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.
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.