A states tax on a nonresidents business income will

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The Legal Environment of Business: Text and Cases
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Chapter 4 / Exercise 2
The Legal Environment of Business: Text and Cases
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A state’s tax on a nonresident’s business income will be upheld as constitutional under the Commerce Clause only if the tax is fairly apportioned to income that arises from the nonresident’s activities within the state. The purpose of this requirement is to ensure that a state taxes only its fair share of a taxpayer’s income. Oklahoma Tax Commission v. Jefferson Lines, 514 U.S. 175 (1995). Without such a requirement, a taxpayer could be taxed multiple times (by multiple taxing jurisdictions) on the same income. States can require taxpayers to apportion their business income using separate accounting or a formula. Under the separate accounting approach, standard accounting methods are used to trace income to the jurisdiction where it was earned. Because separate accounting is costly, difficult to perform, and subject to manipulation, all states use a formula to apportion income. ¶25,125 ALLOCATING INCOME TO A STATE Each state has rules for determining whether any of a nonresident’s income should be allocated to the state and become subject to the state’s income tax. Typically the following types of income will be allocated to a state: Wages, salaries, commissions, and other compensation paid in the state for personal services. Capital gains from sales or exchanges of real property located in the state. Capital gain from the sale or exchange of tangible personal property whose situs was in the state at the time of the sale or exchange. Rents and royalties from real property located in the state. Rents and royalties from tangible personal property utilized in the state. Patent and copyright royalties if the patent or copyright was utilized in the state by the payer. Lottery prizes awarded by the state’s lottery. Estate or trust income from state sources. ¶25,135 SPECIAL RULES FOR ALLOCATING AND APPORTIONING A BUSINESS’ INCOME There are special rules for allocating and apportioning a business’ income among the states from which it derives the income. Different rules are applied to a business’ nonbusiness and business income. To provide a uniform method for allocating and apportioning a business’ business and non- business income among states and foreign countries and prevent businesses from paying tax on more than their net income, the Uniform Division of Income for Tax Purposes Act (UDITPA) was adopted by the National Conference of Commissioners on Uniform State Laws and the American Bar Association in 1957. Twenty-two states and the District of Columbia have adopted UDITPA. The Multistate Tax Commission has adopted model regulations that interpret UDITPA provisions. Many states have adopted all or substantially all of the regulations or have generally consistent provisions. Allocation of Nonbusiness Income
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The Legal Environment of Business: Text and Cases
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Chapter 4 / Exercise 2
The Legal Environment of Business: Text and Cases
Cross/Miller
Expert Verified
Nonbusiness income usually is defined in the negative—as any income other than business income. See, e.g., Section 1(e) of UDITPA. Nonbusiness income includes portfolio income, such as dividends, interest, rents, patent and copyright royalties, and capital gains.

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