CTC CTC State & Local Tax (SALT) 1 — Questions and Answers
Question 1: What is 'nexus' in the context of state and local taxation?
- A minimum threshold of taxable income
- A sufficient connection between a business and a state that creates a tax obligation (Correct answer)
- A type of interstate tax treaty
- A federal standard for apportioning income
Correct answer: A sufficient connection between a business and a state that creates a tax obligation
Nexus is the legally sufficient connection between a taxpayer and a state that gives the state the authority to impose a tax obligation.
Question 2: Under the Supreme Court's South Dakota v. Wayfair (2018) decision, what threshold did South Dakota use to establish economic nexus for sales tax?
- $50,000 in sales or 100 transactions
- $100,000 in sales or 200 transactions (Correct answer)
- $200,000 in sales or 500 transactions
- $500,000 in sales or 1,000 transactions
Correct answer: $100,000 in sales or 200 transactions
South Dakota's economic nexus law — upheld by the Supreme Court — was triggered by $100,000 in sales or 200 separate transactions into the state.
Question 3: Which method is most commonly used by states to apportion multistate corporate income to their state?
- Single-factor payroll formula
- Three-factor formula (sales, property, payroll)
- Single-factor sales formula (Correct answer)
- Two-factor formula (sales and property)
Correct answer: Single-factor sales formula
While the traditional three-factor formula was once standard, most states have shifted to a single-factor sales (receipts) apportionment formula.
Question 4: What is 'use tax' and when does it typically apply?
- A tax on business use of depreciable assets
- A complementary tax owed when sales tax was not collected by the seller (Correct answer)
- A federal excise tax on consumer goods
- A local tax on commercial real estate use
Correct answer: A complementary tax owed when sales tax was not collected by the seller
Use tax is a self-assessed tax owed by the buyer on taxable purchases where the seller did not collect sales tax, such as out-of-state online purchases.
Question 5: Which Public Law limits states from taxing the income of a business whose only in-state activity is soliciting orders for goods shipped from outside the state?
- Public Law 86-272 (Correct answer)
- Public Law 94-455
- Public Law 91-172
- Public Law 99-514
Correct answer: Public Law 86-272
P.L. 86-272 protects businesses from state income tax when their only in-state activity is soliciting orders for tangible personal property fulfilled from outside the state.
Question 6: A company sells products in 10 states and has physical locations in only 3. Under economic nexus rules, what determines its filing obligations in the other 7 states?
- Only the location of its principal office
- Whether it meets each state's sales or transaction thresholds (Correct answer)
- The Federal nexus standard set by the IRS
- Whether it files a consolidated federal return
Correct answer: Whether it meets each state's sales or transaction thresholds
Post-Wayfair, each state's economic nexus thresholds (typically $100,000 in sales or 200 transactions) determine whether the company has a filing obligation in that state.
CTC CTC State & Local Tax (SALT) 1
What is 'nexus' in the context of state and local taxation?