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Similar apportionment formulas are used to determine corporate income tax liability, but the MTC model statute includes definitions specific to financial institutions. This includes the value of loan receivables for inclusion in the property factor, and loan-servicing fees and investment interest for inclusion in the receipts factor.
Further, the tax commission includes sourcing rules, which indicate whether a particular value should be included in the in-state portion or the out-of-state portion. For example, when a financial institution collects interest from mortgages, the state in which the mortgaged property is located will be allocated the value of the interest, as well as fees and penalties earned from those mortgages.
In theory, if every state implemented the rules as proposed by the MTC, 100 percent of an entity’s income would be taxed. Many states, however, implement their own variations of the apportionment formula. Some states, like Indiana and Connecticut, rely on a single-factor formula based solely on receipts. New York uses a three-factor formula based on receipts, payroll and deposits.
Because states will sometimes use a different apportionment formula for their F.I.T. than for their corporate income tax, the application of the F.I.T. to a business could substantially change the amount of tax the business will pay.
Given the variations between states, a multistate business must be especially diligent in determining the apportionment method, factors and sourcing rules applicable for each state with which the business has nexus.
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State F.I.T.s can place significant burden on taxpayers in the financial sector. When considering your options — including whether to become a banker or branch operator or to grow your business — pay attention to how any such change could alter your tax liability or tax status. The more you know ahead of time, the less likely you’ll be surprised later on.
Disclaimer: This article is for informational purposes only and does not constitute tax or legal advice.
Francina A. Dlouhy is a partner and the practice leader of the state and local tax group in the law firm of
Baker & Daniels LLP. She has spent more than 30 years representing multistate and multinational businesses in administrative proceedings, appeals and litigation, as well as in business and tax planning. Benjamin A. Blair, law clerk, is a 2010 graduate of the Indiana University Maurer School of Law. Reach the authors: firstname.lastname@example.org and email@example.com.
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