Sales"throwback rules" are becoming a thorn in the side of large companies operating in the United States.

Most US states have corporate income taxes, but since large companies typically operate across state lines, the state has to figure out how much of the company’s income was earned in the state as opposed to outside before applying its tax. State tax departments are outmanned when it comes to sorting through accounts of large multinational corporations. Therefore, states usually treat a large corporation and its many subsidiaries as a “unitary” business and apportion some share of the entire group’s income to the state based on a weighted percentage of the overall sales, property and payroll of the group that are in the state.

Follett Corporation is a book publisher in Illinois that sells textbooks and other educational materials to schools. Many of its sales are by affiliated companies in other states. These affiliates pay sales taxes to the other states on their book sales in those states. However, Illinois has a “throwback rule” that treats the sales as occurring in Illinois for purposes of apportioning income if the books were shipped from a warehouse or factory in Illinois by a “person [who] is not taxable in the state of the purchaser.”

Follett argued that since its affiliates paid sales taxes to the other states, the sales could not be Illinois sales. However, an Illinois appeals court disagreed in December. The court refused to read the word “person” in the statute to mean the Follett group as a whole.

Companies would be wise to focus on how out-of-state sales are structured to avoid tripping throwback rules. The case is Follett Corporation v. Illinois Department of Revenue.

Keith Martin