SMChap 023

Chapter 23 - State and Local Taxes
Chapter 23
State and Local Taxes
SOLUTIONS MANUAL
Discussion Questions
1. [LO 1] Why do states and local jurisdictions assess taxes?
The primary purpose of state and local taxes is to raise revenue to finance state
governments. These taxes can be income, sales, property, and excise taxes.
2. [LO 1] Compare and contrast the relative importance of judicial law to state and local
and federal tax law.
Federal law is governed primarily by Code (statutory law) and Treasury Regulations
(administrative law) and judicial law is usually of lesser importance. Judicial law is of
critical importance in state law. There are numerous cases that must be understood to have
a working knowledge of state and local taxes.
3. [LO 1] Describe briefly the nexus concept and explain its importance to state and local
taxation.
Nexus is the sufficient connection between a taxpayer and a state that allows the imposition
of a tax. The level of connection varies based on the type of tax. For example, any physical
presence in a state will create nexus for sales tax while the nexus standard for income taxes
is generally higher.
4. [LO 1] What is the difference, if any, between the state of a businesss commercial
domicile and its state of incorporation?
Commercial domicile is the state where a business is headquartered and directs operations
from. The state of incorporation is the location where the corporate charter was filed. Most
of the time, a businesss state of commercial domicile and incorporation are the same.
However, they sometimes differ. This is particularly true of publicly traded corporations that
are usually incorporated in Delaware, but are often domiciled in New York or California.
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5. [LO 1] What types of property sales are subject to a sales tax and why might a state
choose to exclude the sales of certain types of property?
Most states only subject tangible personal property to sales tax. Most states exclude real
property and services from the sales tax base. Many states exclude unprepared food
(groceries) from the sales tax base because taxing these goods is regressive
(disproportionately taxes the poor). Many states also place a surtax on prepared
(restaurant) foods.
6. [LO 1] In what circumstances would a business be subject to income taxes in more than
one state?
Anytime a business conducts its trade or business in a manner exceeding the nexus
standard in more than one state (which chooses to assert its sovereign right to tax) the
business will be subject to business taxes in multiple states. However, businesses subject
to tax in more than one state have the ability to apportion or divide their income
between or among the states in which they have income tax nexus to mitigate the
consequences of taxing the same income more than once.
7. [LO 1] Describe how the failure to collect sales tax can result in a larger tax liability for
a business than failing to pay income taxes.
Sales tax is typically collected by the seller from the buyer and is remitted on gross
sales. Income tax is determined from the net income base (gross income less deductions)
and apportioned when appropriate. For example, imagine that a company operates in a
single state having a sales tax rate of 5 percent and an income tax rate of 4 percent. If
the company has $1,000,000 in sales, cost of goods sold of $600,000 and other expenses
of $300,000 the sales and income tax payable are computed as follows: $50,000 of sales
tax payable ($1,000,000 x 5 percent); $4,000 of income tax payable ({[$1,000,000 $600,000]-$300,000}x 4 percent). In addition, if the business would have properly
collected the sales tax from its customers, it would simply remit the amount and have no
liability.
8. [LO 2] Discuss reasons why restaurant meals, rental cars, and hotel receipts are often
taxed at a higher rate than the average sales tax rate.
States often impose higher sales tax rates on meals, rental cars, and hotel receipts
because these items are typically imposed disproportionately upon non-residents of a
state. Non-residents visiting for work or pleasure use these services and capture
additional revenue for a state which allows for lower tax revenues to be raised on state
residents.
9. [LO 2] Compare and contrast the difference between general sales tax nexus and the
new Amazon rule creating nexus in New York.
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The general sales tax nexus rule established in the Quill decision is that an out of state
retailer must have physical presence in the state to create sales tax nexus. For example,
salesmen entering the state would create a need for a state to collect and remit sales tax.
New York implemented a new law in 2008 which requires internet-based retailers,
without physical presence, to collect and remit sales tax. Amazon has already filed suit
against the state of New York.
10. [LO 2] What is the difference between a sales tax and a use tax?
A sales tax liability accrues on the sale of property within the state. A use tax liability
accrues in the state purchased property will be used when the seller in one state ships goods
to a customer in a different state and the seller is not required to collect the sales tax (the
seller does not have sales tax nexus in the state to which the goods are shipped).
11. [LO 2] Rene operates Scandinavian Imports a furniture shop in Olney, Maryland.
Scandinavian Imports ships goods to customers in all 50 states. Scandinavian Imports
also appraises antique furniture. Recently in-home appraisals have been done in the
District of Columbia, Maryland, Pennsylvania, and Virginia. Online appraisals have
been done for customers in California, Minnesota, New Mexico, and Texas. Determine
where Scandinavian Imports has sales and use tax nexus.
Scandinavian Imports has nexus in Maryland--its state of commercial domicile. It also has
nexus in the District of Columbia, Pennsylvania, and Virginia because it has physical
presence that is created through personnel performing appraisals. The online appraisals do
not create nexus because they lack physical presence that creates sales and use tax nexus.
12. [LO 2] Web Music, located in Gardnerville, Nevada, is a new online music service that
allows inexpensive legal music downloads. Web Music prides itself in the fact that it
has the fastest download times in the industry. Web Music achieved this speed by
leasing server space from 10 regional servers dispersed across the country. Discuss
where Web Music has sales tax nexus.
Web Music has nexus in Nevada because of its commercial domicile. Because Web sells
music in an intangible form, some states may not try to tax the transaction. An important
question is whether a leased server is the same as having property within a state. Most
states would argue that renting the property creates nexus within the states where the server
is located. Webs business model creates problems in applying the historical sales and use
tax nexus rules.
13. [LO 2] Discuss possible reasons for why the Commerce clause was included in the U.S.
Constitution.
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The Commerce clause was designed to promote interstate commerce by protecting

businesses through placing restraints on a states ability to burden businesses with the
administrative burden of complying and the financial burden of paying the sales tax.
14. [LO 2] Describe the administrative burden that businesses face in collecting sales taxes.
Businesses with sales tax nexus must collect and remit sales tax from its customers to the
state. The administrative burden is that they must calculate and collect the tax, and then
comply by completing the tax returns and remitting the tax.
15. [LO 3] Compare and contrast the rules for where domiciliary and non-domiciliary
businesses must file state income tax returns.
A domiciliary (an in-state business) must always file a state income tax returnassuming
the state taxes income. A non-domiciliary must only file an income tax return if the nexus
standard is created. For non-domiciliary businesses, the standard varies based on the type
of business. Sellers of tangible personal property are protected by Public Law 86-272; other
businesses have a lower thresholdany physical presence creates nexus.
16. [LO 3] Lars operates Keep Flying, Incorporated, a used airplane parts business, in
Laramie, Wyoming. Lars employs sales agents that visit mechanics in all 50 states to
solicit orders. All orders are sent to Wyoming for approval. All parts are shipped via
common carrier. The sales agents are always on the lookout for wrecked, abandoned, or
salvaged aircraft with rare parts because they receive substantial bonuses for removing
these parts and shipping them to Wyoming. Discuss the states where Keep Flying has
income tax nexus.
Keep Flying has nexus in all 50 states (assuming they salvage parts in every state). While
Keep Flying sells tangible personal property and is protected by Public Law 86-272, its
sales personnel violate this by salvaging parts off planes during their travels.
17. [LO 3] Explain changes in the U.S. economy which have caused P.L. 86-272 to become
partially obsolete and provide an example of a company that P.L. 86-272 works well for
and an example of a company that it does not work well for.
P.L. 86-272 was enacted in the 1950s. At that time, the economy was primarily bricks and
mortar. The statute was designed for traditional companies that produced tangible goods
and sold them through traditional sales personnel. Todays economy has shifted toward
intangibles and services. The rules designed for bricks and mortar type companies do not
create a level playing field across businessesthere are winners and losers.
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18. [LO 3] Climb Higher is a distributor of high end climbing gear and is located in
Paradise, Washington. Climb Highers sales personnel regularly perform the following
activities in an effort to maximize sales:
Carry swag (free samples) for distribution to climbing shop employees.

