State and Local Taxes - Lecture Notes

This set of flashcards covers key vocabulary and concepts related to state and local taxes, focusing on taxation types, nexus, and implications for business operations.

State Tax Types

Different categories of taxes imposed at the state level, including sales tax, income tax, property tax, and excise tax.

Sales and Use Tax

Tax on retail sale of tangible personal property and certain services; use tax is a complementary tax requiring self-assessment when sales tax was not charged.

Income Tax Nexus

The connection that allows a state to impose income tax on a business based on its presence or activity within the state.

Franchise Tax

Tax imposed on the right to operate within a state, which may or may not be based on income.

Property Tax

Tax calculated on the value of real property and sometimes tangible personal property.

Excise Tax

Tax levied on specific goods, services, or activities, such as motor fuel or alcohol.

Nexus

The minimum level of connection between a taxpayer and a state allowing taxation by that state.

NOMAD States

States that do not impose state sales and use taxes, including New Hampshire, Oregon, Montana, Alaska, and Delaware.

Tax Base

The amount or value to which a tax rate is applied to determine the total tax liability.

Tax Rate

The percentage at which a tax is levied on the tax base.

Physical Presence Nexus

A traditional standard for establishing nexus based on a company's physical operation in a state, such as having an office or employees.

Economic Nexus

A modern standard for nexus based on the volume of sales into a state, regardless of physical presence.

Use Tax

A tax on the value of goods purchased out of state and used within the state.

Sales Tax Collection Requirement

The obligation of businesses to collect sales tax when they have nexus in a particular state.

Tax Exemptions

Certain sales that are not subject to sales tax under specific circumstances, such as sales for resale or to government entities.

Auditing

The process by which tax authorities examine tax records of a business to ensure compliance with tax laws.

Public Law 86-272

Federal law limiting states' ability to impose income tax on out-of-state businesses under certain conditions.

Unitary Reporting

A state tax requirement where all members of a corporate group file a combined tax return reflecting the group's total income.

Non-Business Income

Income that is allocated to a specific state rather than apportioned, such as dividends or interest.

Corporate Income Tax Nexus

The specific connection through physical or economic presence that allows a state to impose corporate income tax.

Apportionment

The method of dividing income among states so it is taxed fairly based on business activity in each state.

Sales Factor

Part of the apportionment formula that considers the sales a business has in each state to determine taxable income.

Payroll Factor

Part of the apportionment formula based on the total compensation paid to employees in each state.

Property Factor

Part of the apportionment formula that includes the value of real and personal property owned by the business in the state.

Compliance Burden

The challenges businesses face in meeting their tax obligations, particularly in calculating and reporting taxes.

Centralization of Management

An aspect of unitary group criteria that considers the centralized control of a corporate group's operations.

Tangibility

Property that can be perceived with the senses, relevant in determining taxability.

Apportioned Income

The income that is subject to tax after applying the apportionment factors.

Allocation

The process of assigning non-business income to specific states for taxation.

Sales Tax Sourcing

Determining which jurisdiction's sales tax applies based on where the customer receives the goods or services.

Severance Tax

Tax imposed on the extraction of natural resources, such as oil or minerals.

Capital Stock Tax

A tax based on the value of a company's outstanding shares.

Payroll Tax

Tax imposed on employers based on the salaries paid to employees.

Remote Seller Sales Tax Nexus

The connection established for sales tax purposes by out-of-state sellers who lack a physical presence but engage in significant economic activity within a state, often measured by sales volume or transaction count. This was largely affirmed by the Wayfair decision.

Wayfair Decision

The landmark 2018 Supreme Court case of South Dakota v. Wayfair, Inc. which overturned the physical presence rule for sales tax nexus, allowing states to require remote sellers to collect sales tax if they meet certain economic thresholds.

Streamlined Sales and Use Tax Agreement (SSUTA)

An agreement among states to simplify and modernize sales and use tax administration, aiming to reduce the compliance burden for businesses operating in multiple states.

Sales Tax Holiday

A temporary period during which specific retail sales are exempt from sales tax, often used by states to encourage consumer spending on certain goods.

Taxability of Services

States generally treat the taxability of services differently from tangible personal property; most services are not taxed unless specifically enumerated in state statutes, while tangible goods are often presumed taxable.

