1. Welcome Back
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2. Welcome Back
Time for Any Question
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3. Chapter 23
STATE AND LOCAL TAXES
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4. Types of Taxes 1) Federal Taxes: Income taxes
Employment and unemployment taxes
Excise taxes
Transfer taxes
2) State and local taxes:
Sales and use taxes
Property taxes
3) Implicit taxes
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5. 1) Federal Taxes A. Income taxes
Represents approximately 55.3% of all tax revenues collected in the United States (Individuals 47.4% and Corporations 7.9%)
Levied on individuals, corporations, estates, and trusts
B. Employment and Unemployment taxes
Second largest group of taxes imposed by the U.S. government
Employment taxes include the OASDI (Social Security tax), and the MHI tax (Medicare tax)
Unemployment taxes fund temporary unemployment benefits for individuals terminated from their jobs without cause
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6. 1) Federal Taxes C. Excise taxes
Third largest group of taxes imposed by the U.S. government
levied on the quantity of products sold
D. Estate and Gift taxes
levied on the fair market values of wealth transfers upon death or by gift
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7. 2) State and Local Taxes A. Sales and Use taxes B. Property taxes
Tax base for a sales tax is the retail sales of goods and some services
Tax base for the use tax is the retail price of goods owned, possessed or consumed within a state that were not purchased within the state
B. Property taxes
Property taxes are ad valorem taxes, meaning that the tax base for each is the fair market value of the property
Real property taxes consists of taxes on land and structures permanently attached to land
Personal property taxes includes taxes on all other types of property, both tangible and intangible
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8. 2) State and Local Taxes C. Income taxes
Most state taxable income calculations largely conform to the federal taxable income calculations, with a limited number of modifications
D. Excise taxes
States typically impose excise taxes on items subject to federal excise tax
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9. 3) Implicit Taxes
Indirect taxes that result from a tax advantage the government grants to certain transactions.
Defined as the reduced before-tax return that a tax-favored asset produces because of its tax advantaged status
Difficult to quantify but important to understand in evaluating the relative tax burdens of tax-advantaged investments Income taxes
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10. How to evaluate different tax systems?
Sufficiency: involves assessing the aggregate size of the tax revenues that must be generated and making sure that the tax system provides these revenues.
Equity: how the tax burden should be distributed across taxpayers.
Certainty: means that taxpayers should be able to determine when to pay the tax, where to pay the tax, and how to determine the tax.
Convenience: tax system should be designed to be collected without undue hardship to the taxpayer.
Economy: should minimize the compliance and administration costs associated with the tax system.
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11. Sufficiency Types of revenue forecasting:
Static: Forecasting revenue ignores how taxpayers might alter their activities in response to a tax law change and to base projected tax revenues on the existing state of transactions.
Dynamic: Forecasting which tries to predict possible responses by taxpayers to new tax laws.
Income Effect: as tax rates go up, people will work harder to maintain same after-tax income.
Substitution Effect: as tax rates go up, people will substitute non-taxable activities because the marginal value of taxable ones has decreased.
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12. Equity
In general terms, a tax system is considered fair or equitable if the tax is based on the taxpayer’s ability to pay.
Horizontal Equity: two taxpayers in similar situations pay the same tax.
Vertical Equity: taxpayers with greater ability to pay tax, pay more tax relative to taxpayers with a lesser ability to pay tax.
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13. Learning Objectives
Describe the primary types of state and local taxes.
Determine whether a business has sales and use tax nexus and calculate its sales tax withholding responsibilities.
Identify whether a business has income tax nexus and determine its state income tax liabilities.
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14. State and Local Taxes Purpose Subject to taxes if:
Raise revenue to finance state governments
Subject to taxes if:
Taxpayer’s commercial domicile
State where a business is headquartered and directs operations
Taxpayer has nexus
Nexus is the sufficient (or minimum) connection between a business and a state that subjects the business to the state’s tax system.
