Posted tagged ‘apportionment’

Recent Developments Regarding the “Throw Out Rule” by the New Jersey Tax Court and the Multistate Tax Commission

February 20, 2017

By Adam Koelsch

Recently, in Elan Pharm. v. Division of Taxation, the Tax Court of New Jersey issued a non-binding opinion that further limits the Division of Taxation’s enforcement of the controversial “throw out rule.”

Sometimes, when a multi-state taxpayer apportions its income, that taxpayer will source a receipt to a state in which the receipt is not subject to tax, either because the state has chosen not to tax it or because the state is not able to do so. One reason that a receipt may not be taxable, and a reason at issue in Elan Pharm., is P.L. 86-272 — a federal law that prohibits a state from taxing a business whose activities in that state are limited to the sale and/or the solicitation of sales of tangible personal property shipped from another state. This type of income sourcing creates “nowhere income,” that is, income that is not taxed by any jurisdiction.

In order to combat this, some states have employed a tactic known as a “throw out rule.” Under the rule, non-taxed receipts are ignored in calculating the state’s share of total receipts by subtracting the non-tax receipts from the apportionment denominator. As the Tax Court noted, “[b]y throwing out receipts from the denominator, the sales fraction always increases, causing the apportionment formula and the taxpayer’s resultant CBT [Corporation Business Tax] liability to New Jersey to increase.” The New Jersey throw out rule (former N.J. Stat. Ann. § 54:10A-6[B]), which was repealed by legislation in late 2008, continues to be enforced by the Division for the tax periods between January 1, 2002 and June 30, 2010.

Previously, in Whirlpool Properties, Inc. v. Director, Division of Taxation, 26 A.3d 446 (N.J. 2011), the New Jersey Supreme Court had held that, under the fair apportionment prong of the U.S. Supreme Court’s Complete Auto Transit test, application of the throw out rule to receipts sourced to states that simply choose not to impose a tax (as opposed to being unable constitutionally to impose a tax) is unconstitutional.

Recently, on February 7, 2017, the Multistate Tax Commission, in a staff comment regarding the operation of a proposed throw out rule in its Model Regulations, has suggested that the rule should apply only when a state cannot impose an income-based tax under the constitution or P.L. 86-272, and should not consider whether the state actually chooses to impose a tax.

In Elan Pharm., the taxpayer had filed income tax returns in six states, including New Jersey, for 2002. The taxpayer had received receipts from forty-four states in which it had claimed it was not taxable because the state lacked jurisdiction under P.L. 86-272. The taxpayer had property in thirty-nine states and payroll in forty-eight states. Nevertheless, the Division had included in the apportionment denominator only those receipts from the six states in which the taxpayer had filed, excluding the remainder of the receipts under the throw out rule.

The Tax Court, however, disagreed with the Division’s application of the rule. The Tax Court noted that several states in which the taxpayer conducted business (not just the six in which it had filed) had “throwback rules” — that is, a rule by which sales receipts are reassigned to the state from which goods are shipped when the purchaser’s state cannot impose an income or franchise under the constitution or P.L. 86-272. Thus, because certain receipts captured under the throwback rule could have been taxed by the shipping states, those receipts could not be excluded by application of the throw out rule by New Jersey.

In addition, the Court found that the presence of taxpayer’s property and/or payroll in many of the states from which excluded receipts had been sourced created sufficient nexus to render the receipts taxable in those states despite P.L. 86-272, and therefore could not be excluded using the throw out rule.

Despite its repeal, the throw out rule remains a subject of controversy which will continue to impact businesses operating in New Jersey. Indeed, understanding application of the rule is especially important to business entities that had never previously filed CBT returns in New Jersey — and therefore cannot benefit from the statute of limitations for the years that the rule was effective — because of their mistaken belief that their activities were insufficient to create nexus.

