CTC CTC State & Local Tax (SALT) 2 — Questions and Answers
Question 1: Which of the following items is typically exempt from sales tax in most U.S. states?
- Prepared restaurant meals
- Prescription drugs (Correct answer)
- Clothing accessories
- Digital downloads
Correct answer: Prescription drugs
Prescription drugs are exempt from sales tax in the vast majority of states as a matter of public health policy.
Question 2: What is a 'combined reporting' requirement in state corporate income taxation?
- Filing a single return for all affiliated entities with commonly controlled income (Correct answer)
- Reporting both state and federal taxes on the same form
- A requirement to report all officer compensation to the state
- Consolidating payroll taxes with income taxes
Correct answer: Filing a single return for all affiliated entities with commonly controlled income
Combined reporting requires affiliated corporations under common ownership to report their income as a single entity to prevent profit-shifting to low-tax states.
Question 3: What is the purpose of a 'throwback rule' in state income tax apportionment?
- To recapture previously deducted state tax payments
- To assign sales to a taxpayer's home state when the destination state cannot tax the income (Correct answer)
- To reverse prior-year apportionment errors
- To allocate capital gain income to the state of asset origin
Correct answer: To assign sales to a taxpayer's home state when the destination state cannot tax the income
The throwback rule assigns out-of-state sales back to the seller's state when the seller lacks nexus in the destination state, preventing 'nowhere income.'
Question 4: Which of the following best describes a 'voluntary disclosure agreement' (VDA) in the SALT context?
- An agreement where the IRS forgives back taxes in exchange for future compliance
- A program allowing taxpayers to come forward and pay back taxes with reduced penalties (Correct answer)
- A state program requiring corporations to disclose related-party transactions
- A treaty between states to share taxpayer data
Correct answer: A program allowing taxpayers to come forward and pay back taxes with reduced penalties
A VDA allows a taxpayer with prior unfiled obligations to come forward voluntarily and settle back taxes, typically with reduced or waived penalties and a limited lookback period.
Question 5: What is the 'Multistate Tax Compact' and its significance for state taxation?
- A federal law standardizing state sales tax rates
- An interstate agreement promoting uniformity in state tax laws and allowing the three-factor apportionment election (Correct answer)
- A compact requiring states to share income tax revenue
- A treaty governing cross-border digital services taxation
Correct answer: An interstate agreement promoting uniformity in state tax laws and allowing the three-factor apportionment election
The Multistate Tax Compact is an interstate agreement that promotes uniformity in state tax laws and historically allowed taxpayers to elect the three-factor apportionment formula.
Question 6: Under what concept does a state assert the right to tax income earned by a nonresident individual who was formerly domiciled there?
- Unitary taxation
- Residency exit tax
- Domicile-based continuing taxation (Correct answer)
- Sourcing rules
Correct answer: Domicile-based continuing taxation
Some states apply domicile-based continuing taxation, asserting taxing rights over former residents for income sourced to the state or tied to their prior domicile.
CTC CTC State & Local Tax (SALT) 2
Which of the following items is typically exempt from sales tax in most U.S. states?