A Addback Statutes – For state tax purposes, statutory provisions that require taxpayers to add back certain intercompany costs (e.g., interest and intangibles) that would otherwise be deductible for federal income tax purposes. Ad-valorem Tax – Tax levied on the assessed value of real or personal property determined to be taxable. Allocation– The tracing and attribution of an item of income (or loss), receipt, or property to a particular state(s); e.g., nonbusiness income of a multijurisdictional business is usually assigned to a particular state(s) for tax purposes. Apportionment – A mechanism for dividing a multistate corporation's tax base (e.g., income or gross receipts) among the states in which it does business. Apportionment assigns income to a state by way of a fraction representing the ratio of in-state factors to total factors, rather than separately tracing items of income (or loss) to the state where the income was generated. Appraised Value – The value of real or personal property at a particular point in time, as determined by a qualified individual based on the appropriate investigation of the market. Three approaches are to be addressed but may not pertain to every property: Sales, Income and Cost. Assessed Value – The dollar amount that a property is given when put on the assessment roll for tax purposes. Can be at full value (100%) or a percentage of full value. Attributional or Agency Nexus – When an out-of-state taxpayer has nexus with a state based on the activities an in-state non-employee or third party deemed to be acting on behalf of the out-of-state taxpayer. (Sometimes incorrectly referred to as “affiliate nexus.” The mere presence of an affiliate is not sufficient to create nexus absent additional activity performed in-state on behalf of the out-of-state related entity.) B Bundled Transaction – The retail sale of two or more goods or services, each of which is otherwise distinct and identifiable, which are sold for one non-itemized price. Business Income– Generally defined as (1) income arising from transactions and activities in the regular course of the taxpayer’s trade or business (transactional test), and/or (2) includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business (functional test). Recently, some states have asserted it is all income constitutionally subject to apportionment. C Canned Software – Prepackaged or “off-the-shelf” computer software, not customized for the purchaser. Centralization of Management – One of the factors relied on by the U.S. Supreme Court to determine if two or more entities are engaged in a unitary business. Generally, refers to the administrative and organizational coordination between two or more business entities; e.g., a single group of people controlling all the subsidiaries in a corporation. Check-The-Box – The federal “check-the-box” classification regulations provide a default rule for an eligible entity that does not elect its classification. An election is necessary only when an eligible entity chooses to be classified initially other than under the default rule, or when the entity chooses to change its classification. Combined Report – Some states mandate combined reporting of affiliates that are engaged in a unitary business. Combined reporting is a state income tax filing/apportionment methodology whereby a taxpayer’s state tax liability is determined by including the income and factors of the entire unitary business. Includible affiliated entities may be limited to domestic (US) affiliates (known as water’s-edge filing) or may include all affiliates, foreign and domestic (known as worldwide combined reporting). Commerce Clause – Clause in the U.S. Constitution, Art. I, Sec. 8, stating that Congress has exclusive authority to “regulate commerce with foreign nations, and among the several states, and with the Indian tribes.” The “dormant” or “negative” Commerce Clause is a legal doctrine which presumes that by affirmatively granting Congress the power to regulate commerce, the Commerce Clause contains an implied prohibition against a state improperly burdening or discriminating against interstate commerce. Consolidated Return – A state income tax filing methodology whereby a single tax return is filed on behalf of members of the consolidated group based on percentage of ownership. The filing of a consolidated return is usually based on federal consolidated return filings, may be limited to nexus entities, is generally elective, and, where elective, often does not require members of the consolidated group be engaged in a unitary business. Cost of Performance – Concept used to source sales of services and intangibles; income from the service is apportioned to the state where the income producing activity is performed, based on cost of performance. E.g., Company Y performs a service in State A for a customer who resides in State B. The income producing activity is performed in State A because that is where Company Y’s costs of performing the services are located. The income from the service will be assigned (sourced) to State A for apportionment purposes. Cost of performance can be assigned based on a plurality (100% to the state with greatest costs of performance) or proportional to the costs of performance in each state. Credit – A tax benefit that offsets tax liabilities. Generally, tax credits are more valuable than tax deductions because they reduce tax directly, rather than reducing taxable income. Oftentimes, state tax credits are provided to taxpayers as a means of encouraging economic development in a state. Custom Software – Computer software designed specially to meet the needs of a particular customer. D Destination Sourcing – Method of determining where sales or use