Understanding the Throwback Rule
The “throwback rule” is a crucial statute that states can adopt to ensure that corporations pay taxes on 100% of their profits, effectively closing tax loopholes. In the realm of corporate income tax, every state must determine the portion of a company’s profits subject to taxation within its jurisdiction.
How Does the Throwback Rule Function?
In conventional state tax calculations, some income escapes taxation, termed as “nowhere income.” This traditional apportionment method has faced criticism for unfairness towards small enterprises based solely in one state. Such businesses end up shouldering a heavier tax burden on their profits compared to larger multi-state corporations.
Furthermore, critics argue that multi-state corporations with “nowhere income” are shifting their tax responsibilities onto state residents, ultimately reducing corporate income tax as a state revenue source. To address such issues, many states have implemented the throwback rule, which attributes non-taxable sales into other states back to the point of origin for tax purposes.
The throwback rule operates as a complement to the destination rule, ensuring that sales not taxable in certain states are redirected to the states where the transaction originated. This mechanism prevents companies from evading taxes by exploiting inconsistencies in tax jurisdictions.
An alternative to the throwback rule, formerly adopted by New Jersey and West Virginia, is the “throwout rule,” which excludes sales not attributed to any state. While both rules aim to streamline tax liabilities for corporations, the emphasis on fair and comprehensive corporate taxation remains a priority in state revenue policies.