State Apportionment

Apportionment is the mechanism by which a multistate business divides its income among the states in which it operates, so that each state taxes only the portion attributable to activity within its borders. Without it, a company operating in twenty states could face tax on 100 percent of its income twenty times over.

The traditional formula, drawn from the Uniform Division of Income for Tax Purposes Act, averaged three factors - the ratio of in-state property, payroll, and sales to the respective totals everywhere. Over the past two decades states have moved decisively toward single sales factor apportionment, which measures only the sales ratio. The policy motivation is transparent: single sales factor reduces the tax burden on companies that build plants and hire employees in the state while increasing it on out-of-state sellers.

Sourcing rules determine where a sale counts. Sales of tangible personal property are generally sourced to the destination, with throwback or throwout rules in some states reassigning sales into states where the seller is not taxable. Sales of services and intangibles are sourced either by cost of performance - where the income-producing activity occurred - or, increasingly, by market-based sourcing, which looks to where the customer receives the benefit. The shift to market-based sourcing has been consequential for service businesses, and because states define the benefit-received test differently, the same dollar of revenue can be sourced to two states or to none.

Additional layers include separate versus combined and unitary reporting, treatment of non-business income allocated rather than apportioned, and alternative apportionment petitions where the standard formula produces a distortive result. Apportionment work is data-intensive and depends heavily on revenue detail that operating systems often do not capture at the required granularity.