You are working as a tax consultant focusing on a large profitable U.S. based company’s state income tax expense. To illustrate a point on the effects the varying state apportionment rules have on the company’s aggregate state tax liability assume, for the illustrative year, that the company has adjusted state taxable income (line 28 from the company’s federal return adjusted for state purposes) of $800M. Further, assume under scenario (a) that the company is taxable in State X (because of frequent visits by employees in the state) and sells all its product to customers in this state. State X utilizes just the sales factor to apportion income subject to the state’s income tax rate of 10%. Further, under scenario (a), the company is headquarted in and has all its employees and all its property, plant and equipment (“PP&E”) in State Z. State Z utilizes a three factor (property, payroll and sales) equal weighted apportionment formula. State Z also imposes a 10% income tax rate. As you would expect, the company is also taxable in and files income tax returns in State Z. Under scenario (b) assume the same tax rules, but the opposite facts in regard to the company’s location and the location of its customers. So, in scenario (b) the company is headquartered (and has all its PP&E and payroll) in State X, but makes all its sales to customers in State Z. In scenario (b), as in scenario (a), State X uses a single factor (sales only) apportionment and State Z uses a three factor (property, payroll and sales) equal weighted apportionment formula. Finally, assume neither state has a throw-back or throw-out rule concerning its sale factor.
What would the company’s aggregate state tax expense (total expense to State X and State Z) be under scenario (a) and scenario (b)?