Issues Affecting State Taxation of Multijurisdictional Corporate Income

The manner in which States tax the income of multijurisdictional corporations has been a controversial subject for many years. Resulting primarily from a lack of uniformity among State income tax laws, the issues which have evolved entail large amounts of revenue, bear directly on the Federal-State relationship, and in recent years have grown in complexity, especially as they relate to foreign source income. There are also differences among the 35 States that tax all foreign dividends. The Uniform Division of Income for Tax Purposes Act, model legislation drafted 20 years ago, prescribed the allocation of nonbusiness income, specified an equally weighted three-factor income apportionment formula, defined the factors, and granted States considerable discretion to apply alternative rules when necessary. Since the model legislation was drafted, only 9 States have adopted all of the provisions, another 12 follow it to some extent, and the remaining 24 have disregarded it. Corporate officials have stated that lack of uniformity coupled with frequent regulation changes by the States has increased the cost of preparing State income tax returns. They have estimated that the cost is now 15 percent of their State income tax liability, and they believe the cost will continue to increase. Taxing jurisdictions are vulnerable when the separate accounting approach is followed, because it is extremely difficult to assure that income has not been transferred among jurisdictions to minimize the tax burden. From its study of these issues, GAO has detected a strong desire for greater uniformity on the part of both States and corporate taxpayers.