Pepsi State Tax Dispute Sheds Light on Foreign Affiliate Rules

Several states may choose to amend their corporate tax codes if the company behind Fritos, Cheetos, Cracker Jack, and other iconic snack foods can persuade an Illinois judge the business operates as a foreign corporation.

An income tax dispute pitting the Illinois Department of Revenue against PepsiCo Inc. and its snack food subsidiary Frito-Lay North America Inc. is raising the profile of the “80/20 rule,” an obscure tax filing requirement found in more than a dozen states.

After paying taxes in Illinois for many years, Pepsi in 2011 began characterizing Frito-Lay as a domestic 80/20 company—a US entity having 80% ...