Limitations on States' Jurisdiction to Impose Net Income Based Taxes, written by Fred O. Marcus, Esq., principal in the Chicago law firm of Horwood, Marcus & Berk, Chartered,examines one of the most perplexing questions facing a multistate corporation: the identification of those jurisdictions in which a corporation's activities may be sufficient to subject the corporation to a tax, whether it be a net income tax, a franchise tax measured by net income, a franchise tax measured by capital, or a gross income tax.

This Portfolio is designed to guide practitioners in their quest to solve the enigma of state taxing jurisdiction.  It examines the three principal limitations states face regarding their jurisdiction to tax: the federal constitutional limitations of the Commerce Clause and the Due Process Clause, limitations imposed by federal law (Pub. L. No. 86-272) under the federal government's power to regulate interstate commerce, and limitations which a state may voluntarily impose. 

Limitations on States' Jurisdiction to Impose Net Income Based Taxes provides an analysis of the states' interpretations of Pub. L. No. 86-272 and discusses court decisions under both the Commerce and Due Process Clauses as they pertain to state taxing jurisdiction. In addition, this portfolio 

• Outlines the scenarios that establish sufficient basis for imposition of net income based taxes.
• Reviews the enactment, construction, and application of Pub. L. No. 86-272.
• Defines the practices of the Multistate Tax Commission under Pub. L. No. 86-272.
• Examines correlative use of Pub. L. No. 86-272 to deny apportionment.
• Discusses the impact of Pub. L. No. 86-272 on the receipts factor of the apportionment formula.
• Addresses the applicability of Pub. L. No. 86-272 to members of unitary business groups and to non-U.S. corporations.
• Overviews the application of the Substance Over Form doctrine for intangible holding companies.
• Identifies planning opportunities.

Limitations on States' Jurisdiction to Impose Net Income Based Taxes allows you to benefit from: 

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
• Invaluable practice documents including tables, charts and lists.
• Plain-English guidance from world-class experts.
• Real-world and in-depth analysis that lets you explore various options.
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios.

This Portfolio is part of the Premier State Tax Library, a comprehensive series, which covers major state tax transactions and issues with expert, in-depth analysis, and offers commentary on a wide range of multi-state and state-specific taxation topics, including Sales and Use, Corporate Income, Individual Income, Property, Gross Receipts, Limitations on States' Authorities to Tax, Credits and Incentives, Electronic Commerce, Mergers and Acquisitions, Procedure and Administration, Special Industries, and more.

