By Bruce P. Ely and William T. Thistle,
II*,
State and local taxation of pass-through
entities1continues to present complex
issues for the owners of those entities, especially when the
pass-through entities are conducting business in multiple states.
Compared with resident owners over which a state has jurisdiction
because of their physical presence in the state, non resident
owners of pass through entities are presented with more difficult
issues. As a way to collect additional revenue and potentially
avoid difficult constitutional questions involving how to tax non
residents, many states have enacted entity-level taxes or
withholding or composite return requirements.
Applying these entity-level taxes and withholding/composite
return requirements, however, presents states with a variety of
issues. States may look to federal income tax law when imposing
net-income based taxes on pass-through entities. However, for
multiple reasons, applying federal rules at the
