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17 January 2007


Sarah Lawsky

Tom Rudibaugh--good point. Pub. L. 86-272 is probably one of the main reasons that having a 100% sales factor is such a boon to corporations (because, as you note, if a corp's only contact with a state is sales into that state, the state can't impose tax on the corp). Thus, pace the original post, a majority of states, including high-sales states, do heavily weight their sales factors (sometimes even providing 100% sales factors). Nonetheless, the original post is exactly right that planning that takes advantage of various states' methods of apportionment can be an important element in reducing a corporation's overall tax.

Note too that the Citizens for Tax Justice report isn't suggesting only that corporations are trying to avoid state-level tax by dishonesty. Rather, the report faults both the states and the corporations. Corporations reduce their state-level taxes in part by successfully lobbying states--lobbying for high sales factors in states in which they do a lot of business (high sales states) but don't have a physical presence, lobbying for laws like Pub. L. 86-272, and lobbying for any number of other special tax breaks.

Anyway, state corporation taxation (and state taxation in general) is a subject that certain deserves more academic study, both empirical and theoretical (though there is already some excellent work in the area, by Kirk Stark, among others).

Tom Rudibaugh

This issue is even broader. Many companies have moved their manufacturing operations offshore, and thus have converted their domestic businesses to distribution operations. These operations are then moved to non-taxing states such as Nevada, via distribution facilities. This dilutes the property apportionment factor since the phyiscal assets are now located in a non-taxing jurisdiction. The move offshore, and to Nevada respectively have potentially eliminated nexus in Alabama (California harder to due under unitary principles), so that there would be no tax paid to Alabama. Public Law 86-272 provides relief into Alabama if there are only sales into the state. The discussion is a good discussion that pushed for uniformity amoung the states. Probably will never happen.

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