Detailed Analysis

1410.01. INTRODUCTION

1410.02. CONSTITUTIONAL LIMITATIONS ON STATE TAXING AUTHORITY

A. Exemption of Interstate Commerce from State Taxation (Commerce Clause)

B. Exemption of Interstate Commerce from State Taxation (Due Process Clause)

C. Validation of Direct Net Income Taxes on Interstate Commerce

1410.03. CONTACTS ESTABLISHING A SUFFICIENT BASIS FOR IMPOSITION OF NET INCOME BASED TAXES

Introductory Material

A. Maintenance of an Office in the Taxing State

B. Solicitation in the Taxing State by Employees and Representatives

C. Solicitation in Taxing State by Independent Contractors

D. Maintenance of Fixed Property in the Taxing State

E. Maintenance of Moveable Property in the Taxing State

F. Exploitation of the Taxing State's Market

G. Acts of an Agent

H. Ownership of a Partnership Interest

I. Presence of Intangible Property in the Taxing State

1. Geoffrey Inc. v. South Carolina Tax Commission

a. Due Process Analysis

(1) Purposeful Activity Directed Toward State

(2) Intangible Present Within State

b. Commerce Clause Analysis

2. States' Reactions to Geoffrey

a. States that do Not Require Physical Presence

(1) Arkansas

(2) Florida

(3) Indiana

(4) Iowa

(5) Louisiana

(6) Massachusetts

(7) New Jersey

(8) New Mexico

(9) North Carolina

(10) Oregon

(11) Wisconsin

b. States that Require Physical Presence

(1) Alabama

(2) Missouri

J. State Jurisdiction to Tax Limited Liability Company Income

K. State Jurisdiction to Tax S Corporation Income

L. Provision of Financial Services in the Taxing State

1. Loan Production Offices and Call Programs

2. Cash Management Services

3. Edge Act Corporations

4. Negative Nexus Statutes

5. Credit Cards

M. Activities of an Affiliate in the Taxing State

1410.04. ENACTMENT, CONSTRUCTION AND APPLICATION OF PUBLIC LAW 86-272

Introductory Material

A. Enactment of Public Law 86-272

B. Text of Public Law 86-272

1. Additional Requirements Under Public Law 86-272

C. The United States Supreme Court's View of "Solicitation"

1. Wisconsin Dept. of Revenue v. William Wrigley, Jr., Co.

2. Post-Wrigley Developments

D. Protected Activities of Employees and Representatives

E. Protected Activities of Independent Contractors

F. State Court and Administrative Decisions Interpreting the Solicitation Requirement of Pub. L. No. 86-272

1. State Court and Administrative Decisions Interpreting Solicitation Broadly

a. Colorado

b. Indiana

c. Missouri

d. New York

e. Pennsylvania

f. Tennessee

g. Wisconsin

2. State Court and Administrative Decisions Interpreting Solicitation Narrowly

a. Alabama

b. Alaska

c. Arizona

d. Arkansas

e. California

f. Connecticut

g. District of Columbia

h. Florida

i. Georgia

j. Illinois

k. Iowa

kk. Kansas

l. Maine

m. Maryland

n. Massachusetts

o. Michigan

p. Minnesota

q. Montana

r. New Jersey

s. North Carolina

t. North Dakota

u. Ohio

v. Oklahoma

w. Oregon

x. Rhode Island

y. South Carolina

z. Virginia

G. Maintenance of a Showroom As an Activity Exceeding Solicitation

H. Activities Unrelated to Taxpayer's Sale of Goods in the State As Exceeding Solicitation

I. Summary Comments on "Solicitation"

J. The Delivery Requirement

K. Application of Public Law 86-272 to Local Taxes on Corporate Net Income

L. Meaning of "Net Income Tax"

M. Effect of Voluntary Qualification on Public Law 86-272 Immunity

N. De Minimis Exception

1410.05. PRACTICES OF THE MULTISTATE TAX COMMISSION UNDER PUB. L. No. 86-272

Introductory Material

A. Phase II Statement

1. MTC Policy

2. Nature of Property Sold

3. Solicitation of Orders

4. Ancillary Activities

5. De Minimis Activities

6. Unprotected Activities

7. Protected Activities

8. Independent Contractors

9. Application of Destination State Law in Case of Conflict

10. Application of Statement to Foreign Commerce

11. Application to Corporation Incorporated in State or to Person Resident or Domiciled in State

12. Registration or Qualification to do Business

13. Loss of Protection for Conducting Unprotected Activity During Part of Tax Year

14. Application of the Joyce Rule

B. 2001 Amendments

1410.06. CORRELATIVE USE OF PUB. L. NO. 86-272 TO DENY APPORTIONMENT

Introductory Material

A. The Right to Apportion

B. Impact of Pub. L. No. 86-272 on the Right to Apportion

1410.07. IMPACT OF PUBLIC LAW 86-272 ON THE RECEIPTS FACTOR OF THE APPORTIONMENT FORMULA

Introductory Material

A. The Throwback Rule

1. Application to Domestic Sales of a Domestic Corporate Taxpayer

2. Application to Foreign Sales of a Domestic Corporate Taxpayer

3. Application to Members of Unitary Business Groups

1410.08. APPLICABILITY OF PUBLIC LAW 86-272 TO MEMBERS OF UNITARY BUSINESS GROUPS

1410.09. APPLICABILITY OF PUBLIC LAW 86-272 TO NON–U.S. CORPORATIONS

1410.10. INTANGIBLE HOLDING COMPANIES

A. Substance Over Form Doctrine - General Principles

1. Gregory v. Helvering

2. Application of the Doctrine

B. State Application of the Substance Over Form Doctrine

1. Strict Application - Examples

a. California

b. Indiana

c. Maryland

d. Massachusetts

e. New York

2. Loose Application - Examples

a. Alabama

b. Connecticut

c. Illinois

d. Indiana

e. Louisiana

f. Massachusetts

C. What Taxpayers Should Do

1410.11. PLANNING OPPORTUNITIES

1410.12. CONCLUSION

Working Papers

Item Description Sheet

Worksheet 1 Excerpt from BNA 2008 Survey - Nexus Issues

Worksheet 2 Excerpt from BNA 2008 Survey - Intangible Holding Companies

Worksheet 3 Text of Public Law 86-272

Worksheet 4 Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272

Worksheet 5 Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Pub. L. No. 86-272 as Adopted July 29, 1994 (Phase Two Statement)

Worksheet 6 Example 1 - Illinois and California Both Follow the Joyce Rule

Worksheet 7 Example 2 - Illinois Follows Joyce and California Follows Finnigan II

Worksheet 8 Example 3 - Illinois and California Both Follow Finnigan II

Worksheet 9 Example 4 - Illinois Follows Joyce and California Follows Finnigan II, S-1 Subject to California Taxing Jurisdiction

Worksheet 10 Comparison of Examples

Worksheet 11 Throwback Rule: Applicable Jurisdictional Standards (As of Jan. 1, 2003)

Worksheet 12 Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (S.C. 1993)

Opinion

Worksheet 13 Nexus Bulletin 95-1

Worksheet 14 Minnesota Business Activity Questionnaire

Worksheet 15 Excerpt from BNA 2008 Survey - State Income Tax Nexus Policies

Bibliography

Bibliography