Perform credit checks on new customers to reduce delivery time the first time
merchandise is ordered.
Check customer inventory for proper display and proper quantities.
Accept returns of merchandise for defective goods.
Discuss Climb Highers sales activities that are protected and unprotected under the
Wrigley Supreme Court decision.
Selling activities or solicitation are not well defined by P.L. 86-272. The Wrigley
decision defines what activities are considered solicitation (protected) and which
activities exceed solicitation. Distribution of free samples and checking inventory for
display and quantity are considered solicitation. Performing credit checks and accepting
returns exceed solicitation and create nexus for Climb Higher.
19. [LO 3] Describe a situation where it would be advantageous for a business to establish
income tax nexus in a state.
While nexus creates a potential income tax liability, it can be advantageous in two ways.
First, creating nexus in a state that chooses not to tax a business can create nowhere
income (income that will go untaxed). Second, creating nexus in a state with a lower
effective tax rate than the business current effective tax rate can lower the total state
taxes paid.
20. [LO 3] States are arguing for economic nexus; provide at least one reason for and
against the validity of economic nexus.
States create an economic base from which companies benefit. Companies benefit from
that economic base whether or not they have physical presence or the other attributes
that create nexus. As a result they should compensate the state for creating the market.
Nexus creates a burden (administrative, financial or both). Allowing states to tax
businesses with a slight presence discourages interstate business or commerce and
potentially violates the US Constitution.
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21. [LO 3] Explain the difference between separate return states and unitary return states.
Separate return states usually require each business to file a separate tax return in the
state. For example, if two businesses file a consolidated federal tax return and each has
nexus within Maine, each must file a separate Maine tax return. A unitary return
requires each member of the unitary group to be included on the tax return, even if only
one has nexus in the state. The unitary concept is generally set out in the Mobil decision
where the Supreme Court specified three factors which have become the basis for
determining whether a group of businesses is unitary: functional integration,
centralization of management, and economies of scale. For example, if two businesses
file a federal consolidated tax return they will file a unitary return only if they are
considered to be unitary. If they are unitary they will file a unitary return, even if only
one of the businesses has nexus with a given unitary state.
22. [LO 3] Explain the rationale for the factors (functional integration, centralization of
management, and economies of scale) used to determine whether two or more
businesses form a unitary group under the Mobil decision.
The factors are used to determine if the businesses operate as part of a whole or if they
operate as truly separate businesses. For example, if two businesses file a federal
consolidated tax return because they have common ownership, but the two businesses
have nothing in common other than ownership they will not be unitary. However, if the
businesses are simply a single business operated in two separate entities they will likely
be unitary. Functional integration looks to see if businesses are vertically or
horizontally integrated or share knowledge between them. Centralization of
management attempts to determine whether common management, accounting systems,
common officers, or interlocking boards of directors exist. Economies of scale look to
whether the businesses achieve efficiencies or discounts on raw materials, services, or
other needs simply because they purchase these items together.
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23. [LO 3] Compare and contrast why book/tax and federal/state adjustments are necessary
for interest income.
While most interest is income for both book and tax purposes, there are exceptions.
Book and tax adjustments usually occur because of federal or state bonds. While state
and local bond interest income is income for financial statement purposes it is exempt
for federal tax purposes. This results in a book/tax difference. However, many states tax
state and local bond interest (although many exempt interest from in-state bonds), which
requires a federal/state adjustment to include the income for state income tax purposes.
For federal bonds (taxable for federal tax) there is no book/tax adjustment since the
interest is income for both; however, federal interest is exempt from state income taxas
a result a federal/state adjustment is necessary to exclude the interest for the state
income tax calculation.
24. [LO 3] Compare and contrast the differences between how business and non-business
income are divided among states for a multi-state business.
Business income (income related to the operation of the business) is apportioned or
divided among the states in which the business has nexus. The apportionment process
allows each state where nexus exists to tax its pro-rata portion of the business.
Alternatively, non-business income is sourced or allocated specifically to the state where
it is earned. For example, interest income is typically taxed in the state of commercial
domicile. Also, rental income from a building is taxed in the state where the rental
property is located.
25. [LO 3] Discuss differences between the treatment of government sales and dock sales
for the sales apportionment factor.
The general rule for sales is that they are assigned to the state where the goods are
shipped to. However, there are exceptions. Government sales are assigned to the state
where the goods were shipped from. This rule exists on the theory that the government
exists throughout the country and attempts to keep government sales from being
concentrated to areas with a large government presence. For example, the District of
Columbia, Virginia, and Maryland receive a disproportionate share of government
shipments because of the large share of the federal workforce concentrated there. Dock
sales rules generally try to assign the sale to where the goods will be utilized rather than
where the customer takes possession of the goods. For example, if a Washington
customer obtains machinery from an Oregon retailer and then transports the goods
across state lines, the sales should be assigned to Washington rather than Oregon.
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26. [LO 3] Most states have increased the weighting of the sales factor for the
apportionment of business income. Discuss the possible motivations for the growing
importance of the sales factor in state apportionment.
States may raise a greater portion of their revenue from non-residents through
increasing the sales factor in its apportionment formula. This is because non-resident
companies typically have larger sales factors than payroll or property factors in states
other than their commercial domicile. Similarly, resident companies that do business in
multiple jurisdictions typically have smaller sales factors and larger payroll and
property factors. As a result, increasing the sales factor or eliminating the payroll and
property factors can increase the relative state income tax burden of non-resident
businesses while decreasing the relative state income tax burden of resident businesses.
27. [LO 3] Compare and contrast federal/state tax differences and book/federal tax
differences.
Both of these differences are due to differences in the rules of the starting point for the
tax calculation and the tax base. For example, federal tax returns require the
reconciliation of book income to federal taxable income. Likewise, most states start the
state income tax calculation with federal taxable income and then require the necessary
adjustment to reach state taxable income. So the differences are simply adjustments to
reconcile the relative income calculations.
Problems
28. [LO 2] Crazy Eddie, Incorporated manufactures baseball caps and distributes them
across the northeastern United States. Crazy Eddie is incorporated and headquartered in
New York. It has product sales to customers in Connecticut, Delaware, Massachusetts,
New Jersey, New York, Ohio, and Pennsylvania. It has sales personnel only where
discussed in the scenarios below. Determine the states in which Crazy Eddie has sales
and use tax nexus given the following information:
a) Crazy Eddie is incorporated and headquartered in New York. It also has property,
employees, sales personnel, and intangibles in New York.
b) Crazy Eddie has a warehouse in Connecticut.
c) Crazy Eddie has two customers in Delaware. Crazy Eddie receives orders over the
phone and ships goods to its customers using FedEx.
d) Crazy Eddie has independent sales representatives in Massachusetts. The
representatives distribute baseball related items for over a dozen companies.
e) Crazy Eddie has sales personnel that visit New Jersey. These sales employees follow
procedures that comply with Public Law 86-272. The orders are received and sent to
New York for acceptance. The goods are shipped by FedEx into New Jersey.
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f) Crazy Eddie provides graphic design services to another manufacturer located in

