South-Western Federal Taxation, 2009 Edition
Comprehensive Volume
ISBN: 0324660529
Chapter 24
Multistate Corporate Taxation
Allocate. The assignment of income for various tax purposes. A multistate corporation’s nonbusiness income usually is allocated to the state where the nonbusiness assets are located; it is not apportioned with the rest of the entity’s income. The income and expense items of an estate or trust are allocated between income and corpus components. Specific items of income, expense, gain, loss, and credit can be allocated to specific partners, if a substantial economic nontax purpose for the allocation is established. Alternate valuation date. Property passing from a decedent by death may be valued for estate tax purposes as of the date of death or the alternate valuation date. The alternate valuation date is six months from the date of death or the date the property is disposed of by the estate, whichever comes first. To use the alternate valuation date, the executor or administrator of the estate must make an affirmative election. Election of the alternate valuation date is not available unless it decreases the amount of the gross estate and reduces the estate tax liability.
Apportion. The assignment of the business income of a multistate corporation to specific states for income taxation. Usually, the apportionment procedure accounts for the property, payroll, and sales activity levels of the various states, and a proportionate assignment of the entity’s total income is made, using a three-factor apportionment formula. These activities indicate the commercial domicile of the corporation, relative to that income. Some states exclude nonbusiness income from the apportionment procedure; they allocate nonbusiness income to the states where the nonbusiness assets are located.
Nexus. A multistate corporation’s taxable income can be apportioned to a specific state only if the entity has established a sufficient presence, or nexus, with that state. State law, which often follows the Uniform Division of Income for Tax Purposes Act (UDITPA), specifies various activities that lead to nexus in various states.
Payroll factor. The proportion of a multistate corporation’s total payroll that is traceable to a specific state. Used in determining the taxable income that is to be apportioned to that state.
Property factor. The proportion of a multistate corporation’s total property that is traceable to a specific state. Used in determining the taxable income that is to be apportioned to that state.
Public Law 86–272. A congressional limit on the ability of the state to force a multistate corporation to assign income to that state. Under P.L. 86–272, where orders for tangible personal property are both filled and delivered outside the state, the entity must establish more than the mere solicitation of such orders before any income can be apportioned to the state.
Sales factor. The proportion of a multistate corporation’s total sales that is traceable to a specific state. Used in determining the taxable income that is to be apportioned to that state.
Throwback rule. If there is no income tax in the state to which a sale otherwise would be apportioned, the sale essentially is exempt from state income tax, even though the seller is domiciled in a state that levies an income tax. Nonetheless, if the seller’s state has adopted a throwback rule, the sale is attributed to the seller’s state, and the transaction is subjected to a state-level tax.
UDITPA. The Uniform Division of Income for Tax Purposes Act has been adopted in some form by many of the states. The Act develops criteria by which the total taxable income of a multistate corporation can be assigned to specific states.
Unitary theory. Sales, property, and payroll of related corporations are combined for nexus and apportionment purposes, and the worldwide income of the unitary entity is apportioned to the state. Subsidiaries and other affiliated corporations found to be part of the corporation’s unitary business (because they are subject to overlapping ownership, operation, or management) are included in the apportionment procedure. This approach can be limited if a water’s edge election is in effect.
Water’s edge election. A limitation on the worldwide scope of the unitary theory. If a corporate water’s edge election is in effect, the state can consider only the activities that occur within the boundaries of the United States in the apportionment procedure.