Thomson Reuters Corporation : Top 10 Multistate Tax Issues Facing Companies
Ten significant multistate tax problem areas and how to handle them, from
the Tax & Accounting business of Thomson Reuters
NEW YORK, April 3, 2013 - When companies operate in multiple states, income
taxes in each of those states can have a significant impact on the bottom
line. Managing these ten common problem areas can minimize the business's
overall tax burden, and help its finance team prepare for issues that may come
up during an audit. These tips are from an article by Carl N. Richie, CPA, in
the latest issue of Thomson Reuters Journal of Multistate Taxationand
1. Property factor issues
Contrary to popular belief, the property factor often requires more
consideration than simply preparing a schedule, by location, of the company's
real and tangible personal property. Some states require the property factor
to be computed based on book value, fair value, or adjusted tax basis, while
others look to original cost.
2. Sourcing payroll
If an employee performs services in several states, an attempt is made to
divide compensation among the states where services are provided. This is a
significant issue when employees travel around the country regularly.
3. Sourcing revenue from services and intangibles
In the past, most states followed the cost-of-performance test for sourcing
sales of other than real and tangible personal property. Recently this has
changed, as states have found that sourcing revenue to the state in which the
taxpayer's customer is located, or where the benefit of a service is received,
may bring in more revenue from out-of-state companies.
In apportioning receipts from sales of tangible personal property, many states
employ the throwback rule, whereby sales are attributed to the taxing state if
the goods are shipped from the taxing state to a purchaser in another state
and the taxpayer is not taxable in that other state. In order to properly
source these sales, one must have a good understanding of where the taxpayer
5. Interstate Commerce Tax Act
Public Law 86-272 (the Interstate Commerce Tax Act) prohibits a state from
levying an income tax on taxpayers whose activity in the state is limited to
mere solicitation of sales of tangible personal property. This is an
often-misunderstood law, and can yield some traps for taxpayers.
6. Special industries' apportionment
For most businesses, taxable income is apportioned under the standard
three-factor formula, or in some states a single sales factor. Certain
industries, however, are subject to different apportionment formulas. The fact
that not all states use the same apportionment scheme for a particular
industry can be tricky.
7. Missing out on credits and incentives
When it comes time to prepare returns, it is often too late to take advantage
of credits and other incentives that may have been available in particular
states. Many opportunities are left on the table, often because the right
questions were not asked well before the returns were prepared.
8. Not carefully considering the state tax impact of major transactions
A major transaction, such as the sale of a subsidiary, can lead to problems if
state issues are not properly addressed. Often, federal income tax issues are
considered ad nauseam, with state income taxes being an afterthought. A
transaction may be structured favorably for federal income tax purposes, only
to result in a significant unexpected state income tax impact.
9. Filing separate vs. combined returns
For C corporations (and in some states, S corporations), a unitary group of
corporations may need to file a combined return. Many returns are filed on a
single-entity basis, without consideration of whether a state requires a
10. Appropriate treatment of entity partners
In many, but not all, states, a corporation that has an interest in a
pass-through entity must aggregate its apportionment factors with its
distributive share of the pass-through entity's factors. However, some states
require apportionment at the entity level. In other states, perhaps, only for
a pass-through entity with which a taxpayer has a unitary relationship may the
taxpayer aggregate the apportionment factors.
For more information on how Thomson Reuters can support 1099 reporting,
multistate corporate income tax planning and indirect tax challenges, visit
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