CPA Tcp Quiz: Evaluate Apportionment And Nexus Issues

What this quiz covers

This quiz focuses on Evaluate Apportionment And Nexus Issues, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Tcp.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. A seller exceeds a state's economic nexus threshold, commonly $100,000 in sales or 200 transactions in the state - physical presence is no longer required. (correct answer)
2. A seller has at least one employee physically working in the state.
3. A seller's nationwide revenue exceeds $1 million.
4. A seller advertises its products in the state through any medium.

Explanation: Wayfair eliminated the physical presence requirement for sales tax nexus - economic presence (meeting transaction or revenue thresholds) is sufficient. Answer A is correct. Physical presence (B) is no longer required. National revenue (C) is not the nexus standard. Advertising (D) alone does not establish economic nexus.

Question 2

1. Only taxes businesses that have employees physically located in the state.
2. Apportions income based solely on the ratio of the taxpayer's payroll in the state to total payroll.
3. Apportions income equally among all states where the business operates.
4. Apportions income based solely on the ratio of the taxpayer's sales attributable to the state to the taxpayer's total sales everywhere - this rewards businesses that create jobs and property in the state but sell elsewhere. (correct answer)

Explanation: Single sales factor apportionment uses only the sales ratio, which benefits companies with in-state production (property/payroll) and out-of-state sales by excluding property and payroll from the formula. Answer D is correct. Employee location (A) is a nexus issue. Payroll-only (B) describes a payroll factor formula. Equal allocation (C) ignores the actual formula.

Question 3

1. The taxpayer's sales sourced to the state divided by the taxpayer's total sales everywhere. (correct answer)
2. The taxpayer's in-state sales minus returns and allowances.
3. The average of the taxpayer's beginning and ending in-state accounts receivable.
4. The ratio of in-state customers to total customers.

Explanation: The sales factor = in-state (state-sourced) sales / total everywhere sales, expressed as a fraction. Answer A is correct. Absolute sales amount (B) is not the factor. AR averages (C) are used in property factor calculations. Customer counts (D) are not the sales factor.

Question 4

1. The state where the service provider's employees physically performed the service.
2. The state where the service provider's headquarters are located.
3. The state where the customer received the benefit of the service - regardless of where the service was performed. (correct answer)
4. The state with the highest income tax rate where the taxpayer has nexus.

Explanation: Market-based sourcing sources service revenue to where the customer receives the benefit - favoring businesses with out-of-state performance that serve in-state customers. Answer C is correct. Cost-of-performance (A) is the traditional alternative rule. Headquarters (B) is not the sourcing standard. Tax rate (D) is not a sourcing rule.

Question 5

1. A taxpayer's income in a state decreases year over year.
2. A taxpayer has nexus in every state where it makes sales.
3. A taxpayer's property factor exceeds its payroll factor.
4. A sale is 'thrown back' to the state of origin (where the goods are shipped from) when the destination state has no jurisdiction to tax the seller - preventing some sales from falling out of all state apportionment formulas. (correct answer)

Explanation: The throwback rule prevents 'nowhere income' by assigning sales back to the shipping state when the seller lacks nexus in the destination state. Answer D is correct. Year-over-year changes (A) are irrelevant. Nexus everywhere (B) is the opposite situation where throwback doesn't apply. Factor comparisons (C) don't trigger throwback.

Question 6

1. 20% - calculated as (20% property + 20% payroll + 20% sales) / 3 = 20%. (correct answer)
2. 25% - calculated as average of (20%, 20%, 30%).
3. 30% - calculated using only the sales factor.
4. 23.3% - calculated as (20% + 20% + 30%) / 3.

Explanation: Property: $200K/$1M = 20%; Payroll: $100K/$500K = 20%; Sales: $300K/$1.5M = 20%. Average = (20+20+20)/3 = 20%. Answer A is correct. The sales factor is 20% ($300K/$1.5M), not 30% (B, C, D are all wrong because sales = 300/1500 = 20%).

Question 7

1. Advertising in a state through national publications or broadcast media.
2. Billing customers located in the state.
3. Having employees, independent contractors, property, or inventory in the state - any physical connection may create nexus for income tax purposes beyond P.L. 86-272 protections. (correct answer)
4. Holding a bank account in the state.

