personal property.
Assume Corporation A has $100 of income from operating in several states. Further assume Corporation A is considered to have nexus with State X and that Corporation A has the following activity with respect to State X.
Sales to customers in State X vs. all sales
100 - 1,000
Property in State X vs. all property
10 - 50
Payroll expense of employees in State X vs. all payroll expense
15 - 100
Given these assumptions, how much of Corporation A’s $100 of income should be apportioned to State X if State X uses an equally weighted 3 factor formula based upon sales, property, and payroll?
Sales to customers in State X vs. all sales: 10%
Property in State X vs. all property: 20%
Payroll expense of employees in State X vs. all payroll expense: 15%
$100 x ( (10%+20%+15%)/3) = $ 15
Assume Corporation A has $100 of income from operating in several states. Further assume Corporation A is considered to have nexus with State X and that Corporation A has the following activity with respect to State X.
Sales to customers in State X vs. all sales
100 - 1,000
Property in State X vs. all property
10 - 50
Payroll expense of employees in State X vs. all payroll expense
15 - 100
Given these assumptions, how much of Corporation A’s $100 of income should be apportioned to State X if State X uses a sales only factor?
Sales to customers in State X vs. all sales: 10%
Property in State X vs. all property: 20%
Payroll expense of employees in State X vs. all payroll expense: 15%
$100 x 10% = $ 10
True or False: The nexus standards for income tax purposes and sales/use tax purposes are the same.
False.
The National Bellas Hess and Quill decisions provide a clear nexus standard for sales/use tax purposes (i.e., physical presence is required).
The nexus standard for income tax purposes is less clear, especially with respect to the sale of services and intangible property. As a result, several states have enacted economic nexus laws for income tax purposes – especially surrounding the providing of services and the sale of intangible property.
For state and local tax purpose, what is “nexus”?
For state and local tax purposes the first threshold question for a taxpayer is whether they have sufficient nexus (i.e., connection) to a state to warrant the state imposing certain tax burdens on the taxpayer.
What is Public Law 86-272?
PL 86-272 serves as a “stop-gap” against implementing a state income tax against “foreign” (out of state) companys.
- Only applicable to the sales of tangible personal property. Thus, it is not applicable to the sale of services or intangible personal property.
- Employees physically present in the state must only be soliciting sales. They cannot be doing installation or approving sales. The sales should be approved out of state and shipped from out of state.
It is codified at 15 U.S.C. §§ 381–384.