Ohio. While the services are performed in New York, Crazy Eddies designers visit
Ohio at least quarterly to deliver the new designs and receive feedback.
g) Crazy Eddie receives online orders from its Pennsylvania client. Because the orders
are so large, the goods are delivered weekly on Crazy Eddies trucks.
a) Crazy Eddie would have sales and use tax nexus only in New York; it lacks physical
presence required in the other states where it has sales.
b) Crazy Eddie would have sales and use tax nexus in New York and Connecticut; it
lacks physical presence required in the other states where it has sales.
c) Crazy Eddie would have sales and use tax nexus only in New York; it lacks physical
presence required in Delaware because it ships the goods using a common carrier.
d) Crazy Eddie would have sales and use tax nexus only in New York; it may also have
nexus in Massachusetts if the independent representative only represents Crazy
Eddie (considered to be an agent). However, typically independent representatives
sell merchandise from various vendors and are not considered to be the agent of the
vendor.
e) Crazy Eddie would have sales and use tax nexus in New York; nexus would not be
created in New Jersey because it has no physical contact in that state.
f) Crazy Eddie would have sales and use tax nexus in New York and Ohio; the
presence of Crazy Eddies personnel in Ohio will create nexus there as well.
g) Crazy Eddie would have sales and use tax nexus in New York and Pennsylvania; the
use of Crazy Eddies trucks in Pennsylvania creates physical presence required for
sales and use tax.
29. [LO 2] Brad Carlton operates Carlton Collectibles, a rare coin shop in Washington,
D.C., Carlton ships coins to collectors in all 50 states. Carlton also provides appraisal
service upon request. During the last several years the appraisal work has been done in
either the DC shop or at the homes of private collectors located in Maryland and
Virginia. Determine the jurisdictions in which Carlton Collectibles has sales and use tax
nexus.
Carlton Collectibles would have sales tax nexus in the District of Columbia, Maryland,
and Virginia because Brads appraisal work creates nexus in Maryland and Virginia.
Carlton would have a sales and use tax collection requirement in the District of
Columbia because it has commercial domicile there.
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30. [LO 2] Melanie operates Mels Bakery in Foxboro, Massachusetts. Mels retail stores
are located in Connecticut, Maine, Massachusetts, New Hampshire, and Rhode Island.
Mels also ships specialty breads nationwide upon request. Determine Mels sales tax
collection responsibility and calculate the sales tax liability for Massachusetts,
Connecticut, Maine, New Hampshire, Rhode Island, and Texas using the information
about each state provided below:
a) The Massachusetts stores earn $500,000 in sales. Massachusetts sales tax rate is 5
percent; assume it exempts food items.
b) The Connecticut retail stores have $400,000 in sales ($300,000 from in-store sales
and $100,000 for catering) and $10,000 in delivery charges for catering activities.
Connecticut sales tax is 6 percent and excludes food products, but taxes prepared meals
(catering). Connecticut also imposes sales tax on delivery charges on taxable sales.
c) Mels Maine retail store has $250,000 of sales ($200,000 for take-out and $50,000 of
in-store sales). Maine has a 5 percent sales tax rate and a 7 percent sales tax on prepared
food; it exempts other food purchases.
d) The New Hampshire retail stores have $250,000 in sales. New Hampshire is one of
five states with no sales tax. However, it has a room and meals tax rate of 8 percent.
New Hampshire considers any food or beverage that is served by a restaurant for
consumption on or off the restaurant premises to be considered a meal.
e) Mels Rhode Island retail stores have $300,000 in sales. The Rhode Island sales tax
rate is 7 percent and its restaurant surtax is 1 percent. Rhode Island considers Mels a
restaurant because its retail store has seating.
f) One of Mels best customers relocated to Texas, which imposes an 8.25 percent state
and local sales tax rate but exempts bakery products. This customer entertains regularly
and ordered $5,000 of food items this year.
a) Mels would have no liability in Massachusetts. This is because Massachusetts
exempts food products from sales tax. However, if the definition of food products
didnt include prepared bakery goods or specialty breads, Mel would pay $25,000
($500,000 x 5 percent) in Massachusetts sales tax.
b) Mels would have a $6,600 (110,000 x 6 percent) sales tax liability in Connecticut.
This is because the state taxes catering receipts and delivery charges on catering at
six percent.
c) Mels would have a $3,500 ($50,000 x 7 percent) sales tax liability in Maine. This is
because the state taxes prepared food (in-store sales at 7 percent rather than the 5
percent regular rate). Because Maine exempts other food purchases, there is no
sales tax on take out purchases.
d) Mels would have a $20,000 ($250,000 x 8 percent) sales tax liability in New
Hampshire. This is because the state taxes prepared food. However, if there were an
exception for bakery goods, then Mels would be exempt.
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e) Mels would have a $24,000 ($300,000 x 8 percent) sales tax liability in Rhode
Island. This is because the state taxes Mels as a restaurant and places a one percent
surtax on top of the regular rate.
f) Mels would have no sales tax liability in Texas because it lacks physical presence
there. Additionally, Mels customer would not have a use tax liability in Texas since
bakery goods are exempt.
31 [LO 2] {Research} Cuyahoga County, Ohio has a sales tax rate of 7.75 percent.
Determine what the state, local, and transit (a local transportation district) portions of the
rate are. You may find resources on the State of Ohio website including the following
link:
http://www.tax.ohio.gov/Portals/0/tax_analysis/tax_data_series/sales_and_use
/salestaxmapcolor.pdf
The total rate is 7.75 percent. The county tax rate is 1.25 percent; the transit tax rate is 1.00
percent. Thus the state tax rate is 5.5 percent.
32 [LO 2] Kai operates the Surf Shop in Laie, Hawaii. The Surf Shop designs,
manufacturers and customizes surf boards. Hawaii has a 4 percent excise tax that is
technically paid by the seller. However, the state also allows "tax on tax" to be charged,
which effectively means a customer is billed 4.166% of the sales price. Determine the
sales and use tax liability that the Surf Shop must collect and remit, or that the customer
must pay for each of the following orders:
a) Bronco, a Utah customer, places an internet order for a $1,000 board that will be
shipped to Provo, Utah where the local sales tax rate is 6.25 percent.
b) Norm, a California resident, comes to the retail shop on vacation and has a $2,000
custom board made. Norm uses the board on vacation and then has the Surf Shop ship
the board to Los Angeles, California where the sales tax rate is 8.5 percent.
c) Jim, an Ohio resident, places an order for a $2,000 custom board at the end of his
vacation. Upon completion the board will be shipped to Columbus, Ohio where the
sales tax rate is 7 percent.
d) Bo, a Nebraska resident, sends his current surf board to the Surf Shop for a custom
paint job. The customization services come to $800. The board is shipped to Lincoln,
Nebraska where the sales tax rate is 7 percent.
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a) Kais would have no sales tax liability. Bronco would have a $63 ($1,000 x 6.25
percent) use tax liability in Utah.
b) Kais would have a $83 ($2,000 x 4.166 percent) sales tax liability. Norm would
have a $87 ([$2,000 x 8.5 percent] - $83 paid to HI) use tax liability in California.
c) Kais would have no sales tax liability. Jim would have a $140 ($2,000 x 7 percent)
use tax liability in Ohio.
d) Kais would have no sales tax liability because Hawaii doesnt tax services. Bo
would have no Nebraska use tax liability because it doesnt tax services.
33 [LO 2] Last year Pete, a Los Angeles, California resident, began selling autographed
footballs through Trojan Victory (TV), Incorporated, a California corporation. TV has
never collected sales tax. Last year TV had sales as follows: California ($100,000),
Arizona ($10,000), Oregon ($15,000), New York ($50,000), and Wyoming ($1,000).
Most sales are made over the internet and shipped by common carrier. How much sales
tax should TV have collected in each of the following situations:
a) California treats the autographed football as tangible personal property subject to an
8.25 percent sales tax. Answer for California.
b) California treats the autographed football as part tangible personal property ($50,000)
and part services ($50,000) and tangible personal property is subject to an 8.25 percent
sales tax. Answer for California.
c) TV has no property or other physical presence in New York or Wyoming. Answer for
New York and Wyoming.
d) TV has Pete deliver a few balls to fans in Arizona (5.6 percent) and Oregon (no sales
tax) while attending football games there. Answer for Arizona and Oregon.
e) Related to part d, can you make any suggestions that would decrease TVs Arizona
sales tax liability?
a) TV would have a $8,250 ($100,000 x 8.25 percent) sales tax liability in California.
b) TV would have a $4,125 ($50,000 x 8.25 percent) sales tax liability in California.
c) TV would have no sales or use tax liability in New York or Wyoming because TV
lacks physical presence in those states.
d) TV would have a $560 ($10,000 x 5.6 percent) sales tax liability in Arizona but no
Oregon liability.
e) If TV shipped the footballs through common carrier to its Arizona clients rather than
having Pete (TVs agent) deliver them then no sales or use tax liability would be
accrued by TV. TVs customers would still have an Arizona state use tax liability.
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34 [LO 2] Armstrong Incorporated, a Texas corporation, runs bicycle tours in several

