Authors
Co-A uthor
June 26, 2012
Recent Developments in the State
Taxation of Pass-Through Entities
and Their Owners
State and local taxation of pass-through entities1 continues 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, nonresident owners of pass-
through entities are presented with more dicult issues. As a way to collect additional
revenue and potentially avoid dicult constitutional questions involving how to tax
nonresidents, 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 state and local level often presents more
questions than it answers. First, the federal rules do not address jurisdictional issues in a
domestic context. Second, domestic entities must only comply with one federal taxing
regime, while multistate pass-through entities must comply with the taxing systems of
each state in which they have nexus.
In addition, owners of multistate pass-through entities must answer the often
troublesome questions of where they must le returns and what income must be included
on the return for each state in which they are required to le. Jurisdictional questions,
apportionment issues, and reporting requirements for owners of pass-through entities
residing in a state other than where the entity does business are just a few of the areas in
which there have been numerous recent developments. Many states continue to assert
that an ownership interest in a pass-through entity alone is sucient to give the state
jurisdiction over the nonresident owners doing business in that state. States taking this
position may often ignore or fail to give adequate weight to federal constitutional issues
that arise when taxing nonresident owners.
State and Local Tax Alert
Multistate Edition
Published by Bradley Arant Boult Cummings LLP
William T. Thistle, II
205.521.8985
wthistle@babc.com
Christopher R. Grissom
205.521.8514
cgrissom@babc.com
Bruce P. Ely
205.521.8366
bely@babc.com
June 26, 2012 1 www.babc.com
LLCs and LLPs STATE TAX WEBINAR
* Bruce Ely is a partner and Chair of the State & Local Tax Practice Group at Bradley Arant Boult Cummings LLP, resident in its Birmingham,
Alabama oce. Will Thistle is Vice-Chair of the Pass-Through Entities Subcommittee of the ABA Section of Taxation’s Committee on State
and Local Taxes., a CPA, and a senior associate in the rm’s Birmingham oce. This newsletter is based in part on the authors’ recent article in
Business Entities. See B. Ely, W. Thistle, and S. Rhyne, “State Tax Update for Pass-Through Entities and Their Owners,” 14 J. Bus. Entities, 4 (May/
June 2012).
1 For purposes of this article, a “pass-through entity” means a partnership (general or limited) or a limited liability company (LLC) whose
income is generally not taxed at the entity level, but, instead, is passed through and taxed when it is received by the owner(s) of the entity.
Wednesday,
June 27th
12pm - 1:45pm (CDT)
for webinar details
By Bruce P. Ely and William T. Thistle, II*,
Co-Authored by Christopher R. Grissom
Bruce Ely will be leading a panel discussion during a webinar sponsored by Straord Publications this
Wednesday from noon to 1:45 pm Central time entitled “LLCs and LLPs: Navigating the Variable State Tax
Treatment of the Entity and its Owners.” The other panelists will be Patrick Smith of PricewaterhouseCoopers
LLP in Chicago and co-author of the leading treatise on the topic, and John Fletcher, State Tax Counsel for
General Electric Company in Albany, New York and an expert in the eld of pass-through entity taxation.
The webinar will brief state tax advisors and multistate companies on the diering state tax policies and
classications of LLCs and LLPs, partner/member nexus issues, apportionment variations, entity-level taxes,
composite returns and withholding obligations, and the like.