tax is due based on the destination of the goods or services. Direct Pay Permit – A permit under which a business agrees to self-assess sales/use tax on all taxable goods and services it purchases, thus avoiding paying sales or use tax to its suppliers when taxable goods or services are purchased. Dividend-Received Deduction – A deduction granted to corporate shareholders for dividends received from corporations which they have an ownership interest. Dock Sale – A sale in which a purchaser picks up goods from the seller's place of business (i.e., shipping dock) as opposed to the seller shipping the goods via common carrier or delivering the goods in its own vehicles. Dormancy Period – Time period before unclaimed property is considered abandoned. Drop Shipment – A sale in which a retailer directs a manufacturer or wholesaler to ship a product purchased by the retailer's customer directly to the customer. Due Process Clause – Clause found in the Fourteenth Amendment of the U.S. Constitution prohibiting a state from depriving “any person of life, liberty, or property, without due process of law.” As applied to state and local tax issues, the Due Process Clause requires that an entity have a sufficient minimal connection with a state before the state has jurisdiction over that entity. E Economic Nexus – A substantial nexus position asserted by some states based solely on a taxpayer’s economic contacts (e.g., sales to customers) with the taxing state without the taxpayer having a physical presence. Economies of Scale – One of the factors relied on by the U.S. Supreme Court to determine if two or more entities are engaged in a unitary business. Generally refers to the economic advantages gained by the interaction by two or more related businesses. Electronic Data Interchange (“EDI”) – The transfer of structured data, by agreed standards, from one computer system to another. Electronic Funds Transfer (“EFT”) – The electronic transmission of money over a computer-based system. Frequently used by businesses to transfer tax payments to the state. Some states may require certain taxpayers to pay taxes by EFT. Exclusion – With respect to sales tax, outside the scope of the imposition statute, thus not taxable. Exemption – With respect to sales tax, inside the scope of the imposition statute, but statutorily excluded. Exemption Certificate – A document, if correctly completed, that allows a seller to not collect the sales/use tax from a purchaser. Expense Disallowance – For state tax purposes, statutory provisions that require taxpayers to add back certain intercompany costs (e.g., interest and intangibles) that would otherwise be deductible for federal income tax purposes. Also known as “addback statutes.” F FICA (Federal Insurance Contributions Act) Tax – A payroll tax imposed by the U.S. government on both employees and employers to fund Social Security and Medicare. Finnigan– Named after a California State Board of Equalization (SBE) ruling. When determining the numerator of the sales factor for a unitary group, a state that applies Finnigan requires the receipts of all members of the unitary group be included in computing the state’s sales factor, regardless of whether or not the member has nexus in the state. Finnigan also has implications for determining whether sales are required to be “thrown back” to the state of origination because the taxpayer is immune from taxation in the destination state. In Finnigan, the SBE held that sales shipped from California to another state were not thrown back to California as long as any member of the unitary group was subject to taxation in the destination state, even if the corporation that made the sale was protected by P.L. 86-272. See also Joyce. Franchise Tax – A tax on corporations based on the number of shares issued or the amount of the corporation’s assets, i.e. based on the net worth of the corporation. If the tax is a franchise tax measured by net income, it is more properly called an income tax. Functional Integration – One of the factors relied on by the U.S. Supreme Court to determine if two or more entities are engaged in a unitary business. Generally, the Court looks at the extent to which two or more business are integrated; e.g., the businesses share the same marketing, legal, and accounting teams, and/or share the same headquarters. Functional Test – The UDITPA definition of business income, which many states have adopted or have substantially adopted, has been interpreted as containing two tests for determining if income is “business income.” The functional test provides that all gain from the disposition of a capital asset is considered business income if the acquisition, management, and disposition of an asset was used by the taxpayer in its regular trade or business operations. G Gross Receipts Tax – A tax on the total gross revenues of a business, with limited exclusions and deductions. H Horizontal Integration– Businesses are horizontally integrated when they are in the same general line of business, but are operating in different entities. I Incentive – A financial factor providing motivation for a particular action, sometimes used by a state to entice businesses to relocate or expand their businesses in the state. There can be both tax and non-tax incentives. Income Producing Activity – Concept used by some states to source sales of services and intangibles. Applies to each separate item of income and means the transactions and activity directly engaged in by the taxpayer in the regular course of its trade or business for the ultimate purpose of obtaining gains or profits. Independent Contractor – Generally, a non-employee who performs work for a taxpayer. Often an independent contractor is entrusted