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.

Location Sales Income Tax?

Virginia $10 million Yes

Maryland 5 million No

West Virginia 5 million No

Tennessee 15 million No

North Carolina 10 million Yes

Pennsylvania 5 million Yes

Ohio 10 million No

Kentucky 5 million No

South Carolina 5 million No

Georgia 10 million No

Europe 20 million No

Gross $100 million

NET Income 10 million

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).

Payroll Factor Property Factor Sales Factor Sales Factor

Virginia Share:Total:

5 million10 million

5 million10 million

10 million100 million

10 million100 million

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.

Payroll Factor Property Factor Sales Factor Sales Factor

Virginia Share:Total:

5 million10 million

5 million10 million

47.5 million100 million

47.5 million100 million