State
Income Tax
State
income tax is levied in addition to federal
income tax, except in certain cases noted below
in which all or part of federal income tax paid
is allowed to be set off against state income
tax. See Forms of
Company for details of structures (LLCs,
'S' Corporations etc) that allow a 'pass-through'
tax situation, in which federal income tax (and
therefore, state income taxes) apply to the
owners of the organization rather than to the
organization itself. For most incorporated commercial
organizations (known as 'C' corporations) and
foreign companies, federal income taxes will
apply to income earned from business activity
in the US, and state income taxes will apply
in all of the states where a business has qualifying
activity.
Business
activity in a state will attract taxation there
if the organization concerned has 'nexus' in
that state. Nexus for income tax purposes is
normally established when a corporation derives
income from sources within the state, owns or
leases property there, employs personnel there
or has capital or property in the state. However,
the exact definition varies from state to state.
Congress
has however established some exemptions from
state taxation. Law 86-272 provides immunity
from state taxation if a business merely solicits
orders for the sales of tangible personal property
that are sent outside the state for approval
or rejection and, if approved, are filled and
shipped by the business from a point outside
the state. The law does not cover leases, rentals,
transfers of real property and the sale of services.
The statute does not define solicitation; therefore,
each state defines it differently.
Nexus
is usually not created by the following activities:
-
Advertising campaigns or sales activities
and incidental and minor advertising;
-
Carrying free samples only for display or
distribution;
-
Owning or furnishing automobiles to salespersons;
- Passing
inquires or complaints to the home office;
-
Maintaining a sample or display room for less
than 14 days; or
-
Soliciting sales by an in-state resident employee,
provided that the employee does not maintain
a place of business in the state, including
an office in the home.
The
situation regarding intellectual property is
confused. In some states the licensing of a
trademark is sufficient to establish nexus;
in others, not.
Some
states attempt (often unsuccessfully) to 'attribute'
nexus to an entity based on the activities of
related (eg subsidiary or affiliated) entities.
Nexus is attributed using the concept of agency,
the 'alter ego' theory, or the concept of unitary
taxation (most famously in California against
multinationals, where it failed).
State
taxation is relatively simple if a company is
doing business in just one state, but if a business
operates in multiple states, income will have
to be apportioned according to sometimes complex
formulae, and there is plentiful room for dispute.
The Uniform Division of Income for Tax Purposes
Act (UDITPA) was established to provide uniformity
among the states with respect to the taxation
of multistate corporations, and it has been
adopted, at least in part, by most states. UDITPA
provides that a business is considered to be
taxable in another state when:
- The
corporation is subject to the other state's
net income tax, franchise tax measured by
net income, franchise tax for the privilege
of doing business, or corporate stock tax;
or
-
The other state has jurisdiction to impose
a net income tax on the corporation, whether
or not the state actually does so.
Most
of the states that impose a corporate income
tax begin the computation of state taxable income
with taxable income as reflected on the federal
corporate income tax return (Form 1120). Those
states use either taxable income before the
net operating loss and special deductions (Line
28) or taxable income itself (Line 30). Those
states whose computation of state taxable income
is not coupled to the federal tax return could
adopt their own state-specified definitions
of gross and taxable income. Nevertheless, even
those states typically adopt the majority of
federal income and deduction provisions.
In
May, 2004, a poll conducted by Bloomberg’s Wealth
Management magazine, found that the state of
New York ranked 49th in a league table measuring
the tax burden in each state, with only Wisconsin
and “tax hell” Rhode Island producing worse
results.
By using an identical set of six tax parameters,
the survey found that the most wealth-friendly
state was Wyoming, where these parameters produced
a tax bill of $7,259. By comparison, the same
tax calculations resulted in a bill of $56,419
in Rhode Island.
A
analysis of state corporate income tax figures
produced in March, 2005, meanwhile, claimed
that America’s largest 250 corporations have
managed to reduce their state income tax contributions
to around one-third of the actual average state
corporate tax rate.
The
report, released by the liberal-leaning think
tank, Citizens for Tax Justice (in association
with the Institute on Taxation and Economic
Policy) was a follow-up to a September 2004
study of the federal income taxes paid by 275
Fortune 500 corporations, of which 252 disclosed
their state and local income tax payments.
According
to the CTJ study, by 2003, these 252 companies
had reduced their state income tax payments
to an average of 2.3% of their US profits, which
compares to an average statutory state corporate
tax rate of around 6.8%, resulting in a decline
in the total contribution of state corporate
income taxes to the economy of almost 40% since
1989.
The
study claimed that 71 of the 252 companies managed
to pay no state income tax at all in at least
one year from 2001 through 2003, while 25 of
the firms enjoyed multiple no-tax years. In
addition, 35 companies paid no state income
tax in 2003, and another 138 paid less than
half the statutory state corporate tax rate
in the same year.
