Magazine article The CPA Journal

Investment Income of Multistate Corporations

Magazine article The CPA Journal

Investment Income of Multistate Corporations

Article excerpt

A corporation which conducts multistate operations is required to pay tax to each of the states in which it does business. The amount of tax due to each state is based on the income derived in that state. A formula approach is generally used to determine the amount of income which a multistate business earns in every state in which it operates. The formula is generally based on a ratio derived from property located is the state, the sales derived from the state, and the wages paid to employees located in the state.

Even though a corporation is subject to taxation in a particular state, the U.S. Supreme Court in its 1980 decision, Exxeon Corporation vs. Wisconsin Dept. of Revenue, in interpreting the due process clause and the commerce clause of the constitution, held that a state may not tax a nondomiciliary corporation on income derived from an activity totally unrelated to the activity which the corporation conducts within the state. This principal of segregating the activities of a husiness applies to all types of activities. What is required for such segregation of activities is that there be no connection between them. Activities which are connected are called "unitary." A state can tax all "unitary" activities conducted by a nondomiciliary business, even these conducted outside the state. An example of activities which might be considered not to be unitary would be a real estate rental operation and a manufacturing operation which does not utilize the real estate. Another example is an investment activity and a business activity where the investment assets and income derived therefrom are not used in the business.

After the U.S. Supreme Court's Exxon decision, the issue was revisited in 1982 by the U.S. Supreme Court in ASRRCO Inc. vs. Idaho and Container Corporation of America vs. California in 1983. The U.S. Supreme Court upheld its prior decision and based on the due process clause and the commerce clause, limited the states in their ability to tax income earned in other states, specifically dividend income received from affiliates that were not connected to the operations of the recipient.

Although the issue had been consistently decided in favor of the taxpayer, a number of states continued to tax income earned from outside their borders. The primary type of income which was taxed was investment income. New Jersey, Massachusetts, and Connecticut are examples of states which have maintained this approach. However, the New Jersey Courts in a number of cases held against the New Jersey Division of Taxation on this issue.


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