Throwback Rule

DEFINITION of 'Throwback Rule'

A measure states can adopt to ensure corporations pay state taxes on 100% of their profits. Traditional state apportionment formulas base state corporate taxes on a formula that considers where a corporation's property, payroll and sales are located. These formulas result in "nowhere income," or income on which a corporation does not pay tax in any state. The throwback rule is meant to eliminate this tax loophole.

BREAKING DOWN 'Throwback Rule'

Critics consider traditional apportionment formulas unfair to small businesses that have profits that are 100% taxable because all of their business activities are located in a single state. These businesses end up paying taxes on a greater percentage of their profits than some multi-state corporations do. Critics also think that multi-state corporations with "nowhere income" are burdening state residents by not paying for their fair share of public services, and that the corporate income tax has declined significantly as a source of state revenue as a result of the "nowhere income" loophole.