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CHP 9

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2 views

CHP 9

Uploaded by

13llindy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Slide 9-1

Principles of Taxation: Advanced


Strategies
 Chapter 9
 Multistate Business Expansion

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-2
Sale Taxes
 45 states impose a sales tax on sales of
tangible personal property within their
jurisdiction
 Many local governments also impose a
sales tax

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-3
Nexus
 Business must have some physical
relationship with jurisdiction before being
required to collect sales tax
 Such a relationship is referred to as nexus

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Use Tax
Slide 9-4

 Tax imposed on goods purchased out of state but


used in state
 Imposed to prevent people going out of state to
buy goods and not paying sales tax
 Typically only imposed if sales tax not collected
on original sale

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-5
Use Tax Collection
 Generally a voluntary system for out of
state or mail order purchases
 Tax must be collected by out of state
businesses only if they have nexus

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-6
Sales and Use Tax Exemptions
 Many states exempt food and drugs from
sales tax
 Sales of raw materials intended for resale
generally exempt

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-7

State and Local Income Tax


 Imposed on corporations by 46 states and
District of Columbia
 Only imposed on corporations that have
nexus
 Imposed on income attributable to state

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-8
Nexus for Income Tax
 Must have some sort of physical presence in
state
 Federal law prohibits states from taxing
corporations if only connection with state is
selling tangible personal property in state if
orders shipped from outside state

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-9
Economic Nexus
 Some states take position that earning
income from intangible assets within state
creates nexus even if no physical presence

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-10
Impact of State Income Tax on
Federal Tax
 State income tax deductible for federal tax
 State income taxes on individuals are
generally an itemized deduction

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-11
State Taxable Income
 Generally starts with federal taxable income
 Common modifications:
 Deduction for state income tax added

back
 Add municipal bond interest

 Subtract any interest from federal bonds

 Adjust depreciation

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-12
Multistate Businesses
 States may only tax income earned within
their borders
 Methods:
 Direct allocation

 Apportionment

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-13

Allocation
 Generally just used for nonbusiness income
such as interest, dividends, rents and
royalties
 Income is taxed directly to state where
earned

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-14

Apportionment
 Some states apportion all income, some just
business income
 Uniform Division of Income for Tax
Purposes(UDIPTA) used by many states
apportions based upon three factors
 Sales

 Payroll

 Property

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-15
Apportionment Factors
 May states weigh factors evenly
 Some double weight sales
 Some do not use payroll
 Some states use a one factor formula based
upon sales

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-16
Sales Factor
 Based upon state of final product delivery
 Throwback rule
 Used by many but not all states

 If corporation does not file in state in

which product is delivered, sale is


attributed to state in which sale originates

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-17
Property Factor
 Includes all real and tangible personal
property
 Generally based on original cost

 Leased property also considered by


capitalizing lease costs by some factor

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-18 State Net Operating Loss
Carryovers
 Determined by state rules based upon loss
allocated to state

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-19
Affiliated Corporations
 Filing rules vary greatly depending on state
 Some states do not allow consolidated
returns. Some allow consolidated returns
for members which have nexus with that
state

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-20

Unitary Businesses
 Many states require all members of a unitary
business to report on a combined return
 Definition of unitary business is somewhat unclear
but based upon corporations whose operations are
integrated and interdependent
 Some states include world wide operations while
others allow a “water’s edge elections” that only
includes US operations

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-21
State Taxation of Passthrough
Entities
 Entity is not subject to state income tax but
partners, members and S corporation
shareholders are
 Partners, members and S corporation
shareholders must file and pay tax in states
in which entity has operations

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-22
Internet Operations
 Difficult to apply traditional nexus rules
 Often companies establish separate

entities for internet operations to shield


the internet sales
 Internet Tax Freedom Act prohibits new
taxes on internet sales

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-23
Other State Taxes
 Property
 Taxes on property transfers
 Franchise taxes

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc
Slide 9-24
State Incentives
 Many states provides credits, tax rebates
and other incentives to locate business
within them
 Incentives must be considered when
determining effect tax rate

McGraw-Hill/Irwin Copyright (c) 2002 by the McGraw-Hill


Companies Inc

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