The New Jersey Tax Court opinion can be found here

2011 Year-End SALT Update

January 6, 2012

 by Jennifer Weidler

ARIZONA

Arizona DOR Finds Nexus for Sales Representatives Providing Customer Support and Training

Of course it had nexus: Arizona DOR rules that corporation has substantial nexus due to presence of sales representatives who provide customer support and training.

(more…)

Weekly SALT Update Nov. 7, 2011

November 7, 2011

 By Paul Masters with contributions by Jennifer Weidler in Chamberlain’s Philadelphia office.

State Regulations and Public Notices

California Board of Equalization issues a proposal to amend the definition of “retailers engaged in business in this state,” in conformance with AB 155. It will take effect either September 15, 2012 or January 2013. The effect of this change would be to expand the requirement for retailers to register with the Board and remit California use taxes, or to be subject to payment of these use taxes on such failure to remit.

Utah State Tax Commission notifies public of proposed rule change implementing three-factor formula for apportionment It also requires services to be “inUtah” if the benefit inUtah exceeds that received in any other state, and sets forth rules for the apportionment of income from intangible property.

Indiana Department of Revenue issues information bulletin on application of sales tax to restaurants, and a dealer must pay sales tax on the value of cars not used by sales staff, services to setup rented property are included as taxable as part of the rental receipts, cleaning agents do not qualify for manufacturing exemption, and no public transportation exemption for company that did not document sale of trucking services for hire – listed wrong on invoice. And in an expanded discussion, the DOR rules a manufacturer must pay use tax on HVAC equipment essential for manufacturing operations.

And then there were seven: Ohio revises its requirement for Ohio car dealers to collect Ohio sales tax on non-resident purchases of cars to be taken out of state, with collection required for seven states.

Colorado DOR revises FYI detailing responsibility of taxpayer to pay sales tax on vending machine receipts. Colorado DOR revises FYI 62 regarding rules on collecting local sales tax to be remitted to the state. (more…)

Weekly SALT News Update

October 18, 2011

State DOR Letters and Administrative Rulings

Illinois Office of Administrative Hearings respects the entity, and rules Department of Revenue cannot go after owner of corporation for use tax liability on vessel use in Illinois. Use tax is not a trust tax. It also rules that the foreign corporate owner of a vessel used in Illinois for 30 days/year has sufficient nexus to allow Illinois to impose use tax on value of vessel. Taxpayer allowed credit for tax paid outside the state. Correct tax base for assessment of use tax is the purchase price reduced by depreciation prior to first use in Illinois.

Virginia Tax Commissioner rules that a taxpayer cannot include a foreign corporation that did not have nexus with Virginia into its combined Virginia corporate income tax return. Further, the taxpayer failed to follow proper procedure to claim a valid business purpose to exclude factoring fees required to be added back. In another ruling, it finds that a corporate officer who had no responsibility for financial reporting matters was not personally liable for unpaid use tax pursuant to Va. Code § 58.1-1813. The occasional sale exemption applies for a school that engages in sales of surplus items once per year (or every other year). In fact, as long as no more than three such sales occur each year, the sales are exempt. A manufacturer who leases a vending machine used to dispense exempt safety equipment used in the manufacturing process are subject to sales tax. The dispensing of exempt safety equipment is not an exempt activity, and the activity is not used directly in the manufacturing process.

 

State Regulations and Public Notices

The California Franchise Tax Board issues Cal. Admin. Code tit. 18, § 25128.5 that clarifies the single sales factor filing election now available to multistate taxpayers that must apportion their business income derived from sources in California. It applies to tax years beginning on or after January 1, 2011. It issues a 15-day notice for comment for proposed § 25136 relating to sales of other than tangible personal property. It arguably broadens the scope, but is offered as an attempt to capture the original intent of the original regulation. It further defines the meaning of “mixed intangible,” looks to the location of the benefit of the service for approximating sales.