Bundled Transaction

A retail sale of two or more products or services for a single non-itemized price. Sales tax rules for bundled transactions vary by state and can depend on the predominant item.

Sales for Resale Exemption

An exemption from sales tax for items purchased by a vendor with the intent to resell them in the regular course of business, preventing double taxation.

Drop Shipment

A transaction involving three parties: a seller who takes an order from a customer, and a third-party supplier who ships the product directly to the customer. Sales tax rules can vary depending on nexus and state laws for each party.

Vendor Compensation for Sales Tax

A small discount or allowance that some states provide to businesses for the administrative costs associated with collecting and remitting sales tax to the state.

Use Tax Calculation

If a business brings a $100 item from a non-sales tax state into a 5% sales tax state for its own use, the use tax liability is 100 \times 0.05 = 5.

P.L. 86-272 Protected Activities

Examples include soliciting orders for sales of tangible personal property, having sales representatives operate from their homes (if no other business activities occur there), or using independent contractors to solicit orders.

P.L. 86-272 Unprotected Activities

Examples include making repairs, providing installation or engineering services, training employees, or maintaining any office other than a sales office for soliciting orders within the state.

Factor Presence Nexus Thresholds

Specific numerical thresholds, often defined by dollar amounts of property, payroll, or sales activity within a state, which, if exceeded, establish income tax nexus without requiring a physical presence.

Business vs. Non-Business Income Test (Functional Test)

A test used to determine if income arises from transactions and activity in the regular course of the taxpayer's trade or business (business income) or from the acquisition, management, and disposition of property that constitutes an integral part of the taxpayer's regular trade or business operations.

Throwback Rule

An income tax apportionment rule that requires sales of tangible personal property to be "thrown back" (included) in the sales factor numerator of the state from which the property was shipped if the seller is not taxable in the destination state.

Throwout Rule

An income tax apportionment rule that excludes (throws out) sales from the denominator of the sales factor if the seller is not taxable in the destination state where the sales occurred.

Commercial Domicile

The state where a corporation has its principal place of business or conducts its primary management, often relevant for allocating non-business income.

Combined Reporting

A method of reporting for state income tax purposes where related corporations that constitute a single "unitary business" combine their income and apportionment factors from all states to determine a single, unified tax base.

Consolidated Reporting

A method of state tax reporting where affiliated corporations elect to file a single tax return, typically based on federal consolidated return rules, combining their incomes and deductions. Unlike combined reporting, it doesn't necessarily require a unitary business.

Sourcing of Services (Income Tax)

For income tax apportionment, sales from the performance of services are typically sourced to the state where the income-producing activity is performed, or where the benefit of the service is received by the customer.

Gross Receipts Tax

A state tax imposed on the total gross revenue of a business from all or certain types of activities, without deductions for costs of goods sold or other expenses. It is distinct from sales or income tax.

Real Property Tax

A type of property tax levied on land and permanent structures attached to it, such as buildings and improvements.

Personal Property Tax (Tangible)

A tax levied on the value of tangible assets that are not permanently affixed to real estate, such as machinery, equipment, furniture, and inventory.

Ad Valorem Tax

A tax based on the assessed value of an item, typically property. The term means 'according to value' in Latin.

Voluntary Disclosure Agreement (VDA)

A program offered by states that allows non-compliant taxpayers to come forward, disclose their past tax liabilities, and often receive favorable terms such as a limited look-back period or waiver of penalties.

Statute of Limitations (State Tax)

The legally defined period during which a state tax authority can assess additional tax, or a taxpayer can claim a refund, usually three to four years from the date the return was filed or due.

Estimated State Income Tax

Payments made by businesses throughout the year to satisfy their anticipated state income tax liability, required to avoid underpayment penalties.

Multistate Tax Commission (MTC)

An intergovernmental state tax agency whose primary role is to promote uniformity in state tax laws, facilitate information exchange among states, and administer various programs, including joint audits.

Tax Appeals Process (State)

The formal procedure taxpayers follow to dispute a state's tax assessment or decision, typically involving administrative review, hearings, and potentially judicial review.

Intercompany Transactions (State Tax)

Transactions between related entities within a corporate group, which are highly scrutinized for state income tax purposes, especially in unitary combined reporting states, to ensure proper allocation and apportionment of income.