CPAs need to consider the effects of throwback and throw-out rules on the sales factor when preparing multistate corporate income tax returns for companies that ship tangible personal property to customers located nationwide. This article provides an overview of the basics of the throwback and throw-out rules and their attempt to diminish “nowhere sales”—thus, “nowhere income”—that CPAs need to be aware of to properly advise companies that face such circumstances.

The Basics

In general, for purposes of corporate income tax apportionment, sales of tangible personal property are generally sourced to the location of the customer based on the customer’s shipping address. If a company ships tangible personal property to a state but does not have “nexus” (a connection requiring an income tax filing) in that state (e.g., due to Public Law 86-272 protection), then those sales would not be included in the numerator of any state’s sales factor, thus creating nowhere sales—sales that are not sourced to any state for purposes of calculating a company’s sales apportionment. Nowhere sales translate to nowhere income—income that is not apportioned to any state and thus not taxed at the state level.

Consider the following scenario:

  • ▪ Company A has the following sales in a given tax year:
    • ▪ State B: $400,000 (40%)
    • ▪ State C: $400,000 (40%)
    • ▪ State D: $100,000 (10%)
    • ▪ State E: $100,000 (10%)


  • ▪ Company A only has nexus in State B and State C; therefore, only files state income tax returns in State B and State C.
  • ▪ For simplicity purposes, assume that States B, C, D, and E all impose a single sales factor for purposes of apportioning income.
  • ▪ Company A sells tangible personal property.
  • ▪ All of Company A’s inventory is located in State B and is thus shipped from State B.

If Company A is only filing state income tax returns in States B and C, then 20% (10% State D and 10% State E) of sales are not being apportioned to any state, thus resulting in nowhere income.

The Throwback and Throw-out Rules

The throwback rule and the throw-out rule are intended to increase the sales factor in a state by either increasing the numerator (throwback) or decreasing the denominator (throw-out). Needless to say, increasing the sales factor increases the income that is apportioned to a given state, thus increases the total amount of income that is subject to state income tax.

With the throwback rule, sales to states in which the company lacks nexus are essentially added to the numerator of the sales factor if the sale originates in that state (i.e., thrown back to the state). With the throw-out rule, sales to states in which the company lacks nexus are subtracted from the denominator of the sales factor (i.e., thrown out).

Example 1. Assume the same scenario as above, but State B imposes a throwback rule. Because Company A does not have nexus in States D and E, these sales would be thrown back to the state of origin (State B), thus increasing State B’s sales factor from 40% to 60%, and eliminating any nowhere income.

Example 2. If State B imposes a throw-out rule, State D and E’s sales would be subtracted from the denominator of State B’s sales factor, increasing State B’s sales factor to 50% and decreasing nowhere income from 20% to 10%.

As demonstrated above, throwback and throw-out rules can be highly effective at reducing the amount of nowhere income, particularly when inventory is shipped from a state with a throwback rule. Due to several factors, such as different state apportionment formulas (single sales versus three factor), throwback and throw-out rules do not always result in 100% of a company’s income being subject to state income tax, as in Example 1 above.

As is generally the case with state and local income taxation, each jurisdiction has its own body of rules and regulations; unfortunately, there is generally never a bright-line test to apply for all states. Indeed, not all taxing jurisdictions implement a throwback or throw-out rule.

Relevant States

States that impose a throw-back rule include Alaska, Arkansas, California, Colorado, Hawaii, Idaho, Illinois, Kansas, Massachusetts, Mississippi, Montana, New Hampshire, New Mexico, North Dakota, Oklahoma, Oregon, Rhode Island, Utah, Wisconsin, and the District of Columbia. States that impose a throw-out rule include Kentucky, Louisiana, and Maine.

The throwback rule generally only applies to states where inventory is shipped from. It is important to review the throwback rules in states from which a business stores and ships inventory, to make sure the numerator of the sales factor is reported correctly on apportionment schedules of state income tax returns. Companies with inventory in Amazon warehouses across the country should consider what impact this inventory has on their sales factor in states with a throwback rule.

Moreover, reviewing sales, property, and payroll by state through a nexus study can assist tax advisors in determining which states a business has a filing requirement in. This is important for knowing which states’ throwback and throw-out rules need to be considered.

States are expanding their nexus rules and are applying factor presence thresholds to doing business definitions. Additionally, in light of South Dakota v. Wayfair, [585 U. S. ____ (2018)], states are beginning to apply similar thresholds to income tax as sales tax (i.e., Hawaii and New Jersey). Throwback and throw-out rules should be considered not only for purposes of sourcing receipts of tangible personal property, but also for purposes of evaluating an entity’s economic presence in a state.

States’ throwback and throw-out rules should be reviewed annually, as the rules are constantly changing. For example, Arkansas is phasing out its throwback rule starting in 2024. Vermont recently repealed its throwback rule on sales of tangible personal property for tax years beginning after January 1, 2023. In contrast, Maryland’s proposed budget for fiscal year 2025 included the adoption of a throwback rule, although this proposal and others included with the proposed budget are expected to face significant challenges.

CPAs who advise companies that sell tangible personal property and have nexus in multiple states, particularly those noted above, should review the state’s throwback and throw-out rules to determine the correct application of these rules, and their effect on the numerator and denominator of the sales factor based on a company’s specific facts and circumstances.

Corey L. Rosenthal, JD is a principal at CohnReznick LLP, New York, N.Y.
Ashley Murphy is a SALT senior associate at CohnReznick LLP.