You are a tax manager with a public accounting firm. Two of your clients have engaged you to do a nexus review to determine if they are filing corporate income tax returns in the appropriate states. They have provided you with certain facts, but you need additional information to complete your analysis. Based on the facts presented, please answer the questions completely and provide support for your conclusions.

Case Studies Corporate Income Tax Nexus

1. Dragons, Inc. (Corporation) global manufacturer

Facts:

• Manufactures and sells dishwashers and other kitchen appliances to retail customers
• Installs and repairs kitchen appliances
• Incorporated in Delaware
• Corporate headquarters is located in Philadelphia, Pennsylvania
• Manufacturing facilities are located in Massachusetts, Pennsylvania, and Texas
• Sales offices are located in Massachusetts, Maryland, New Jersey, Ohio, Pennsylvania, Texas, and Wisconsin
• Maintains inventory in numerous public warehouses located in geographic areas where market concentration is greatest
• Sells product to customers in 40 states, Canada, Mexico, and Europe
• Company employees (sales representatives) visit customers throughout the U.S.
• Product is shipped from the 3 manufacturing facilities and public warehouses directly to customers via company trucks and common carriers
• All sales orders are sent to corporate headquarters (Pennsylvania) for approval or rejection
• Damaged or defective products are picked up by the company at the customers location and returned to one of the companys manufacturing facilities
• Partial sales by state data is provided below for states with factor presence nexus standards

Questions:

A) Based on the facts and the sales information below, in what states do you think Dragons, Inc. would have substantial nexus for corporate income tax purposes? Explain.

B) What additional information would you need to determine if Dragons, Inc. has taxable nexus in any other states (in addition to those in your answer to A)?

C) Would making repairs or providing on-site maintenance to the dishwashers be protected under P.L. 86-272? Why? Does it matter if these are infrequent and irregular activities occurring only a few times a year? Explain.

D) Would your answer to (C) differ if Dragons, Inc. used third-party independent contractors to perform these services instead of company employees? Why?

E) What is a factor presence nexus standard (bright-line nexus)? Does P.L. 86-272 still apply in a state which has adopted factor presence nexus for income tax?

F) What local Philadelphia business taxes would Dragons, Inc. be subject to and what is the nexus standard used by Philadelphia? Note: Please address taxes imposed on corporations only (research required). Department of Revenue | Homepage | City of Philadelphia

Dragons, Inc.

Sales Data for States with Factor Presence (Economic Nexus) Standards most recent calendar year

Sales by State (Over $1 million) Sales Threshold for Corp. Income Tax Nexus

New York $10,500,000 > $1,000,000

Massachusetts $ 7,200,000 > $500,000

Pennsylvania $ 6,800,000 > $500,000

Michigan $ 6,300,000 > $350,000

Ohio $ 3,500,000 > $500,000 Commercial Activity Tax*

Connecticut $ 2,100,000 > $500,000

Tennessee $ 1,200,000 > $500,000

Other states with factor presence / economic nexus standards include (sales information not provided):

• Alabama
• California
• Colorado
• Hawaii
• Indiana
• Maine
• Oregon Corporate Activity Tax*
• Texas

* Tax based on gross receipts