1、Chapter 24,Multistate Corporate Taxation,Copyright 2010 Cengage Learning,Comprehensive Volume,Overview,46 states and District of Columbia impose a tax based on corps taxable incomeMajority of states “piggyback” onto Federal income tax baseEssentially, they have adopted part or all of the Federal tax
2、 provisions,Computing Corporate State Income Tax Liability (slide 1 of 2),Starting point in computing taxable income* State modification items State tax base Total net allocable income/(loss) (nonbusiness income) Total apportionable income/(loss) (business income) States apportionment percentage Inc
3、ome apportioned to the state*Most states use either line 28 or line 30 of the Federal corp tax return (Form 1120). In other states, the corp must identify and report each element of income and deduction on the state return.,Computing Corporate State Income Tax Liability (slide 2 of 2),Income apporti
4、oned to the state Income/(loss) allocated to the state State taxable income/(loss) State tax rate Gross income tax liability for state- States tax credits Net income tax liability for the state,Common State Additions (slide 1 of 3),Interest income on state/municipal obligations and other interest in
5、come exempt from Federal income taxMay exclude interest income on obligations within that state to encourage investment in in-state bonds,Common State Additions (slide 2 of 3),State income taxes deducted on Federal return Includes franchise taxes based on incomeFederal depreciation in excess of amou
6、nt allowed by state (if depreciation systems differ),Common State Additions (slide 3 of 3),State gain in excess of Federal gain on assets; Federal loss in excess of state loss on assetsAdjustments to amounts under Federal electionsFederal Net Operating Loss Deduction,Common State Subtractions(slide
7、1 of 3),Interest on U.S. obligations to extent included in Federal taxable incomeStates cannot impose income tax on income from U.S. obligations, but may assess income-based franchise taxState depreciation in excess of Federal (if depreciation systems differ),Common State Subtractions(slide 2 of 3),
8、Federal gain in excess of state gain on assets; State loss in excess of Federal loss of assetsAdjustments to amounts under Federal elections,Common State Subtractions(slide 3 of 3),State Net Operating Loss DeductionDividends received from certain out-of-state corps to extent included in Federal retu
9、rnFederal income taxes paid,UDITPA and the Multistate Tax Commission,Uniform Division of Income for Tax Purposes Act (UDITPA) is a model law relating to assignment of income among states for multistate corpsMany states have adopted UDITPA either by joining the Multistate Tax Compact or modeling thei
10、r laws after UDITPA,Nexus for Income Tax Purposes (slide 1 of 2),Nexus is the degree of business activity which must be present before a state can impose tax on an out-of-state entitys incomeSufficient nexus typically exists if:Income is derived from within stateProperty is owned or leased in stateP
11、ersons are employed in statePhysical or financial capital is located in state,Nexus for Income Tax Purposes (slide 2 of 2),No nexus if only “connection” to state is solicitation for sale of tangible personal property, with orders sent outside state for approval and shipping to customer (Public Law 8
12、6-272) Sales tax can still apply,Independent Contractors,May generally engage in the following activities without establishing nexus for the company:Solicit salesMake salesMaintain sales officeSource: Public law 86-272,Allocation and Apportionment of Income (slide 1 of 3),Apportionment is the means
13、by which business income is divided among states in which it conducts businessCorp determines net income for the company as a whole and then apportions some to a given state, according to an approved formula,Allocation and Apportionment of Income (slide 2 of 3),Allocation is a method used to directl
14、y assign specific components of a corps income, net of related expenses, to a specific stateAllocable income generally includes:Income or loss from sale of nonbusiness propertyIncome or losses from rents or royalties from nonbusiness real or tangible personal property,Allocation and Apportionment of
15、 Income (slide 3 of 3),Typically, allocable income (loss) is removed from corporate net income before the states apportionment formula is appliedNonapportionable income (loss) assigned to a state is then combined with income apportionable to the state to arrive at total income subject to tax in the
