Accounting Questions - State and Local Tax

Multiple Choice Questions (50 points)

1. In Scripto, the United States Supreme Court held that: A. the presence of independent contractors in a state does not create nexus for an out of state seller. B. the presence of employees in a state does not create nexus for an out of state seller. C. the presence of independent contractors in a state is treated no differently for use tax collection purposes than the presence of employees. D. the National Bellas Hess decision was overruled.

2. A catalog retail seller, Gizmo, who sells all of its merchandise via the mails, uses an out of state printer to print and ship thousands of catalogs into state Z, advertising its products and providing order forms as well as telephone and internet information to facilitate orders for the product. Gizmo has an employee in state Z to assist with securing mailing lists and other marketing efforts. Which one of the following statements is most accurate? A. Gizmo is liable for use tax on the cost of the catalogs sent into state Z. B. Gizmo is not liable for use tax on the catalogs because it is not selling them, it is giving them away to the residents of state Z. C. the employee that assists in marketing does not give nexus to Gizmo in state Z because he is not involved in selling Gizmos merchandise. D. Gizmo is not liable for use tax on the catalogs because it is protected under PL 86-272.

3. A lessor of equipment, which has no physical presence in a state except for the leased equipment used by the lessee, is concerned about its potential obligation to register and collect use tax in that state. Which one of the following statements is most accurate? Assume that the state involved has not adopted nexus expanding legislation nor the Wayfair standard of economic nexus. A. leases are not categorized as sales of tangible personal property and there is no use tax collection obligation. B. leases are categorized as sales of tangible personal property, but there is no use tax collection obligation because it has no physical presence in the state. C. leases are categorized as sales of tangible personal property, and there is a use tax collection obligation because the leased equipment constitutes physical presence. D. leases are not categorized as sales of tangible personal property,and there is no sales tax obligation on the lessee

4. Which of the following Supreme Court decisions was (were) overruled in the Wayfair case? A. National Bellas Hess B. Quill C. Borders On Line D. Complete Auto Transit E. both A and B F. A, B, and C G. None of the cases was overruled.

5. Which two of the following transactions are most probably exempt from the sales and/or use tax of the state in which it occurs for X Manufacturing Company? A. X Manufacturing Company purchases computers for its office personnel, whose office is located in the same building as the manufacturing plant. B. X Manufacturing Company sells its products to Rays Wholesale Sales Inc, which ultimately makes sales to customers who use the product. C. X Manufacturing Company makes sales of its product to the local school, part of the local county school district, for use in providing education. D. X Manufacturing Company purchases delivery trucks to transport its products to its customers. E. X Manufacturing Company purchases office supplies for the use of office personnel located in the manufacturing plant.

6. Rayfield Corporation is a manufacturer of office lamps and fans. It sells these products to numerous customers. Rayfield periodically on an as needed basis actually uses some of the office lamps and fans in its offices. Which one of the following statements is most accurate regarding Rayfields sales and use tax compliance? A. Rayfield has no sales or use tax obligation because it is not selling the lamps and fans to third parties. B. Rayfield has a sales or use tax obligation based on the sales price it charges for the lamps and fans to third parties. C. Rayfield has a sales or use tax obligation based on the cost of labor, materials, and a fair profit margin which it incurs in manufacturing the lamps and fans. D. Rayfield has a sales or use tax obligation based on the cost of materials it incurs in manufacturing the lamps and fans.

7. Jones is a construction contractor. He has a contract to build Linda a residence. Which one of the following statements is most accurate regarding Jones purchase of lumber from a local Home Depot to construct the house? A. It is not subject to sales because it is a purchase for resale B. It is subject to sales tax because Jones is the end user of the lumber C. It is not subject to sales tax because it is being used in the manufacture of a house D. None of the above.

8. Which one of the following statements is accurate regarding a standard drop shipment transaction (assume the Virginia law applies)? A. the manufacturer is generally required to collect sales or charge use tax regardless of the location of the reseller. B. the reseller is obligated to collect use tax from the purchaser, but only if the manufacturer who is shipping the goods, has nexus in the purchasers state. C. the reseller is obligated to collect use tax from the purchaser if the reseller has nexus in the state of the purchaser. D. the purchaser is not obligated to self assess use tax under any circumstances in a drop shipment transaction.

9. Which one of the following statements is most accurate regarding most states treatment of software? A. canned software is not taxable B. custom software is taxable C. canned software is taxable D. none of the above.

10. Which one of the following statements is most accurate regarding the sales tax? A. It is generally imposed on the seller. B. It is generally imposed on the buyer and collected by the seller from the buyer. C. It is imposed on the gross sales price less a reasonable cost of goods sold. D. It is imposed on sales of tangible personal property and most services.

Short Answer Questions (20 Points)

1. An internet book seller, which has no affiliated corporate entities and has no physical presence in state P, sells all of its books to customers in the states via orders received electronically over the internet generated from its own website. The seller accepts the orders outside of state P and ships them via a common carrier to state P customers. It has no advertising on any websites in the state and its sole method of contacting customers is through catalogs it mails into the state. It has no other connection with state P. State P has legislation which adopts the nexus standard upheld in the Wayfair case. Does the seller have a use tax collection obligation in state P? What if representatives of the internet book seller visited the state to participate in a trade show where certain special edition books could be purchased? If you need additional information, make sure to list what you need to know and why, but specify your conclusions based on what you find out.

2. Which of the following transactions would most likely be subject to sales tax? Why or why not? $1,000 charge from a CPA for the completion and delivery of an individual tax return. $3,000 charge from an attorney for the drafting and completion of an estate plan including a will, revocable trust, advanced medical directive, and a power of attorney. $15,000 paid for a painting by Peter Max, a renowned painter.

Problem (30 Points)

Blue Corporation has its corporate headquarters in the state of Alpha and its manufacturing location in the state of Beta. It has employee salesmen who work out of offices in their homes and solicit business exclusively. These salesmen are located in the states of Gamma, Delta, and Cigna. It also has a number of independent contractor industry sales representatives (reps), based in Dion and Theta, who work for commissions on a non-exclusive basis (meaning they work for other unrelated companies as well) for Blue. The company accepts all orders from the salesmen and reps at its corporate headquarters and all products are shipped to customers from its Beta location via common carrier.

Blue Corporation makes sales in excess of $500,000 into all of the above mentioned states. It also has customers to which it sells products in the amounts of $20,000 or less annually (which amount to less than 10 transactions annually) in Sigma, Xena, and Mu. Blue has no salesmen or reps in those states. Finally, Blue Corporation has a 100% owned subsidiary, Yellow Corporation, which is located only in the state of Pi and operates a repair service business for products manufactured by Blue, as well as many other companies. Assume that all of the above states are separate company income taxing states and have adopted the original version of UDITPA. Further assume that all of the states have adopted the nexus standard for sales and use tax specifically approved in the Wayfair case.

Identify in which state or states Blue has income tax nexus and why. If in doubt on a state based on the facts explain what more you need to know and what the deciding issue might be.

Identify in which state or states Blue has sales and use tax nexus and why. If in doubt on a state based on the facts explain what more you need to know and what the deciding issue might be.