A Pinch of Salt- March 2011- Can You Take This to the Bank? State Taxation of Financial Institutions


In this installment ofAPinch of SALT, we analyze some of the difficult state tax issues for financial institutions, including entity classification, nexus, apportionment, and combined reporting, and examine the implications that the changing federal regulatory scheme may have on state taxation of financial institutions.

Traditional notions of what constitutes a financial institution are becoming increasingly blurry under modern state tax regimes. Many states are broadening their definition of financial institution to include not only those types of entities traditionally considered financials, such as banks and savings and loan associations, but also corporations that conduct activities similar to those activities that may be conducted by traditional financial institutions. Also, these expanded definitions may include entities that simply own or are otherwise affiliated with traditional financial institutions. As one could predict, these definitions are anything but consistent among the states. For entities engaged in a business that is not in the traditional sense a banking business, but are providing a service or deriving income from activities that may be similar to that of banks, today’s landscape presents numerous challenges. The various state approaches create a compliance nightmare for many taxpayers, requiring careful attention to the varying tax bases, apportionment rules, rates, treatment of tax attributes, and filing methods. Also, a careful eye must be kept on regulatory changes, as this may lead to changes in entity classification.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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