It has been more than 20 years since Ohio enacted legislation requiring taxpayers to add back some expenses paid to related parties for state income tax purposes. Since then, more than 20 states have enacted similar provisions. Those provisions are commonly referred to as addback statutes. Those statutes generally limit taxpayers from reducing their state income tax liability by deducting interest and intangible expenses paid to an out-of-state related party.
While addback statutes vary by state, they are nearly uniform in their ambiguity and lack of guidance. That has resulted in varying interpretations and applications by taxpayers. In some cases, the statutes are also constitutionally suspect. Despite their widespread infirmities, addback statutes have generated very little litigation. This article outlines the three basic components shared by all addback statutes, analyzes litigation involving those components, and explores the dearth of litigation on the subject.
Originally published in State Tax Notes on October 28, 2013.
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