- P.L. 86-272 protection has been eroded for companies with digital activity. According to SALT guidance from the Multistate Tax Commission (MTC), which of the following digital activities goes beyond solicitation and creates income tax nexus?
Answer: Providing post-sale support through online chat, cookies that adjust content based on user preferences, or other interactive digital activities that go beyond mere order solicitation.
The MTC has interpreted P.L. 86-272 narrowly for digital activities - interactive features like chat support and personalized cookies constitute business activities beyond protected solicitation, creating nexus. Answer D is correct. Browsing (A) and online ordering (B) are protected. Promotional emails (C) are within solicitation. Interactive support (D) exceeds protection.
- Economic nexus standards for state income tax purposes (separate from sales tax Wayfair thresholds) typically arise when:
Answer: A business exceeds a state's statutory or regulatory economic presence threshold - common thresholds include $50,000 to $500,000 of in-state sales or revenue, even without physical presence.
Many states have enacted economic nexus standards for income tax that set minimum revenue thresholds, creating nexus without physical presence following Wayfair. Answer A is correct. Any customer (B) is too broad. A 10% threshold (C) is not a standard threshold. Business registration (D) creates nexus but is not the economic nexus standard.
- A corporation with nexus only in State A and State B has total income of $500,000. State A apportions 40% and State B apportions 60% to itself (using different formulas). The total state tax base is:
Answer: $500,000 or potentially more than $500,000 if the two states' apportionment formulas result in apportionment percentages that together exceed 100% - double taxation occurs when states use inconsistent sourcing rules.
If State A apportions 40% and State B apportions 60%, total is 100% - no issue. But states using different sourcing rules can together apportion more than 100%, resulting in double taxation. Answer C is correctly identifies the risk. Not all income is necessarily captured at exactly 100% (A). The scenario given is 100% but C explains when problems arise (B is wrong as a conclusion, C is the best answer).
- A taxpayer has the following data for State Y: property in State Y = $200,000; total property everywhere = $1,000,000; payroll in State Y = $100,000; total payroll everywhere = $500,000; sales in State Y = $300,000; total sales everywhere = $1,500,000. Using a three-factor equally weighted formula, State Y's apportionment percentage is:
Answer: 20% - calculated as (20% property + 20% payroll + 20% sales) / 3 = 20%.
Property: $200K/$1M = 20%; Payroll: $100K/$500K = 20%; Sales: $300K/$1.5M = 20%. Average = (20+20+20)/3 = 20%. Answer A is correct. The sales factor is 20% ($300K/$1.5M), not 30% (B, C, D are all wrong because sales = 300/1500 = 20%).
- Following the Supreme Court's decision in South Dakota v. Wayfair (2018), economic nexus for sales tax purposes is established when:
Answer: A seller exceeds a state's economic nexus threshold, commonly $100,000 in sales or 200 transactions in the state - physical presence is no longer required.
Wayfair eliminated the physical presence requirement for sales tax nexus - economic presence (meeting transaction or revenue thresholds) is sufficient. Answer A is correct. Physical presence (B) is no longer required. National revenue (C) is not the nexus standard. Advertising (D) alone does not establish economic nexus.
- Public Law 86-272 (P.L. 86-272) provides protection from state income tax when a business:
Answer: Limits its in-state activities to solicitation of orders for tangible personal property that are approved and shipped from outside the state.
P.L. 86-272 protects companies from state income tax when their only in-state activity is soliciting orders for tangible personal property shipped from outside the state. Answer C is correct. Incorporation state (A) doesn't provide P.L. 86-272 protection. No dollar threshold exists (B). Employees may be present for solicitation (D).
- The property factor in state apportionment is generally computed using:
Answer: The average of the beginning and ending original cost (or net book value, depending on state) of real and tangible personal property owned or rented in the state, relative to total property everywhere.
The property factor uses the average of beginning and ending year values (typically cost or GAAP basis) of owned and rented tangible property (rented property is typically valued at 8x annual rent). Answer C is correct. FMV (A) is generally not used. Book value alone (B) ignores the averaging and rental property. Assessed value (D) is not the apportionment standard.
- Under the 'market-based sourcing' rule for services, sales are typically sourced to:
Answer: The state where the customer received the benefit of the service - regardless of where the service was performed.
Market-based sourcing sources service revenue to where the customer receives the benefit - favoring businesses with out-of-state performance that serve in-state customers. Answer C is correct. Cost-of-performance (A) is the traditional alternative rule. Headquarters (B) is not the sourcing standard. Tax rate (D) is not a sourcing rule.
- A state may tax a non-domiciliary corporation's income only to the extent of the income that is:
Answer: Fairly apportioned to the state through a constitutionally permissible apportionment formula that reflects the business activity in the state - the U.S. Constitution requires that state taxation be fairly apportioned and not discriminatory.
The Constitution (Commerce and Due Process Clauses) requires that state income tax on interstate commerce be fairly apportioned, have nexus, be non-discriminatory, and fairly related to services provided. Answer D is correct. Employee wages (A), customer billing (B), and in-state assets (C) are components of the formula, not the complete constitutional standard.
- A sales transaction is 'sourced' to a state for apportionment purposes when:
Answer: The product is delivered or the service benefit is received in that state - under destination-based sourcing rules (most common), the sales factor reflects where customers receive goods or services.