Indiana Department of Revenue revises Directive No. 5 as to the proper tax treatment for income paid to entertainers in the state. It classifies the treatment based on (i) employees of a promoter, (ii) independent contractors, and (iii) employees of a production company. It also revised Information Bulletin No. 88 regarding the tax treatment of non-resident professional athletes playing in Indiana. It revises Information Bulletin No. 39 to reflect the new single-factor sales apportionment for non-resident individuals. And Information Bulletin No. 11 for sales tax is revised to further lay out the proper taxation of purchases (and exemption for consumables), as well as clarifying when an exemption certificate for the purchase of food from a restaurant is proper.

Utah State Tax Commission issues rule effective October 1, 2011 regarding proper allocation of gross receipts attributable to Utah. If the corporation does not have an office in Utah from which the sales are negotiated or effected, then the receipts allocable to Utah are (i) those resulting from performance of services with greater benefit in Utah than any other state, and (ii) sale of goods for delivery in state regardless of title terms. Utah State Tax Commission has promulgated final rule 884-24P-033 that modifies guidance on the assessment of personal property tax for business property and motor vehicles.

Wisconsin Department of Revenue revised Tax Publication 207, which provide guidance for contractors as to the payment of sales tax. Notable changes are relating to equipment being provided by an operator, and conformity with Chula Vista case.

Ohio Department of Revenue has began a push to let the public know about a new use tax amnesty program that began in October. This is a key opportunity for businesses to come into compliance in connection with use tax in Ohio.

New York State Department of Taxation and Finance releases a summary of 2011 legislative changes to the sales tax.

 

State Legislative Affairs

California modifies existing law to require not only the reimbursement of sales tax paid by a manufacturer to replace a vehicle under the state’s “Lemon Law,” but to also reimburse any payment of use tax by the manufacturer. AB 1069 has extended the California film tax credit, an amount based on a percentage of expenditures for the production of a qualified motion picture in California, or, where the qualified motion picture has relocated to California or is an independent film, to July 1, 2015. AB 291 extended the additional $0.006 per gallon tax for storage of petroleum in underground tanks through January 1, 2014.

Tennessee’s governor announced an agreement with Amazon to bring in more jobs and $350 million in capital investment as Amazon agrees to begin collecting Tennessee sales tax effective January 1, 2014 unless a national “solution” first arises. The Legislature would have to approve the agreement, with a bill to be introduced in January.

Reps. Womack (R) and Speier (D) announced that they are cosponsoring Amazon legislation in the U.S. House. It would empower states to require online retailers to collect sales and use tax even if the retailer lacks a physical presence. The bill will be known as the Marketplace Equity Act.

 

Judicial and Administrative Decisions

New Jersey Superior Court Appellate Division affirms the decision of the Tax Court, published at 25 N.J. Tax 398 (Tax 2010), granting the Director,

Division of Taxation, summary judgment dismissing the Estate’s complaint with prejudice and denying an inheritance tax refund.  The court rules that the three-year limitation on requesting inheritance tax overpayment refunds, set by N.J.S.A. 54:35-10, is enforceable; and the Square Corners Doctrine does not apply to the facts of this case so as to preclude application of N.J.S.A. 54:35-10.

The Kentucky Court of Appeals, in Department of Revenue v. St. Joseph Health Sys., Inc., et al, reversed a decision in which the lower court found that a gas broker was not a utility, and thus not subject to the utility gross receipts tax. KRS 160.613(1). The hospital had argued as an exempt entity it was not subject to the tax. This was a matter of statutory interpretation by the court, and the court undertook the review to interpret the statute “liberally.” Bob Hook Chevrolet Isuzu, Inc. v. Commonwealth Transportation Cabinet, 983 S.W.2d 488, 490 (Ky. 1998).  (Note: Texas narrowly construes tax statutes against the taxing authority – so quite possibly a different result in Texas.) Because the statute did not state the tax is imposed on a “public utility,” but instead it is imposed on “utility services,” it found that the gas broker was liable.

