Understanding the Impact of Throwback and Throwout Rules on Corporate Tax Liability
In the intricate world of state taxation, two terms are increasingly shaping the financial landscapes for corporations: throwback rules and throwout rules. These tax policies, though not widely known outside of tax circles, carry significant weight in determining a company’s tax liability.
Throwback rules are particularly impactful, as they can lead to a substantial increase in a corporation’s tax burden. Originally conceived to recoup lost corporate income tax revenue due to the Interstate Income Act of 1959, or Public Law 86-272, these rules can inadvertently stifle economic efficiency and deter new corporate investments. The law itself was intended to limit states’ ability to tax businesses based on their physical presence, or nexus, within a state.
Corporate income is typically apportioned based on a combination of property, payroll, and sales within a state’s borders. However, throwback rules allow states to tax income from sales in other states where the selling company lacks a tax nexus. This means that “nowhere income”—income from sales that cannot be taxed by the state where the sale occurs—is “thrown back” to the originating state and included in the sales factor used to calculate tax liability.
Maine’s throwout rule takes a different approach by excluding such nowhere income from the denominator of the apportionment fraction, similarly increasing a firm’s corporate tax liability. This rule, along with those in 27 other states and the District of Columbia that require firms to throw out sales of intangible personal property, exemplifies how these policies can distort economic decision-making and discourage in-state investment.
The consequences of these rules are far-reaching. They not only raise a firm’s tax liability but also erode state competitiveness. Companies may choose to relocate to avoid these higher taxes, leading to a decrease in tax revenue over time as business activities diminish within states enforcing these rules. Eliminating throwback and throwout provisions could pave the way for more equitable and growth-oriented tax policies.
As states continue to grapple with the balance between revenue generation and economic growth, the debate over throwback and throwout rules remains a critical topic for businesses and policymakers alike. With tax policy intricacies affecting investment decisions, staying informed is crucial for navigating the evolving landscape of corporate taxation.
