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Our Example: The Acme Manufacturing Company. Acme manufacturing has identical factories in Virginia and North Carolina, each with $5 million worth of real estate and equipment and each with a $5 million annual payroll. It also has a small sales office in Pennsylvania.
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Our Example: The Acme Manufacturing Company Acme manufacturing has identical factories in Virginia and North Carolina, each with $5 million worth of real estate and equipment and each with a $5 million annual payroll. It also has a small sales office in Pennsylvania.
Acme Sales and Income Tax Acme has $100 million in annual sales in ten states and in Europe. It is only required to pay income tax in states where it has a physical presence.
The Corporate Income Tax Now The portion of Acme’s net income that Virginia taxes is determined by a formula. It is a fraction based on the share of Acme’s total payroll, total property, and total sales that are located in Virginia. The “sales factor” is counted twice. For Acme, that works out as follows:Convert the fractions to the same denominator, add them, and Acme pays Virginia income tax on 120/400 of its net income, or 30 percent. It pays income tax of $180,000 ($3 million x .06).
The Corporate Income Tax with a Throwback Rule With a throwback rule, the sales factor is based on not only the product sold in Virginia but also product shipped from Virginia to locations where Acme pays no income tax. For this example, the shipments from Virginia and North Carolina are presumed to be balanced and each accounts for half the 75 percent of Acme’s product shipped outside Virginia, North Carolina and Pennsylvania (the other states where Acme pays income tax). Convert the fractions to the same denominator, add them, and Acme pays Virginia income tax on 195/400 of its net income, or 48.75 percent. It pays income tax of $292,500 ($4.875 million x .06) – 63 percent more.
