Apportionment Overview

As noted, apportionment refers to the manner in which income is divided between various taxing jurisdictions. Several factors combine to create complexity and confusion. Over time, a number of states have moved from an evenly weighted formula to one in which receipts receive more emphasis.  Our video overview sets the stage for our pitfalls, risks and opportunities discussions.


What is apportionment?

Gary Bingel:

Apportionment is just the way states divide up your income among themselves, and there's really two ways of doing it: one is allocation, one is apportionment. They are related however different concepts. So allocation is specifically assigning a particular item of income to a particular state, items such as interest, dividends, non-business income are typically allocated or specifically assigned to a specific state.

Apportionment on the other hand is how states divide up your overall regular recurring business income among themselves. Obviously if every state in which you did business tried to tax you at a hundred percent there'd be nothing left over for you which states are generally okay with but taxpayers are not. Apportionment is usually done through some formula or method, so usually historically it's been a three factor formula evenly weighted of property, payroll and receipts.

Over the last several years, maybe decade even, more and more states have gone away from that evenly weighted three factor formula to a single factor formula consisting of just receipts, and even states and aren't there yet or more heavily weighting the receipts factors that you may see a four factor formula where the receipts are double weighted and the property and payroll make up the remainder of it. Historically when most of these apportionment formulas were written and when they came into being we were a very goods based economy so selling widgets was selling tangible personal property. These formulas and most of the methods worked very well when that's where we're selling, you knew where you were delivering the property, delivering what you were selling, whether it was someone walking into a store or you actually shipping it by common carrier. As we've moved away from a goods and tangible property sort of economy to more of a knowledge-based economy and intangible sort of economy more and more companies are more and more finding that they are making their income through those intangibles, so instead of shipping widgets they're now shipping intellectual property or shipping software or performing services. We’re a very service based economy now so more and more states have moved from the traditional what I'll say point of delivery which worked well for tangible goods, they’ve gone to more of a market-based sourcing for services as well. Historically states used a cost performance method for sourcing receipts from services so they would look at where the service was actually performed or where other costs were located such as third party costs, your buildings, machinery, etc. more and more states have gone away from that now because they thought it was too complicated, many of them didn't do cost performance studies, didn't understand them and as a practical matter many auditors just looked to where the service was performed anyway. So over the past decade again more and more states have started to move towards market-based sourcing for services as well as intangible property.

Gary Bingel's 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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