Explanation: Physical nexus for income tax can arise from employees, agents, property, or inventory - connections beyond protected solicitation activities under P.L. 86-272. Answer C is correct. Advertising (A), billing customers (B), and bank accounts (D) generally do not create physical nexus.

Question 8

1. Each member of a corporate group to file separate state returns reporting only their own income.
2. All members of an affiliated group to file one combined state return based on federal consolidated taxable income.
3. Only the parent corporation to report all income of subsidiaries.
4. Members of a unitary business group to combine their income and factors into a single apportionment calculation - eliminating intercompany transactions and income shifting within the unitary group. (correct answer)

Explanation: Combined reporting eliminates tax avoidance through intercompany transactions by treating the unitary group as a single entity for apportionment purposes. Answer D is correct. Separate filing (A) allows income shifting combined reporting prevents. Combined reporting is based on unitary income, not consolidated federal income (B). Only parent reporting (C) doesn't capture the unitary concept.

Question 9

1. A business exceeds a state's statutory or regulatory economic presence threshold - common thresholds include $50,000 to$500,000 of in-state sales or revenue, even without physical presence. (correct answer)
2. A business has any customers located in the state.
3. A business earns at least 10% of its total revenue from in-state customers.
4. A business is registered to do business in the state.

Explanation: Many states have enacted economic nexus standards for income tax that set minimum revenue thresholds, creating nexus without physical presence following Wayfair. Answer A is correct. Any customer (B) is too broad. A 10% threshold (C) is not a standard threshold. Business registration (D) creates nexus but is not the economic nexus standard.

Question 10

1. The state where the company's servers hosting the software are located.
2. The state where the customer uses (receives the benefit of) the software - typically the customer's location. (correct answer)
3. The state where the software was developed.
4. Equally allocated among all states where the company has nexus.

Explanation: Market-based sourcing assigns SaaS revenue to where the customer accesses and uses the service - the customer's location. Answer B is correct. Server location (A) is the cost-of-performance approach, not market-based. Development state (C) is not the sourcing rule. Equal allocation (D) is not the standard.

Question 11

1. A functional integration, centralization of management, and economies of scale among the entities - factors indicating they operate as a single enterprise rather than independent businesses. (correct answer)
2. Ownership of more than 50% of each subsidiary's stock.
3. Filing a combined return in every state where any member has nexus.
4. All group members to be incorporated in the same state.

Explanation: The unitary business concept requires evidence of operational integration, central management, and economies of scale - the constitutional and economic basis for combined reporting. Answer A is correct. Ownership percentage (B) is one factor but not the only test. Combined returns are required in combined reporting states (C) but not automatically everywhere. Incorporation state (D) is irrelevant.

Question 12

1. Property/3 + Payroll/3 + Sales/3.
2. Property/3 + Payroll/3 + 2 x Sales/3.
3. (Property factor + Payroll factor + 2 × Sales factor) / 4. (correct answer)
4. Property × 1/3 + Sales × 2/3.

Explanation: In a double-weighted sales formula, the sales factor is counted twice and the denominator is increased to 4 to keep the formula summing to 100%. The correct formulation is (Property factor + Payroll factor + Sales factor + Sales factor) / 4, which equals (P + W + 2S) / 4. Answer C is correct. Equal weighting (A) is the traditional three-factor formula, not double-weighted. Answer B incorrectly keeps the denominator at 3 while doubling the sales numerator weight - this would cause the formula to sum to more than 100%. Answer D ignores the payroll factor entirely, leaving an incomplete formula.

Question 13

1. The buyer pays from a bank account located in that state.
2. The transaction is negotiated by a salesperson located in that state.
3. The invoice is generated in that state.
4. The product is delivered or the service benefit is received in that state - under destination-based sourcing rules (most common), the sales factor reflects where customers receive goods or services. (correct answer)

Explanation: Sales factor sourcing follows destination rules - sales are assigned to the state where the customer receives the product or the benefit of the service. Answer D is correct. Bank account location (A), salesperson location (B), and invoice origin (C) are not standard sourcing rules.

Question 14

1. States typically start with federal taxable income and make state-specific additions and subtractions - some states conform to federal law (IRC conformity) while others have their own definitions of taxable income. (correct answer)
2. State taxable income always equals federal taxable income.
3. States use GAAP net income as the starting point for state taxable income.
4. Federal and state taxable income are determined independently with no relationship.

