Let's imagine I invited 12 people over for dinner. For this particular dinner, each plate is filled and sat on the table before the guests arrive. As time goes by, all of the guests show up except for dinner guests #1 through #3. After about 20 minutes, dinner guest #4 asks if he can eat the food sitting on dinner guest #1's plate.
Another 20 minutes goes by and dinner guest #4 asks if he can eat the food sitting on dinner guest #2's plate.
Another 20 minutes goes by and dinner guest #4 asks if he can eat the food sitting on dinner guest #3's plate.
The above scenario is similar to what happens when a state has a throwback rule and another state doesn't tax the company. Dinner guest #4 represents the state with the throwback rule. Dinner guests #1 through #3 represent states that don't tax the company. As a result, the state with the throwback rule wants what is left or what isn't taxed by the other states, regardless of the fact that the food (or sales) was not meant for dinner guest #4.
The Council on State Taxation (COST) recently commented on a bill in Indiana that would repeal the state's throwback rule. COST has a formal policy statement on throwback rule provisions that asserts throwback laws seek to require companies to pay tax in one state on income that another state has chosen not to tax or is legally unable to tax. According to COST, a company's tax liability in one state should not be measured by its tax in another state. Throwback rules discourage investment in a state. Consequently, such rules must not be adopted and be repealed.
I agree with COST's position. A company's liability in one state should be measured by the company's activity in that state. A state should not be able to tax a company on activity that does not occur in that state simply because the other state chooses to not tax the company or doesn't have the legal authority to tax the company.
As COST's policy statement mentions, repealing throwback laws will remove the constant discrepancies and arguments related to determining when a taxpayer is 'taxable in another state.' Throwback laws generally allow a taxpayer to not throwback sales as long as the taxpayer can prove that it is 'taxable in the other state.' Unfortunately, states have different thresholds and definitions for what it means to be 'taxable in another state' causing unnecessary confusion and controversy.
What do you think? Should dinner guest #4 get to eat other guests' food?