Almost all states tax corporate income through corporate income or franchise
taxes. The tax rates range from 1 percent to 12 percent. The taxable
income computations for state purposes may differ from the computation
for federal purposes, especially regarding the accelerated cost recovery
deductions. For a state to tax a corporation, two tests must be met:
- There
must be a minimal connection between corporate activities
and the state (the “nexus test”),
and
- The
income attributable to the taxing state must be rationally
related to values connected with the taxing state (the “rational
relationship test”).
Once it is determined that apportionment of income to the
state is proper, apportionment generally follows a three-factor
formula based on percentages of worldwide sales, payroll
and property attributable to the state. These percentages
are averaged to arrive at an apportionment factor applied
to the corporation's worldwide income. In certain cases,
a foreign corporation may be permitted to separately account
for the income taxable in the particular state. Certain states
may impose capital or net worth taxes in lieu of or in addition
to income taxes. Some cities (e.g., New York City) also impose
corporate income taxes.
While most states tax each corporation separately, several
states (e.g., California) employ the unitary method and tax
an affiliated group of corporations not only on income from
its purely local operations but instead on a portion of its
entire income, to the extent that the affiliated group operates
a unitary business. Several factors are considered in determining
whether there is a unitary business, including functional
integration, centralization of management, and economies
of scale. Although the unitary method has been applied to
the worldwide activities of an affiliated group of corporations,
most states using this method now limit its application to
the US activities of an affiliated group.
Sales and Use Tax
Forty-five states and more than 7,000 local jurisdictions
impose sales and use taxes. When doing business with US customers,
neglecting or not knowing the applicable sales and use tax
rules can be costly.
Complying with sales and use tax laws is sometimes complex.
In most states, compliance is facilitated by filing a single
tax return that covers the state and all local jurisdiction
taxes. In some states, local sales and use taxes are administered
by local authorities that require additional local tax filings.
Filing sales and use tax returns may be obligatory or prudent
even if no tax is due.
A Canadian
company with a minimal physical presence in a state may
have sales and use tax compliance obligations.
The in-state presence of an out-of-state company’s
property, employees, independent agents or representatives
can create a filing obligation. For example, a Halifax food
processor that engages an independent sales representative
to solicit sales to supermarkets in Pennsylvania must comply
with Pennsylvania sales and use tax rules.
Determining
whether a state’s sales and use tax laws
apply is critical. The answer is relatively obvious when
a sale takes place and the purchaser takes possession at
the seller’s storefront. An out-of-state seller should
generally consider the tax laws in effect at the destination
where goods are shipped.
Use taxes
generally apply where sales tax was not paid to the “use” state
at the time of purchase. Assume a California resident purchases
a taxable item in Nevada
and pays Nevada sales tax at the point of purchase. On return
to California, he or she must self-assess and remit use tax
to California for the use of the item in California, although
California may allow credit for the Nevada tax paid.
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"The
information contained herein is of a general nature and
is not intended to address the circumstances of any particular individual
or entity. Although we endeavor to provide accurate and
timely information, there can be no guarantee that such information
is accurate as of the date it is received or that it
will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough
examination
of the particular situation.
KPMG and the KPMG logo are registered trademarks of KPMG
International, a Swiss cooperative.
© 2006 KPMG LLP, the
Canadian member firm of KPMG International,
a Swiss cooperative. All rights
reserved."
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