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.


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.

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