State and Local Tax



State and Local Tax

Introduction

The tax is a compulsory levy made by an administrative authority (State, local authorities, provinces, regions and departments, districts, countries, municipalities etc.) resource for people living on its territory or with interests to be allocated to public utility services. Generally constituting a significant portion of revenue with payroll, taxes fuel the state budget or state or federal subdivision (a province, a region, a territory, department, district, etc.) and to a lesser degree of competence in specialized agencies. Historically, the tax is an important element in U.S. history and evolution of their shapes: the modern state has the monopoly on the collection of taxes.

Discussion

In 1957, UDITPA was passed in an effort to promote conformity among states and their income tax reporting structures. Originally, the drafters of UDITPA proposed a three-factor apportionment method for most businesses. This method involved those factors of economic activity essential to most companies in that day and age- property, payroll, and sales. These particular factors were meant to establish a reasonable reflection of where a company was operating based on capital investment, costs of production, and revenues. Several cases have determined these measures to be appropriate and confirmed their fairness in properly estimating the taxable income attributable to a given state (Helms & Christian, 2011).

However, the economy of today and its associated business models are more complex than those that existed in 1957 when UDITPA was passed. For example, in 2010, the service sector represents a far greater percentage of the Gross Domestic Product when compared to 1957. The sector including manufacturing decreased from 39.8% to 24.9% from 1947 to 1987, while the sector that includes services, excluding distributive services, increased from 24.7% to 42% over the same time period (Pogue, et.al, 1992). As well, there is a current explosion of electronic services, use of revenue-generating intangible assets, and ecommerce in today's markets- items not prevalent or even imagined at the time UDITPA was drafted. Finally, the segregation of activities into various forms of entities for legitimate business and legal reasons has added to the complexity of our current economy (Helms & Christian, 2011).

Recognizing the economy is ever-changing, the U.S. Supreme Court in Container" acknowledged the unitary concept and gave states broad discretion in creating formulas to apportion activities. In Allied-Signal, Inc. v. Director, Div. of Taxation, (TM) the Court recognized the flexibility of the unitary concept in adapting to different economic activities and models (Friedman, et.al, 1987). Many states have utilized their discretion and the flexibility of the unitary concept by passing legislation that adjusts their apportionment approaches to give greater weight to the sales factor, eliminate the property and payroll factors altogether, and even implement throwback/throw out provisions in order to capture sales not being taxed in other jurisdictions (Pogue, et.al, 1992).

However, there remains the conflict between the state courts as to when UDITPA should be applied. Several court cases have held that these relief provisions should only be utilized in unusual and limited circumstances and any other application ...