At
a state corporate tax rate rate of 6.8%, the
CTJ calculated that the 252 corporations would
have paid $67.1 billion in state corporate income
taxes over the 2001-03 period on the $1 trillion
in U.S. profits that they reported. In reality,
the firms paid $25.4 billion in state income
taxes, the report stated.
Condemning
the findings, Robert S. McIntyre, director of
Citizens for Tax Justice and author of the study
observed that: “The data in our report show
in stark terms just how successful large corporations
have become at shirking their tax responsibilities
to state and local governments.”
He
went on to add that: “As a result, individual
taxpayers and purely in-state (usually smaller)
businesses are paying a heavy price, in the
form of higher taxes, reduced public services
and unfair competition.”
However,
Merrill
Lynch & Co. and Lexmark International Inc, two
firms reportedly singled out as major culprits
in the study, refuted the CTJ’s conclusions.
"The
study is absolutely incorrect as it relates
to Merrill Lynch," remarked company spokesman
Bill Halldin, dismissing the allegation that
the firm paid no state income tax from 2001
through 2003 despite reporting profits in those
periods.
"We
paid state and local taxes in each of the three
years referenced," stated Mr Halldin.
Meanwhile,
a Lexmark spokeswoman explained that the firm
had paid $15 million in state corporate income
taxes during the same period, in addition to
a number of other taxes such as state and local
property, payroll, insurance and sales tax.
"Lexmark
is committed to complying with all tax laws
in every jurisdiction around the world where
we do business," the spokeswoman stated.
In
March 2008, however, a new study from the Tax
Foundation, a nonpartisan tax research group
in Washington, suggested that most American
states tax companies at a higher rate than any
other country in the developed world.
"This
is startling news for America's businesses and
workers," commented Tax Foundation president
Scott Hodge, the study's author.
"Tax
competition for jobs and investment is fierce,
and the US continues to fall further and further
behind. Our states should be the world's leaders
in many things, but high taxation should not
be one of them. The high federal corporate tax
rate is literally crushing states' competitive
abilities. That means fewer jobs for American
workers," he added.
Counting
the federal rate alone, the US has the world's
highest corporate tax rate, but including average
sub-national rates (federal plus state in the
US), Japan, with a combined rate of 39.54%,
edges out the US for the highest-tax location.
This
new study broke the tax down state-by-state,
adding each state's corporate tax rate to the
federal corporate tax rate. The results showed
that: 24 states impose, when combined with the
federal rate, a higher business tax rate than
in any other nation; 32 states have a combined
corporate tax rate higher than third-ranked
Germany; 46 states have a combined corporate
tax rate higher than fourth-ranked Canada; and
all 50 states have a combined corporate tax
rate higher than fifth-ranked France.
"If
federal lawmakers are serious about making the
US corporate tax system more competitive globally,
they will have to partner with state officials
to lower the nation's overall corporate tax
burden," Hodge added.
"Likewise,
state officials should have a vested interest
in cutting the federal corporate tax rate because
there is only so much they can do to improve
their own competitiveness."
After
all, even corporations in the three states that
do not impose a major state-level corporate
tax — Nevada, South Dakota, and Wyoming
— still shoulder a higher corporate tax
rate than France, and 25 other major countries,
because of the 35% federal corporate rate,"
he observed.
The
state of Iowa topped the Tax Foundations's corporate
tax table with a combined rate of 41.6%. Pennsylvania
(41.5%), Minnesota (41.4%), Massachusetts (41.2%),
Alaska (41.1%) and New Jersey (41.1%) all have
a combined corporate tax rate of more than 41%.
California came in 11th with a combined rate
of 40.7%.
At
the other end of the table, Texas had the lowest
combined corporate tax rate at 36% (excluding
those states that do not impose their own corporate
tax), followed by Alabama (37.8%) and Colorado
(38%).
Over the past several years, a growing number
of states have sought to collect business activity
taxes from businesses in other states. The problem
is that different states use different standards
for determining what constitutes sufficient
contacts with a state to justify taxation.
There
have been various attempts to introduce legislation
to regularize the situation. In September, 2005,
a lobby group representing several major corporations,
including Citigroup and Nike, urged Congress
to pass a bill aimed at clarifying when companies
face corporate taxes for remote sales from other
states. Although the resulting bill, known as
'The Business Activity Tax Simplification Act,'
(BATSA), was introduced several times into the
Congress, by 2009 it had yet to reach the statute
book.
The
measure seeks to resolve the issue of states
seeking to collect business activity taxes from
businesses headquartered in other states by
setting out specific guidelines for when an
out-of-state business may be charged a tax for
doing business in a state.
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