A water’s edge election basically says that you (as a business or entity) agree to be taxed within the jurisdiction for the sales that occur within that state, but only within the parameters of that state. The goal is to reduce the total tax owed for conducting business in a jurisdiction outside of the “home” of the associated taxpayer or company. If a business does not make that election, for example if you are a California corporation and you are doing business in Oregon and Washington, if you do not claim appropriate “water’s edge” elections then California can go back and lay claim to all of those sales (and apply associated taxes).
This may sound easy at the outset, but legally it becomes quite complicated. State tax authorities take different positions on who can be associated in a group – which businesses or companies are unitary or “affiliated”, and there are complex regulations regarding who can be part of the unitary group and what situations preclude a water’s edge election. This has been the source of complex litigation over the years, and it is important to review all aspects of your business and its operations and affiliations prior to making a water’s edge election. Contact the experienced business and tax professionals at Allen Barron for a complimentary consultation at 866-631-3470.