Dott Corporation generated $300,000 of state taxable income from selling its mapping software in States A and B. For the taxable year, the corporation’s activities within the two states were as follows:
?
State A
State B
Total
Sales$500,000
$1,500,000
$2,000,000
Property250,000
–0–
250,000
Payroll200,000
300,000
500,000
?
Dott has determined that it is subject to tax in both A and B. Both states utilize a three-factor apportionment formula that equally weights sales, property, and payroll. The rates of corporate income tax imposed in States A and B are 7% and 10%, respectively. Determine Dott’s total state income tax liability.
What will be an ideal response?
?
| State A Income Tax Liability | |||
| Taxable income | $300,000 | ||
| Apportionment Formula | |||
| Sales | $500,000/$2,000,000 | = | 25.00% |
| Property | $250,000/$250,000 | = | 100.00% |
| Payroll | $200,000/$500,000 | = | 40.00% |
| Total | 165.00% | ||
| ?State A apportionment factor (165.00%/3) | ?× 55.00% | ||
| Taxable income apportioned to A | $165,000 | ||
| A tax rate | × 7.00% | ||
| A tax liability | $ 11,550 | ||
| State B Income Tax Liability | |||
| Taxable income | $300,000 | ||
| Apportionment Formula | |||
| Sales | $1,500,000/$2,000,000 | = | 75.00% |
| Property | $0/$250,000 | = | –0–% |
| Payroll | $300,000/$500,000 | = | 60.00% |
| Total | 135.00% | ||
| State B apportionment factor (135.00%/3) | ×45.00% |
| Taxable income apportioned to B | $ 135,000 |
| B tax rate | ×10.00% |
| B tax liability | $ 13,500 |
| Total State Tax Liability | |
| A tax liability | $11,550 |
| B tax liability | 13,500 |
| Total tax liability | $25,050 |
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