A three-member panel of the Vermont Supreme Court (not precedential) holds that a comparable provided by taxpayer to dispute assessed value sufficient to rebut presumption of validity of tax appraisal. The government appraiser must provide some evidence to support valuation.

The Washington Board of Tax Appeals rules that a prescription provider whose customers were enrollees of Washington’s Uniform Medical Plan did not qualify for the lower business and occupation tax rate for persons engaged in warehousing and reselling drugs for human use. The BDA focused on the definition requiring drugs to be resold to hospitals and health care providers. UMP is in the insurance business, and insurance companies are not included.

Illinois Department of Revenue Office of Administrative Hearings rules that food given away is subject to use tax.

Michigan Tax Tribunal rules that estimated audit was flawed because of auditor went to purchases to determine sales, as opposed to relying on Z tapes. Auditor’s judgment of inherent unreliability of Z tapes is not sufficient to disregard those records. Taxpayer’s documented close supervision of all sales, understanding of how to transact sales in conformance with tax code by the employees, as well as reconciliation of Z tapes to cash and credit card receipts. Internal controls are sufficient to ensure tax is property collected and reported. Michigan Tax Tribunal rules that former shareholder who sold interest in corporation and continued as president and employee was not a responsible corporate officer under MCL 205.27a(5).

New York Supreme Court rules in New York Mills Redevelopment Co. LLC, et al. v. Town of Whitestown et al. that a taxpayer must have actual notice of withdrawal of exemption, and that upon such date of actual notice the statute of limitations beings to run.

Pennsylvania Commonwealth Court rules in Procter & Gamble Paper Products Co. v. Commw. that pallet used to transport and hold products constitutes exempt packaging for sales and use tax purposes. This is a tax opportunity across the various states.

Ford Motor Co. sues the Florida Department of Revenue to overturn a decision that mandates Ford to pay use tax on parts provided by Ford to complete warranty repairs by repair shops.

Washington Department of Revenue issues a decision regarding agents for growers, warehousing and separate business, and fruit bin rentals. A fruit packing house asserts that its fruit sorting and packing income is exempt from the service and other activities B&O tax, alleging that its income was compensation for the “receiving, washing, sorting, and packing” of fruit from a grower.  It also protests the warehousing B&O tax assessed on amounts derived from its storage of fruit claiming that this activity was not a separate business activity from its fruit sorting and packing business. Taxpayer also protests the deferred sales tax/use tax assessed on fruit bin rentals. While income from performing the fruit sorting and packing services would be exempt if performed for a grower, the customer was a packing house, so no exemption. As to the separate business issue, the DOR pointed to Yakima Fruit Growers Ass’n v. Henneford, 187 Wash. 252, 60 P.2d 62 (1936), which analyzed the separate business issue as to growers, and rejected the taxpayer’s argument. Regarding the argument that sales and use tax did not apply, the DOR pointed to a lack of documentation to prove up that sales tax had already been paid, or to show that the bins belonged to the customers and rejected the claim. In another released decision, the Washington Department of Revenue rules that a grocery store does not qualify for the lower B&O rate slaughter houses due to processing of meat products in the store delis. Finally, it lays out in another ruling the proper tax treatment for certain amusement and recreation sales, and how that fits into the resale exemption for purchased items necessary to provide those services, all in the context of the B&O tax. It is a detailed ruling, and instructive for bifurcating sales of TPP from services, and how the resale exemption fits into that box.

 

Other Documents

It was a flyer for a New York school hockey team that gave the New York State Department of Taxation and Finance the motivation to enact the controversial Amazon law based on affiliate contact. Robert Plattner, Commissioner, stated that an employee of the Department received a flyer from his son’s hockey team, and the flyer touted that the hockey team would receive 6 percent of all sales purchased through Amazon. That appeared to be more like a commission, the active solicitation of sales in New York by Amazon, and along the lines of Scripto as opposed to Quill. The rest is history. Thanks to Amy Hamilton for her report.