states. Armstrong also has a Texas retail store and an internet store, which ships to out
of state customers. The bicycle tours operate in Colorado, North Carolina, and Texas
where Armstrong has employees and owns and uses tangible personal property.
Armstrong has real property only in Texas. Armstrong has the following sales:
State
Arizona
California
Colorado
North Carolina
Oregon
Texas
Totals
Armstrong Sales
Goods
Services
Total
$34,194
$0
$34,194
110,612
0
110,612
25,913
356,084
381,997
16,721
225,327
242,048
15,431
0
15,431
241,982
877,441 1,119,423
$1,458,85
$444,853
2 $1,903,705
Assume the following tax rates: Arizona (5.6 percent), California (7.75 percent),
Colorado (8 percent), North Carolina (6.75 percent), Oregon (8 percent), and Texas (8.5
percent). How much sales and use tax must Armstrong collect and remit?
Armstrong has sales and use tax nexus in Texas (commercial domicile), Colorado, and
North Carolina. Sales tax nexus is created in Colorado and North Carolina because of
the physical presence of Armstrongs employees who provide services there. As a result,
Armstrong has sales and use tax liability of $20,568 in Texas, $2,073 in Colorado, and
$1,129 in North Carolina. It is important to note that while the provision of services
triggers the sales tax liability, the calculation is based on the goods sold within each
state. The calculations are as follows:
State
Colorado
North
Carolina
Texas
Goods
Rate
Liability
25,913
8.00%
$2,073
16,721
241,982
$284,61
6
6.75%
8.50%
$1,129
$20,568
$23,770
35 [LO 3] Kashi Corporation is the U.S. distributor of fencing (sword fighting) equipment
imported from Europe. Kashi is incorporated in Virginia and headquartered in
Arlington, Virginia. Kashi ships goods to all 50 states. Kashis employees attend
regional and national fencing competitions where they maintain temporary booths to
market their goods. Determine whether Kashi has income tax nexus in the following
situations:
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a) Kashi is incorporated and headquartered in Virginia. It also has property, employees,

sales personnel, and intangibles in Virginia. Determine whether Kashi has nexus in
Virginia?
b) Kashi has employees that live in Washington, DC and Maryland. All of their
employment-related activities are performed in Virginia. Determine whether Kashi has
nexus in Washington D.C. and Maryland?
c) Kashi has two customers in North Dakota. Kashi receives orders over the phone and
ships goods to its customers using FedEx. Determine whether Kashi has nexus in North
Dakota?
d) Kashi has independent sales representatives in Illinois. The representatives distribute
fencing and other sports-related items for many companies. Determine whether Kashi
has nexus in Illinois?
e) Kashi has sales personnel that visit South Carolina for a regional fencing competition
for a total of 3 days during the year. All orders received are sent to Virginia for credit
approval and acceptance. The goods are shipped by FedEx into South Carolina.
Determine whether Kashi has nexus in South Carolina?
f) Kashi has sales personnel that visit California for a national fencing competition and
several regional competitions for a total of 17 days during the year. All orders received
are sent to Virginia for credit approval and acceptance. The goods are shipped by FedEx
into California. Determine whether Kashi has nexus in California?
g) Kashi receives orders from its Pennsylvania client over its website. Because the
orders are so large, the goods are delivered on Kashis trucks on a weekly basis.
Determine whether Kashi has nexus in Pennsylvania?
h) In addition to shipping goods, Kashi provides fencing lessons in Virginia and
Maryland locations. Determine whether Kashi has nexus in Virginia and Maryland?
i) Given that Kashi ships to all 50 states, are there locations that Kashi currently does
not have nexus in that would decrease Kashis overall state income tax burden it nexus
were created in these locations?
23-14
a) Kashi has nexus in Virginia, its state of commercial domicile.

