AuthorRoin, Julie

INTRODUCTION 608 I. INCREASED OPPORTUNITIES FOR DUPLICATIVE TAXATION: BROADENING TAXABLE NEXUS 616 II. THE UNDERMINING OF UDITPA AND THE MULTISTATE TAX COMPACT 628 A. The Continued Use of Different Apportionment Formulas 630 B. The Continued Use of Different Factor Definitions 634 III. THE UNFORTUNATE SITUATION OF (SOME) TELECOMMUTERS 640 IV. THE FALSE PROMISE OF THE DORMANT COMMERCE CLAUSE 647 V. SHOULD CONGRESS GET INVOLVED? 655 A. The Slipperiness of "Source" 656 B. How Should Congress Choose Among Formulas? 665 VI. HOW BAD IS DOUBLE TAXATION? 667 VII. TAXPAYER SELF-HELP 673 A. Corporate Self-Help 673 B. Individual Self-Help 678 C. Jurisdictional Self-Help 686 CONCLUSION 693 INTRODUCTION

One of the predicates of a national marketplace is the abolition of many state laws that favor in-state over interstate commerce. In practice, this aim, though embedded in constitutional text (1) and practice, (2) is remarkably hard to attain. In particular, it has proven difficult to reconcile state sovereignty over fiscal affairs with tax neutrality between single-state and multistate taxpayers. (3) In their efforts to maximize their own tax revenues and other economic interests, states often enact (or try to enact (4)) tax rules that lead to double taxation of multistate taxpayers, that is, rules which result in more than one state imposing tax on a tax base without offset or other regard for taxes levied by other states on that same base. In turn, this duplicative taxation appears to distort taxpayer behavior in ways that confound both the concept and the operation of a national economic marketplace. Legal changes and increases in the fiscal pressure on states have exacerbated these distortions, as they have caused many states to raise tax rates and cleverly expand their (asserted tax) jurisdiction. The end result is an increase in the cost and likelihood of disparities in the tax treatment of wholly in-state and multistate taxpayers.

For an old and familiar example of duplicative taxation, one needs to look no further than the states' use of different formulas for apportioning the business income earned by taxpayers with multistate business activities. For a short period of time, almost all states employed a three-factor apportionment formula. (5) This formula apportioned one-third of taxpayers' income on the basis of in-state sales versus total sales, one-third on the basis of in-state business property versus total business property, and the final third on the basis of in-state payroll versus total payroll. (6) Thus, if 30% of Acme Corporation's total sales were made to customers in State A, a state which also accounted for 20% of its business property and 10% of its payroll, 20% of Acme's business income would be apportioned to, and taxed by, State A. The other 80% percent would be apportioned to, and taxed by, other states in similar fashion. (7) In the best of all worlds, 100% of its income would be taxed in some state. (8) However, Iowa, a state with few factories and office buildings but disproportionately more consumers, decided to increase its income tax revenues--in a way that would not scare off actual business investors--by adopting another apportionment formula, one which took into account only the location of sales. (9) The difference between the two formulas is readily apparent. If Iowa were just like State A, the sales-onlyformula would apportion 30% of Acme's income to Iowa--and if the other states in which Acme did business continued to use the three-factor formula, those other states would continue to claim the right to tax a total of 80% percent of Acme's income. As a result, Acme would be subject to state income taxes calculated with respect to 110% of its actual business income. In short, 10% of its income would be taxed, in full, by two different states, and its overall tax burden would be higher than if it had carried out its business operations in only one state, including Iowa. (10)

Another example of duplicative taxation arises from the disparate state tax treatment of remote working arrangements. These disparities can lead to duplicative state taxation at both the employer and the employee level. Although the existence (and effect) of these disparities is not new, (11) the explosive growth in remote working arrangements spurred by the COVID pandemic has drawn renewed attention to them.

