Chapter 12 All

Chapter 12 - State and Local Taxes
Chapter 12
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 business’s

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 businesses 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.
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
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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) 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 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 than 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.
The general rule established in the Quill decision is that an out of state retailer
must have physical presence in state to create 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.
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10. [LO 2] What is the difference between a sales tax and a use tax?
A sales tax liability accrues on the sales 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] Renée operates Scandinavian Imports a furniture shop in Olney,

Maryland. Scandinavian Imports that 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 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. Web’s 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.
The Commerce clause was designed to promote interstate commerce by protecting

businesses through placing restraints on a state’s ability to burden businesses with
the administrative burden of complying and the financial burden of paying the tax.
14. [LO 2] Describe the administrative burden that businesses face in collecting sales
taxes.
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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,
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 return—
assuming 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 threshold—any
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 salvage 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 is 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. Today’s economy
has shifted toward intangibles and services. The rules designed for bricks and mortar
type companies do not create a level playing field across businesses—there are
winners and losers.
18. [LO 3] Climb Higher is a distributor of high end climbing gear and is located in
Paradise, Washington. Climb Higher’s 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 of new customers to reduce delivery time of
first order of merchandise.
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 Check customer inventory for proper display and proper quantities.

 Accept returns of merchandise for defective goods.
Discuss Climb Higher’s sales activities that are protected and unprotected under
the Wrigley Supreme Court decision.
Selling activities or solicitation is not well defined by P.L. 86-272. The Wrigley
decision defines what activities are considered solicitation (protected) and which
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.
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.
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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.
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, the 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 tax—as 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.
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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.
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:
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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.
f) Crazy Eddie provides graphic design services to another manufacturer located
in Ohio. While the services are performed in New York, Crazy Eddie’s 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 Eddie’s 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 lacks
physical presence required in the other states where it has sales.
e) Crazy Eddie would have sales and use tax nexus 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.
f) Crazy Eddie would have sales and use tax nexus in New York and Ohio; the
presence of Crazy Eddie’s 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 Eddie’s 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 either in the DC shop or at the homes of private
collectors located in Maryland and Virginia. Determine the jurisdictions that
Carlton Collectibles has sales tax nexus in.
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Carlton Collectibles would have sales tax nexus in the District of Columbia,
Maryland, and Virginia because Brad’s 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.
30. [LO 2] Melanie operates Mel’s Bakery in Foxboro, Massachusetts. Mel’s retail
stores are located in Connecticut, Maine, Massachusetts, New Hampshire, and
Rhode Island. Mel’s also ships specialty breads nationwide upon request.
Determine Mel’s 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 have $500,000 in sales. The Massachusetts sales tax
is 5 percent. Assume that Massachusetts sales tax laws exempt 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. The Connecticut sales tax is 6 percent. The tax excludes food
products, but taxes prepared meals (catering). Connecticut also imposes sales tax
on delivery charges on taxable sales.
c) The 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 and a 7 percent sales
tax on prepared food. Maine exempts food purchases other than prepared food.
d) The New Hampshire retail stores have $250,000 in sales. New Hampshire is
one of five states with no sales tax. However, New Hampshire has a room and
meals tax 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) The 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
Mel’s a restaurant because its retail store has seating.
f) One of Mel’s best customers relocated to Texas, which imposes an 8.25 percent
state and local sales tax rate but exempts bakery products from its tax. This
customer entertains regularly and ordered $5,000 of food items this year.
a) Mel’s would have no liability in Massachusetts. This is because