b) Kashis employees living in the District of Columbia and Maryland will not create
nexus there. However, if the employees were to make deliveries to customers in those
jurisdictions on the way home that would create nexus.
c) Kashi does not have nexus in North Dakota.
d) The presence of independent contractors in California does not create nexus in
California. However, if the independent contractor only represented Kashi (no other
vendors) they would likely be considered Kashis agent and could create nexus.
e) Kashi does not have nexus in South Carolina. Kashi is protected by P.L. 86-272
because it merely solicits for sales of tangible personal property. Kashi is also likely
protected by the trade show rule.
f) Kashi does not have nexus in California. Kashi is protected by P.L. 86-272 because
it merely solicits for sales of tangible personal property. Kashi may also be protected
by the trade show rule, this would depend on whether separate shows days are
treated separately or aggregated for purposes of calculating the 14 day rule.
g) The presence of Kashis truck in Pennsylvania will create nexus there.
h) The provision of fencing lessons (services) in Virginia and Maryland will create
income tax nexus there. Services are not a protected activity under P.L. 86-272.
i) Yes, Kashi should create nexus with any state that doesnt have an income tax. This
will allow Kashi to apportion part of its business income to states which do not tax
the apportioned incomethis creates nowhere income. Kashi may also consider
creating nexus in low-tax jurisdictions but would have to balance the lower taxes
against the higher tax compliance costs.
36 [LO 3] Gary Holt LLP provides tax and legal services regarding tax-exempt bond
issues of state and local jurisdictions. Gary typically provides the services from his New
York offices. However, for large issuances Gary and his staff travel to the state to
complete the work. Determine whether Gary Holt has income tax nexus in the
following situations:
a) Gary Holt is a New York partnership and headquartered in New York. It also has
property and employees in New York. Does it have income tax nexus in New York?
b) Gary Holt has employees that live in New Jersey and Connecticut. All of their
employment related activities are performed in New York. . Does it have income tax
nexus in New Jersey and/or Connecticut?
c) Gary Holt has two customers in California. Gary personally travels to California to
finalize the Alameda County bond issuance. Does it have income tax nexus in
California?
23-15
a) Gary Holt has nexus in New York through its commercial domicile, provision of
services, property, and payroll.
b) Gary Holt does not have nexus in New Jersey and Connecticut. Its employees do not
create nexus there.
c) Gary Holt has nexus in California through the provision of services in California.
Services are not a protected activity under P.L. 86-272.
37 [LO 3] Root Beer, Inc. (RBI) is incorporated and headquartered in Seattle, Washington.
RBI runs an internet business www.makerootbeer.com. RBI sells bottling equipment
and other supplies to make home-made root beer. RBI has an Oregon warehouse facility
that it ships goods from. Determine whether RBI has income tax nexus in the following
situations:
a) Root Beer is incorporated and headquartered in Washington. It has property and
employees in Oregon and Washington. Determine whether RBI has nexus in Oregon
and Washington.
b) Root Beer has hundreds of customers in California but has no physical presence (no
employees or property). Determine whether RBI has nexus in California.
c) Root Beer has 500 New York customers but has no physical presence (no employees
or property). Remember New York has the new Amazon rule. Determine whether RBI
has nexus in New York.
a) RBI has income tax nexus in Washington and Oregon. Nexus is created in
Washington through commercial domicile, payroll, and property. However,
Washington does not have a corporate income tax, but has a Business and
Occupation (gross receipts) tax instead. Nexus is created in Oregon through payroll
and property.
b) RBI has no nexus in California because it lacks physical presence.
c) RBI has no income tax nexus in New York, but New Yorks Amazon rule will create
sales and use tax nexus.
38 [LO 3] Rockville Enterprises manufactures wood working equipment and is
incorporated and based in Evansville, Indiana. Rockvilles real property is all in
Indiana. Rockville employs a large sales force that travels throughout the U.S.
Determine whether each of the following is a protected activity in non-domiciliary states
under Public Law 86-272:
a) Rockville advertises using television, radio and newspaper in Wisconsin.
b) Rockvilles employees in Illinois check the credit of a potential customer.
c) Rockville maintains a booth at an industry tradeshow in Arizona for 10 days.
d) Sales representatives check the inventory of a customer to make sure they have
enough in stock and that it is properly displayed.
e) Rockville holds a management seminar for corporate executives over four days in
Florida.
23-16
f) Sales representatives supervise the repossession of inventory from a customer that is

not making payments on time in Maine.
g) Rockville provides automobiles to Idaho and Montana sales representatives.
h) An Alabama sales representative accepts a customer deposit on a large order.
i) Colorado sales representatives carry display racks and promotional material that they
place in customers retail stores without charge.
a) All forms of advertising are a protected activity.
b) Checking the credit of customers is not a protected activity. Employees may take the
customers information and forward it to the home office for the credit check (this
would be a protected activity).
c) The trade show rule protects in-state sales for up to 14 days in most states including
Arizona.
d) Inventory checks (both quantity and proper display) are protected activities.
e) A management seminar is not a protected activity and would create nexus. A sales
personnel seminar is a protected activity.
f) Collection activities are not a protected activity and create nexus.
g) Providing automobiles or monetary compensation for the purchase or lease of an
automobile used by sales personnel is a protected activity.
h) Accepting a customer deposit is the acceptance of an order and is not a protected
activity.
i) Placing display racks and promotional materials without charge is a solicitation and
is a protected activity.
39 [LO 3] Software Incorporated is a sales and use tax software vendor. It provides
customers with a license to use its software that is downloaded on customers machines.
The licensing agreement provides that Software actually retains ownership of the
software. Software has customers in New Jersey and West Virginia. Does Software
have economic nexus in these states because of the following decisions (Lanco, Inc. v.
Director, Division of Taxation, NJ Sup. Ct., Dkt. No.A-89-05(2006); and Tax
Commissioner of West Virginia v. MBNA America Bank, N.A., 640 SE 2d 226 (WV
2006))?
The court decisions (Lanco and MBNA) hold that physical presence isnt necessary in
order to create income tax nexus. Lanco licensed trademarks, trade names, and service
marks within New Jersey. MBNA issued credit cards to West Virginia customers and had
no employees, payroll or property in that state. By analogy, Softwares licensing the use
of its intangible product in New Jersey and West Virginia should create nexus under
those precedents.
23-17
40 [LO 3] {Research}Peter Inc., a Kentucky corporation owns 100 percent of Suvi Inc., a
Mississippi corporation. Peter and Suvi file a consolidated federal tax return. Peterhas
income tax nexus in Kentucky and South Carolina. Suvi in Mississippi and South
Carolina. Kentucky, Mississippi, and South Carolina are separate return states. In
which states must Peter and Suvi file tax returns? Can they file a combined/consolidated
return in any states? Explain. (Hint: Use South Carolina Form SC 1120 and the related
instructions.)
Peter must file in Kentucky and South Carolina because it has nexus in those states. Suvi
must file in Mississippi and South Carolina because it has nexus in those states. South
Carolina permits a consolidated tax return (see Form SC1120, Schedule J). Each
corporation electing to file a consolidated return determines its income or loss
separately, allocates its allocable income separately, and calculates its apportionable
income separately using separate apportionment factors.
41 [LO 3] Use California Publication 1061 (2011) to determine the various tests California
uses to determine whether two or more entities are considered to be part of a unitary
group.
In Publication 1061, California uses tests from the following cases:
Butler Brothers, Butler Brothers v. McColgan, 315 U.S. 501 (1942), (unity of ownership,
operations, and a centralized executive force)
Edison California Stores v. McColgan (1947) 30 Cal.2d.472, (if the operations within
the state is dependent on or contributes to operations outside the state);
Container Corporation, Container Corporation v. Franchise Tax Board (1983) 463 U.S.
159, (three unities test and dependency and contribution test);
Mobil Oil, Mobil Oil Corp. v. Commr of Taxes of Vt. (1980) 445 U.S. 425, (functional
integration, centralization of management, and economies of scale).
42 [LO 3] Bulldog, Incorporated is a Georgia corporation. It properly included, deducted,
or excluded the following items on its federal tax return in the current year:
23-18
Federal Treatment
Item
Amount
Georgia Income Taxes

Tennessee Income Taxes
Washington Gross Receipts Tax
Georgia Bond Interest
Federal T-Note Interest
Domestic Production Act. Ded. (DPAD)
$25,496
$13,653
$3,105
$10,000
$4,500
$15,096
Deducted on federal return

Excluded from federal return
Included on federal return
Use the Georgia Corporate Income Tax Form 600 and Instructions to determine what
federal/state adjustments need to be made for Georgia. Bulldogs Federal Taxable
Income was $194,302. Calculate the Bulldogs Georgia state tax base.
Bulldogs Georgia state tax base is $218,551, which is calculated as follows:
Bulldog Georgia Tax Base
(1) Federal Income
Additions
(2) DPAD
(3) Tennessee tax
Subtractions
(4)Federal T-note
interest
$194,30
2
$15,096 Per instructions
$13,653 Per instructions
$4,500 Per return
$218,55
1 (1) + (2) +(3) (4)
Additionally, Publication 611

(corporate instructions)
indicates that non-income based
tax (Washington Gross Receipts
Tax) is deductible (no adjustment
is necessary) and Georgia bond
interest is deductible.
43 [LO 3] Herger
Corporation does
business in California, Nevada, and Oregon and has nexus in these states as well.
Hergers California state tax base was $921,023 after making the required federal/state
adjustments. Hergers state tax base contains the following items:
Georgia Tax Base
23-19
Item
Federal T-note interest
Nevada municipal bond interest
California municipal bond interest
Interest expense related to T-note interest
Royalty income
Travel expenses
Amount
$5,000
$3,400
$6,000
$1,400
$100,000
$9,025
Determine Hergers business income.