16、state,Apportionment Procedure,Business income is assigned to states using an apportionment formulaBusiness income arises from the regular course of businessIntegral part of taxpayers regular businessNonbusiness income is apportioned or allocated to the state in which the income-producing asset is lo
17、cated,Apportionment Factors,Apportionment formulas vary among statesTraditionally, states use a three-factor formula that equally weights sales, property, and payrollMany states use a modified formula where sales factor receives a larger weight Tends to pull larger amount of out-of state corporation
18、s income into the stateMay provide tax relief to corps domiciled in the state,Sales Factor (slide 1 of 3),Sales factor is a fractionNumerator is corps sales in the stateDenominator is corps total sales everywhereMost states follow UDITPAs “ultimate destination concept”Tangible asset sales are assume
19、d to take place at point of delivery, not where shipping originates,Sales Factor (slide 2 of 3),Dock sales occur when delivery is taken at sellers shipping dockMost states apply the destination test to dock salesIf purchaser has out-of-state location to which it returns with the product, sale is ass
20、igned to purchasers state,Sales Factor (slide 3 of 3),Throwback ruleIf adopted by state, requires that out-of-state sales not subject to tax in destination state be pulled back into origination stateTreats such sales as in-state sales of the origination stateAlso applies if purchaser is U.S. governm
21、ent,Payroll Factor (slide 1 of 4),Payroll factor is a fractionNumerator is compensation paid within a state Denominator is total compensation paid by the corporation,Payroll Factor (slide 2 of 4),Compensation includes wages, salaries, commissions, etcAmounts paid to independent contractors are exclu
22、dedSome states exclude amounts paid to corporate officersSome states require that deferred compensation amounts be included in the payroll factor (e.g., 401(k) plans),Payroll Factor (slide 3 of 4),Compensation of an employee is usually not split between states (unless employee is transferred or chan
23、ges positions)Usually allocated to state in which services are primarily performedIf more than one state, attribute to:Employees base of operations, or, if none,Place where work is directed or controlled, or, if none,Employees state of residency,Payroll Factor (slide 4 of 4),Only compensation relate
24、d to production of apportionable income is included in payroll factorIn states that distinguish between business and nonbusiness income, compensation related to nonbusiness income is not includedCompensation related to both business and nonbusiness income is prorated between the two,Property Factor
25、(slide 1 of 3),Property factor generally includes average value of real and tangible personal property owned or rentedNumerator is amount used in the stateDenominator is all of corps property owned or rented,Property Factor (slide 2 of 3),Property includes:Land, buildings, machinery, inventory, etcM
26、ay include construction in progress, offshore property, outer space property (satellites), and partnership propertyProperty in transit is included in numerator of destination state,Property Factor (slide 3 of 3),Property is typically valued at average original or historical cost plus additions and i
27、mprovementsSome states allow net book value or adjusted basis to be usedLeased property, when included in the property factor, is valued at eight times its annual rental payments,Allocation, Apportionment Example,Total allocable income (State A) $100,000Apportionable income (States A and B) 800,000T
28、otal income $900,000All sales, payroll, and property is divided equally between states A and B. Both states use identical apportionment formulas.Taxable income: State A State B .1/2 Apportionable income $400,000 $400,000Allocable income 100,000 -0-Total state taxable income $500,000 $400,000,Apporti
29、onment Example(slide 1 of 2),Americo, Inc. operates in three states with the following apportionment systems:Ws factors: average of four factors, sales double-weightedXs factors: average of three factors, equally weightedYs factors: sales factor onlyState: W X Y Total .Sales:$400,000$100,000$500,000
30、$1,000,000 Factor 40% 10% 50%Payroll: 90,000 150,000 60,000 300,000Factor 30% 50% 20%Property: 120,000 240,000 40,000 400,000Factor 30% 60% 10%,Apportionment Example (slide 2 of 2),Taxable income for year (all states) $100,000State W X Y . Sales 40% 10% 50% Sales 40% N/A N/A Payroll 30% 50% N/APrope
31、rty 30% 60% N/ATotal 140% 120% 50%Average 35% 40% 50%Taxable income to each state $35,000$40,000$50,000Total taxed in all states: $125,000N/A = not applicable,Apportionment Example Revisited (slide 1 of 2),Americo, Inc. moves most personnel and property to state Y.State: W X Y Total .Sales:$400,000
