Despite the overwhelming business opposition to “throwout” sales factor apportionment rules and New Jersey’s recent repeal of its “throwout” rule, Maine is now bucking the trend and adopting a new “throwout” rule. Effective for 2010 and subsequent years, Maine adopted the Finnigan methodology for computing the sales factor for a combined return and to replace its “throwback” rule with the “throwout” rule.
Under the new Finnigan methodology of Code Me. R. 810 for determining the numerator of the sales factor in a combined report, “total sales of the taxpayer” in Maine now includes sales of the taxpayer and sales of any other entity included in a combined return, regardless of whether those entities themselves have nexus with Maine. The adoption of Finnigan applies to both unitary groups that have elected to file a single combined return and those that file separate returns utilizing combined apportionment. If separate returns are filed, each taxpayer’s return will include in the numerator of the sales factor its own Maine sourced sales as well as a portion of the Maine sourced sales of those entities in the unitary group that do not have nexus with Maine.
The new “throwout” rule in Code Me. R. 801 requires taxpayers to exclude from the sales factor denominator those sales of tangible personal property shipped to customers within a state in which the taxpayer is not taxable. Notably, sales are thrown out of the sales factor regardless of whether they are shipped or delivered from Maine. The “throwout” rule applies in the context of a combined return as well but – under the Finnigan rule – only if none of the members of the unitary group is taxable in the state of delivery.
Although the differences between a “throwback” and a “throwout” rule may seem subtle, the important distinction is that a “throwback” rule increases the sales factor by including sales in the numerator that have some connection with the state (i.e., sales of tangible personal property shipped from Maine to a state where the taxpayer is not taxable). On the other hand, a “throwout” rule increases the factor by excluding sales from the denominator that arguably have no connection with the state because the exclusion occurs regardless of the location from which the property is shipped.
Maine’s adoption of the “throwout” rule is of particular concern given the fact that it apportions income based only on a single sales factor apportionment formula. The exclusion of a large amount of sales from the denominator under the “throwout” rule therefore may cause a significant increase in the overall apportionment percentage. West Virginia is another state that employs “throwout,” but West Virginia uses a three-factor formula with double-weighted sales factor. New Jersey previously had a “throwout” rule that was challenged in court. Despite the fact that the court upheld the rule in Whirlpool Properties, Inc. v. Director, Division of Taxation and Pfizer, Inc. v. Director of Taxation, Dockets A-1180-08T2 and A-1182-08T2 (N.J. Super. Ct. App. Div., July 12, 2010), New Jersey has repealed the “throwout” provision for tax periods beginning on or after July 1, 2010.