Sometimes states intentionally favor domestic commerce, and sometimes they unintentionally discriminate against foreign commerce. In Kraft General Foods Inc. v. Iowa Department of Revenue and Finance, the US Supreme Court made clear that both are illegal. Because most states’ corporate income taxes conform to the Internal Revenue Code (IRC) to some degree, recent federal tax changes set the stage for unintentional (and unconstitutional) discrimination.
In this installment of “A Pinch of SALT” in Tax Notes State, Eversheds Sutherland attorneys Jeff Friedman, Jeremy Gove and Chelsea Marmor analyze the IRC’s disparate capitalization requirements for domestic and foreign research and experimental (R&E) expenditures for tax years beginning in 2022. While the federal government is free to treat foreign commerce differently from domestic commerce, states and localities do not enjoy that same freedom. Thus, when states conform to the IRC and incorporate the federal tax system’s differing treatment of domestic and foreign R&E expenses, that conformity may violate the foreign commerce clause.
Read the full article here.