Corporate Close-Up: Some Taxpayers Send Income on Road to Nowhere

“Taking that ride to nowhere…We’ll take the ride,” say the lyrics to the former Talking Heads hit song. This sentiment is shared by corporations making sales in more than one state. This is because in some circumstances these corporations are able to reap “nowhere income,” which occurs when the corporation makes sales or shipments of tangible personal property to a destination state in which the receipts are not subject to tax.  

To prevent “nowhere income,” some states have enacted a throwback rule, which requires in-state corporations to include such out-of-state sales in the numerator of their receipts factor.  To compute the numerator of the receipts factor, taxpayers usually assign receipts from the sale of tangible personal property to the destination state. However, under a throwback rule, such receipts are assigned to the state from which the goods were shipped if the taxpayer is not taxable in the destination state.

Twenty-two states indicated that they have a throwback rule in Bloomberg BNA’s 2016 Survey of State Tax Departments.  One gray area of the states’ application of their throwback rules involves the question of which jurisdiction’s nexus laws the throwback state uses for determining whether sale is taxable in the other state. Twelve states indicated on the survey that they apply the home state’s nexus laws and seven states said they apply the destination state’s laws instead.

Also, a corporation may be required to show that it filed a return and paid tax to prove that it is taxable in the destination state. Fourteen states indicated that a corporation must file a return and pay tax in the destination state in order to prevent application of a throwback rule.

The good news for corporations making sales into more than one state is that some states do not have a throwback rule. This means that they may be able to structure their activities in a manner that would result in less than 100 percent of their income being subjected to tax.

Continue the discussion on LinkedIn: What are some of the other gray areas involving throwback rules?

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