State Unitary Tax Reporting Obligations Expand Potential Tax Liabilities for Foreign Corporations


To All Firm Clients –

Due to the current economic climate, many states are scrambling to meet budgetary shortfalls and are desperately seeking new sources of revenue.  As a result, more and more states have proposed mandatory unitary combined reporting as a way to generate additional income tax revenue.

Unitary combined reporting applies to a commonly owned and controlled group of corporations that are engaged in a “unitary business.”  Under unitary combined reporting, such corporate groups must calculate their state-level tax by combining all of their business incomes and apportioning a single combined amount of income to the taxing state using various apportionment factors.  Currently, twenty-four states impose unitary combined reporting in connection to corporations‘ state income tax assessments.

Unitary combined reporting can be furthered classified into two main sub-classifications, “water‘s-edge combined reporting” and “worldwide unitary combined reporting.”  In general, states that use water’s-edge combined reporting only extend reporting and tax obligations to those members of a unitary group that are United States corporations.  Using worldwide unitary combined reporting, the state imposes its tax obligations not just on business entities operating in the United States, but on the entire worldwide group of entities that are engaged in a “unitary business.”

What may cause concern for foreign corporations with local subsidiaries is that, although water‘s-edge combined reporting remains the norm, states are increasingly using worldwide unitary combined reporting.  Moreover, even for tax regimes that are typically classified as water‘s-edge combined reporting schemes, the compliance obligations of the tax regime may not in fact end at the water’s edge and may still cause compliance problems for foreign corporations with subsidiaries in the United States.

Client Advisory

The growth in popularity of unitary combined reporting regimes increases the risk that a foreign corporation’s income may become subject to state-level taxation.  This area of tax law is still developing, and there is a great deal of variation in how states have implemented their unitary combined reporting regimes.  For example, states differ greatly in how they define a “unitary business” that would be subject to unitary combined reporting and in the factors that they use to apportion business income.

Clients who are concerned with potential compliance issues associated with unitary combined tax reporting should directly contact Alison Rule at or 703-714-1312.

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