Weekly SALT News Update

August 29, 2011

Texas Supreme Court Rules “Pole Tax” Does Not Violate First Amendment

In a unanimous decision Texas Supreme Court rules stripper “pole tax” does not violate First Amendment. The decision reverses a 2-1 Third Court of Appeals decision, which had held the tax violated the First Amendment in upholding the trial court’s ruling. The decision remands the case to the trial court, where three arguments remain, all based on challenges to the tax under the Texas Constitution.

New Jersey Appeals Court Upholds Tax Court Finding No Unitary Nature of Limited Partnership

New Jersey Appellate Division holds limited partner of limited partnership was not subject to Corporation Business Tax because limited partner was not unitary with limited partnership and limited partner had no independent nexus with NJ. The decision upholds the lower court’s decision. The decision is discussed in greater detail at this blog post.

Missouri Denies Sale for Resale Exemption for Guest Houses

Worlds of Fun  (“WOF”) operated cabins and cottages that it rented to guests on a nightly basis. It claimed a sale for resale exemption on tangible personal property that it provided to the guests in the quarters, such as benches, beds and mattresses. The Administrative Hearing Commission denied the exemption on the basis that insufficient control was transferred to the guests. A similar case regarding toiletries is currently pending before the Texas Third Court of Appeals, for which the trial court denied the sale for resale exemption.

California Governor Asks Legislature for Mandatory Single-Factor Formula

The California governor asks the Legislature for a mandatory single-factor formula for state income tax based on sales in California. The hope is that such a change would incentivize business to maintain corporate headquarters in the state.

Pennsylvania Reissues Ruling on Computer “Help” Services

The Pennsylvania Department of Revenue has reissued SUT-6-014, which clarified those “help” services that are subject to sales tax. Where the taxpayer’s employees are not under the control of the customer, the services rendered are not taxable as a “help supply” service.  61 Pa. Code § 60.4.

Arizona Appeals Rules No Need to Exhaust Administrative Remedies

The Arizona Court of Appeals reversed a lower court decision, and ruled that a direct appeal to the tax court is permitted in connection with a tangible personal property valuation.

New Mexico Accepts CPA’s Negligence to Waive Penalty

A taxpayer who had not filed for the New Mexico gross receipts tax was granted a waiver from the payment of penalty based on the representation that such non-filing was the result of advice provided by a CPA.

Allcat Replies to Texas Attorney General in Challenge to Texas Franchise Tax

Allcat has filed its reply to the Texas Attorney General in connection with its challenge that the Texas Franchise Tax (also known as the “margin tax”) is unconstitutional. Allcat argued that limited discovery was appropriate at the Supreme Court level, that the Uniform Declaratory Judgment Act does apply, and requested more time to brief the case.

New York Rules Estimated Audit Proper with Partial Records

The New York Division of Tax Appeals has ruled that due to only partial records being provided in a protracted audit of a taxpayer, that it was appropriate to estimate the sales tax due.

Texas Supreme Court Requests Briefing of Sale for Resale Case 

The Texas Supreme Court has requested briefing in connection with a claim for the sale for resale exemption for prizes sold in “claw” machines.

New York Rules Not Able to Estimate Tax Refund

The New York Division of Tax Appeals has ruled that a taxpayer cannot use estimate to calculate refund or credit amount for sales and use tax.

Indiana Tax Court Rules for Miller Brewing on Apportionment

Miller Brewing avoids income tax on Indiana sales if third party picks up at plant. Court says irrelevant that tax avoided in all states as a result of decision.

Georgia Considers Tax Court

A Georgia legislative subcommittee considered the creation of a tax court on August 24, 2011.