Massachusetts exempts food products from sales tax. However, if the
definition of food products didn’t include prepared bakery goods or specialty
breads Mel would pay $25,000 ($500,000 x 5 percent) in Massachusetts’
sales tax.
b) Mel’s would have a $6,600 sales tax liability in Connecticut. This is because
the state taxes catering receipts and delivery charges on catering at six
percent.
c) Mel’s 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
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d) rather than the 5 percent regular rate). Because Maine exempts other food
purchases, there is no sales tax on take out purchases.
e) Mel’s 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 Mel’s would be exempt.
f) Mel’s would have a $24,000 ($300,000 x 8 percent) sales tax liability in
Rhode Island. This is because the state taxes Mel’s as a restaurant and places
a one percent surtax on top of the regular rate.
g) Mel’s would have no sales tax liability in Texas because it lacks physical
presence there. However, Mel’s customer would have a $413 ($5,000 x 8.25
percent) use tax liability in Texas.
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/divisions/tax_analysis/tax_data_series/sales_and_use/do
cuments/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 while 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.
a) Kai’s would have no sales tax liability. Bronco would have a $63 ($1,000 x
6.25 percent) use tax liability in Utah.
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b) Kai’s 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) Kai’s would have no sales tax liability. Jim would have a $140 ($2,000 x 7
percent) use tax liability in Ohio.
d) Kai’s would have no sales tax liability because Hawaii doesn’t tax services.
Bo would have no Nebraska use tax liability because it doesn’t tax services.
33. [LO 2] {Planning} 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 TV’s
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 (TV’s agent) deliver them then no sales or use tax
liability would be accrued by TV. TV’s customers would still have an Arizona
state use tax liability.
34. [LO 2] Armstrong Incorporated, a Texas corporation, runs bicycle tours in a

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
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35. personal property. Armstrong has real property only in Texas. Armstrong has the
following sales:
Armstrong Sales
State Goods Services Total
Arizona $34,194 $0 $34,194
California 110,612 0 110,612
Colorado 25,913 356,084 381,997
North Carolina 16,721 225,327 242,048
Oregon 15,431 0 15,431
Texas 241,982 877,441 1,119,423
Totals $444,853 $1,458,852 $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 Armstrong’s employees that 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 Goods Rate Liability

Colorado 25,913 8.00% $2,073
North
Carolina 16,721 6.75% $1,129
Texas 241,982 8.50% $20,568
$284,61
6 $23,770
36. [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. Kashi’s
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:
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?
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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 Kashi’s 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) {Planning} Given that Kashi ships to all 50 states, are there locations that Kashi
currently does not have nexus in that would decrease Kashi’s overall state income
tax burden it nexus were created in these locations?
a) Kashi has nexus in Virginia, its state of commercial domicile.

b) Kashi’s 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 Kashi’s 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 Kashi’s truck in Pennsylvania will create nexus there.
12-13
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 doesn’t have an income
tax. This will allow Kashi to apportion part of its business income to states
which do not tax the apportioned income—this 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.
37. [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, occasionally, 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.
b) Gary Holt has employees that live in New Jersey and Connecticut. All of their
employment related activities are performed in New York.
c) Gary Holt has two customers in California. Gary personally travels to
California to finalize the Alameda County bond issuance.
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.
38. [LO 3] Root Beer, Inc. (RBI) is incorporated and headquartered in Seattle,
Washington. RBI runs an internet business makerootbeer.com. RBI sells bottling
equipment and other supplies to make home made root beer. Root Beer 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?
12-14
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 York’s Amazon rule will
create sales and use tax nexus.
39. [LO 3] Rockville Enterprises manufactures wood working equipment and is

incorporated and based in Evansville, Indiana. Rockville’s 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.

b) Rockville’s 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.
f) Sales representatives supervise the repossession of inventory from a customer
that is not making payments on time.
g) Rockville provides automobiles to Idaho and Montana sales representatives.
h) An Alabama sales representative accepts a customer deposit on a large order.
i) 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 customer’s 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.
12-15
40. [LO 3] {Research} 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; 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 isn’t
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, the Software’s licensing the use of its intangible product in New Jersey
and West Virginia should create nexus under those precedents.
41. [LO 3] {Research}Pete Corporation owns 100 percent of Suvi Corporation. Pete
is a Kentucky Corporation. Suvi is a Mississippi Corporation. Pete and Suvi file
a consolidated federal tax return. Pete has income tax nexus in Kentucky and
South Carolina. Suvi has income tax nexus in Mississippi and South Carolina.
Kentucky, Mississippi, and South Carolina are separate return states. In which
states must Pete 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.)
Pete 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, calculates it
apportionable income separately using separate apportionment factors.
42. [LO 3] {Research} Use California Publication 1061 (2008) 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) and, 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. Comm’r of Taxes of Vt. (1980) 445 U.S.
425, (functional integration, centralization of management, and economies of scale).
12-16
43. [LO 3] {Research} Bulldog, Incorporated is a Georgia corporation. It properly

