For many years, transfer pricing has been at the centre of the international tax stage. U.S. taxpayers, however, should be careful not to overlook the fact that transfer pricing considerations are also important for state and local tax purposes. For taxpayers with intercompany transactions or arrangements among related U.S. legal entities, state transfer pricing practices will determine the amount of taxes owed at the state level.
State transfer pricing addresses (i) the proper pricing of goods, intangibles and services exchanged between two entities under common control, and (ii) other proper allocation of income and expenses between commonly controlled entities. Put very simply, many state Departments of Revenue (DORs) care about transactions between a taxpayer’s separate U.S. legal entities, even in cases where the IRS does not. If taxable income is shifted away from a state due to mispriced intercompany transactions or other erroneous sharing of common income or expenses, whether intentional or not, that state’s DOR is not going to be happy.
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