welcome back, before we dive too far into multi state corporate income taxation, it's important that we understand a little bit of the history of how we got to where we are today. As you probably learned in a previous federal income tax class, the first modern corporate income tax was imposed by the federal government beginning in 1909. This was four years before the 16th Amendment was ratified in 1913. Now you may recall that the 16th Amendment removed from the Constitution the requirement that income taxes be a portion based on state population. However, the Supreme Court of the United States held that this 1909 corporate income tax didn't run afoul of the pre 16th Amendment constitution. Because it was very cleverly called an excise tax on the privilege of doing business, which just so happened to be measured by net income of the corporation. Now, a couple of years later in 1911, Wisconsin was the first state to adopt a modern state corporate income tax. And this type attacks slowly caught on across the country, by 1930 18 states had adopted a corporate income tax. By 1940 that number was up to 35 states, today, there are 44 states, the tax corporate in that income. Ohio, Texas and Washington don't have corporate net income taxes, but they have another type of tax called a gross receipts tax or in the case of Texas, is actually a gross margins tax with limited deductions. Now, Wyoming, Nevada and South Dakota, with some limited exceptions, have no corporate in that income tax or gross receipts tax. Of course, that's not to say they don't have taxes on corporations, but they don't have taxes of these types. Now for historical reasons that today are mostly irrelevant, state corporate income taxes have developed in two different ways. First, corporate net income taxes that are direct taxes on corporations net income attributable to a state. The second type of corporate income tax we see today are franchise taxes imposed on the privilege of doing business within a state that again just so happened to be computed or measured based on the corporations in that income. Now, as an aside, franchise taxes often have an alternative tax base, usually based on something called capital stock. But we'll talk about those taxes in a later video. Now the reason we see two different flavors of state corporate income taxes, it's largely irrelevant today. But prior to complete auto transit case, you may remember from us talking about it earlier in the course of the Supreme court had held quote. A state may not lay a tax on the privilege of engaging in interstate commerce, this was called the Spector Rule. So many state franchise taxes based on income were found to be unconstitutional under the then existing dormant Commerce Clause jurisprudence. So those franchise taxes on the privilege of doing business couldn't reach or tax and exclusively interstate business. So, for example, think of a business and state A that only sells products to customers and state B. You can compare that to an intra state business in state A that sells to customers and state A. But states are clever and with the creativity similar to what Congress exhibited when they worked around the 16th Amendment with their corporate income tax in 1909. State legislators recast or reworded their corporate franchise taxes as a direct corporate tax on the net income of corporations that was fairly apportioned to their state. So they avoided that whole tax on the privilege of doing business language. And it turns out that this distinction between a franchise tax and a direct corporate income tax, even though they basically reached the exact same economic result to the Supreme court, it made a meaningful difference. So in 1959 the Supreme court ruled in the landmark state and local tax case of Northwestern states Portland submit that a state could impose a direct income tax on the profits of a corporation conducting an exclusively interstate business. So this made the Spector Rule one of draftsmanship, right, your corporate income tax law correctly, it would pass constitutional muster right it poorly. Well, then you lose the ability to tax and exclusively interstate business Now, eventually, the Specter rule would be completely overruled by the Supreme court in 1977 and complete auto transit, eliminating the Supreme Court's irrational obsession with formalistic statute drafting. But in 1959 northwestern states, Portland cement was a big deal, and interstate businesses were very concerned about the possibility of states adopting constitutional corporate net income taxes and mass. So in response to northwestern states, Congress very quickly responded with Public Law 86-272, which we'll talk about in its very own video. But basically, this law put limited restrictions on a state's ability to assess a net income tax on interstate business. Of course, because Northwestern states was a Supreme Court case interpreting the dormant commerce clause, Congress could override this decision with the affirmative grant of power from the Commerce Clause. And they did, at least partially but Public Law 86-272 was only intended to be a temporary measure while Congress considered more comprehensive action. So in the early 1960s, Congress formed a commission to study interstate taxation and determine what additional actions they should take to mitigate the possibility of interstate businesses facing unfair or double taxation from the states. The results of this study was the Willis report, issued in 1965. This report severely criticized the lack of uniformity among the states and how they tax interstate businesses. And this report proposed legislation that would dictate to the states a uniform tax base and uniform apportionment factors for taxing interstate business activities. Now, of course, states hated the idea of Congress imposing upon them a taxing scheme. So they got together and in 1967, 7 states adopted the multi state tax Compact, which was an agreement between the states to promote quote, uniformity or compatibility and significant components of tax systems. And facilitate quote, taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration. Now the multi state tax compact also endorsed something that have been floating around for a few years previous without much attention. And this was called UDITPA or the Uniformed Division of Income for Tax Purposes Act, which is a model act to promote uniformity across state lines in the application of allocation and apportionment rules. Now the multi state tax compact also created an entity called the Multi State Tax Commission, which still today is a central player in the formation of uniform laws and rules. And states can choose to adopt these model laws, and they often look to the NTC for interpreting existing laws. Now there are 16 members of the multi state compact currently who have taken the compact and incorporate it into their own state law. But even more states have been influenced by the compacts provisions. And currently almost every state participates in the Multi State Tax Commission's activities, at least to some extent. But flash back to the late 1960s with the states on a path to generating uniformity among themselves. And without Congress having to step in, Congress abandoned their plans for additional legislation and today the Multi State Tax Commission and you dip to play a crucial role in developing and maintaining the playing field for state taxation. Now, to make one final point in this video, we've been talking about a trend towards uniformity among the states. And we'll take a closer look at a lot of different areas where states do, in fact have quite a bit of uniformity in how they treat certain situations. But despite this trend, I can tell you with absolute certainty that there will never be total uniformity among the states in the arena of Multi State Taxation. Here that's one of the big reasons why state local taxation is such an action packed, exciting area of taxation.
