Question

Subject: Business Tax

Brood Corporation realized $1.5 million of taxable income from the sales of its products in States A and B. Both states employ a three-factor apportionment formula that equally weights sales, property, and payroll. Brood’s gross sales, payroll, and property attributable to or located in the states are shown below. Based on this data, determine the tax liability for State A and State B, and the total effective tax rate.

	State A	State B	Totals
Gross Sales	$2,000,000	$3,000,000	$5,000,000
Payroll	1,500,000	0	1,500,000
Property	2,500,000	0	2,500,000
Income tax rate	10%	5%

Answer 1

Apportionment of Taxable Income to State A

Sales Factor $2,000,000/$5,000,000 = 40%

Property Factor $2,500,000/$2,500,000 = 100%

Payroll Factor $1,500,000/$1,500,000 = 100%

Sum of Apportionment Factors = 240% /3 = 80%

Taxable Income Apportioned to State A = 80% * $1,500,000 = $1,200,000

Tax Rate State A 10%

Tax Liability, State A $1,200,000 * 10% = $120,000

Apportionment of Taxable Income to State B

Sales Factor $3,000,000/$5,000,000 = 60%

Property Factor $0 = 0%

Payroll Factor $0 = 0%

Sum of Apportionment Factors = 60% /3 = 20%

Taxable Income Apportioned to State A = 20% * $1,500,000 = $300,000

Tax Rate State B 5%

Tax Liability, State A $300,000* 5% = $15,000.

Total tax liability = $135000

Effective tax rate = ($135000/$1500000) = 9%

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