Tax Planning Goals

1
Tax Planning Goals

• Avoiding income recognition
• Postponing income recognition
• Changing tax jurisdictions
• Controlling classification of income
• Spreading income among related taxpayers
• When to act contrary to usual techniques

2
Multistate Income Tax

• Sources of the law
• State constitution, code, rulings, cases
• UDITPA
• PL 86-272
• Multistate Tax Commission
• CCH Service
• Corporate income tax
• Start with a Form 1120 number
• Apply modifications
• Some states do their own

3
State/Local Tax Basics

• Requirement of Nexus
• Immunity under PL 86-272
• Allocation -- Usually for nonbusiness income
• Direct assignment to a state
• Apportionment -- Usually for business income
• Assign to state by formula
• Factors are usually property, payroll, sales
• Weighting and defns of factors vary by state
• Can be special formulas and factors for specific
  industries

4
Sales Factor

• Resembles Gross Receipts in most states
• Ultimate destination concept
• But services sourced to production state, not
  destination
• Dock sale To state of purchaser
• Throwback rule about half of the states
• Source to state of origination
• What if destination state uses a non-income tax?

5
Payroll Factor

• Compensation in-state, sometimes from a payroll
  tax form, relating to Apportionable income
• Can include fringes, 401k deferrals, etc
• Some states exclude executives compensation
• Not payments to independent contractor
• Usually assigned all to one state
• Base of operations, then
• Place of control

6
Property Factor

• Work with average values, sometimes from
  assessment forms, of assets used for
  Apportionable income
• But can elect to use tax basis, book value, or
  other historical cost can elect quarterly,
  monthly averages
• In-transit property
• Moveable property, like trucks
• Leased property

7
Planning with the Factors

• Sales factor
• Delivery location
• Delivery method
• Property factor
• Remove idle property, nonbusiness assets
• Use of leasing subsidiary
• Payroll factor
• Employees who travel
• Independent contractors

8
More Multistate Tax Planning

• Location decisions
• Whether, where to create nexus
• Sales, training functions
• Repairs, maintenance
• Research, inventories
• Income into low-tax, loss into high-tax
• Passive investment companies
• Only re nonunitary states
• Attacks by home states

9
Unitary Theory Combined Reporting

• This is not the consolidated return!
• Unitary group, affiliates file a combined return
• All data are reported on a group basis
• Can be required or elective by the state
• Usually shifts tax burden to the states with
  higher property values, compensation, sales
  prices
• Can gain from shifting income to low-tax state

10
Sales/Use Tax

• Retail-level transaction tax
• Sourcing is to place of purchase or use
• Lax enforcement on cross-border sales
• Usually only on tangible personal property
• Nexus issues
• SCt requires physical presence before tax must be
  collected
• Internet Taxes

11
Sales/Use Tax

• Exemptions/Exclusions
• Sales for resale
• Casual, occasional sales
• Items for manufacturing, Processing, Fabricating
• Not repairs, maintenance
• Not repackaging, reshaping
• Manufacturing, farming equipment
• Sales to exempt organizations
• Sales of off limits goods

12
2008 Apportionment Factors