What is the Throwback Rule?

The throwback rule is a tax rule that allows a state to tax a corporation or business entity for the profits made in the state. Corporations, whose sales originate from certain states are subject to tax payment on those sales under the throwback rule. Also, the throwback rule allows states to tax corporations for their facilities in the state. The objective of the throwback rule is to minimize non-payment of taxes by corporations, it eradicates loopholes that lead to tax evasion. This rule empowers states to levy a corporate tax on sales, facilities, and income of corporations made from their states.

How Does a Throwback Rule Work?

In the traditional taxation formulas used by many states, many corporations do not pay tax on certain involves because they are often tagged ‘nowhere income’. These formulas not only aid tax avoidance or evasion, but they also do not achieve fairness since small businesses tend to have all their profits taxable while others do not pay tax on all their income. The throwback rule, however, came as a remedy for the loopholes created by traditional tax formulas. This rule states that 100% of the profits of a corporation are taxable by the states. With this rule, corporations are compelled to pay all taxes and tax escape through ‘nowhere income’ was eradicated.