General Facts. High & Mighty Corporation (“H&M”) produces and sells office furniture online that is shipped by common carrier. H&M was incorporated in the state of Akli and it has at least some activities in four states: Akli, Beta, Copper, and Dungland. H&M has the following sales, payroll, and property in each of these states:

               Activity                               Akli                       Beta                      Copper                Dungland                Total

Sales                            $2,500,000                $1,000,000         $1,000,000               $500,000            $5,000,000

Payroll                         $1,000,000                    $600,000           $250,000               $150,000            $2,000,000

Property                      $2,800,000                    $200,000                      $0               $0                         $3,000,000

In addition to being incorporate in Akli, H&M also has its corporate headquarters and most of its employees in Akli where it’s main production facility is located and all products are shipped from Akli to H&M’s customers. H&M also has a small production facility in Beta that produces raw materials that are sent to Akli for final production. H&M only has sales employees in Copper and Dungland. H&M provides installation services upon delivery of its product in all states using independent contractors, except this installation service is not offered in Dungland. H&M’s activities in Dungland are limited to online sales, advertising, and couple of employees on its sales team that work out of their home offices. 

Problem 1. Income Tax Nexus.  Based on the facts above, and assuming all four states base their taxes on apportionment of net income, in which states does H&M have nexus under Public Law 86-272?

 

Problem 2. Allocation & Apportionment.  In addition to the facts in Problem 1, H&M earns $1,150,000 in federal taxable income consisting of $1M in business income as well as $150K of non-business income consisting of $100K of interest income on a money market account and $50K of rental income from renting unused commercial property in Beta. Assume the states have no adjustments to income and that Akli apportions on an equally weighted three-factor apportionment, Beta uses a double-weighted payroll formula, Copper has no state level income tax, and Dungland apportions exclusively based on sales. Calculate H&M’s taxable income in Alkli, Beta, Copper, and Dungland (due to the calculations involved, you might consider completing this problem with the assistance of excel).

Answer rating: 100% (QA)

Problem 1 Income Tax Nexus Based on the facts above and assuming all four states base their taxes on ... View the full answer