While many states have eliminated the throwback rule, Mississippi still has one. This refund opportunity arose while we studied the client’s ASC 740-10 reserve. We noted that the client’s effective state tax rate was quite high as compared to benchmark. The reason? To some extent the high rate was attributed to the fact that the client had essentially doubled booked its state tax liabilities. The client had a large distribution facility in Mississippi out of which e-commerce goods were shipped directly to consumers in most states. Because the e-commerce entity, a subsidiary in a complex corporate group, had no nexus in destination states (states to which goods were shipped to consumers) the client correctly “threw back” sales to Mississippi as required under Mississippi law.
However, we noted a rather obscure inconsistency. One of the large accounting firms, assisting the client, established a reserve for nexus for the e-commerce entity under ASC 740-10 (at that time FIN 48). The accounting firm correctly noted that the e-commerce entity likely had nexus in “destination” or “shipped to” states due to two key operating facts: 1) the e-commerce entity conducted in-state deliveries and installations and 2) a related “bricks and mortar” entity with retail locations accepted returns of merchandise made by the related e-commerce entity.
The net effect of these two factors, i.e. throwback sales to Mississippi but a reserve for nexus in destination states created a double booking of state tax liabilities. Noting this, Barnwell recognized that Mississippi’s throwback rule, while perhaps archaic and outdated was at least internally consistent. Stated differently, if the nexus creating activities noted above – sales returns and in-state deliveries and installation – would create nexus in a reverse fact pattern where such activity occurred in Mississippi as a would-be destination state, such activity meant that the e-commerce entity would not be required to throwback sales for Mississippi purposes. Barnwell filed and secured $2 million in refunds for the open statutory period, and the client continues to file returns in Mississippi without having to throwback sales.
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