to undertake a specific project but is left free to do the assigned work and to choose the method for accomplishing it. Instant Unity – A concept that a unitary relationship can exist immediately once common ownership is established. The issue arising in the context of corporate acquisitions is whether the acquisition creates “instant unity” between the acquiring corporation and the target corporation. Intangible Personal Property – Property that has no physical existence beyond mere representation, and has no extrinsic value; includes rights over tangible real and personal property, but not rights of use and possession. Its value lies chiefly in what is recognized to be its benefits and values; e.g., copyrights and trademarks. J Joyce– Named after a California State Board of Equalization ruling. When determining the numerator of the sales factor for a unitary group, a state that applies a Joyce methodology requires that only receipts of members of the unitary group with nexus in the state be included in computing the state’s sales factor. Joyce also has implications for determining whether sales are required to be “thrown back” to the state of origination because the taxpayer is immune from taxation in the destination state. In a Joyce state, receipts from sales of goods shipped to a state by a member of the unitary group that is immune from taxation in the destination state are required to be thrown back to the origin state. See also Finnigan. M Managed Audit – When the taxpayer or taxpayer’s designee examines records, determines liability and works with the taxing authority to conduct an audit. Market Sourcing – For the purpose of determining the numerator of the sales factor in relation to services and intangibles, receipts will be sourced to the state where the services are delivered (or the benefit of the service is received) or the intangible is used. Market Value – The value a property would sell for between a willing buyer and a willing seller in an open and competitive market with no relation between the two parties. Mixed Transaction – A transaction that contains both taxable and nontaxable elements. Multistate Tax Compact (“MTC”) – Created by the National Association of Attorneys General and the National Legislative Council in 1966. The Multistate Tax Compact created the Multistate Tax Commission (MTC), established a joint audit program for multistate taxpayers, adopted UDITPA (Article 4 of the compact), and provided a taxpayer election to apply UDITPA (Article 3 of the compact). N Net Operating Loss (“NOL”) – Result of tax-deductible expenses exceeding taxable income for a particular year. Generally, NOLs can be carried forward, and some states allow NOLs to be carried back. Nexus – Used generically to indicate a taxpayer has sufficient presence in a state for that state to require tax collection responsibilities or to impose tax liability. U.S. Supreme Court requires substantial nexus under the Commerce Clause and sufficient contacts under the Due Process Clause. Nonbusiness Income – All income a state does not consider to be business income. This type of income is usually allocated to a state for income tax purposes, rather than apportioned. O Occasional/Casual Sale – For corporate income tax purposes, in some states, gross receipts arising from incidental or occasional sale of fixed assets are excluded from the receipts or sales factor altogether, and they are not attributable to any state. For sales and use tax purposes, the overwhelming majority of states with sales taxes exempt “casual” or “occasional” sales from the tax base. These exemptions typically apply to sales by those who are not regularly engaged in the business of selling; however, some states exclude from their occasional sales provision the sale of motor vehicles, aircraft, vessels, and mobile homes. P Pass-Through Entity (“PTE”) – An entity, such as a partnership, Limited Liability Company or S Corporation, that is disregarded for federal income tax purposes. The income generated by the PTE is taxed to its owners. Although PTEs are disregarded federally, some states impose a tax on the PTE itself. Privilege Tax – A tax imposed for the privilege of engaging in the business in a jurisdiction. Property Tax – See ad valorem tax. Public Law 86-272 – This is a federal law regulating the states’ taxation of interstate commerce. P.L.86-272 forbids a state from imposing an income tax on income derived from the sale of tangible personal property in interstate commerce unless the taxpayer's activities in the taxing state exceed solicitation of sales of tangible personal property (and certain ancillary activities). Thus, even if a taxpayer has nexus in a state, if its activities in that state fall within the scope of P.L 86-272, it will be immune from income taxation in that state. (Note: this does not apply to sales/use taxes and some gross receipts-based taxes.) R Responsible Person – An individual who has the duty to perform or the power to direct the act of collecting, accounting for or paying over trust fund taxes and is responsible for paying tax if the entity owing the tax fails to pay the tax. S Sale – Varies by state, but generally when there is a transfer of title or possession for consideration. Sale for Resale – A sale by a wholesaler to a retailer, dealer, or other means where the purchaser will resell the product. This type of sale is generally exempt from sales tax, provided the purchaser provides a valid document (e.g., resale certificate) to the wholesaler. Sales Tax – A tax imposed on retail sales of tangible personal property and certain services. Separate Return – A filing methodology where a taxpayer with nexus in a state reports and is taxable on its income only and is