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1 Jared Walczak, Throwback and Throwout Rules: A Primer 1 (2019)

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Throwback and Throwout Rules:

A Primer

Jared Walczak
Senior Policy Analyst

Key Findings

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When corporate income is apportioned among states for tax purposes, it is
possible for some income to be earned in states which lack jurisdiction to tax
the corporation, generating what is known as nowhere income that is not
taxed by any state.

Throwback and throwout rules are designed to allow states from which sales
originate to tax the income from those sales in cases when the destination
state, which would normally do so, lacks jurisdiction to levy tax on a given
company (most commonly due to threshold requirements imposed by federal
law), producing this nowhere income.

Twenty-two states and the District of Columbia impose throwout rules, under
which sales of tangible property which are untaxable in the destination state
are thrown back into the numerator of the origin state's sales factor.

Three states impose throwout rules for sales of tangible property, under
which nowhere income is subtracted from the denominator, while 22 states
have adopted throwout rules for sales of intangible property.

Unitary combined reporting, where a state treats all affiliated companies
as part of a single group for tax purposes, adds complexity in throwback,
and combined reporting states must adopt rules which determine whether
they can capture nowhere income associated with a particular company if
another member of its unitary group is taxable in the destination state.

In some combinations, these combined reporting rules-known as Joyce and
Finnigan rules-can yield double taxation, while in others they can leave some
income still untaxed.

Throwback rules can yield exceedingly high and often uncompetitive levels
of taxation for some businesses, to the point that the outmigration they
generate can more than offset any revenue gains from taxing nowhere

No. 662
July 2019

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