Agenda

The Throwout Rule: A Controversial State Response to “Nowhere” Income

“Nowhere” Income

States possess broad authority to craft unique tax regimes with diverse apportionment methodologies, such as single-sales factor or three-factor apportionment formulas and cost-of-performance or market-sourcing rules. The states’ power to enact diverse apportionment methodologies has created instances of multiple taxation as well as so-called “nowhere” income, which is untaxed income of multistate taxpayers. Consistent with our federalist system, states also have the right to enact laws that combat perceived structural flaws of their tax systems, including nowhere income. Of the remedial tax laws that seek to curb nowhere income, the “throwout rule” is arguably the most controversial. This BNA Audiocast examines the advent of the throwout rule and variations of the rule adopted (or considered) by several states. The speakers discuss the constitutionality of the throwout rule.

The Throwout Rule

Under the throwout rule, if a taxpayer is not taxable in a state where receipts are sourced, then the taxpayer must exclude those receipts from the denominator of the taxing state’s sales factor. Thus, the throwout rule redistributes formerly untaxed, or “nowhere,” income among the states where that taxpayer is subject to tax.

During this webinar, recorded on December 11, 2008, multistate tax practitioners Kendall Houghton and Charlie Kearns argue that the throwout rule allows states to tax more than their fair share of income and runs afoul of the U.S. Constitution’s protections against multiple taxation. In response, the Multistate Tax Commission’s (MTC’s) Shirley Sicilian notes that one of the goals of the Uniform Division of Income for Tax Purposes Act (UDITPA) is to avoid nowhere income. Though not currently included in UDITPA’s provisions, the throwout rule, she argues, is an appropriate response, similar to the throwback rule, to preventing nowhere income. She also says that the throwout rule is not facially unconstitutional.

UDITPA Review

For years, tax professionals have lamented the difficulties of applying mid-century UDITPA apportionment rules in this new millennium business environment. In response to these compiling difficulties, a number of states have begun to consider significant adjustments to their adopted version of the model UDITPA. The MTC initiated a project to consider amendments to the Multistate Tax Compact and recommended to the Uniform Law Commission that it initiate a project to review its model UDITPA. Several aspects of these projects have been very controversial, including the question of whether there should be a project at all.

Presentation Objectives

During this 60-90 minute presentation, attendees will learn:
• Which jurisdictions employ a throwout rule or variation thereof
• How to identify some scenarios in which a throwout rule is likely to apply
• The details of the MTC’s use of the throwout rule in certain model statutes and regulations,
• Why throwout rules have been constitutionally challenged
• The latest developments in New Jersey regarding litigation and legislation addressing the throwout rule
• The impetus and status of the MTC’s and ULC’s initiatives to modernize model apportionment laws