Question

Explain how the absence of a throwback rule favors firms located in a state with examples.

Answer 1

Answer:-

Throwback rule can be adopted by state to ensure that corporation pay state taxes on 100% of profits. In past state aportioned computation base state corporate taxes considering where a corporation's property, payroll and sales are located, which could have resulted in some revenue which is not taxed in any stat. The throwback rule is meant to eliminate this tax loophole.

lets take a case where firm A which has 100% of property , 100% of payroll and 40% of sales coming from that state. The firm end's paying only tax on 80% of income i.e. (100+100+40)/3 and 20% of income is not taxed in any state.

If throwback rule is there it will tax balance 20% of income in state where firm has it's facilities.