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Principles for Sourcing of Multijurisdictional Income or "Slicing Shadow" |
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| The article was authored by Benjamin F. Miller and is 32 pages in length. It was originally published in the State and Local Tax Lawyer 2008 Symposium Edition. |
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The articles and essays included in this Edition offer an overview of the group reporting schemes in use across the country and examine the economic origins and the evolution of the unitary business principle that underlies combined reporting. They explore the policy considerations that states assess in choosing whether to adopt combined reporting and the conflicting policy goals of different jurisdictions. Additionally, they examine single vs. aggregate taxpayer theory, analyze procedural issues raised by combined reporting, explore the ultimate (but apparently unreachable) goal of uniformity, and, finally, weigh all the pros and cons of combined reporting. The day-long program from which these pieces are adapted was held at Georgetown University Law Center on May 14th, 2008.
For information on the State and Local Tax Lawyer 2008 Symposium Edition, click here.
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Initially, for state tax purposes it should be noted sourcing questions only arise when you have a taxpayer who is doing business in more than one jurisdiction, or perhaps more correctly, when it does not restrict its taxable activities to a single jurisdiction. When a corporate taxpayer has taxable activities in a single jurisdiction, the rule is to fall back on the residency principle; a resident is taxable by the state of residency on all of its income. Consequently, this Article will deal generally only with the sourcing issues for corporate taxpayers operating, having taxable nexus, in several jurisdictions.
In Container Corp. of America v. Franchise Tax Board, Justice Brennan described the problem of sourcing, or allocating, income geographically as "bearing some resemblance . . . to slicing a shadow." There are two basic methods for "sourcing" income. One is what is commonly referred to as separate, or geographic, accounting. The other is formulary apportionment. As between the two methods, the United States Supreme Court has said, "Both geographical accounting and formula apportionment are imperfect proxies for an ideal which is not only difficult to achieve in practice, but also difficult to describe in theory."
In this Article I will suggest various criteria that might be considered in establishing states' sourcing mechanisms and the legal constraints placed upon the states, and then evaluate the different mechanisms. Because the Symposium is directed to the use of combined reporting, I will discuss the relationship of combined reporting to sourcing determinations in light of the complexities of the modern corporate enterprise. In addition, I will offer some possible insights based upon the discussions the European Union (EU) is having on the possible adoption of a formulary approach.
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