Chapter 24 Multistate Corporate Taxation

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Discussion Questions
1. LO.1 You are working with the top management of one of your clients in selecting the U.S. location for a new manufacturing operation. Craft a plan for the CEO to use in discussions with the economic development representatives of several candidate states. In no more than two PowerPoint slides, list some of the tax incentives the CEO should request from a particular state during the negotiations. Be both creative and aggressive in the requests.
2. LO.1 Complete the following chart by indicating whether each item is true or false.
Explain your answers by referencing the overlap of rules appearing in Federal and most state income tax laws.
Item True or False
a. Most of the states start with Federal taxable income in computing state taxable income. ___________
b. The states use a wide variety of rules to compute corporate taxable income; thus, there is no “typical” state income tax computation. ___________
c. Aggregate state taxable incomes always equal Federal taxable income; tax rules merely split the income among the states. ___________
d. The corporate income tax systems of most states can be described as applying progressive rate structures. ___________
e. A typical state income tax credit would equal 10% of the costs incurred to purchase and install solar energy panels for an existing factory. ___________
3. LO.2 In no more than three PowerPoint slides, list some general guidelines that a taxpayer can use to determine whether it has an obligation to file an income tax return with a particular state. (Include the terms nexus and domicile in your answer.)
4. LO.2 Josie is a sales representative for Talk2Me, a communications retailer based in
Fort Smith, Arkansas. Josie’s sales territory is Oklahoma, and she regularly takes day trips to Tulsa to meet with customers.
During a typical sales call, Josie takes the customers’ current orders for phones, cases, and attachments, and, using her wireless phone, sends the orders to headquarters in Fort Smith for immediate action. Approved orders are shipped from the
Little Rock warehouse.
Are Josie’s sales subject to the Oklahoma corporate income tax? Explain.
5. LO.2 Continue with the facts of Question 4. CheapPhones, one of Josie’s customers who is facing tight cash flow problems, wants to return about 100 defective cell phones. Talk2Me tells Josie to bring the phones back to headquarters. Fearing that she will lose CheapPhones as a customer if she does not comply with the request, Josie says, “Let me save you the time and cost of packing and shipping the defective phones. Put them in the trunk of my car, and I’ll take them back.” Does
Josie’s action change the answer to Question 4? Why or why not?
6. LO.3 Indicate whether each of the following items should be allocated or apportioned by the taxpayer in computing state corporate taxable income. Assume that the state follows the general rules of UDITPA.
a. Profits from sales activities.
b. Profits from consulting and other service activities.
c. Losses from sales activities.
d. Profits from managing the stock portfolio of a client.
e. Profits from managing one’s own stock portfolio.
f. Gain on the sale of a plot of land held by a real estate developer.
g. Gain on the sale of a plot of land held by a manufacturer, on which it may expand its factory.
h. Rent income received by a manufacturer from the leasing of space to a supplier.
7. LO.3 Regarding the apportionment formula used to compute state taxable income, does each of the following independent characterizations describe a taxpayer that likely is based in-state or out-of-state? Explain.
a. The sales factor is positively correlated with the payroll, but not the property, factor.
b. The sales factor is much higher than the property and payroll factors.
c. The property and payroll factors are much higher than those for other nexus states.
d. The sales and payroll factors are low, but the property factor is very high.
e. The sales factor is remaining constant, but the payroll factor is decreasing.
8. LO.5 The trend in state income taxation is to move to an apportionment formula that places extra weight on the sales factor. Many states now use salesfactor- only apportionment. Explain why this development is attractive to the taxing states.
9. LO.5 Megan is an accountant for KnoxCo. She is a telecommuter and works most days from her home in Tennessee. Twice a month, she travels to Georgia for a staff meeting at the employer’s Atlanta headquarters. In which state’s payroll factor should Megan’s compensation be included if:
a. Megan is an employee and is covered by the qualified retirement plan of her
Atlanta employer?
b. Megan works as an independent contractor for several clients, including the
Atlanta-based firm?
c. Megan is an employee, and for one day each month, she provides accounting services for KnoxCo’s Memphis rental properties?
10. LO.5 Keystone, your tax consulting client, is considering an expansion program that would entail the construction of a new logistics center in State Q. List at least five questions you should ask in determining whether an asset that is owned by Keystone is to be included in State Q’s property factor numerator.
11. LO.6 The trend in state income taxation is for states to adopt a version of the unitary theory of multijurisdictional taxation in their statutes and regulations.
a. Explain why some states are attracted to the unitary theory and a combined reporting scheme of multistate income taxation.
b. Is the application of the unitary theory a help or a detriment to the taxpayer?
Why?
12. LO.6 State A enjoys a prosperous economy, with high real estate values and compensation levels. State B’s economy has seen better days—property values are depressed, and unemployment is higher than in other states. Most consumer goods are priced at about 10% less in B than in A. Both A and B apply unitary income taxation to businesses that operate within the state. Does unitary taxation distort the assignment of taxable income between A and B? Explain.
13. LO.7 Evaluate this statement: An S corporation can facilitate the meeting of its state income tax filing obligations by developing a common spreadsheet that allocates and apportions income among the states with which it has nexus. This spreadsheet is attached to each of the state returns to be filed. (Hint: Use the term composite return in your answer.)
14. LO.8 Create a PowerPoint outline describing the major exemptions and exclusions from the sales/use tax base of most states. Use your slides to discuss this topic with your accounting students’ club.
15. LO.8 Your client, HillTop, is a retailer of women’s clothing. It has increased sales during the holiday season by advertising gift cards for in-store and online use. HillTop has found that gift card holders who come into the store tend to purchase goods that total more than the amount of the gift card. Further, about onethird of the gift cards never are redeemed, thereby yielding cash to the company without a reduction of inventory. What are the tax issues confronting HillTop related to the gift cards?
16. LO.2, 9 Your client, Ecru Limited, uses a small sales force to solicit sales of its wholesale restaurant supplies. Ecru is based in State W, and the sales representatives are assigned territories in States X, Y, and Z. Ecru owns no property and employs no other personnel outside of W.
As Ecru’s tax adviser, you are to write a policy manual listing various “do’s and don’ts” for the sales personnel so that Ecru does not create income tax nexus with X, Y, and Z.
To prepare for your assignment, write a memo for the tax research file, summarizing the rules as to the ability of a corporation to terminate or create income tax nexus. Make certain that you discuss the Wrigley case in your analysis.
17. LO.9 Your client, Royal Corporation, generates significant interest income from its working capital liquid investments. Write a memo for the tax research file, discussing the planning opportunities presented by establishing a passive investment company. Support your memo with a diagram of the resulting flow of assets and income.
18. LO.2, 5, 9 As the director of the multistate tax planning department of a consulting firm, you are developing a brochure to highlight the services it can provide.
Part of the brochure is a list of five or so key techniques that clients can use to reduce state income tax liabilities. Develop this list for the brochure. Consider only income tax consequences in your analysis.