Feedback and Engagement Needed | Corporate Tax Reform:  Opportunities for Key AIV Priorities, Questions about Additional Changes

The Ways and Means Committee is considering legislation to make changes to how Vermont’s corporate income tax is calculated and apportioned.  Some of these changes would greatly benefit Vermont manufacturers and related businesses, while other possible changes raise uncertainties.

Feedback and support from manufacturers will be critical in moving forward on the positive changes and but also to clarify the uncertainties surrounding other issues.  The changes are highlighted below and discussed in greater detail following.

We strongly encourage you to connect us with your contacts for tax policy matters and your Vermont corporate income taxes so that we can work with you to identify the positive opportunities and understand any possible negative consequences.  You can contact us at to discuss further.

There are three primary proposals to address:

  • Moving toward “single sales” apportionment of corporate income, which benefits manufacturers and other exporters of goods and services. The draft proposal includes a modest step in this direction but might be amended to lay out further steps toward full single sales apportionment.  This is a long-standing policy priority for AIV.
  • Elimination of the “throwback rule”. The draft proposal does not currently eliminate the “throwback rule”, which can increase the tax liability of manufacturers and other exporters of goods and services, but AIV has pushed for this change to be considered alongside the move toward single sales.

With regard to moving toward single sales apportionment and eliminating the throwback rule, the key need is for Vermont manufacturers to identify the benefits for them and to help us advocate for the changes.

  • Elimination of the “Overseas Business Organization” exclusion, or the “80/20” rule, which excludes the US income from a US business entity that has at least 80% of its property and payroll outside of US from the calculation of total US income of its larger affiliated corporate group. Eliminating this exclusion is currently included in the draft proposal, but there is uncertainty over how many Vermont businesses, including how many manufacturers, currently qualify for this exclusion and what the implications of eliminating it would be.

With regard to eliminating the 80/20 rule, the key need is to identify any Vermont manufacturers or related businesses that claim this status, and to work with them to understand the implications of eliminating it, both on its own but also if it was done in concert with moving toward single sales and eliminating the throwback rule, which could significantly mitigate any increase in Vermont tax liability.


As noted above, we ask that you contact us at to discuss these issues further and to help us connect with your contacts for tax policies affecting your company.  If you are interested in more information in the meantime, however, the following is a more detailed explanation and discussion of the three issues outlined above:

Increasing the Weighting of Sales in Apportionment

As noted above, one proposed change would make progress toward a long-standing policy goal of AIV – specifically, moving toward “single sales” apportionment of corporate income.  This approach can provide significant tax relief to Vermont manufacturers and other exporters of goods and services, because it ties taxable income to instate sales and not out of state sales.

States have long determined their share of a company’s total income subject to taxation by looking at the share of that company’s sales, property, and payroll located in that state relative to outside of that state, and taxing that percentage of the company’s total income.  Historically, states weighted sales, property, and payroll factors evenly and averaged those factors to come up with the taxable percentage of income.

However, over time many states have increased the weighting of sales.  Because the majority of sales for a manufacturer or other exporter of goods or services takes place outside the state in which that company is located, increasing the weight of sales in this calculation reduces the overall percentage of company income that the home state subjects to corporate tax.

In 2004, Vermont passed legislation effective in 2006 that made changes to how Vermont companies include income from larger corporate groups affiliated with them (see more below).  In that legislation, Vermont also moved to “double weighting” sales – increasing the weight of sales from 1/3 (along with 1/3 property and 1/3 payroll), to 50% (along with 25% property and 25% payroll).

Currently, nearly 30 states use “single sales” apportionment, which means they only look at the distribution of sales and disregard property and payroll entirely.  This provides the maximum tax relief to manufacturers and other exporters based in that state.  More states are currently scheduled to make this transition.

The proposal currently being considered in the Ways and Means Committee would move Vermont to “triple weighting” sales, increasing sales to 60% of the calculation (along with 20% property and 20% payroll).  This is a small step toward a 100% sales factor, but would be consistent with phasing in single sales apportionment over a couple of years, as a number of other states have done.  Indeed, AIV has advocated and the Committee is considering including the next steps toward 100% sales over the next two years in the proposed legislation.

Need to Eliminate the Throwback Rule

In supporting moving to single sales apportionment, it is important to eliminate what is called the “throwback” rule.  For states that have a throwback rule, like Vermont, when sales take place in another state where a company does not have a nexus for income tax, those sales are “thrown back” to the home state and included in that state’s sales factor in calculating taxable income.

For example, if a company in Vermont has sales in Maine, but that company does not have a taxable nexus in Maine and is therefore not subject to Maine’s corporate income tax, Vermont would count those sales as if they happened in Vermont, thereby increasing the taxable income of the company in Vermont.

This can add up to a meaningful increase in taxable income, and in an arbitrary and capricious way.  You could have two companies that are the same in every way and have the same total income, but because one might have more sales in states where they don’t have a taxable nexus than the other, Vermont would tax each differently.  Similarly, a company’s taxable income could vary widely even if total income remains the same, simply because sales occurred in different states year to year.

The throwback rule is bad policy in any case, but because the variability in taxable income under a throwback rule increases the more heavily a state weights the sales factor, it is critical to eliminate the throwback rule as a state moves toward single sales apportionment.

As noted above, elimination of the throwback rule is not currently in the proposal being considered by the Committee.  However, AIV has addressed this issue in testimony and direct discussions with legislators and the Administration, and we are making progress in including this issue as we move forward.

Implications of Eliminating “Overseas Business Organization” status, or the “80/20 Rule”

Vermont adopted “unitary combined reporting” in 2004 (effective 2006), which requires the total income of both Vermont companies and any larger corporate organization they are affiliated with to be combined before calculating the share of the income subject to Vermont corporate tax.  This combined income is limited to US income, or “water’s edge”, however.

For US businesses with footholds in both the US and in foreign countries, this can raise issues about determining what income is on what side of the water’s edge.  To avoid unwarranted disputes with US companies with relatively small US income, Vermont adopted the “80/20” rule.  Under this rule, individual US companies with at least 80% of their payroll and property outside the US, called “Overseas Business Organizations”, are simply excluded from the larger affiliated group’s combined income.

Not many states use the 80/20 rule, and the draft proposal before the Committee would eliminate it.  Supporters argue that this would more accurately calculate the total US income in unitary combined reporting by affiliated corporate groups.  However, questions have been raised about the interplay between the 80/20 rule and how Vermont already aggressively taxes overseas income in terms of dividends, etc.  Also, there is little information currently on how many businesses are claiming this exclusion and therefore the practical impacts of increasing their taxable income.  AIV is particularly interested in better understanding the practical impacts on manufacturers and related businesses in Vermont.