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Repeal of “Throwback Rule” Would Open Corporate Tax Loophole

Issue Brief
January 30, 2018

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:

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.