US 27 | State Tax Sourcing Rules

US Tax

Let’s talk about state tax sourcing rules. How do you determine which income is taxable in which state? If you sell into California but also into lots of other states, how do you determine what is taxable in California and what is taxable in other states? That is the question that Ed Antolin of Vallejo Antolin Agarwal Kanter, or in short VAAK in Walnut Creek, California will discuss with you.

To determine which net income is taxable where, you look at sales. You determine the sales for each state. And then you apply that percentage to your net income. That portion of net income is then taxable in that particular state. But in addition - if a particular state has the throwback rule - then any net income in tax-free states is then also added to your taxable income in that state.

What you do when you have sales in two states with a throwback rule. So let’s say you have sales in California and Colorado. Both states use the throwback rule. But then you also sell into Wyoming which has no state income tax. So the throwback rule applies. But which state gets that net income? California or Colorado?

If a state has a throwback rule like California, the sales gets thrown back to the state from which the goods were sent. For example, if you store inventory in CA and sell to a customer in WY, the sales are thrown back to CA. So the state that gets the throwback is the state from which the inventory was sent.

So in our example of California v Colorado. If the goods were sent from California, California gets to tax the Wyoming net income. And if the goods were sent from Colorado, then Coloardo gets to tax that income under the throw back rules since Wyoming has no income tax. So that makes it even more important to store your goods in a low tax state.

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