Sales factor sourcing follows destination rules - sales are assigned to the state where the customer receives the product or the benefit of the service. Answer D is correct. Bank account location (A), salesperson location (B), and invoice origin (C) are not standard sourcing rules.
- A corporation has nexus in 5 states and uses a three-factor apportionment formula. The apportioned income for State X is calculated as:
Answer: The corporation's taxable income multiplied by a fraction - (in-state property/total property + in-state payroll/total payroll + in-state sales/total sales) / 3.
The three-factor formula multiplies total taxable income by the average of the three equally weighted factors (property, payroll, sales), each as a ratio of in-state to everywhere. Answer B is correct. Equal division by states (A) ignores the factors. Customer-sourced income (C) is a component of the sales factor only. Days-worked percentage (D) is not the formula.
- A business sells software as a service (SaaS) to customers in multiple states. Under market-based sourcing, the revenue from each SaaS subscription would be sourced to:
Answer: The state where the customer uses (receives the benefit of) the software - typically the customer's location.
Market-based sourcing assigns SaaS revenue to where the customer accesses and uses the service - the customer's location. Answer B is correct. Server location (A) is the cost-of-performance approach, not market-based. Development state (C) is not the sourcing rule. Equal allocation (D) is not the standard.
- Which of the following best describes the relationship between federal taxable income and state taxable income for a corporation?
Answer: States typically start with federal taxable income and make state-specific additions and subtractions - some states conform to federal law (IRC conformity) while others have their own definitions of taxable income.
State income tax computations typically begin with federal taxable income and adjust for state-specific items - states vary in their conformity to federal law. Answer A is correct. State and federal income often differ (B). GAAP net income is for financial reporting (C). There is a direct relationship - federal TI is the starting point (D).
- The 'throwback rule' in state apportionment applies when:
Answer: A sale is 'thrown back' to the state of origin (where the goods are shipped from) when the destination state has no jurisdiction to tax the seller - preventing some sales from falling out of all state apportionment formulas.
The throwback rule prevents 'nowhere income' by assigning sales back to the shipping state when the seller lacks nexus in the destination state. Answer D is correct. Year-over-year changes (A) are irrelevant. Nexus everywhere (B) is the opposite situation where throwback doesn't apply. Factor comparisons (C) don't trigger throwback.
- Physical presence nexus for income tax purposes can be established by:
Answer: Having employees, independent contractors, property, or inventory in the state - any physical connection may create nexus for income tax purposes beyond P.L. 86-272 protections.
Physical nexus for income tax can arise from employees, agents, property, or inventory - connections beyond protected solicitation activities under P.L. 86-272. Answer C is correct. Advertising (A), billing customers (B), and bank accounts (D) generally do not create physical nexus.
- The sales factor in state income tax apportionment is generally calculated as:
Answer: The taxpayer's sales sourced to the state divided by the taxpayer's total sales everywhere.
The sales factor = in-state (state-sourced) sales / total everywhere sales, expressed as a fraction. Answer A is correct. Absolute sales amount (B) is not the factor. AR averages (C) are used in property factor calculations. Customer counts (D) are not the sales factor.
- A state requires combined reporting for unitary businesses. 'Combined reporting' requires:
Answer: Members of a unitary business group to combine their income and factors into a single apportionment calculation - eliminating intercompany transactions and income shifting within the unitary group.
Combined reporting eliminates tax avoidance through intercompany transactions by treating the unitary group as a single entity for apportionment purposes. Answer D is correct. Separate filing (A) allows income shifting combined reporting prevents. Combined reporting is based on unitary income, not consolidated federal income (B). Only parent reporting (C) doesn't capture the unitary concept.
- Which of the following situations would cause a company to lose P.L. 86-272 protection from state income tax?
Answer: Having in-state employees who provide post-sale customer service, repair equipment, install products, or perform activities that go beyond solicitation of tangible personal property orders.
P.L. 86-272 protection is lost when employees perform activities beyond protected solicitation - service, repair, installation, and other non-solicitation activities create nexus. Answer B is correct. Order solicitation (A) is protected. Shipping from outside (C) is the protected activity. Advertising (D) typically does not create income tax nexus.
- A state that uses a single sales factor apportionment formula:
Answer: Apportions income based solely on the ratio of the taxpayer's sales attributable to the state to the taxpayer's total sales everywhere - this rewards businesses that create jobs and property in the state but sell elsewhere.
Single sales factor apportionment uses only the sales ratio, which benefits companies with in-state production (property/payroll) and out-of-state sales by excluding property and payroll from the formula. Answer D is correct. Employee location (A) is a nexus issue. Payroll-only (B) describes a payroll factor formula. Equal allocation (C) ignores the actual formula.
- A multistate business with nexus in three states uses a double-weighted sales factor formula. In a state that double-weights sales, the apportionment formula is:
Answer: (Property factor + Payroll factor + 2 × Sales factor) / 4.
In a double-weighted sales formula, the sales factor is counted twice and the denominator is increased to 4 to keep the formula summing to 100%. The correct formulation is (Property factor + Payroll factor + Sales factor + Sales factor) / 4, which equals (P + W + 2S) / 4. Answer C is correct. Equal weighting (A) is the traditional three-factor formula, not double-weighted. Answer B incorrectly keeps the denominator at 3 while doubling the sales numerator weight - this would cause the formula to sum to more than 100%. Answer D ignores the payroll factor entirely, leaving an incomplete formula.