not combined with related entities. Statistical Sample – A small subset of a larger population which can be mathematically analyzed for the purposes of making inferences about the larger population. Streamlined Sales Tax Project (“SSTP”) – An organization made up of representatives from almost all states that joined forces in 2000 with the goal of simplifying and modernizing sales and use tax collection and administration. SSTP drafted a model sales tax act, the Streamlined Sales and Use Tax Agreement, which approximately 24 states have adopted or substantially adopted. T Tangible Personal Property – A common definition for sales tax purposes is “personal property that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses.” “Tangible personal property” may include electricity, water, gas, steam, and (as under the Streamlined Sales Tax definition) prewritten computer software. Throwback – In a state that has a “throwback” rule, if the taxpayer is not taxable in the destination state, the taxpayer must include sales of tangible property in the numerator of the sales factor in the state from which the goods are shipped. Throwout – In a state that has a "throwout" rule, a taxpayer must eliminate from both the numerator and the denominator of the sales factor sales to customers located in states in which the seller is not taxable. Some states use this rule for services. Transactional Test – The UDITPA definition of business income, which many states have adopted or have substantially adopted, has been interpreted as containing two tests for determining if income is “business income.” In general, under the transactional test income is business income if it is attributable to a type of business transaction in which the taxpayer regularly engages. Three Unities Test – A test promulgated by the California Supreme Court for determining whether two or more businesses are unitary. The test is met if the following circumstances are present: Unity of Ownership: There is a common ownership structure between a business and its affiliates. Generally, must be greater than 50 percent stock ownership. Unity of Operation: Demonstrated by centralized support functions, such as accounting, legal, personnel, purchasing, advertising, and sales. Unity of Use: Demonstrated by a central executive force, general system of operations, trademarks, tradenames, etc. True Object Test – A test used in many states to determine whether a transaction constitutes a taxable sale of tangible personal property or a nontaxable sale of services. The test looks to whether the purchaser's “true object” was to acquire the finished product or the service. Trust Fund Tax – A tax paid to a business (like FICA, other payroll taxes or sales taxes) by a customer or employee or accrued by the business, which must be paid to a governmental entity. U Unclaimed Property – Liabilities on a company’s books and records which are due to another. Some examples include uncashed payroll checks or uncashed accounts payables checks. Uniform Division of Income for Tax Purposes Act (“UDITPA”) – A model act drafted in 1957 by the National Conference of Commissioners on Uniform State Laws in response to a widely recognized need for a uniform method of dividing income for tax purposes among the states. The primary purpose for the creation of UDITPA was twofold: (a) To promote uniformity in the allocation practices among the states that impose tax on or measured by the net income of a corporation; and (b) To relieve the pressure for congressional legislation in the field. The act covers business/nonbusiness income and apportionment of tangible personal property and services using equally weighted property, payroll and sales factors. Unitary – Judicially developed Constitutional concept whereby separate legal business entities are treated for tax purposes as a single business unit based on those entities having integrated operations. Judicially developed tests include: 1) the three unities test, 2) the contribution or dependency test and 3) the functional integration, centralization of management and economies of scale test, which is the test articulated by the U.S. Supreme Court. State reporting statutes may include domestic (US) related entities in a unitary group (known as a water’s-edge election or water’s-edge filing), or may require or allow inclusion of all unitary entities, both foreign and domestic (worldwide combined reporting). Use Tax – A complement to the sales tax, use tax is imposed on the in-state use, storage, or consumption of tangible personal property and certain services. In general, states imposing a use tax must give credit for the sales tax paid on the product to another taxing jurisdiction. V Vertical Integration – A vertically integrated business is one in which various related entities perform successive steps necessary to produce/sell a finished product. Voluntary Disclosure Agreement (“VDA”) – A program offered by most states whereby taxpayers can receive certain benefits (generally reduction of penalties) by proactively contacting the state and disclosing prior period unpaid tax liabilities. Generally, VDA’s can only be entered into by out-of-state taxpayers that have not yet been contacted by the state’s taxing authority. W Water’s-Edge – Water’s-edge refers to the composition of the unitary group. A unitary group making a water’s-edge election will eliminate the income and factors of certain affiliated (unitary) foreign corporations in preparing the combined report. Conversely, in a worldwide combined reporting regime, the income and factors of foreign corporations will generally be included in the combined report. See also “Unitary.” Worldwide Combined Reporting – See “Water’s-Edge” and “Unitary.”
