State and Local Tax (SALT) attorney Bruce Ely was quoted in Bloomberg BNA on the tax treatment of nonresidents whose only connection with a state is an ownership interest in a pass-through entity operating there. The 2017 Survey of State Tax Departments showed that states have adopted varied approaches – some which may run counter to the Ohio Supreme Court’s ruling in Corrigan v. Testa in which the court held that Ohio was not allowed to tax a nonresident pass-through entity owner’s gain as if it were income from the business itself.
“Apparently a number of state tax departments haven’t yet digested the Ohio Supreme Court’s landmark 2016 ruling in Corrigan v. Testa,” said Ely, a member of the Bloomberg BNA State Tax Advisory Board. “If the state doesn’t even have a statute to rely on, I think they’re really skating on thin ice.”
Ely noted the “surprising number” of states that responded to the recent Bloomberg BNA survey that they would impose their income tax on a nonresident partner’s gain on the sale of its interest in a partnership doing business in their state under a variety of conditions.
“There are both constitutional and state law challenges to states taxing sales of pass-through entity interests for nonresidents, except in relatively rare circumstances where nexus has been created independently and the partnership interest has established a ‘business situs’ in the taxing state,” Ely said.
The complete article, “Corporate Close-Up: States Take Varied Approaches to Taxing Sales of Pass-Through Entity Interests,” appeared in Bloomberg BNA on May 22, 2017. (login required)