Repeal of “Throwback Rule” Would Open Corporate Tax Loophole

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Repeal of “Throwback Rule” Would Open Corporate Tax Loophole

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By eliminating a law known as the “throwback rule,” a bill currently in the Oregon legislature would create a new corporate tax loophole. The throwback rule makes it harder for multi-state corporations to avoid paying taxes.

Repeal of “Throwback Rule” Would Open Corporate Tax Loophole

By eliminating a law known as the “throwback rule,” a bill currently in the Oregon legislature would create a new corporate tax loophole. The throwback rule makes it harder for multi-state corporations to avoid paying taxes. Today, corporations pay far less in Oregon taxes than they used to, in part due to aggressive tax avoidance strategies.[1] It would be a mistake for lawmakers to repeal the throwback rule, as Senate Bill 1527 in the 2018 legislative session proposes to do.[2]

Throwback rule solves the problem of “nowhere income”

A corporation that does business in more than one state must determine what portion of its profits are taxable in Oregon. Oregon, like a number of states, looks solely at the share of a multi-state corporation’s national sales sold in Oregon to determine the profits that are taxable.[3] For example, if 10 percent of a corporation’s sales take place in Oregon, then 10 percent of that corporation’s profits are subject to Oregon’s corporate income tax.

There is a caveat: simply selling tangible goods in a state does not alone subject a corporation to the state’s income tax. Under federal law, states can only tax corporations with sufficient “nexus” or connection to the state. This means that for a multi-state corporation’s profits to be subject to the Oregon corporate income tax, the company must conduct activities other than soliciting sales and distributing goods in Oregon, such as operating a warehouse, for instance.[4]

The nexus requirement gives rise to the problem of “nowhere” income. Nowhere income is income not apportioned to any state for tax purposes. This creates an opportunity for multi-state corporations to avoid paying a states’ income taxes.

The throwback rule, which Oregon and 23 other states have on their books, solves the problem of nowhere income going untaxed.[5] The throwback rule says that sales in a state where a company lacks sufficient nexus are apportioned to the state from which the sale originated.[6]

Throwback rule serves Oregon well and should be preserved

The throwback rule protects important interests for Oregon. Specifically, the rule:

    • Deters tax avoidance by multi-state corporations. Without the throwback rule, Oregon would open the door to increased corporate tax avoidance.[7] Consider an Oregon-based corporation that sells 50 percent of its goods in Oregon and 50 percent of its goods in California, but has no nexus in California and thus is not taxed by California. Without the throwback rule, this corporation would avoid paying taxes on half of its profits, yet would be taking full advantage of Oregon’s infrastructure and educated workforce. There are already enough tax loopholes in Oregon for multi-state corporations without Oregon creating another.

 

    • Helps level the playing field for Oregon-based corporations. Without the throwback rule, multi-state corporations have an opportunity to avoid paying taxes on some of their profits. By contrast, with or without the throwback rule, Oregon-based corporations that sell goods only in Oregon pay taxes on all of their profits, putting them at a disadvantage.

 

  • Raises revenue for schools and essential services. Oregon’s corporate income tax has been declining for decades, making it harder for the state to fund schools and other essential services. Eliminating Oregon’s throwback rule would only exacerbate this problem, reducing the amount of revenue that Oregon receives from multi-state corporations.

The throwback rule serves Oregon well. The Oregon legislature should leave it in place and reject SB 1527.


[1] Tyler Mac Innis and Juan Carlos Ordóñez, The Gaming and Decline of Oregon Corporate Taxes, June 29, 2016.

[2] SB 1527, 2018 session, section 11. The bill eliminates 12 words from Oregon Revised Statutes Chapter 314: “or the taxpayer is not taxable in the state of the purchaser”.

[3] This formula for taxing multi-state corporations based solely on in-state sales is known as “single sales factor apportionment,” a departure from the traditional way of taxing multi-state corporations. Before 1991, Oregon took into account three factors: a corporation’s in-state sales, its in-state payroll, and its in-state property. Multi-state corporations, however, persuaded the Oregon legislature to phase out the latter two factors. By 2008, the only factor that remained was the amount of sales within Oregon. That change dramatically shrunk the Oregon tax bill for corporations with a big payroll and property footprint in the state that mainly sell outside Oregon, corporations such as Nike and Intel. Tyler Mac Innis and Juan Carlos Ordóñez, The Gaming and Decline of Oregon Corporate Taxes, June 29, 2016, at p. 6.

[4] “Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272,” Multistate Tax Commission.

[5] John C. Healy and Michael S. Schadewald, 2018 Multistate Corporate Tax Guide, Vol. I, CCH, pp. 5377-5387. Three of the 23 states have a variant of the throwback rule in effect (the “throwout” rule) which has the same goal of eliminating nowhere income.

[6] Oregon Revised Statutes 314.665, section 2(b).

[7] Michael Mazerov, Closing Three Common Corporate Income Tax Loopholes Could Raise Additional Revenue for Many States, Center on Budget and Policy Priorities, May 23, 2003.

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OCPP

Written by staff at the Oregon Center for Public Policy.

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