Hergers California business income would be $817,623 ($921,023 - $100,000 of
royalty income - $3,400 of Nevada municipal bond interest). The royalty income would
be considered non-business or allocable income. The Federal T-note interest and related
expenses are excluded from the California state income tax base as is the California
municipal bond interest. The travel expenses are in the state tax base and are a business
expense (no adjustment is necessary).
44 [LO 3] Bad Brad sells used semi trucks and tractor trailers in the Texas panhandle. Bad
Brad has sales as follows:
Bad Brads
State
Colorado
Oklahoma
New
Mexico
Texas
Totals
Sales
$234,99
2
402,4
50
675,204
1,085,24
9
$2,397,8
95
Bad Brad is a Texas Corporation. Answer the questions in each of the following
scenarios.
a) Bad Brad has nexus in Colorado, Oklahoma, New Mexico and Texas. What are the
Colorado, Oklahoma, New Mexico and Texas sales apportionment factors?
b) Bad Brad has nexus in Colorado and Texas. Oklahoma and New Mexico sales are
shipped from Texas (a throwback state). What are the Colorado and Texas sales
apportionment factors?
c) Bad Brad has nexus in Colorado and Texas. Oklahoma and New Mexico sales are
shipped from Texas (a throwback state); $200,000 of the Oklahoma sales were to the
federal government. What are the Colorado and Texas sales apportionment factors?
23-20
d) Bad Brad has nexus in Colorado and Texas. Oklahoma and New Mexico sales are
shipped from Texas (assume Texas is a non-throwback state). What are the Colorado and
Texas sales apportionment factors?
23-21
a) The sales factors are the state sales divided by the total sales. For example
Colorados sales factor is 9.8 percent ($234,992/$2,397,895). The sales factors are
as follows:
Colorado sales factor
Oklahoma sales factor
New Mexico sales factor
Texas sales factor
9.80%
16.78%
28.16%
45.26%
100.00%
b) Thrown back sales are added to the Texas numerator. Thus, the Texas sales
numerator increases to $2,162,903($402,450 + $675,204 + $1,085,249). The
Colorado and Texas factors are as follows:
Texas sales factor*
*($2,162,903/$2,397,895)
9.80%
90.20%
100.00%
c) Federal government sales are added to the numerator of the state where they
shipped from (Texas). As a result, all of the Oklahoma sales are added to Texas
through either the throwback or government sales rules. The Colorado and Texas
factors are as follows:
Texas sales factor
9.80%
90.20%
100.00%
d) Without the throwback rules, the sales from New Mexico and Oklahoma are
excluded from both the numerator and denominator. The Colorado and California
sales factors are 17.8 ($234,992/$1,320,241) percent and 82.2
(1,085,249/$1,320,241) percent, respectively.
Texas sales factor
17.80%
82.20%
100.00%
23-22
45 [LO 3] Nicoles Salon a Louisiana Corporation, operates beauty salons in Arkansas,

Louisiana, and Tennessee. These salon sales by state, are as follows:
Nicoles Salon
State
Sales
Arkansa
s
$130,239
Louisian
309,19
a
2
Tenness
ee
723,010
$1,162,4
Total
41
What are the payroll apportionment factors for Arkansas, Louisiana, and Tennessee in
each of the following alternative scenarios?
a) Nicoles Salon has nexus in Arkansas, Louisiana, and Tennessee.
b) Nicoles Salon has nexus in Arkansas, Louisiana, and Tennessee, but $50,000 of the
Arkansas amount is paid to independent contractors.
a) Nicoles salons payroll factors are as follows:
Arkansas
11.20%
Louisiana
26.60%
Tennessee
62.20%
100.00%
($130,239/$1,162,441
)
($309,192/$1,162,441
)
($723,010/$1,162,441
)
b) The independent contractor amount is subtracted from the Arkansas numerator,

which also lowers the denominator. Nicoles salons payroll factors are as follows:
Arkansas
7.21%
Louisiana
27.79%
Tennessee
64.99%
100.00%
($80,239/$1,112,441)
($309,192/$1,112,441
)
($723,010/$1,112,441
)
23-23
46 [LO 3] Delicious Daves Maple Syrup a Vermont Corporation, has property in the
following states:
Property
State
Beginning Ending
Maine
$923,032
$994,221
Massachusetts
103,311
203,109
New Hampshire
381,983
283,021
Vermont
873,132
891,976
Total
$2,281,458 $2,372,327
What are the property apportionment factors for Maine, Massachusetts, New Hampshire,
and Vermont in each of the following scenarios?
a) Delicious has nexus in each of the states.
b) Delicious has nexus in each of the states, but the Maine total includes $400,000 of
investment property that Delicious rents out (unrelated to its business).
c) Delicious has nexus in each of the states, but also pays $50,000 to rent property in
Massachusetts.
a) Delicious has the following property factors:
Maine
Massachusetts
New Hampshire
Vermont
Beginning
$923,032
$103,311
$381,983
$873,132
Ending
Average
Factor
$994,221
$958,627
41.20%
$203,109
$153,210
6.58%
$283,021
$332,502
14.29%
$891,976
$882,554
37.93%
$2,372,32 $2,326,89
$2,281,458
7
3
100.00%
b) Delicious must remove the investment (non-business property) from the property
factors. Delicious would have the following property factors:
Maine
Massachusetts
New Hampshire
Vermont
Beginning
$523,032
$103,311
$381,983
$873,132
Ending
Average
Factor
$594,221
$558,627
28.99%
$203,109
$153,210
7.95%
$283,021
$332,502
17.26%
$891,976
$882,554
45.80%
$1,972,32 $1,926,89
$1,881,458
7
3
100.00%
23-24
c) Delicious must add the rental property to Massachusetts. The annual rent ($50,000)
is multiplied by eight and thus ($400,000) is included in both the numerator and
denominator. Delicious would have the following property factors:
Maine
Massachusetts
New Hampshire
Vermont
Beginning
$923,032
$503,311
$381,983
$873,132
Ending
Average
Factor
$994,221
$958,627
35.15%
$603,109
$553,210
20.29%
$283,021
$332,502
12.19%
$891,976
$882,554
32.36%
$2,772,32 $2,726,89
$2,681,458
7
3
100.00%
47 [LO 3] Susies Sweet Shop has the following sales, payroll and property factors:
Sales
Payroll
Property
Iowa
Missouri
69.20%
32.01%
88.00%
3.50%
72.42%
24.04%
What are Susies Sweet Shops Iowa and Missouri apportionment factors under each of
the following scenarios:
a) Iowa and Missouri both use a three-factor apportionment formula.
b) Iowa and Missouri both use a four-factor apportionment formula that doubleweights sales.
c) Iowa uses a three-factor formula and Missouri uses use single-factor apportionment
formula (based solely on sales).
a) Using a three-factor formula, the total apportionment would be 96.39 percent.
Susies Iowa and Missouri apportionment factors would be as follows:
Sales
Payroll
Property
Apportionment Factor
Iowa
Missouri
69.20%
32.01%
88.00%
3.50%
72.42%
24.04%
229.62%
59.55%
/3
/3
76.54%
19.85%
96.39%
b) Using a four-factor (double-weighted sales) formula, the total apportionment would