Explanation: State income tax computations typically begin with federal taxable income and adjust for state-specific items - states vary in their conformity to federal law. Answer A is correct. State and federal income often differ (B). GAAP net income is for financial reporting (C). There is a direct relationship - federal TI is the starting point (D).

Question 15

1. Earned by employees physically located in the state.
2. Received from customers with billing addresses in the state.
3. Attributable to assets located in the state.
4. Fairly apportioned to the state through a constitutionally permissible apportionment formula that reflects the business activity in the state - the U.S. Constitution requires that state taxation be fairly apportioned and not discriminatory. (correct answer)

Explanation: The Constitution (Commerce and Due Process Clauses) requires that state income tax on interstate commerce be fairly apportioned, have nexus, be non-discriminatory, and fairly related to services provided. Answer D is correct. Employee wages (A), customer billing (B), and in-state assets (C) are components of the formula, not the complete constitutional standard.

Question 16

1. Having a salesperson who solicits orders but cannot accept them.
2. Having in-state employees who provide post-sale customer service, repair equipment, install products, or perform activities that go beyond solicitation of tangible personal property orders. (correct answer)
3. Shipping products to customers from outside the state.
4. Advertising through local media in the state.

Explanation: P.L. 86-272 protection is lost when employees perform activities beyond protected solicitation - service, repair, installation, and other non-solicitation activities create nexus. Answer B is correct. Order solicitation (A) is protected. Shipping from outside (C) is the protected activity. Advertising (D) typically does not create income tax nexus.

Question 17

1. The taxpayer earns income from investments in federal treasury securities.
2. The taxpayer makes sales to customers in states where it lacks nexus and the shipping state does not have a throwback rule - those sales fall out of all apportionment formulas. (correct answer)
3. The taxpayer operates in states with no income tax.
4. The taxpayer earns capital gains that no state claims the right to tax.

Explanation: Nowhere income arises when sales go to nexus-lacking destination states without a throwback rule - the sales are excluded from the numerator of all states and are therefore not apportioned to any state. Answer B is correct. Treasury interest (A) has specific exclusion rules. No-tax states (C) don't create nowhere income. Capital gains (D) are subject to allocation rules.

Question 18

1. The fair market value of all in-state property at year-end.
2. The book value of all in-state depreciable assets.
3. The average of the beginning and ending original cost (or net book value, depending on state) of real and tangible personal property owned or rented in the state, relative to total property everywhere. (correct answer)
4. The assessed value of in-state real property for local property tax purposes.

Explanation: The property factor uses the average of beginning and ending year values (typically cost or GAAP basis) of owned and rented tangible property (rented property is typically valued at 8x annual rent). Answer C is correct. FMV (A) is generally not used. Book value alone (B) ignores the averaging and rental property. Assessed value (D) is not the apportionment standard.

Question 19

1. The throwout rule increases the apportionment percentage by throwing income back to the originating state.
2. Instead of throwing sales back to the originating state, the throwout rule removes from the sales denominator any sales made to states where the taxpayer lacks nexus - potentially increasing the apportionment percentage in states where the taxpayer does have nexus. (correct answer)
3. The throwout rule applies only to service companies, while throwback applies to goods.
4. The throwout rule requires the taxpayer to allocate income directly to specific states.

Explanation: The throwout rule removes 'nowhere sales' from the sales denominator (rather than adding them to the originating state's numerator), which can increase apportionment percentages for states where the taxpayer has nexus. Answer B is correct. Throwout doesn't throw back to origin state (A). Both rules apply to various business types (C). Throwout affects the denominator, not direct allocation (D).

Question 20

1. Is incorporated in a state other than where it conducts business.
2. Has less than $1 million in sales in a state.
3. Limits its in-state activities to solicitation of orders for tangible personal property that are approved and shipped from outside the state. (correct answer)
4. Has no employees physically present in the state.

Explanation: P.L. 86-272 protects companies from state income tax when their only in-state activity is soliciting orders for tangible personal property shipped from outside the state. Answer C is correct. Incorporation state (A) doesn't provide P.L. 86-272 protection. No dollar threshold exists (B). Employees may be present for solicitation (D).