Whirlpool Secures Partial Victory in New Jersey Supreme Court Case: “Throw-Out” Rule Unconstitutional When Applied to Sales in States without Income Tax

August 4, 2011

 By Paul Masters

The long-contested constitutional issue concerning the New Jersey throw-out rule has finally culminated in a New Jersey Supreme Court decision recognizing the general constitutionality of the rule, but for its application to sales receipts attributable to states that choose not to impose an income tax. But first, we summarize what this decision did not do. The decision did not address in any significant way the current challenges to nexus that the states confront. Rather, the decision reaffirmed existing federal law, 15 U.S.C.A. §§ 381-84 (commonly referred to as “P.L. 86-272”), and looked to well-grounded constitutional law by the United States Supreme Court. Cases regarding nexus continue to move forward, with KFC reaching an unfavorable decision at the Iowa Supreme Court, on petition for a writ of certiorari at the United States Supreme Court, and Texas also in that mix with the current Taco Bell litigation (examining whether Taco Bell has nexus with Texas by sending a third-party to inspect its Texas franchisees). However, the decision does push back against state attempts to expand its tax base, by placing a firm limit on expansion where a state is able to claim and tax revenue from another state because such state, such as Nevada, has elected not to impose an income tax on activities in which the constitutional nexus standard has been reached.

The throw-our rule that was challenged excluded certain income from the sales fraction’s denominator of the modified three-factor formula used by New Jersey, as provided for in New Jersey’s statutory scheme. N.J. Laws, L. 2002, c. 40, § 8.  The modified three-factor formula employed by this legislation weighed a taxpayer’s property, payroll and sales in the numerator, while the denominator was the taxpayer’s total taxed sales, as opposed to the general provision for taxpayers to use total sales. The non-taxed sales are thus “thrown out,” hence the name for the rule. The New Jersey legislature subsequently amended the statute to eliminate the throw-out rule, but only after the date of the operative facts in these cases. N.J. Laws, L. 2008, c. 120.

This decision is a partial affirmation of prior decisions by both the New Jersey Tax Court and the Appellate Division of the New Jersey Superior Court. In these prior decisions, both courts upheld the constitutionality of the throw-out rule. The courts looked to the constitutional standard provided in United States v. Salerno, 481 U.S. 739, 107 S. Ct. 2095, 95 L. Ed. 2d 697 (1987). Tax Court found three general circumstances where the throw-out rule operates constitutionally: (i) the income excluded from the denominator relates in whole or in part by activities in New Jersey, (ii) the application of the throw-out rule has no material effect on the sales fraction because the income in the non-taxing state is insignificant to the total income of the taxpayer, and (iii) the property and payroll fractions significantly temper the impact of the disputed sales fraction.

The Appellate Division agreed with the application of the Salerno standard, pointed to the lack of any case law in which an allocation formula was struck down as facially unconstitutional, and observed that it is unlikely that any person can actually demonstrate that “a given formula will yield allocations for most out-of-state taxpayers that are unconstitutionally disproportionate.” Because Whirlpool did not contest that it had nexus with New Jersey, and that sales to non-taxing states were not part of that business, the Appellate Division concluded the constitutional conditions were satisfied for application of the throw-out rule by New Jersey. The Appellate Division summarized that the throw-out rule does not result in double taxation, does not pressure taxpayers to increase their business activities in New Jersey at the expense of other states, and is thus facially constitutional.

The Supreme Court disagreed, in part. In doing so, the focus turned to four-prong approach used in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S. Ct. 1076, 1079, 51 L. Ed. 2d 326, 331 (1977). This four-prong approach will sustain a state’s formula apportionment methodology for income tax when the tax: (i) is applied to an activity with a substantial nexus with the taxing state, (ii) is fairly apportioned, (iii) does not discriminate against interstate commerce, and (iv) is fairly related to the services provided by the state. Complete Auto, 430 U.S. at 279, 97 S. Ct. at 1079, 51 L. Ed. 2d at 331. The Whirlpool court focused on the second prong: fair apportionment.

