CHAPTER 13—STATE AND LOCAL TAXATION Key
1. States generally impose a capital based franchise tax in lieu of a tax based on net income.
2. X purchases goods for resale. X will generally be liable for sales tax on such purchases.
3. Property taxes are typically imposed based on the historical cost of assets.
4. A corporation must own property within a state in order for nexus to exist.
5. P.L. 86-272 is applicable only to state income taxes.
6. Furnishing a salesperson with a company car will generally not cause a foreign corporation to become taxable
in the state in which the salesperson solicits orders.
7. Consigning property to an independent contractor will not create nexus under P.L. 86-272.
8. Most states begin with federal taxable income (line 28 or 30 of page 1, Form 1120) as the starting point for
computing state taxable income.
9. Most states allow a deduction for state income taxes in computing state taxable income.
10. Most states allow an exclusion for interest on U.S. government obligations in computing state taxable
income.
11. Passive income, such as interest, dividends, rents, and royalties, always constitutes nonbusiness income.
12. Business income is allocated whereas nonbusiness income is apportioned.
13. Most states employ a two-factor apportionment formula based on sales and property.
14. Y Corp. ships goods from its manufacturing plant in State A to a customer in State B. Y Corp. is taxable in
both States A and B. For purposes of the sales factor, the sales are attributed to State B.
15. Y Corp. ships goods from its manufacturing plant in State A to a customer in State B. Y Corp. is taxable
only in State A. State A employs a throwback rule For purposes of the sales factor, the sales are not attributed to
either state.
16. The property factor is generally calculated based on the net book value of property at year end.
17. Leased property is generally not taken into account in computing the property factor.
18. Employee X spends one-half her time in State A and one-half her time in State B. For purposes of the
payroll factor, her compensation should be allocated equally to States A and B.
19. For purposes of the payroll factor, “compensation” generally includes the fair value of nontaxable fringe
benefits.
20. Corporations X and Y comprise a unitary business. Corporation X operates only in State A, while
Corporation Y operates only in State B. Both states impose a state income tax and employ the unitary concept.
A portion of Corporation X’s income will be taxed in State B.
21. Where consolidated returns are required for state purposes, they include only those members of the affiliated
group that possess nexus with the taxing state.
22. Corporation F is a foreign subsidiary of Corporation D, a U.S. corporation operating solely in State A.
Corporation F conducts no business in the United States; however, corporations D and F comprise a unitary
group. If a “water’s edge” election is made, none of Corporation F’s income will be subject to taxation by State
A.
23. All states apply the same tests in determining whether a group of businesses constitutes a “unitary”
business.
24. The unitary concept has no application where a group of related businesses are organized as separate
corporate entities.
25. The sum of the apportionment percentages for the states in which a corporation conducts business must
always equal 100 percent.
26. Real property taxes are imposed based on
27. X Corp. buys property in State X that imposes a sales tax of 4 percent. X transports the property into State Y
for use in its business. State Y imposes a sales tax of 6 percent. As a result of this transaction, State Y will likely
impose
28. As of the close of the current year, Z Corp. holds assets with a fair market value of $1,000,000 and a book
value of $800,000. Z has liabilities of $300,000, Z conducts all of its business in State A that imposes a
franchise tax at a rate of 4 percent. What is Z’s franchise tax liability for the current year?
29. S Corp. buys tangible personal property for $100,000 in State Z that imposes a sales tax of 5 percent. S
intends to use $20,000 of the property in its business and resell the remaining $80,000. What is S’s sales tax
liability?
30. M Corporation’s federal taxable income for the current year is $100,000. Such amount includes $10,000 of
interest on U.S. government obligations and excludes $6,000 of interest on state and local obligations. M
deducted $3,000 of state income taxes in arriving at federal taxable income. M is taxable only in State A. State
A allows a deduction for interest incurred on federal obligations, taxes all municipal bond interest, and
disallows a deduction for state income taxes. What is M’s state taxable income?
31. M Corporation’s federal taxable income for the current year is $200,000. Such amount includes $12,000 of
interest on U.S. government obligations and excludes $10,000 of interest on state and local obligations ($8,000
on State A obligations and $2,000 on State B obligations.). M deducted $15,000 of state income taxes in
arriving at federal taxable income. M is taxable only in State A. State A allows a deduction for interest incurred
on federal obligations, taxes out-of-state municipal bond interest, and disallows a deduction for state income
taxes. What is M’s state taxable income?
32. Which of the following types of income would probably constitute “nonbusiness income” for state income
tax purposes?
33. Which of the following types of income would probably be considered “business income” for state income
tax purposes?
34. T Corp. owns investment securities that are physically located in State A. T is incorporated in State B and
its home office (from which the securities portfolio is managed) is located in State C. States B and C impose a
state income tax. The earnings on the investment securities will most likely be taxed in
35. T Corp. owns investment securities that are physically located in State A. T is incorporated in State B and
its home office (from which the securities portfolio is managed) is located in State C. All three states impose a
state income tax. The earnings on the investment securities will most likely be taxed in
36. D Corporation operates in two states, Y and Z. Both states impose a state income tax. For the current year,
D has taxable income of $5,000,000 (after state adjustments). Such income consists of $4,000,000 of business
income and $1,000,000 of nonbusiness income attributable solely to State Y. D conducts sufficient activities in
both states to create nexus. Both states allocate nonbusiness income and apportion business income using a
three-factor formula in which sales, payroll, and property are equally weighted. The current year factors are as
follows:
State Y
State Z
Sales
80%
20%
Property
40%
60%
Payroll
60%
40%
What is D’s State Y taxable income for the current year.