be 97.60 percent. Susies Iowa and Missouri apportionment factors would be as
follows:
23-25
Sales
Sales
Payroll
Property
Iowa
Missouri
69.20%
32.01%
69.20%
32.01%
88.00%
3.50%
72.42%
24.04%
298.82%
91.56%
/4
/4
74.71%
22.89%
97.60%
c) If Iowa uses a three-factor formula, as in part (a), and Missouri uses a single (sales)
factor apportionment factor, the total apportionment would be 108.55 percent.
Susies Iowa and Missouri apportionment factors would be as follows:
Iowa
Missouri
76.54%
32.01%
108.55%
48 [LO 3] Brady Corporation is a Nebraska Corporation but owns business and

investment property in surrounding states as well. Determine the state where each item
of income is allocated.
a.
b.
c.
d.
$15,000 of dividend income.

$10,000 of interest income.
$15,000 of rental income for South Dakota property.
$20,000 of royalty income for an intangible used in South Dakota (where nexus
exists).
e. $24,000 of royalty income from Kansas (where nexus does not exist).
f. $15,000 of capital gain from securities held for investment.
g. $30,000 of capital gain on real property located in South Dakota.
23-26
a. Nebraska; dividend income is generally allocated or sourced to the state of

commercial domicile.
b. Nebraska; interest income is generally allocated or sourced to the state of
commercial domicile. Although, one exception is that interest on working
capital is considered business income and is apportioned rather than
allocated.
c. South Dakota; rental property income is generally allocated or sourced to
where the property is located.
d. South Dakota; royalty income is generally allocated or sourced to where the
property is used.
e. Kansas, royalty income is generally allocated or sourced to where the
property is used, but if nexus does not exist it is allocated to the location
where the intangible is controlled (Nebraska).
f. Nebraska; capital gain from property held for investment is generally
allocated or sourced to the state of commercial domicile.
g. South Dakota; capital gain from real property is generally allocated or
sourced to the state where the property is located.
49 [LO 3] Ashton Corporation is headquartered in Pennsylvania. Ashton has a
Pennsylvania state income tax base of $500,000. Of this amount, $50,000 was nonbusiness income. Ashtons Pennsylvania apportionment factor is 42.35 percent. The
non-business income allocated to Pennsylvania was $32,000. Assuming a Pennsylvania
corporate tax rate of 8.25 percent, what is Ashtons Pennsylvania state tax liability?
Ashton Corporations Pennsylvania state tax liability is $18,362. The state tax liability
is calculated as follows:
Ashton Corporation
(1) State tax base
(2) Total allocated income
(3) Apportionable income
(4) PA apportionment factor
(5) PA apportioned income
(6) PA allocated income
(7) PA taxable income
(8) PA tax rate
(9) PA state tax liability
$500,00
0
$50,000
$450,00
0
42.35%
$190,57
5
$32,000
$222,57
5
8.25%
$18,362
Given
Given
(1) - (2)
Given
(3) x (4)
Given
(5) + (6)
Given
(7) x (8)
Comprehensive problems
23-27
50. [LO 3] Do you know what Cloud computing is? Cloud computing is the use of hosted
computer facilities through the internet. Gmail, RIA Checkpoint, and even using your
iPhone are some applications of cloud computing.
a. If HP provides a customized bundle of servers, storage, network and security software,
business application software to a customer in Washington state how is it taxed?
b. Is HP leasing tangible personal property which is taxable or providing a non-taxable
service?
c. Is the buyer of HPs products subject to Washingtons sales and use tax?
d. Is HP subject to Washingtons B&O tax?
Solution: If youre buying or selling cloud computing services, it is critical to determine
what youre buying or selling. You may be leasing equipment, making service payments,
or paying a license for using software these distinctions are important and can have
an impact on your companys tax filings. Current tax law does not necessarily reflect the
realities of cloud computing. Cloud computing transactions arent quite leases and
arent quite services, but tax law requires them to be classified in one of these two
categories. Eventually, tax regulations will be updated and clarified. Now, there isnt
enough consensus to know how to treat them for most states.
To deal with these issues, Washington State changed its laws in 2009 to deal with the
shift, the report said. The state now requires that Washington residents pay state tax
regardless of how their goods are delivered. So Washington residents will be subject to
the sales and use tax. HP would be subject to the Washington B&O tax because nonincome based taxes are not protected under Public Law 86-272.
23-28
51. Sharon, Inc. is headquartered in State X, Sharon owns 100% of Carol, Josey and Janice
Corps. Assume sales operations are within the solicitation bounds of Public Law 86272. Each of the corporations has operations in the following states:
Domicile State
Dividend
income
Business
income
Sales: State X
State Y
State Z
State A
State B
Property: State
X
State Y
State Z
State A
Payroll: State
X
State Y
State Z
State A
Sharon, Inc.
State X
(throwback)
1,000
Carol Corp
State Y
(throwback)
200
Josey Corp
State Z (nonthrowback)
300
Janice Corp
State Z (nonthrowback)
500
50,000
30,000
10,000
10,000
70,000
10,000
40,000
20,000
10,000
5,000
20,000
10,000
20,000
10,000
50,000
10,000
10,000
10,000
20,000
80,000
50,000
10,000
25,000
20,000
3,000
10,000
10,000
10,000
40,000
Compute the following for State X assuming a tax rate of 15 percent.

a. Calculate the State X apportionment factor for Sharon Inc., Carol Corp.,
Josey Corp., and Janice Corp.
b. Calculate the business income apportioned to State X.
c. Calculate the taxable income for State X for each company.
23-29
d. Determine the tax liability for State X for the entire group.
Josey has no nexus in State X because it has no property or payroll there (no physical
presence). The State X tax liability is $6,793; calculated as follows:
Sharon
Sales
X
Total
70,000
100,000
10,000
70,000
Josey
No
NEXUS
10,000
35,000
Property
X
Total
50,000
100,000
20,000
100,000
0
25,000
10,000
30,000
Payroll
X
Total
10,000
10,000
10,000
50,000
0
3,000
0
20,000
0.70
0.50
1.00
2.20
0.14
0.20
0.20
0.54
0.3333
0.3333
0.00
0.6666
Income
0.7333
50,000
0.18
30,000
0.2222
10,000
Apportioned Income
Allocated Income
36,667
1,000
5,400
0
2,222
0
State Taxable Income
37,667
5,400
2,222
Sales
Property
Payroll
Carol
Janice
10,000
30,000
45,289
15%
6,793
Taxable
income
Tax rate
State tax
liability
52. Happy Hippos (HH) is a manufacturer and retailer of New England crafts. HH is
headquartered in Camden, Maine. HH has sales, employees, property, provides
services, and commercial domicile as follows:
State
Connecticut
Maine
Massachusetts
New
Hampshire
Rhode Island
Vermont
Sales
Happy Hippos In-State Activities

