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Business_taxation_Chapter12answers - Chapter 12 Questions...

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Chapter 12 Questions and Problems for Discussion 1. Corporations can deduct state income tax paid in the computation of federal taxable income. Therefore, the after-tax cost of the state tax payment must reflect the federal tax savings from the deduction, which is a function of the corporation’s marginal tax rate. 2. a. NY has nexus with Pennsylvania because it has a physical presence (the retail outlets) in the state. b. NY does not have nexus with Pennsylvania because its in-state activity (solicitation of orders for sales of tangible goods) is immune under P.L. 86-272. c. NY does not have nexus with Pennsylvania because it does not carry on any in-state activity and has no physical presence in the state, even though it sells goods to customers residing in Pennsylvania. d. NY does have nexus with Pennsylvania because it carries on an in-state activity (repair and maintenance service) that is not immune under P.L. 86-272. 3. Physical presence nexus means that a corporation owns or uses tangible property located in a state or has employees working in the state. Economic nexus means that a corporation conducts a regular commercial activity by transacting with clients or customers residing in the state. 4. The federal government does not require states to use a specific apportionment formula. However, the federal courts have held that states must use a rational and fair method to determine the portion of income from interstate commercial enterprises subject to the state’s income tax. 5. Each state’s laws could provide a different definition of taxable income subject to apportionment, a different apportionment formula, or different definitions of the factors included in the apportionment formula. 6. If a state has a relatively low (or even no) corporate tax, a multistate business might want to create nexus with the state to shift a portion of its income from interstate commercial activities to the state. 7. The home country is the country in which the business owners reside or in which the business is incorporated. A host country is any country in which a foreign firm or corporation conducts a business or commercial activity. 8. A bilateral income tax treaty is an agreement between two countries that provides unique rules defining and limiting each country’s jurisdiction to tax the residents of the other. 9. The nature and extent of LF’s business activity within County Y may be insufficient to create jurisdiction. Country Y may have an income tax treaty with the United States providing that neither country will tax a corporation formed under the laws of the other unless that corporation maintains a permanent establishment in the host country. In this case, LF apparently does not have a permanent establishment in Country Y.
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