What is the Throwback Rule?
A “throwback rule” is a statute that states can adopt and use to ensure that corporations pay their state taxes on 100% of their profits. Each state that imposes a corporate income tax must determine how much it can tax the company’s profits if each company is doing business within its borders.
The traditional state division calculation calculates state corporate taxes based on a formula that considers where the corporation’s assets, payroll, and sales are located. The result of these formulas is “nowhere income,” or income on which a corporation does not pay tax in any state. The throwback rule is meant to eliminate this tax loophole and cut down on corporate tax avoidance.
How the Throwback Rule Works
Under traditional taxation formulas used by states, some income is left non-taxable as “income anywhere.” Critics see such traditional division formulas as unfair to small businesses whose profits are 100% taxable because all of their business activities are located in the same state. These businesses pay taxes on a higher percentage of their profits than some multi-state corporations.
Critics also think that multi-state corporations with “nowhere income” are burdening the state’s residents by not paying their fair share of public services and resulting in “nowhere income” as a source of state revenue. There has been a significant fall in corporate income tax. “Escape route.
The best state remedy to the income problem anywhere is implementing a so-called “throwback rule,” which mandates sales in other states or the federal government that are not taxable, “throwback” to the original state for the tax. will be given” purpose. In other words, the throwback rule is a backup for the destination rule: when the destination rule grants a sale to a state that cannot tax that sale, the sale is handed back to the state that is the source of the sale. .
An alternative to the throwback rule is the “throwout rule” currently used by New Jersey and West Virginia. Rather than seeking to hand over all sales to the states in which the company operates, the throwout rule excludes any sales assigned to any state from the overall sales.