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| Taxation in the United States |
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| Federal taxation |
| Authority · History Internal Revenue Service (Court • Forms • Code • Revenue) Taxpayer standing Income tax · Payroll tax Alternative Minimum Tax Estate tax · Excise tax Gift tax · Corporate tax Capital gains tax |
| State and local taxation |
| State income tax State tax levels Sales tax · Use tax Property tax Land value tax |
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Taxation by country
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State and local income taxes are imposed in addition to Federal income tax. State income tax is allowed as a deduction in computing Federal income tax, subject to limitations for individuals. Some localities impose an income tax, often based on state income tax calculations. Forty-three states and many localities in the United States impose an income tax on individuals. Forty-seven states and many localities impose a tax on the income of corporations.[1]
State income tax is imposed at a fixed or graduated rate on the taxable income of individuals, corporations, and certain estates and trusts. The rates vary by state. Taxable income conforms closely to Federal taxable income in most states, with limited modifications.[2] The states are prohibited from taxing income from Federal bonds or other obligations. Most do not tax Social Security benefits or interest income from obligations of that state. Several states require different lives and methods be used by businesses in computing the deduction for depreciation. Many states allow a standard deduction or some form of itemized deductions. States allow a variety of tax credits in computing tax.
Each state administers its own tax system. Many states also administer the tax return and collection process for localities within the state that impose income tax.
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State tax rules vary widely. Those states imposing a tax on income compute the tax as a tax rate times taxable income as defined by the state. The tax rate may be fixed for all income levels and taxpayers of a certain type, or it may be graduated, that is, the tax rates on higher amounts of income are higher than on lower amounts. Tax rates may differ for individuals and corporations.
Most states conform to Federal rules for determining:
Gross income generally includes all income earned or received from whatever source, with exceptions. The states are prohibited from taxing income from Federal bonds or other obligations.[3] Most states also exempt income from bonds issued by that state or localities within the state, as well as some portion or all of Social Security benefits. Many states provide tax exemption for certain other types of income, which varies widely by state. The states imposing an income tax uniformly allow reduction of gross income for cost of goods sold, though the computation of this amount may be subject to some modifications.
Most states provide for modification of both business and non-business deductions. All states taxing business income allow deduction for most business expenses. Many require that depreciation deductions be computed in manners different than at least some of those permitted for Federal income tax purposes. For example, many states do not allow the additional first year depreciation deduction.
Most states tax capital gain and dividend income in the same manner as other investment income. In this respect, individuals and corporations not resident in the state generally are not required to pay any income tax to that state with respect to such income.
Some states have alternative measures of tax. These include analogs to the Federal Alternative Minimum Tax in 14 states,[4] as well as measures for corporations not based on income, such as capital stock taxes imposed by many states.
Income tax is self assessed, and individual and corporate taxpayers in all states imposing an income tax must file tax returns in each year their income exceeds certain amounts determined by each state. Returns are also required by partnerships doing business in the state. Many states require that a copy of the Federal income tax return be attached to at least some types of state income tax returns. The time for filing returns varies by state and type of return, but for individuals in many states is the same (typically April 15) as the Federal deadline .
Every state, including those with no income tax, has a state taxing authority with power to examine (audit) and adjust returns filed with it. Most tax authorities have appeals procedures for audits, and all states permit taxpayers to go to court in disputes with the tax authorities. Procedures and deadlines vary widely by state. All states have a statute of limitations prohibiting the state from adjusting taxes beyond a certain period following filing returns.
All states have tax collection mechanisms. States with an income tax require employers to withhold state income tax on wages earned within the state. Some states have other withholding mechanisms, particularly with respect to partnerships. Most states require taxpayers to make quarterly payments of tax not expected to be satisfied by withholding tax.
All states impose penalties for failing to file required tax returns and/or pay tax when due. In addition, all states impose interest charges on late payments of tax, and generally also on additional taxes due upon adjustment by the taxing authority.
Forty-three states impose a tax on the income of individuals, sometimes referred to as personal income tax. Tax rates vary widely, with the highest marginal rate being 11% (assessed in Hawaii and Oregon on individual income above $200k and $250k, respectively)[5]. The income subject to tax varies by state. Some states impose the tax on Federal taxable income with minimal modifications, while others tax a measure bearing little resemblance to Federal taxable income.[6]
The states imposing an income tax on individuals tax all taxable income (as defined in the state) of residents. Such residents are allowed a credit for taxes paid to other states. Most states tax income of nonresidents earned within the state. Such income includes wages for services within the state as well as income from a business with operations in the state. Where income is from multiple sources, formulary apportionment may be required for nonresidents. Generally, wages are apportioned based on the ratio days worked in the state to total days worked.
All states that impose an individual income tax allow most business deductions. However, many states impose different limits on certain deductions, especially depreciation of business assets. Most of the states allow non-business deductions in a manner similar to Federal rules. Few allow a deduction for state income taxes, though some states allow a deduction for local income taxes. Eight of the states allow a full or partial deduction for Federal income tax.
In addition, some states allow cities and/or counties to impose income taxes. Most Ohio cities and towns impose an income tax on individuals and corporations. By contrast, in New York only New York City and Yonkers imposes a municipal income tax.