37. D Corporation operates in two states, Y and Z. Both states impose a state income tax. For the current year,
D has taxable income of $5,000,000 (after state adjustments). Such income consists of $4,000,000 of business
income and $1,000,000 of nonbusiness income attributable solely to State Y. D conducts sufficient activities in
both states to create nexus. Both states allocate nonbusiness income and apportion business income using a
three-factor formula. State Y equally weights the three factors, while State Z assigns double weight to the sales
factor. The current year factors are as follows:
State Y
State Z
Sales
80%
20%
Property
40%
60%
Payroll
60%
40%
What is D’s State Z taxable income for the current year.
38. X Corp. has a manufacturing facility in State A. It has sales in State B, as well as in State A. X conducts
sufficient activities in both states to create nexus. During the current year, X has sales as follows:
Sales shipped from State A to customers in State A
$10,000,000
Sales shipped from State A to customers in State B
8,000,000
Dock sales to State B customers
2,000,000
What is X’s State A sales factor for the current year?
39. X Corp. has a manufacturing facility in State A. It has sales in State B, as well as in State A. X conducts
sufficient activities in both states to create nexus. During the current year, X has sales as follows:
Sales shipped from State A to customers in State A
$20,000,000
Sales shipped from State A to customers in State B
22,000,000
Dock sales to State B customers
8,000,000
What is X’s State A sales factor for the current year?
40. B Corp. has a manufacturing plant in State Y. It has sales in both States Y and Z; however, its activities in
State Z are insufficient to create nexus under P.L. 86-272. For the current year, B has sales as follows:
Sales shipped from State Y to customers in State Y
$20,000,000
Sales shipped from State Y to customers in State Z
12,000,000
Dock sales to State Z customers
8,000,000
State Y has enacted a throwback rule. What is B’s State Y sales factor for the current year?
41. B Corp. has a manufacturing plant in State Y. It has sales in both States Y and Z; however, its activities in
State Z are insufficient to create nexus under P.L. 86-272. For the current year, B has sales as follows:
Sales shipped from State Y to customers in State A
$10,000,000
Sales shipped from State Z to customers in State B
15,000,000
Dock sales to State Z customers
5,000,000
State Y has enacted a throwback rule. What is B’s State Y sales factor for the current year?
42. M Corp. earns $100,000 of business income from the licensing of a patent to an unrelated party. M’s
commercial domicile is State A. The licensee utilizes the patent in State B. Under the MTC regulations,
royalties received by M from the license should be included in the numerator of the sales factors as follows
43. For purposes of the property factor, “property” generally excludes
44. For purposes of the property factor, leased property is generally valued at
45. Employee X drives a company automobile 6,000 miles in State A and 4,000 miles in State B. The
automobile is valued at $20,000 for purposes of the property factor. The corporation’s home office is located in
State C. For purposes of the payroll factor, X’s compensation is assigned to State B. The value of the
automobile should be included in the numerator of the property factor as follows
46. X Corp. holds property as follows:
State A
State B
Beginning of Year
End of Year
Beginning of Year
End of Year
Cost
$1,000,000
$1,500,000
$500,000
$500,000
Accumulated
depreciation
($200,000)
($300,000)
($100,000)
($125,000)
The laws of State A provide for the use of average original cost in determining the property factor. What is X’s State A property factor for the current
year?
47. For purposes of the payroll factor, which of the following amounts generally constitute “compensation”?
48. D, a traveling salesman for Z Corp., spends 60 percent of his time in State A, 30 percent of his time in State
B, and 10 percent of his time in State C. D has no fixed base of operations. Z Corp’s. home office, from which
D’s activities are supervised, is located in State B. D resides in State C. How is D’s compensation assigned for
purposes of determining the payroll factor?
49. W Corp. owns 100 percent of the stock of three subsidiaries, X, Y, and Z. W, X, Y, and Z file a consolidated
return for U.S. federal income tax purposes. W, X, and Y have nexus with both States A and B. Z has nexus
only with State B. If a consolidated state income tax return is filed in State A, how many corporations will be
included in such return?
50. W Corp. owns 100 percent of the stock of three subsidiaries, X, Y, and Z. W, X, Y, and Z file a consolidated
return for U.S. federal income tax purposes. W, X, and Y have nexus with both States A and B. Z has nexus
only with State B. All four corporations comprise part of a unitary business. If combined reporting based on
unitary principles is utilized in State A, how many corporations’ income and apportionment figures will be taken
into account?
51. W Corp. owns 100 percent of the stock of three subsidiaries, X, Y, and Z. W and X have nexus with both
States A and B. Y conducts business only in State B. Z is a foreign corporation that conducts no business in the
United States. All four corporations comprise part of a unitary business. If combined reporting based on unitary
principles is utilized in State A and a water’s edge election is made, how many corporations’ income and
apportionment figures will be taken into account?
52. Which of the following statements concerning the unitary concept is correct?
53. Which of the following statements concerning the state taxation of S corporations is true?
54. Which of the following methods is utilized by states to ensure collection of tax from nonresident
shareholders?