TITLE

STATE JURISDICTION TO TAX "NOWHERE" ACTIVITY

AUTHOR(S)
Swain, John A.; Hellerstein, Walter
PUB. DATE
September 2013
SOURCE
Virginia Tax Review;Fall2013, Vol. 33 Issue 2, p209
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
A recurring problem in the taxation of cross-border economic activity is jurisdiction to tax so-called "nowhere" activities, i.e., activities that occur in locations where they may escape taxation because they occur outside of any taxing jurisdiction (e.g., the high seas) or because they occur in a jurisdiction that lacks power to tax them. As an economic matter, failure to tax these activities skews the competitive playing field in favor of firms with nowhere income or property, resulting in efficiency (and revenue) losses. States are well aware of this problem and they have proposed and adopted a variety of approaches to ensure "full accountability" of income and property that might otherwise escape taxation altogether. These approaches all have the effect of reassigning nowhere activities to states that arguably have authority to impose a tax, thus raising both tax policy and constitutional questions. From a tax policy perspective, one may contend that however laudable the goal of full accountability may be, it is illogical to posit two contrasting methods for sourcing activity depending entirely on whether the activity is or is not taxable elsewhere. From a constitutional perspective, sourcing rules that arguably have an extraterritorial reach implicate both Due Process and Commerce Clause concerns. Indeed, the 2009 U.S. Supreme Court case of Polar Tankers, Inc. v. City of Valdez raised -- but did not reach -- the question of how to resolve these competing claims in the context of the property taxation of oceangoing vessels. This article demonstrates that properly designed statutes that in practical effect absorb nowhere values reflect both good tax policy and are consistent with constitutional constraints on the states' power to tax. It does so by reexamining the two commonly accepted foundations for the exercise of state tax power: residence and source. Underlying both these concepts is the notion that states provide benefits, opportunities, and protections for which they can ask something in return. Thus, state tax apportionment formulas are not so much about making abstract determinations of where income or other taxable values are geographically located, but rather how to divide a tax base among the jurisdictions that provide such benefits, opportunities, and protections.
ACCESSION #
109369746

 

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