What is Apportionment?
February 21, 2020
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.
The way you divide up your income among the various states is through two methods. One is through allocation, the other is apportionment. Allocation is just taking specifically enumerated items and specifically is sourcing them to one state or enough. So things things like interest or maybe a capital gain from a sale of a piece of real estate may get specifically sourced or allocated to a particular state. Generally, the vast majority of your income, your business income, gets split up among the states through some sort of formula, and that's what's known as apportionment.
Historically, apportionment was done through an evenly-weighted, three-factor formula consisting of property, payroll, and receipts. That formula worked great when we were a goods economy, selling tangible personal property and such. Over the past several decades, we've obviously become much more of a information economy or an intangibles economy. As a result of that, states have moved away from that evenly-weighted, three-factor formula and have moved to a single-factor formula based solely on receipts.