Today I want to talk about how sales income from product shipped out of state can be taxed by the state from which the product was shipped. People in the trade call this the throwback rule.
An example of the throwback rule is supplied from a recent tax dispute involving a company that manufactures large bins/boxes in Indiana and sells its product nationwide. I will simplify the facts for illustration.
The company sold its products nationwide, including to Georgia, shipping from its Indiana plant. Indiana has a single sales apportionment formula meaning that Indiana taxes the company’s net income based upon the share of the net income that was earned from the company’s Indiana customers. Indiana under that rule would not tax sales income made to the company’s Georgia customers.
However, Indiana, like many states, also would tax the earnings of the company from its Georgia customers if the company shipped the large bins/boxes from Indiana to Georgia customers and the company is not taxable in Georgia.
What does it mean that the company is not taxable in Georgia? It means that Georgia can’t tax the company’s Georgia sales income because federal law won’t let Georgia tax the income.
In our story, the company did not source its Georgia sales income to Indiana under the throwback rule. Indiana audited the company. The company had the burden to prove it was taxable in Georgia. Indiana concluded that the company had not met its burden of proof: “In this instance, Taxpayer only provided expense reports of employees, to show that it is taxable … (in Georgia) … Taxpayer did not provide any tax returns or registration to do business in … (Georgia) … Furthermore …, … (the company stated) … that the only business conducted in the state is the ‘solicitation of sales.’ … This statement only reinforces … (Indiana’s) … position … Thus, Taxpayer did not meet its burden under IC § 6-8.1-5-1(c), and the Department must include the listed states’ sales in Indiana’s throwback sales calculation.”
The Indiana Department of State Revenue Letter of Findings is No. 02-20170298 (January 31, 2018) and can be found at: http://www.in.gov/legislative/iac/20180131-IR-045180030NRA.xml.pdf
Comment. This throwback rule is designed to tax “nowhere income”: income earned by the company in a state that can’t tax it because of federal law. To avoid the throwback rule, the company in this case had to prove that its sales people did more than ask the Georgia customers for the sale. They had to go beyond asking such as getting signed purchase orders from customers or doing something unrelated like repairing the bins/boxes.
As a practical matter, providing Georgia tax returns or registering in Georgia to do business should do the trick.
By John McCauley: I help people buy and sell businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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