Magazine article The CPA Journal

Throwout Is Alive and Well in Connecticut

Magazine article The CPA Journal

Throwout Is Alive and Well in Connecticut

Article excerpt

Virtually all states use a three-factor formula of property, payroll and receipts to determine the portion of a multistate corporation's income subject to tax in the state. The average of the percentages of the three factors is multiplied by the state's equivalent of taxable income to compute the amount subject to tax.

The principles used in determining the factors are not uniform. The most significant differences and the best tax planning opportunities are in the receipts factor. Many states, including New York and New Jersey, use the destination basis to define receipts from the sale of tangible personal property that are treated as earned within the state. As a result, sales of property delivered to states where the corporation is not subject to tax are not included in the receipts factor in any state.

California and the other states that follow the Uniform Division of Income for Tax Purposes Act (UDITPA) use a concept called recapture or throwback in the receipts factor. Under this concept, sales on a destination basic and sales of property delivered to states in which the corporation is not subject to tax are treated as in-state sales. Recapture or throwback can substantially increase the receipts factor.

THE THROWOUT CONCEPT

A third concept called "throwout" has been used by a few states to limit the benefits of the destination basis. Under throwout, sales of property delivered to states in which the corporation is not taxable are eliminated from the numerator and the denominator of the receipts factor.

These concepts are best illustrated by an example. Assume that 10% of a corporation's sales are delivered in its state of commercial domicile and that another 10% are delivered in a state where it is subject to tax because it has an office. The remainder are delivered to states where the corporation is not subject to tax.

In this example, the receipts factor in the home state on a destination basis is 10%. Under the recapture concept of UDITPA, the receipts factor is 90% because of the addition of sales delivered where the corporation is not taxable. Under throwout, however, the receipts factor is 50% because these sales are eliminated from both the numerator and the denominator.

The Pennsylvania Department of Revenue pioneered the use of throwout with the case of Hellertown Mfg. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.