included, deducted, or excluded the following items on its federal tax return in the
current year:
Federal Treatment
Item Amount
Deducted on federal return
Georgia Income Taxes $25,496
Tennessee Income Taxes $13,653 Deducted on federal return
Washington Gross Receipts Tax $3,105 Deducted on federal return
Georgia Bond Interest $10,000 Excluded from federal return
Federal T-Note Interest $4,500 Included on federal return
Domestic Production Act. Ded. (DPAD) $15,096 Deducted 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. Bulldog’s Federal
Taxable Income was $194,302. Calculate the Bulldog’s Georgia state tax base.
Bulldog’s Georgia state tax base is $218,461, which is calculated as follows:
Bulldog Georgia Tax Base

$194,30
(1) Federal Income 2 Additionally,
Additions Publication 611
(2) DPAD $15,096 Per instructions (corporate
(3) Tennessee tax $13,563 Per instructions instructions)
Subtractions indicates that
(4)Federal T-note non-income
interest $4,500 Per return based tax
$218,46 (Washington
Georgia Tax Base 1 (1) + (2) +(3) – (4) Gross Receipts
Tax) is
deductible (no adjustment is necessary) and Georgia bond interest is
deductible.
44. [LO 3] Herger Corporation does business in California, Nevada, and Oregon and
has nexus in these states as well. Herger’s California state tax base was $921,023
after making the required federal/state adjustments. Herger’s state tax base
contains the following items:
Item Amount
Federal T-note interest $5,000
Nevada municipal bond interest $3,400
12-17
California municipal bond interest $6,000
12-18
Interest expense related to T-note interest $1,400

Royalty income $100,000
Travel expenses $9,025
Determine Herger’s business income.
Herger’s 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).
45. [LO 3] Bad Brad sells used semi trucks and tractor trailers in the Texas
panhandle. Bad Brad has sales as follows:
Bad Brads
State Sales
Colorado $234,992
Oklahoma 402,450
New Mexico 675,204
Texas 1,085,249
Totals $2,397,895
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. The 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. The 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?
d) Bad Brad has nexus in Colorado and Texas. The 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?
a) The sales factors are the state sales divided by the total sales. For example
Colorado’s sales factor is 9.8 percent ($234,992/$2,397,895). The sales
factors are as follows:
12-19
Colorado sales factor 9.80%

Oklahoma sales factor 16.78%
New Mexico sales factor 28.16%
Texas sales factor 45.26%
100.00%
b) Thrown back sales are added to the Texas numerator. Thus, the Texas sales
numerator increases to $2,162,903. The Colorado and Texas factors are as
follows:

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:

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.

100.00%
46. [LO 3] Nicole’s Salon operates beauty salons in Arkansas, Louisiana, and
Tennessee. Nicole’s sales, by state, are as follows:
Nicole’s Salon
State Sales
Arkansas $130,239
Louisiana 309,192
Tennessee 723,010
Total $1,162,441
12-20
Nicole’s Salon is a Louisiana Corporation. What are the payroll apportionment

factors for Arkansas, Louisiana, and Tennessee in each of the following
alternative scenarios?
a) Nicole’s Salon has nexus in Arkansas, Louisiana, and Tennessee.

b) Nicole’s Salon has nexus in Arkansas, Louisiana, and Tennessee, but $50,000
of the Arkansas amount is paid to independent contractors.
a) Nicole’s salon’s payroll factors are as follows:
($130,239/$1,163,441
Arkansas 11.20% )
($309,192/$1,163,441
Louisiana 26.60% )
($723,010/$1,163,441
Tennessee 62.20% )
100.00%
b) The independent contractor amount is subtracted from the Arkansas

numerator, which also lowers the denominator. Nicole’s salon’s payroll factors
are as follows:
Arkansas 7.21% ($80,239/$1,112,441)