Fair apportionment has two requirements: (i) internal consistency and (ii) external consistency. Internal consistency is where an application of the formula by every state would result in no more than all the taxpayer’s business income being taxed. Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 169, 103 S. Ct. 2933, 2942, 77 L. Ed. 2d 545, 556 (1983).  It is a hypothetical analysis of what the world would be like if every state had New Jersey’s throw-out rule. The second requirement is an actual analysis of whether the state’s reach goes beyond that portion of revenue that is fairly attributable to economic activity within the taxing state. Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 185, 115 S. Ct. 1331, 1338, 131 L. Ed. 2d 261, 271-72 (1995). In other words, whether New Jersey’s throw-out rule reasonably reflects the activity within its jurisdiction.

Whirlpool argued that by including out-of-state receipts in New Jersey’s tax base, New Jersey taxed more than its “fair share.” The New Jersey Supreme Court divided these receipts into two parts: (i) receipts from states that could not impose an income tax due the lack of nexus in that state, and (ii) receipts from states that chose not to impose an income tax. As to the first, the Court ruled that the throw-out rule was constitutional, but as to the latter, the answer is “no.”

The reasoning as to the former is that another state’s decision tax, or not tax, its income would cause a change in New Jersey’s share of the income it is entitled to tax. Thus it is not externally consistent. The change is not reflected on the taxpayer’s activities (the economic activity in within the taxing state), but merely a reflection of another state’s legislature to impose tax. But as to the second, regardless of the other state’s choice regarding income tax, the amount that New Jersey would be able to tax via the throw-out rule remains the same. The only way the result would change is if the taxpayer alters its contacts with the other state.

Alabama Enacts Changes to Apportionment Provision Following Multistate Tax Compact, Including Throwout Rule

June 14, 2011

 By Paul Masters

Alabama House Bill 434, signed by Governor Robert Bentley, enacts three significant changes to Alabama’s apportionment provisions for tax years beginning on or after December 31, 2010:

* Double weight the sales factor for determining apportionment to 50%;

* Change from focusing on the location of income production for apportionment purposes to the taxpayer’s market for the sale for transactions other than tangible personal property; and

* Adoption of a “throwout” rule (similar to that recently rejected by New Jersey), by which a transaction that cannot be assigned to a particular state is removed from the denominator (thereby increasing the factor for apportionment to Alabama).

As to the change to the sales factor apportionment, this change reflects changes being considered by the Multistate Tax Compact. As of December 31, 2010, Alabama now apportions based on the following factors: (i) 25% for property, (ii) 25% for payroll, and 50% for sales.

Regarding the sourcing of sales, the prior version of the rule was more similar to that of Texas, in which one looks to source sales to where the income-producing activity takes place. Tex. Admin. Code § 3.591(e)(26). Alabama now sources services based on the taxpayer’s market for the sale, thus receipts from services are apportioned to Alabama if the service is delivered to Alabama, as adjusted for delivery to multiple locations. Similarly, where a person licenses intangible property for use in Alabama, such transaction would be Alabama-sourced. If the state cannot be fairly determined using the market-source rules, the taxpayer must reasonably approximate such sourcing.

Finally, if a taxpayer is unable to assign receipts based on the market-source rules, and they cannot be reasonably approximated, Alabama employs the so-called “throwout rule” by which the receipts are excluded from the denominator if the state of assignment cannot be determined or reasonably approximated. This was a controversial rule and challenged in New Jersey, as by artificially reducing the denominator it leaves the numerator unchanged, and the Alabama sales factor increases. One would expect for taxpayers to challenge the Alabama throwout rule based on the U.S. Constitution’s Commerce Clause, the Due Process Clause, the Supremacy Clause and the Equal Protection Clause. The New Jersey throwout rule has been challenged, for which New Jersey Supreme Court recently heard oral argument, with the lower courts in the cases of Whirlpool Properties, Inc. and Pfizer, Inc., in which the throwout rule was found to be constitutional.