32、$100,000$500,000$1,000,000 Factor 40% 10% 50%Payroll: 30,000 30,000 240,000 300,000Factor 10% 10% 80%Property: 40,000 40,000 320,000 400,000Factor 10% 10% 80% Ws factors: average of four factors, sales double-weightedXs factors: average of three factors, equally weightedYs factors: sales factor only
33、,Apportionment Example Revisited (slide 2 of 2),Taxable income for year (all states)$100,000State: W X Y Sales: 40%10%50% Sales 40% N/AN/A Payroll: 10%10%N/AProperty: 10%10%N/ATotal 100%30%50%Average 25%10%50%Taxable incometo each state $25,000 $10,000 $50,000Total taxed in all states: $85,000N/A =
34、not applicable,Unitary Taxation (slide 1 of 2),Theory: operating divisions are interdependent so cannot be segregated into separate unitsEach unit deemed to contribute to overall profitsUnitary theory ignores separate legal existence of companies: all combined for apportionment,Unitary Taxation (sli
35、de 2 of 2),For multistate apportionment, all divisions or entities are treated as single unitary base:Larger apportionment base (all companies activities)Smaller apportionment factors (each states %),Other Multi-Entity Considerations (slide 1 of 2),Multinational operations: If state uses Unitary sys
36、tem, it may require inclusion of worldwide activities in determining apportionmentMost unitary states allow Waters Edge election so only U.S. operations are includedCost of election may include:Specified number of years before revocationAdditional tax for privilege of excluding foreign entities,Othe
37、r Multi-Entity Considerations (slide 2 of 2),Combined reportingFiled in every unitary state in which one or more unitary members have nexusThe computations reflect apportioned and allocated income of the unitary membersConsolidated returnsSome states allow (or require) consolidated return if filed f
38、or Federal,Taxation of S Corporations (slide 1 of 2),Majority of states with corporate income tax have special provisions that govern S corporationsOnly a few states do not provide special treatment for S corpsIn non-S election states, S corps are taxed the same as C corpsMust have valid S corp elec
39、tion at federal level to get S corp treatment in states,Taxation of S Corporations (slide 2 of 2),Multistate S corps must apportion and allocate income in same manner as regular corpMust file a state tax return in each state with nexusMust inform shareholders of their share of income for each state
40、so their tax returns can be preparedS corp may be allowed to file a single return and pay tax for all shareholders,Taxation of Partnerships and LLCs (slide 1 of 2),Most states treat partnerships, LLCs, and LLPs in a manner that parallels Federal treatmentEntity is a tax-reporting, not a taxpaying, e
41、ntityIncome, loss, and credit items are allocated and apportioned among the partners according to the terms of the partnership agreement,Taxation of Partnerships and LLCs (slide 2 of 2),Some states:Require entity make est. tax pymts. for out-of-state partnersApply an entity-level tax on operating in
42、comeAllow composite returns to be filed for out-of-state partnersGenerally, an in-state partner computes the income tax resulting from all of the flow-through income from the entityPartner is allowed a credit for income taxes paid to other states on this income,Sales and Use Taxes(slide 1 of 3),Sale
43、s tax: Consumers tax on tangible personal property acquired for use or consumptionIn several states, selected services are subject to taxVendor acts as collection agentGenerally, not assessed on goods purchased for shipment out-of-stateUse tax complements sales taxConsumers bringing purchased goods
44、into state pay tax to state in which property is usedStates have difficulty enforcing use tax,Sales and Use Taxes(slide 2 of 3),A majority of states exempt certain sales including, for example: Sales for resaleCasual or occasional salesMost purchases by exempt organizationsSales of targeted itemsSal
45、es to manufacturers, producers, and processors,Sales and Use Taxes (slide 3 of 3),Solicitation by independent brokers is sufficient nexus for sales tax purposesTurns “use” tax into “sales” tax for that state Seller required to collect taxFacilitates collection by state,Other Taxes,States may impose
46、a variety of other state & local taxes on corporations, includingIncorporation or entrance fees or taxesGross receipt taxesStock transfer taxesRealty transfer and mortgage recording taxesLicense taxes, and Franchise taxes based on net worth or capital stock outstanding,If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:Dr. Donald R. Trippeer, CPAtrippedroneonta.eduSUNY Oneonta,
