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The unitary state income tax is a means by which certain states regulate the collection of income in the form of taxes from companies that do interstate commerce or file consolidated tax returns. While the regulation and requirements vary greatly among states, some generalities may be used to explain the concept.
Related companies that share ownership; operations, such as advertising, accounting or central purchasing; and management may find it advantageous to file a consolidated state tax return in those states where it is permitted. The main advantage is the losses of one company can offset the profits from another company, thereby reducing the tax liability. While some states require unitary state tax returns, other states require corporations to go through a rigorous application process that may also require the corporation to prove that its companies have a historical dependency on one another.
When commerce is done across state lines, all states involved may be due a portion of the proceeds. Unitary state income taxes come into play in the apportionment of the income among the states. While a state may deny a corporation's petition to consolidate tax returns if the consolidation means less tax income, the consolidation may prove to increase the interstate commerce income taxed by the state, depending on the calculation guidelines stipulated in the regulations. The apportionment of the collective income can mean an increase in the part taxed by a particular state.
The decision to consolidate financial statements for the purpose of tax savings requires in-depth analysis over a period of years to identify a pattern of benefit. Additional thought must be spent on projecting the future, to ensure the tax benefit will continue, because once consolidation is elected, states are reluctant to allow corporations to revert to individual returns. Keep in mind as well that not all states allow unitary tax returns and those that do may have regulations that drastically differ.
In some states, corporations have the option to consolidate companies based on like services or products, states in which they do business, or other related criteria. This allows the corporations to break related operations into multiple unitary tax returns. One advantage of this method is management can better manage the appropriation of their tax dollars and to assure income is taken only by the states associated with the sale of the products and services.