59 Interestingly, apportionment should be considered even when choosing in which state to operate. As an example, if a company chooses to be based in a state with a three-factor apportionment formula, it will be penalized for being based in the state because property and payroll will be considered as part of the tax base compared to choosing a state that only looks to sales in the state for apportionment purposes. Apportionment is one of the most contested areas of tax and cannot be overlooked as an issue to consider. 7. State Conformity to Federal law, including income protected under a federal income tax treaty and treatment of foreign source income. Are states required to follow the same rules as the IRS in determining taxable income? If a foreign entity earns income that is exempt from U.S. federal income taxation, there is the question whether a state or locality will follow suit. Some states have specific legislation or guidance that provides if the state will or will not conform to the federal income tax laws. In particular, some states exempt income from corporate income tax if such income is exempt from U.S. federal income tax (i) under a federal income tax treaty or (ii) because the income is classified under the federal tax laws as not effectively connected with a trade or business of the foreign taxpayer in the U.S. (so called, nonECI). For other states, one must see whether the state corporate income tax rules adopt federal taxable income as the starting point for the state corporate income taxes, thus implicitly adopting a similar exemption from state corporate income taxes. In addition, states vary in their conformity to the special federal tax rules (GILTI, FDII, etc.) that were enacted into law in the TCJA 2017, as well as other principles of federal tax law applicable to special deductions (such as dividends) and net operating losses. 8. Public Law 86-272 A federal shield protecting certain sellers of tangible personal property from state income tax. Public Law 86-272 is a federal law that protects companies from being subject to a state’s corporate income tax if the only in-state activities relate the solicitation of sales of tangible personal property or related, de minimis activities. While the parameters of fitting in with this protection are relatively narrow, the impact could be substantial if the business activities are solely limited to the sale of tangible personal property. Recently, several states have tried to limit the scope of P.L. 86-272 protection (e.g., by issuing guidance that having cookies installed when visiting a website exceeds the
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