The following states have a flat rate individual income tax:[19]
Most states impose a tax on income of corporations having sufficient connection ("nexus") with the state. Such taxes apply to U.S. and foreign corporations, and are not 696969699969 978-0-8080-192103.</ref>[22]
States are not permitted to tax income of a corporation unless four tests are met under Complete Auto Transit, Inc. v. Brady:
In general, nexus requirements vary by state and are subject to interpretation, generally by the state's comptroller or tax office, and often in administrative "letter rulings."
In Quill Corp. v. North Dakota, the Supreme Court of the United States held that corporations must maintain a physical presence in the state (such as physical property, employees, officers) for a non-transient amount of time, and that such physical presence must be "substantial" for the state to be able to claim that the corporation was maintaining nexus and thus owed apportioned taxes. Quill Corp.'s only contact was in the form of a printed catalog and software disk. Quill prevailed as North Dakota was unable to prove that "substantial" nexus was created.
The state of Texas has held that intellectual property (a software license) owned by a Minnesota corporation with no physical presence in the state was sufficient to create nexus. [23]
Amazon has sued New York State because of a recent NY law that requires Amazon to apportion income tax and charge/remit sales tax due to Amazon affiliates (independent agents) that may be located in the state.
Many critics believe that states facing budget crunches are often putting additional pressure on out-of-state corporations to pay taxes within that state.[24]
The courts have held that the requirement for fair apportionment may be met by apportioning between jurisdictions all business income of a corporation based on a formula using the particular corporation's details.[25] Many states use a three factor formula, averaging the ratios of property, payroll, and sales within the state to that overall. Some states weight the formula. Some states use a single factor formula based on sales.[26]
Some states tax resident corporations on nonbusiness income regardless of apportionment. Generally, a resident corporation is one incorporated in that state. The definition of nonbusiness income varies but generally includes investment income of business corporations, including dividends.
Some states require and some states permit parent/subsidiary controlled groups of corporations to file returns on a consolidated or combined basis. California and Illinois require that all U.S. members of a "unitary" group must file a combined return.
State corporate income tax returns vary highly in complexity from two pages to more than 20 pages. States often require that a copy of the Federal income tax return be attached to the state return. Corporate income tax return due dates may differ from individual tax return due dates. Most states grant extensions of time to file corporate tax returns.
Some of the English colonies in North America taxed property (mostly farmland at that time) according to its assessed produce, rather than, as now, according to assessed resale value. Some of these colonies also taxed "faculties" of making income in ways other than farming, assessed by the same people who assessed property. These taxes taken together can be considered a sort of income tax.[27] The records of no colony covered by Rabushka[28] (essentially, the colonies that became part of the United States) separated the property and faculty components, and most records indicate amounts levied rather than collected, so much is unknown about the effectiveness of these taxes, up to and including whether the faculty part was actually collected at all. Colonies with laws taxing both property and faculties include:
Rabushka makes it clear that Massachusetts and Connecticut actually levied these taxes regularly, while for the other colonies such levies happened much less often.
During and after the American Revolution, although property taxes were evolving toward the modern resale-value model, several states continued to collect faculty taxes. These include:
Following the Panic of 1837, but not always because of that depression, some states attempted to institute or expand income taxes, usually taxing only specific forms of income. These include:
and five states whose income taxes (like Pennsylvania's, except the bank dividend part) produced little revenue:
During the American Civil War and Reconstruction Era, when both the United States of America (1861-1871) and the Confederate States of America (1863-1865) instituted income taxes, so did several states, including:
In 1883 Tennessee instituted the tax on interest and dividends which it still collects.
Following the 1895 Supreme Court decision in Pollock v. Farmers' Loan & Trust Co. which effectively ended a federal income tax, some more states instituted their own:
Also during this period, Hawaii (before annexation by the U.S.) started an income tax in 1896 which was almost immediately ruled to violate the country's constitution; after annexation as a territory, in 1901, it instituted the income tax it still levies as a state.
Following the passage of the 16th Amendment, state income taxes multiplied[31]:
A third of the current state income taxes were instituted during the decade after the Great Depression started:
Two states, South Dakota and West Virginia, abolished Depression-era income taxes in 1942. In 1949, the Alaska Territory instituted an income tax which the state of Alaska would maintain until 1980. And in 1961, West Virginia resumed levying income taxes.
The next wave of states to start taxing personal income began in 1967:
The only remaining state to institute a general income tax to date is Connecticut in 1991, but that tax replaced an earlier income tax apparently limited to capital gains and dividends. Numerous states with income taxes have considered or enacted measures to abolish those taxes since the Late-2000s recession began, and several states without income taxes have considered measures to institute them, but no state has so far actually changed its income-taxing status.
Rhode Island did not have an income tax until 1971, but now it has one of the top five highest maximum rates in the nation.[32][33] New Jersey added an income tax component to its corporation business tax in 1958.[34] Connecticut added a personal income tax in 1992, as the median family income in many of the state's suburbs was nearly twice that of families living in urban areas. Governor Lowell Weicker's administration imposed a personal income tax (designed to address the inequities of the sales tax system) and implemented a program to modify state funding formulas so that urban communities received a larger share. [35]