McGraw-Hill© 2005 The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 10 Multistate Business Expansion

McGraw-Hill© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 10-3 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 10-4 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 10-5 Use Tax 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 10-6 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 10-7 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 10-8 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 10-9 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide Economic Nexus Some states take position that earning income from intangible assets within state creates nexus even if no physical presence

McGraw-Hill© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide Multistate Businesses States may only tax income earned within their borders Methods: Direct allocation Apportionment

McGraw-Hill© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide Allocation Generally just used for nonbusiness income such as interest, dividends, rents and royalties Income is taxed directly to state where earned

McGraw-Hill© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 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 Some states allow taxpayers a choice of apportionment method

McGraw-Hill© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide Property Factor Includes all real and tangible personal property Average based upon beginning and end of year Generally based on original cost Leased property also considered by capitalizing lease costs by some factor

McGraw-Hill© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide State Net Operating Loss Carryovers Determined by state rules based upon loss allocated to state

McGraw-Hill© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide 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© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide Other State Taxes Property Taxes on property transfers Franchise taxes

McGraw-Hill© 2005 The McGraw-Hill Companies, Inc. All rights reserved. Slide State Incentives Many states provides credits, tax rebates and other incentives to locate business within them Common incentive is tax increment financing Incentive payment based upon increase in tax base due to firm’s investment Incentives must be considered when determining effect tax rate