($309,192/$1,112,441
Louisiana 27.79% )
($723,010/$1,112,441
Tennessee 64.99% )
100.00%
47. [LO 3] Delicious Dave’s Maple Syrup 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
Delicious is a Vermont Corporation. 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.
12-21
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.
12-22
a) Delicious has the following property factors:
Beginning Ending Average Factor

Maine $923,032 $994,221 $958,627 41.20%
Massachusetts $103,311 $203,109 $153,210 6.58%
New Hampshire $381,983 $283,021 $332,502 14.29%
Vermont $873,132 $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 $523,032 $594,221 $558,627 28.99%
Massachusetts $103,311 $203,109 $153,210 7.95%
New Hampshire $381,983 $283,021 $332,502 17.26%
Vermont $873,132 $891,976 $882,554 45.80%
$1,972,32 $1,926,89
$1,881,458 7 3 100.00%
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 $923,032 $994,221 $958,627 35.15%
Massachusetts $503,311 $603,109 $553,210 20.29%
New Hampshire $381,983 $283,021 $332,502 12.19%
Vermont $873,132 $891,976 $882,554 32.36%
$2,772,32 $2,726,89
$2,681,458 7 3 100.00%
48. [LO 3] Susie’s Sweet Shop has the following sales, payroll and property factors:
Iowa Missouri
Sales 69.20% 32.01%
Payroll 88.00% 3.50%
Property 72.42% 24.04%
What are Susie’s Sweet Shop’s Iowa and Missouri apportionment factors under
each of the following scenarios:
12-23
a) Iowa and Missouri both use a three-factor apportionment formula.
12-24
b) Iowa and Missouri both use a four-factor apportionment formula that double-
weights 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. Susie’s Iowa and Missouri apportionment factors would be as
follows:
Iowa Missouri
Sales 69.20% 32.01%
Payroll 88.00% 3.50%
Property 72.42% 24.04%
229.62% 59.55%
/3 /3
Apportionment Factor 76.54% 19.85% 96.39%
b) Using a four-factor (double-weighted sales) formula, the total apportionment

would be 97.60 percent. Susie’s Iowa and Missouri apportionment factors
would be as follows:
Iowa Missouri
Sales 69.20% 32.01%
Sales 69.20% 32.01%
Payroll 88.00% 3.50%
Property 72.42% 24.04%
298.82% 91.56%
/4 /4
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. Susie’s Iowa and Missouri apportionment factors would be as
follows:
Iowa Missouri
49. [LO 3] Brady Corporation has the following items of taxable income. Brady 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. $15,000 of dividend income.
12-25
b. $10,000 of interest income.
12-26
c. $15,000 of rental income for South Dakota property.

d. $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.
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.
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.
50. [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
non-business income. Ashton’s 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 Ashton’s
Pennsylvania state tax liability?
Ashton Corporation’s Pennsylvania state tax liability is $18,362. The state tax
liability is calculated as follows:
Ashton Corporation
$500,00
(1) State tax base 0 Given
(2) Total allocated income $50,000 Given
$450,00
(3) Apportionable income 0 (1) - (2)
(4) PA apportionment factor 42.35% Given
$190,57
(5) PA apportioned income 5 (3) x (4)
(6) PA allocated income $32,000 Given
(7) PA taxable income $222,57 (5) + (6)
12-27
5
(8) PA tax rate 8.25% Given
(9) PA state tax liability $18,362 (7) x (8)
12-28
Comprehensive problems
51. Sharon, Inc. is headquartered in State X, Sharon owns 100% of Carol, Josey and
Janice Corps. You can assume that all of the corporations form a single unitary
group. You may assume that the sales operations are within the “solicitation”
bounds of Public Law 86-272. Each of the corporations has operations in the
following states:
Sharon, Inc. Carol Corp Josey Corp Janice Corp

