The Language of State and Local Taxation
Nov 28, 2022

The Language of State and Local Taxation

Jonathan LissBy Jonathan Liss

It may seem to many that state and local taxation (SALT) has its own language that is incomprehensible to those who don’t practice in the field. This blog will attempt to explain a few of the terms SALT practitioners commonly use in performing their jobs.  

Nexus is the first term you should become familiar with, specifically “economic nexus.” Nexus in the SALT world refers to the degree of connection between a company’s business activity and a state that makes the business subject to tax in that state. This term applies to both state sales tax and corporate income tax. Without getting into the evolution of nexus (a blog for another day), a corporation that has a physical presence in a state (i.e., headquarters, office, warehouse, employees) will almost always be subject to the state’s corporate income and sales tax. Remote sellers who transact business through the internet still may have nexus in a state based on their virtual and economic presence. In plain language, economic nexus is created if a business exceeds a certain level of annual in-state sales (let’s say $100,000, for example). If this level is exceeded, the business will be required to collect and remit sales tax and, in certain states, file a corporate income tax return.  

While we’re on the topic of nexus, I want to quickly delve into Public Law 86-272. This sinister-sounding federal law was enacted in 1959. Its purpose was to restrict states from collecting corporate income tax on businesses whose only in-state activities are the solicitation of orders of tangible goods. At the risk of making your head spin, I will not address the scope of solicitation in this blog. The bottom line is that if Public Law 86-272 applies, a business will be exempt from state corporate income tax.  

Close up on the dome of the Pennsylvania CapitolAnother term one often encounters in state income taxation is the concept of “unity” or “unitary business group.” Unitary theory goes way back. It first began in the context of state property taxation of railroads in the 19th century. The question was whether a state could tax its share of an entire transcontinental railroad system, treating the track as rolling stock, and capital as a “unit” for purposes of property taxation. Over time, unitary theory was extended to the corporate income taxation of multistate businesses.

Today, over half the states require unitary business groups to file a combined corporate income tax return, though Pennsylvania does not have such a filing requirement. What exactly is a unitary business group? To briefly explain, there are a number of factors that must be considered in determining whether the activities of a group of corporations constitute a single trade or business (i.e., a unitary business). Some of the key factors of unity, which were developed through case law, include corporations that are engaged in the same general line of business and have common ownership, centralized management, and shared administrative functions. Suffice it to say, the determination of a unitary business can be quite subjective.

While on the subject of corporate income tax, I’ll move on to the term apportionment. Many companies operate in more than one state, with the largest ones operating in all 50 states. How do companies know how much income tax they owe to each state? To calculate how much income from business operations is taxable in each state, states use what is referred to as an “apportionment formula.” Think of apportionment as dividing up a pie. In essence, apportionment is dividing up a company’s income among the states where it is conducting business. Most states use a “single sales factor” apportionment formula, which reflects the market for a company’s products and services. Simply put, the sales apportionment percentage is calculated by dividing the sales within a state by a company’s total sales everywhere. This percentage represents an approximation of the amount of income earned from conducting business in a state. Using the pie analogy, apportioned income is the size of the slice of pie that a state is allowed to tax.  

As we come to the end, I’m going to switch gears and look at a commonly used sales tax term: mixed transaction. To begin with, sales tax is levied on the retail sale of tangible personal property and certain enumerated services. The retail sales tax only applies to final sales for personal use and consumption. In sales tax lingo, tangible personal property has a physical form that is perceptible to the human senses. It may be seen, measured, felt, or touched. Certain transactions consist of the sale of both services and tangible personal property. A mixed transaction, then, is one where both the property and the service are significant elements of the sale but are capable of separate and distinct transactions. For example, the sale of a computer and a service contract would typically be considered a mixed transaction: the property (computer) is taxed, and the service is not taxed. The general rule is that charges must be separately stated on the vendor’s invoice for the property and service elements to receive separate sales tax treatment.  

Half the battle is learning the terminology of state and local tax! This blog barely scratches the surface. Like French or Spanish, it takes time to master the language.  

Jonathan Liss is senior revenue policy analyst for the Philadelphia Department of Revenue. He is also an adjunct professor at Drexel University and Villanova University School of Law. He can be reached at

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.