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15. State and Local Taxes
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16. State and Local Taxes
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17. Sales and Use Taxes
Sales of tangible personal property are generally subject to the sales and use tax
Taxable items vary from state to state
Nexus
Businesses create sales tax nexus when they have a physical presence in the state
Business is required to collect sales tax from customers in a state only if it has sales and use tax nexus with that state
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18. Sales and Use Taxes
Businesses that establish sales and use tax nexus with a state but fail to properly collect sales tax can create significant liabilities that need to be disclosed for financial reporting purposes
Sellers with nexus, collect and remit sales tax
When seller doesn’t have nexus, customer is responsible for paying a use tax to the state in which the property is used
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19. Sales and Use Taxes: Example 1
Kay Bailey Corporation is a Texas corporation engaged in the business of selling rare books. The only activity that Kay Corporation performs in New Mexico is the solicitation of sales through independent agents who visit residents of New Mexico to sell the company’s products.
Does Kay have New Mexico sales and use tax nexus?
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20. Solution
Kay Corporation creates physical presence through its independent agents in New Mexico. Therefore, Kay is required to collect and remit sales tax.
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21. Sales and Use Taxes: Example 2
Perry Corporation is a Texas corporation principally engaged in the sale of fly fishing equipment. Perry’s only activity in Colorado is the solicitation of orders for their sporting equipment through catalogues and flyers. Perry delivers the sporting equipment via USPS to its customers in Colorado.
Does Perry have Colorado sales and use tax nexus?
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22. Solution
Perry is not required to collect Colorado sales tax because it has no physical presence in Colorado. Moreover, it delivers via common carrier.
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23. Income Taxes
Businesses must pay income tax in their state of commercial domicile
The Supreme Court spelled out four criteria for determining whether states can tax nondomiciliary companies and to what extent
Sufficient connection or nexus exists between the state and the business
State may tax only a fair portion of a business’s income
Tax cannot be constructed to discriminate against nonresident businesses
Taxes paid must be fairly related to the services the state provides
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24. Income Taxes
Nexus
Businesses must file income tax returns in states where they have income tax nexus
Rules for determining income tax nexus are not necessarily the same as those for determining sales and use tax nexus
Physical presence creates income tax nexus for service providers, sellers of real property, and businesses licensing intangibles—but not for tangible personal property
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25. Income Taxes
Physical presence does not create nexus for sellers of tangible personal property if their activities in the state are limited to “protected” activities as described by Public Law
Public Law
A. Businesses are protected from income tax nexus if (and only if) all the following apply
1) Tax is based on net income (not gross receipts or revenue)
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26. Income Taxes (continued)
2) Taxpayer sells only tangible personal property
3) Taxpayer’s in-state activities are limited to solicitation of sales
4) Taxpayer participates in interstate commerce
5) Taxpayer is nondomiciliary
6) Taxpayer approves orders outside the state
7) Taxpayer delivers goods from outside the state
B. Providing services along with tangible personal property, violates the criteria and creates nexus
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27. Income Taxes C. Solicitation
Public Law protects solicitation of tangible personal property
Supreme Court determined the following activities meet the definition of solicitation
1) Soliciting by any form of advertising
2) Carrying samples and promotional materials for display or distribution without charge
3) Passing inquiries or complaints to the home office
4) Checking customer’s inventory for reorder
5) Maintaining a sample room for two weeks or less; this is known as the trade show rule
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28. Income Taxes
(continued) 6) Recruiting, training, and evaluating salespeople using homes or hotels 7) Owning or furnishing personal property and autos used in sales activities
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29. Income Taxes
Supreme Court held the following activities do not meet the definition of solicitation and, therefore, create income tax nexus with the state in which they take place
Making repairs
Collecting delinquent account
Installing or supervising the installation of property
Training for employees other than sales representatives
Approving or accepting orders
Repossessing property
Securing deposits
Maintaining an office other than in-home
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30. Income Taxes: Example 1
Mark Corporation, incorporated in Colorado, engages in the sale and distribution of copiers and fax machines across several states. Mark also has a copy center design team that provides comprehensive services to large clients. A description of Mark’s activities in the following states follows:
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31. Income Taxes: Example 1
Mark sells copiers in Utah through its local sales force. Mark maintains no public sales office and maintains no inventory in Utah. All orders are approved in Colorado and delivered via common carrier. To be competitive with a local copier company, Mark has its sales agents on site to supervise installation and perform a two day seminar on proper use of the equipment.
Does Mark have Utah income tax nexus?