Domicile State State X State Y State Z (non- State Z (non-
(throwback) (throwback) throwback) throwback)
Dividend 1,000 200 300 500
income
Business 50,000 30,000 10,000 10,000
income
Sales: State X 70,000 10,000 10,000 10,000
State Y 40,000 5,000
State Z 20,000 20,000 10,000
State A 20,000
State B 10,000 10,000
Property: State 50,000 20,000 10,000
X
State Y 80,000
State Z 25,000 20,000
State A 50,000
Payroll: State 10,000 10,000
X
State Y 40,000
State Z 3,000 10,000
State A 10,000
Required: Compute the income reported, apportionment factors, and tax liability for State
X assuming a tax rate of 15%.
Josey has no nexus in State X because it has no property or payroll there (no physical
presence). The State X tax liability is $6,798; calculated as follows:
Sharon Carol Josey Janice

No
NEXUS
Sales X 70,000 10,000 10,000 10,000
Total 100,000 70,000 35,000 30,000
Property X 50,000 20,000 0 10,000

Total 100,000 100,000 25,000 30,000
Payroll X 10,000 10,000 0 0
12-29
Total 10,000 50,000 3,000 20,000
Sales 0.70 0.14 0.33

Property 0.50 0.20 0.33
Payroll 1.00 0.20 0.00
2.20 0.54 0.67
Apportionment Factor 0.73 0.18 0.22

Income 50,000 30,000 10,000
Apportioned Income 36,667 5,429 2,222

Allocated Income 1,000 0 0
Taxable
State Taxable Income 37,667 5,429 2,222 45,317 income
15% Tax rate
State tax
6,798 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:
Happy Hippos In-State Activities

Commercial
State Sales Employees Property Services Domicile
Connecticut   
Maine     
Massachusetts  
New 
Hampshire
Rhode Island  
Vermont    
Happy Hippos sales of goods and services by state are as follows:
Happy Hippos Sales

State Goods Services Total
Connecticut $78,231 $52,321 $130,552
Maine 292,813 81,313 374,126
Massachusetts 90,238 90,238
New
Hampshire 129,322 129,322
Rhode Island 98,313 98,313
Vermont 123,914 23,942 147,856
Totals $812,831 $157,576 $970,407
12-30
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 doesn’t 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.
HH’s payroll is as follows:
Payroll
State Wages
Connecticut $94,231
Maine 392,195
Massachusetts 167,265
Rhode Island 92,391
Vermont 193,923
Total $940,005
HH’s property is as follows:
Property
State Beginning Ending Rented
Maine $938,234 $937,652
Vermont 329,134 428,142 $12,000
Total $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 HH’s state tax base for Maine assuming federal taxable income of
$282,487.
e) Calculate business and non-business income.
f) Determine HH’s Maine apportionment factors using the three-factor method
(assume that Maine is a throwback state).
g) Calculate HH’s business income apportioned to Maine.
h) Determine HH’s allocation of non-business income to Maine.
i) Determine HH’s Maine taxable income.
j) Calculate HH”s Maine net income tax liability assuming a Maine tax rate of 5
percent.
12-31
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:
New
Connecticu Hampshir Rhode
t Maine Massachusetts e Island Vermont
Taxable sales $78,231 $292,813 $90,238 $0 $98,313 $123,914
Sales tax rate 6.0% 8.0% 7.0% 8.5% 5.0% 9.0%
Sales tax
liability $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) HH’s Maine state tax base is $323,384 and is calculated as follows:
$282,48
Federal taxable income 7
Positive adjustments
State tax expense $32,084
Federal depreciation $59,234
$91,318
Negative adjustments
State tax refund $2,498
Maine depreciation $47,923
$50,421
$323,38
Maine state tax base 4
e) HH’s non-business and business income is as follows:
Maine state tax base $323,384
Allocable income
Vermont rental income $12,000
Maine bonds $10,000
Dividends $10,000
($32,000
Non-business income )
Business income $291,384
12-32
f) HH’s Maine apportionment factor is 59.81; the average of the sales, payroll
and property factors. HH’s sales, payroll, and property factors are 71.31,
41.72, and 66.40 percent, respectively.
12-33
HH’s 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).
Connecticu Vermon
t Maine t
130,552 374,126 147,856
New Hampshire 129,322
Rhode Island 98,313
Massachusett
s 0 90,238 0
Denominato
Numerator 130,552 691,999 147,856 r
970,407
HH’s Maine payroll factor is 41.72 ($392,195/$940,005) percent.
HH’s 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
Beginnin
State g Ending Average
Maine $938,234 $937,652 $937,943
Vermont $425,134 $524,142 $474,638
$1,412,58
Total 1
g) HH’s business income apportioned to Maine is $174,277.
Total business $291,38

