Apportionment Opportunities

February 21, 2020

While apportionment issues present challenges they also present opportunities. Proper planning can help to manage your overall tax liabilities, and knowledge of these issues can help mitigate potential exposures and combat aggressive taxing authorities on audit.

Transcript

Gary Bingel:Just as there are many pitfalls or risks associated with a portion, but there are also many opportunities. Whenever laws are unclear or there's a conflict between state laws, opportunities may arise. Specifically states even though they may have the same cost performance method may be using different types of costs to performance or may not be very clear as to how you calculate that. So you may find yourself having some opportunities to plan around how you define something like what your income producing activity actually is. Is it done at the overall corporate level or do you look at each specific contract. Or when calculating your cost performance, do you include indirect cost or third party costs? So by slicing and dicing some of these costs different ways and some of these statutes different ways where they are not clear, you may get vastly different results which may result in you having some opportunities for planning or an apportioning significantly less than a hundred percent of your income.

Another opportunity that may exist is that for looking for refunds for prior years. If you use a broad brush approach and used one method across many states, you may find that there's an opportunity to better refine the way you did that and you may find that you can use different costs of performance, let's say in one state versus another or what you include there, which may be leading to some refunds or opportunities for refunds. Also, you may be able to use alternative apportionment in an audit scenario where if you find yourself facing a large assessment, you may be able to look at the way the state actually sources your receipts and perhaps petition for some sort of alternative apportionment which may help mitigate some of those assessments.

Finally, you may find that the way a state uses apportionment or their portion methodologies may differ among different types of entities, which may lead to driving your decision as far as what type of entity you choose to do business as. Specifically, some states may use three factor apportionment for partnerships or single factor apportionment for escorts and knowing that can help drive what type of choice of entity you make when deciding how to set up your business.

About Gary Bingel

Gary Bingel, Partner-in-Charge of the National State and Local Tax Group, with expertise focuses on state and local income taxation, and sales and use tax consulting. He has significant experience serving clients in the manufacturing, retail, pharmaceutical, biotechnology, technology and service industries.

More in This Series

How Does Wayfair Impact Companies?

You need to understand the concept of Nexus if you are selling over the internet.
What Has Changed About Nexus and Wayfair?

When you sell over the internet you need to understand the concept of nexus. Because of sales across state lines sales tax must be collected.
How Has Nexus Been Applied Previously?

Presence through intangibles, agents, affiliates and really any sort of minimal connection that people may not think of as physical presence was nevertheless found to be sufficient to establish physical presence for purposes of Nexus and the sales tax and income tax area.
What is the Future of Nexus?

Save you a lot of time, grief and money by knowing your Nexus tax exposure. You need to consider not just your sales tax footprint, but where you're filing things such as income taxes and franchise taxes as well.
How Should Companies Manage Wayfair Changes?

A discussion on how companies should manage Wayfair changes including understanding their Nexus footprint, sales tax and your revenue streams and the taxability of them.

Risks of Apportionment

Apportionment issues present challenges and opportunities. Proper planning can help to manage your overall tax liabilities, and knowledge of these issues can help mitigate potential exposures and combat aggressive taxing authorities on audit.
What is Apportionment?

Apportionment is the manner in which income is divided between various taxing jurisdictions. A number of states have moved to receipts receiving more emphasis. Our video overview sets the stage for our pitfalls, risks and opportunities discussions.
What is Nexus?

In this Nexus overview, Gary Bingel discusses how Nexus varies state by state, the contacts required to generate taxes, "physical presence" and other key focus areas including remote employees, and new sourcing rules among others.