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32. Solution
Mark solicits for the sale of tangible personal property. In addition, the orders are approved out of state (Colorado) and ships via common carrier. However, the installation and training services provided by the sales personnel exceed the “solicitation” standard allowed under PL In addition, it is unlikely that these services can be considered ancillary to solicitation or de minimis. Thus, Mark has income tax nexus.
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33. Income Taxes: Example 2
Mark sells copiers in Arizona through its sales force. For the past 25 years all orders are approved in Colorado and delivered via common carrier. One local sales representative won a large contract in the current year. To help facilitate the sale, Mark reduced its normal fee for its copy center design team by 50% and had them do an onsite visit to customize and integrate the clients new center and equipment.
Does Mark have Arizona income tax nexus?
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34. Solution
Mark solicits for the sale of tangible personal property. In addition, the orders are approved out of state (Colorado) and ships via common carrier. However, the copy center design team sells services—which are not protected under PL As a consequence, Mark will have income tax nexus unless that it can demonstrate that the services are “ancillary” (which would be unlikely) or that the services are de minimis (has occurred only once and is immaterial).
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35. Income Taxes
Income Tax Nexus for Other Business Types or Nonincome-Based Taxes
Public Law does not protect
Service providers, sellers of real property, or businesses licensing intangibles
Businesses from non income-based taxes
Establishing income tax nexus for nonprotected activities, and nexus for nonincome based taxes, requires physical presence just like sales and use tax nexus
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36. Economic Nexus Economic Nexus is a new assertion by states
Businesses generally must have a physical presence in a state to establish income tax nexus with that state (P.L is the exception)
However, many states are currently asserting a business without a physical presence in the state may establish income tax nexus if it has an economic presence in the state
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37. Income Taxes Entities Included on Income Tax Return
Separate tax return
Require only those businesses with nexus in a state to file an income tax return
Unitary tax return
Companies not filing a federal consolidated tax return can become a unitary group
Unitary tax return group includes all members meeting the unitary criteria—whether they have nexus or not
States west of the Mississippi River (and Illinois) are unitary return states
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38. Income Taxes
Supreme Court identified three factors that can be used to determine whether a group of businesses is unitary
1) Functional integration (vertical or horizontal integration or knowledge transfer)
2) Centralization of management (interlocking directors, common officers, or rotation of management)
3) Economies of scale (group discounts or other efficiencies due to size)
Unitary concept pervades activities in the entire income tax system, including computing taxable income, computing apportionment percentages, and determining tax return filing requirements
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39. Income Taxes State Taxable Income
Businesses must calculate state taxable income for each state in which they must file tax returns
Federal taxable income is generally the starting point for computing state taxable income
Businesses must reconcile from federal taxable income to state taxable income
Requires them to identify federal/state adjustments (differences) for each specific state before apportioning the income to a particular state where they have income tax nexus
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40. Income Taxes
Because states do not tax federal interest income, all states require a negative adjustment for federal interest income
Most states require a positive adjustment for state income taxes, as they don’t allow businesses to deduct state income taxes, and they require a positive adjustment for state and local bond interest income, if the bond is from another state
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41. Income Taxes
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42. Income Taxes Dividing State Tax Base Among States
All state taxable income is taxed in the state of commercial domicile unless the business is taxable in more than one state
An interstate business must separate its business income from nonbusiness income
A business must apportion its business income among the states in which it conducts business, whereas it allocates nonbusiness income
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43. Income Taxes Business Income
Includes all revenues earned in the ordinary course of business—sales less cost of goods sold and other expenses
Fairly apportioned or divided across the states where nexus exists
Business may apportion, even if the state does not actually impose tax, and has nexus in that state
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44. Income Taxes Apportionment formula
States determine the apportionment formula for income, and most rely on some combination of three factors:
Sales
Payroll
Property
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45. Income Taxes Apportionment formula
States determine the apportionment formula for income, and most rely on three factors:
Sales
Payroll
Property
Business determines the factors as the ratio of
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46. Income Taxes Sales factor includes:
All gross business receipts net of returns,
Allowances
Discounts
The general rules for determining the amount of sales to include in the sales factor calculation are:
Tangible personal property sales are sourced (included) in the destination state, the location the property is delivered to and used in
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47. Income Taxes
