Happy Hippos (HH) is a manufacturer and retailer of New England crafts. HH is headquartered in Camden, Maine. HH provides services has sales, employees, property, and commercial domicile as follows:

STATE AND LOCAL TAX – RESEARCH MEMO OPTION 1 Happy Hippos (HH) is a manufacturer and retailer of New England crafts. HH is headquartered in Camden, Maine. HH provides services has sales, employees, property, and commercial domicile as follows: Happy Hippos In-State Activities State Sales Employees Property Services Commercial Domicile Connecticut ü ü ü Maine ü ü ü ü ü Massachusetts ü ü New Hampshire ü Rhode Island ü ü Vermont ü ü ü ü Happy Hippos sales of goods and services by state are as follows: Happy Hippos Sales State Goods Services Total Connecticut $78,231 $52,321 $130,552 Maine 292,813 81,313 374,126 Massachusetts 90,238 90,238 New Hampshire 129,322 129,322 Rhode Island 98,313 98,313 Vermont 123,914 23,942 147,856 Totals $812,831 $157,576 $970,407 HH has federal taxable income of $282,487 for the current year. Included in federal taxable income are the following income and deductions: • $12,000 of Vermont rental income; • City of Orono, Maine bond interest of $10,000; • $10,000 of dividends; • $2,498 of state tax refund included in income; • $32,084 of state net income tax expense; and • $59,234 of federal depreciation. • Maine state depreciation for the year was $47,923 and Maine doesn’t allow deductions for state net income taxes. The employees present in Connecticut, Massachusetts, and Rhode Island are sales people who perform only activities protected by Public Law 86-272. Each of the states is a separate-return state. HH’s payroll is as follows: Payroll State Wages Connecticut $94,231 Maine 392,195 Massachusetts 167,265 Rhode Island 92,391 Vermont 193,923 Total $940,005 HH’s property is as follows: Property State Beginning Ending Rented Maine $938,234 $937,652 Vermont 329,134 428,142 $12,000 Total $1,267,368 $1,365,794 $12,000 a) Determine the states in which HH has sales and use tax nexus. b) Calculate the sales tax HH must remit assuming the following sales tax rates: Connecticut (6%), Maine (8%), Massachusetts (7%), New Hampshire (8.5%), Rhode Island (5%), and Vermont (9%). c) Determine the states in which HH has income tax nexus. d) Determine HH’s state tax base for Maine assuming federal taxable income of $282,487. e) Calculate business and non-business income. f) Determine HH’s Maine apportionment factors using the three-factor method (assume that Maine is a throwback state). g) Calculate HH’s business income apportioned to Maine. h) Determine HH’s allocation of non-business income to Maine. i) Determine HH’s Maine taxable income. j) Calculate HH’s Maine net income tax liability assuming a Maine tax rate of 5 percent. INTERNATIONAL TAX – RESEARCH MEMO OPTION 2 USCo, a U.S. corporation, has decided to set up a headquarters subsidiary in Europe. Management has narrowed its location choice to either Spain, or Ireland, or Switzerland. The company has asked you to research some of the income tax implications of setting up a corporation in these three countries. In particular, management wants to know what tax rate will be imposed on corporate income earned in the country and the withholding rates applied to interest, dividends, and royalty payments from the subsidiary to the USCo. To answer the tax rate question, consult KPMG’s Corporate and Indirect Tax Survey 2014, which you can access at http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/corporateindirect-tax-rate-survey-2014.pdf. To answer the withholding tax questions, consult the treaties between the United States and Spain, Ireland, and Switzerland, which you can access at www.irs.gov (type in “treaties” as your search word).

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