income 4
ME apportionment 59.81%
$174,27
ME business income 7
h) HH’s 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) HH’s Maine taxable income is $194,277.
Maine
ME business income $174,27
12-34
7
ME non-business
income $20,000
$194,27
ME taxable income 7
j) HH’s Maine tax liability is $9,714.
12-35
Maine taxable $194,27

income 7
Maine tax rate 5%
Maine tax liability $9,714
12-36

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Chapter 12 - State and Local Taxes

1. [LO 1] Why do states and local jurisdictions assess taxes?

4. [LO 1] What is the difference, if any, between the state of a business’s

Commercial domicile is the state where a business is headquartered and directs

6. [LO 1] In what circumstances would a business be subject to income taxes in

Anytime a business conducts its trade or business in a manner exceeding the

11. [LO 2] Renée operates Scandinavian Imports a furniture shop in Olney,

Scandinavian Imports has nexus in Maryland--its state of commercial domicile. It

The Commerce clause was designed to promote interstate commerce by protecting

 Carry swag (free samples) for distribution to climbing shop

 Check customer inventory for proper display and proper quantities.

19. [LO 3] Describe a situation where it would be advantageous for a business to

While nexus creates a potential income tax liability, it can be advantageous in

Business income (income related to the operation of the business) is apportioned

a) Crazy Eddie is incorporated and headquartered in New York. It also has

a) Mel’s would have no liability in Massachusetts. This is because

a) California treats the autographed football as tangible personal property subject

a) TV would have a $8,250 ($100,000 x 8.25 percent) sales tax liability in

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

State Goods Rate Liability

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

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

h) The provision of fencing lessons (services) in Virginia and Maryland will

a) Root Beer is incorporated and headquartered in Washington. It has property

39. [LO 3] Rockville Enterprises manufactures wood working equipment and is

a) Rockville advertises using television, radio and newspaper.

a) All forms of advertising are a protected activity.

43. [LO 3] {Research} Bulldog, Incorporated is a Georgia corporation. It properly

Bulldog’s Georgia state tax base is $218,461, which is calculated as follows:

Bulldog Georgia Tax Base

California municipal bond interest $6,000

Interest expense related to T-note interest $1,400

Determine Herger’s business income.

Herger’s California business income would be $817,623 ($921,023 - $100,000 of

Colorado sales factor 9.80%

Colorado sales factor 9.80%

Colorado sales factor 9.80%

Colorado sales factor 17.80%

Nicole’s Salon is a Louisiana Corporation. What are the payroll apportionment

a) Nicole’s Salon has nexus in Arkansas, Louisiana, and Tennessee.

a) Nicole’s salon’s payroll factors are as follows:

b) The independent contractor amount is subtracted from the Arkansas

Arkansas 7.21% ($80,239/$1,112,441)

Delicious is a Vermont Corporation. What are the property apportionment factors

a) Delicious has nexus in each of the states.

a) Delicious has the following property factors:

Beginning Ending Average Factor

b) Delicious must remove the investment (non-business property) from the

Beginning Ending Average Factor

Beginning Ending Average Factor

a) Iowa and Missouri both use a three-factor apportionment formula.

a) Using a three-factor formula, the total apportionment would be 96.39

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

a. $15,000 of dividend income.

b. $10,000 of interest income.

c. $15,000 of rental income for South Dakota property.

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

50. [LO 3] Ashton Corporation is headquartered in Pennsylvania. Ashton has a

Sharon, Inc. Carol Corp Josey Corp Janice Corp

Sharon Carol Josey Janice

Property X 50,000 20,000 0 10,000

Payroll X 10,000 10,000 0 0

Total 10,000 50,000 3,000 20,000

Sales 0.70 0.14 0.33