If the business does not have nexus in the destination state, sales are generally “thrown back” to the state from which the property is shipped; this is called the throwback rule
Dock sales (sales picked up by the customer) are generally sourced in the destination state rather than the state where they are picked up
Sales of services are sourced in the state where the services are performed (Illinois is an exception to this rule)
Government sales are sourced in the state from which they were shipped
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48. Income Taxes Payroll Defined as total compensation paid to employees
Includes salaries, commissions, bonuses, and other forms of compensation
Does not include amounts paid to independent contractors
Payroll for each employee is apportioned to a single state
Property
Includes both real and tangible personal property, but not intangible property
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49. Income Taxes General rules for determining the property factors are
Use the average property values for the year [(beginning + ending)/2]
Value property at historical cost rather than adjusted basis
Include property in transit in the state of destination and also business property (values of rented investment properties are excluded)
Include rented or leased property by multiplying the annual rent by eight and adding this value to the average owned-property factor
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50. Income Taxes Nonbusiness Income
Common types of nonbusiness income, and the rules for allocating them to specific states are
Allocate interest and dividends to the state of commercial domicile (except interest on working capital, which is business income)
Allocate rental income to the state where the property generating the rental income is located
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51. Income Taxes
Allocate royalties to the state where the property is used (if the business has nexus in that state; if not, allocate royalties to the state of commercial domicile)
Allocate capital gains from investment property to the state of commercial domicile
Allocate capital gains from selling rental property to the state where the rental property was located
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52. Income Taxes State Income Tax Liability State taxable Income =
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53. Income Taxes State Income Tax Liability
State taxable Income = (Business income × Apportionment factor) +
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54. Income Taxes State Income Tax Liability
State taxable Income = (Business income × Apportionment factor) + Nonbusiness income allocated to the state
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55. Income Taxes Non (Net) Income-Based Taxes
Several states have nonincome-based taxes
Ohio Commercial Activity Tax
Texas Margin Tax
Washington Business & Occupation Tax
These taxes are deductible for calculating taxable income for net income-based taxes
Public Law doesn’t apply to nexus for nonincome based taxes such as gross receipts taxes or property taxes
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56. Happiness is having all homework up to date
Homework assignment
Using Connect – 4 Questions for 60 Points for Chapter 23.
Tax Return; Course Project: Corporation Tax Return Problem # 2 “Blue Catering Service Inc.'s (BCS) 2016 Form 1120” on Pages C-16 till C-18; Due Next Week 7/22/2017 for grading.
Prepare:
chapter: 24 “The U. S. Taxation of Multinational Transactions.”
chapter: 25 “Transfer Taxes and Wealth Planning.”
Happiness is having all homework up to date
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57. Break for Minutes
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58. FORM 1065 u.s. return of partnership income
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59. PAGE 1 – LABEL 1
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60. PAGE 1 – INCOME 2
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61. PAGE 1 – DEDUCTIONS 3
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62. PAGE 1 – SIGN HERE 4
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63. PAGE 1 – PAID PREPARE USE ONLY 5
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64. PAGE 2 – SCH B 1
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65. PAGE 2 – SCH B 2
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66. PAGE 2 – SCH B 3
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67. PAGE 3 – SCH B 1
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68. PAGE 3 – SCH B 2
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69. PAGE 4 – SCH K 1
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70. PAGE 4 – SCH K 2
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71. PAGE 4 – SCH K 3
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72. PAGE 4 – SCH K 4
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73. PAGE 4 – SCH K 5
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74. PAGE 4 – SCH K 6
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75. PAGE 4 – SCH K 7
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76. PAGE 5 – ANALYSIS ON NET INCOME (LOSS)
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77. PAGE 5 – SCH L 1
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78. PAGE 5 – SCH L 2
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79. PAGE 5 – SCH M 1
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80. PAGE 5 – SCH M 2
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81. THANK YOU AND GOOD LUCK
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82. The second Class Case Study for SUMMER 2017 – for ACNT 1347 Course
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83. FORM 1065 u. s. partnerships income tax return
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84. Aspin ridge llc, 1065 North 365 south, ogden, ut 84401
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85. Alvin's Music, Inc.
EIN (employer Identification Number) #:
INCORPORATED Date: April 1st, 2009.
Business Activity Code Number:
Product or Services: Retail sales – Sporting Goods.
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86. Thank you and See You Next Week at the Same Time, Take Care
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87. Lunch Break for 30 Minutes
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