Commercial
Employees Property Services Domicile
Happy Hippos sales of goods and services by state are as follows:

23-30
State
Connecticut
Maine
Massachusetts
New
Hampshire
Rhode Island
Vermont
Totals
Happy Hippos Sales

Goods
Services
Total
$78,231
$52,321
$130,552
292,813
81,313
374,126
90,238
90,238
129,322
98,313
123,914
$812,831
129,322
98,313
147,856
$970,407
23,942
$157,576
HH has federal taxable income of $282,487 for the current year. Included in federal taxable
income are the following income and deductions:
$12,000 of Vermont rental income;
City of Orono, Maine bond interest of $10,000;
$10,000 of dividends;
$2,498 of state tax refund included in income;
$32,084 of state net income tax expense; and
$59,234 of federal depreciation.
Maine state depreciation for the year was $47,923 and Maine doesnt allow deductions for state
net income taxes.
The employees present in Connecticut, Massachusetts, and Rhode Island are sales personnel and
perform only activities protected by Public Law 86-272.
Each of the states is a separate-return state.
HHs payroll is as follows:
Payroll
State
Connecticut
Maine
Massachusetts
Rhode Island
Vermont
Total
Wages
$94,231
392,195
167,265
92,391
193,923
$940,005
23-31
HHs property is as follows:

State
Maine
Vermont
Total
Property
Beginning Ending
Rented
$938,234
$937,652
329,134
428,142 $12,000
$1,267,368 $1,365,794 $12,000
a) Determine the states in which HH has sales tax nexus.

b) Calculate the sales tax HH must remit assuming the following sales tax rates:
Connecticut (6%), Maine (8%), Massachusetts (7%), New Hampshire (8.5%), Rhode
Island (5%), and Vermont (9%).
c) Determine the state in which HH has income tax nexus.
d) Determine HHs state tax base for Maine assuming federal taxable income of
$282,487.
e) Calculate business and non-business income.
f) Determine HHs Maine apportionment factors using the three-factor method (assume
that Maine is a throwback state).
g) Calculate HHs business income apportioned to Maine.
h) Determine HHs allocation of non-business income to Maine.
i) Determine HHs Maine taxable income.
j) Calculate HHs Maine net income tax liability assuming a Maine tax rate of 5
percent.
a) HH has sales tax nexus in Maine, Connecticut, Massachusetts, Rhode Island and
Vermont. HH does not have sales tax nexus in New Hampshire because there is no
physical presence.
b) HH sales tax remittance will be as follows:
Connecticu
t
Taxable sales
Sales tax rate
Sales tax
liability
Maine
Massachusetts
New
Hampshir
e
Rhode
Island
Vermont
$78,231
6.0%
$292,813
8.0%
$90,238
7.0%
$0
8.5%
$98,313
5.0%
$123,914
9.0%
$4,694
$23,425
$6,317
$0
$4,916
$11,152
c) HH has income tax nexus in Maine (commercial domicile), Connecticut (provides

services), and Vermont (provides services).
d) HHs Maine state tax base is $323,384 and is calculated as follows:
23-32
Federal taxable
income
$282,4
87
Positive adjustments
State tax expense
Federal depreciation
Negative adjustments
State tax refund
Maine depreciation
Maine state tax base
$32,08
4
$59,23
4
$91,31
8
$2,498
$47,92
3
$50,42
1
$323,3
84
e) HHs non-business and business income is as follows:

Maine state tax base
Allocable income
Vermont rental
income
$323,3
84
Dividends
Non-business
income
$12,00
0
$10,00
0
$10,00
0
($32,0
00)
Business income
$291,3
84
Maine bonds
f) HHs Maine apportionment factor is 59.81; the average of the sales, payroll and
property factors. HHs sales, payroll, and property factors are 71.31, 41.72, and
66.40 percent, respectively.
23-33
HHs Maine sales apportionment factor is 71.31% ($691,999/$970,407). New

Hampshire, Rhode Island, and Massachusetts sales are thrown back to Maine because
HH lacks income tax nexus in those states (remember that Public Law 86-272 protects
sales activities).
Connectic
ut
130,552
New Hampshire
Rhode Island
Massachuset
ts
Numerator
Vermon
t
147,85
374,126
6
129,322
98,313
Maine
90,238
130,552
691,999
0
147,85 Denominato
6 r
970,407
23-34
HHs Maine payroll factor is 41.72 ($392,195/$940,005) percent.

HHs Maine property factor is 66.40 ($937,943/$1,412,581) percent. The beginning and
ending amounts are averaged. The Vermont beginning and ending amounts include
$96,000 ($12,000 x 8), which is eight times the rents paid during the year
State
Maine
Vermont
Total
Beginnin
g
$938,234
$425,134
Ending
Average
$937,652 $937,943
$524,142 $474,638
$1,412,58
1
g) HHs business income apportioned to Maine is $174,277.

Total business income
ME apportionment
ME business income
$291,384
59.81%
$174,277
h) HHs non-business income allocable to Maine is $20,000 (City of Orono, Maine

bond interest of $10,000 and $10,000 of dividends). Investment income is typically
allocated to the state of commercial domicile.
i) HHs Maine taxable income is $194,277.
Maine
ME business income
ME non-business income
ME taxable income
$174,277
$20,000
$194,277
j) HHs Maine tax liability is $9,714.

Maine taxable income
Maine tax rate
Maine tax liability
$194,277
5%
$9,714
23-35

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Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

The Commerce clause was designed to promote interstate commerce by protecting

Chapter 23 - State and Local Taxes

Carry swag (free samples) for distribution to climbing shop employees.

Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

f) Crazy Eddie provides graphic design services to another manufacturer located in

Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

34 [LO 2] Armstrong Incorporated, a Texas corporation, runs bicycle tours in several

Chapter 23 - State and Local Taxes

a) Kashi is incorporated and headquartered in Virginia. It also has property, employees,

Chapter 23 - State and Local Taxes

a) Kashi has nexus in Virginia, its state of commercial domicile.

Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

f) Sales representatives supervise the repossession of inventory from a customer that is

Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

Georgia Income Taxes

Deducted on federal return

Additionally, Publication 611

Georgia Tax Base

Chapter 23 - State and Local Taxes

Determine Hergers business income.

Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

45 [LO 3] Nicoles Salon a Louisiana Corporation, operates beauty salons in Arkansas,

b) The independent contractor amount is subtracted from the Arkansas numerator,

Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

b) Using a four-factor (double-weighted sales) formula, the total apportionment would

Chapter 23 - State and Local Taxes

48 [LO 3] Brady Corporation is a Nebraska Corporation but owns business and

$15,000 of dividend income.

Chapter 23 - State and Local Taxes

a. Nebraska; dividend income is generally allocated or sourced to the state of

Chapter 23 - State and Local Taxes

Chapter 23 - State and Local Taxes

Compute the following for State X assuming a tax rate of 15 percent.

Chapter 23 - State and Local Taxes

State Taxable Income

Happy Hippos In-State Activities

Happy Hippos sales of goods and services by state are as follows:

Chapter 23 - State and Local Taxes

Happy Hippos Sales

Chapter 23 - State and Local Taxes

HHs property is as follows:

a) Determine the states in which HH has sales tax nexus.

c) HH has income tax nexus in Maine (commercial domicile), Connecticut (provides

Chapter 23 - State and Local Taxes

Maine state tax base

e) HHs non-business and business income is as follows:

Chapter 23 - State and Local Taxes