At the employer level, a remote worker may provide the state in which the employee is physically present both the "nexus" required to impose a corporate income tax, (12) and a tax apportionment based on the "in state" salary of the remote worker. (13) Meanwhile, the state in which the employer's home office is located, using a different definition of an "in state" employee, may include that same salary in the numerator of its apportionment fraction for purposes of determining the corporate income tax owed to that state. The combination would again lead to duplicative taxation. (14)

Differing definitions of the source of salary income also may lead to duplicative taxation at the employee level. Some states claim the right to tax an individual's wage income based on the location of the person performing the services, (15) while others claim the right to tax such income based on the location of the employer's office. (16) Thus, an individual working from a home located in a state other than the one in which her employer's office is found might find her salary subject to tax in two states without any offset for taxes paid to the other state. (17)

There is at present no legal remedy for any of these examples of duplicative taxation. The Supreme Court explicitly blessed Iowa's use of its single-factor formula in 1978 in the case of Moorman Manufacturing Co. v. Bair, (18) and more recently refused to grant leave to hear a case brought by the State of New Hampshire challenging Massachusetts's adoption of the location of the employer source rule for apportioning individuals' personal services income. (19)

A solution to this apparent problem would probably require action by Congress. (20) Conventional wisdom is that the federal government, which is to say Congress if not the federal courts, should restore some level of tax neutrality between single-state and multistate taxpayers. (21) This Article shows, however, that there is no easy solution to this problem, and perhaps simply none worth attempting. Congress could eliminate some instances of double taxation, at the (possible) expense of overall state tax revenues and while reallocating revenue from some states to others. But any intervention of this kind would be politically tricky and--more interesting--difficult to justify as a theoretical matter. Moreover, there is no guarantee that states would not work around any rules that Congress established; the duplicative taxation problem could well re-emerge in slightly different (and perhaps less attractive) guises. Congressional intervention may not be worth the candle, especially when one considers existing opportunities for taxpayer self-help. Part I of this Article explains how judicial decisions loosening constitutional nexus requirements have increased opportunities for double taxation. Part II details the failure of state efforts--embodied in the Uniform Division of Income for Tax Purposes Act (UDITPA) and the Multistate Tax Compact--to standardize state laws for taxing the income of multistate business income. Part III explains the comparable problem faced by telecommuting employees. Part IV explains why federal courts are incapable of eliminating duplicative taxation using their powers under the dormant Commerce Clause. Part V explores the difficulties inherent in designing a "neutral" tax rule eliminating duplicative taxation, leading to questions about the desirability of ameliorating double taxation through Congressional action. Parts VI and VII continue this discussion by detailing the actions taxpayers currently take to minimize duplicative taxation, and those that states adversely affected by Congressional attempts to eliminate duplicative taxation are likely to take.


    When the Supreme Court decided Moorman Manufacturing Co., (22) the case which upheld Iowa's right to use the single-factor sales formula for apportioning the income of multistate taxpayers, it pointed out that while the taxpayer stressed the unfairness of duplicative taxation, the taxpayer had failed to prove that such taxation had occurred. (23) This failure was less likely to be a matter of a poor litigation strategy than the fact that, at the time, prevailing state tax laws did not--in any state--capture large segments of multistate taxpayers' income. Through a combination of careful corporate structuring and the exploitation of restrictive state and federal nexus rules, taxpayers often managed to apportion large segments of their income to states which either lacked the nexus to impose a tax, or did not have an income tax in the first instance. (24)

    For example, many states did not tax businesses lacking a physical presence in their jurisdiction. (25) As a result, no state income tax was collected on income apportioned to such states on the basis of sales made to customers located in those states. (26) In turn, businesses located, or placed their physical assets, with such rules in mind. Following the play-book established by transnational taxpayers, (27) businesses further reduced their income subject to state tax by isolating large portions of their income in entities located (and apparently operating) only in low-or no-tax states. For example, company X, which manufactured and sold goods protected by a valuable trademark, might have that trademark owned by a related holding company, Y, located in a low- or no-tax state. X would then pay Y a substantial royalty for its use of the trademark, claiming that royalty as an expense of X 's...

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