Indiana’s 2015 General Assembly session ended just about two months ago. While this year’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code reforms were less extensive than past sessions, the legislature made welcome fixes to two policies in particular: the throwback rule and personal property taxes.
The throwback rule is a little-known but important part of the corporate tax code that determines a given company’s tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . In corporate tax law, multi-state corporations have to apportion their income to the states they operate in based on some weighing of the corporation’s property, payroll, and sales. In Indiana, the apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. method is entirely based on sales.
States with a throwback rule dictate that a corporation must apportion 100 percent of profits to the states. But because each state has a different apportionment method, sometimes certain income goes untaxed—this income is called “nowhere income.” Throwback rules, which exist in 25 states and DC, throw that nowhere income back into the taxable base.
While Indiana has one of the lowest corporate tax burdens in the country, the throwback rule very frequently complicates corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. ation. In the process of trying to capture nowhere income, multiple states can claim the right to tax the same income, creating more complexity for tax authorities and businesses. By eliminating the rule, Indiana lawmakers have made a major improvement in the state’s tax treatment of corporations.
In addition, state legislators enacted an exemption from the personal property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. for small businesses with up to $20,000 of personal property in a county. This policy is in line with recommendations we made in our comprehensive review of tangible personal property taxes in 2012, and also in testimony to the Indiana House Ways & Means Committee last legislative session.
Tangible personal property taxes place an inordinate tax burden on accumulation of machinery, equipment, and tools, and also contribute significantly to compliance costs because adding up all of a business’s physical capital and depreciating each item based on how old it is takes a lot of accountants. The new de minimis exemption takes away a lot of this compliance cost for small businesses in the state.
Currently, Indiana sits at 8th place in the Tax Foundation’s State Business Tax Climate Index, and is expected to rise to 7th as a result of tax cuts enacted over the last few years. These most recent refroms are one more step advancing Indiana’s reputation as one of the best tax codes in the country.
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