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.


Gary Bingel:

Apportionment is really just the way companies need to divide up their income among different states. If you are a local grocery store and you only have one outlet and you're only doing business in that one state, it's fairly simple. All your income gets a portion to that one state or get sourced that one state. That state gets to tax 100% of your income. If you're a large multi-state business or doing business across state lines, you need to figure out how much each state can tax of your income. Obviously, each state cannot tax 100% of your income or you'd be out of business fairly quickly.

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.

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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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.

Apportionment Opportunities

In this Apportionment overview, Gary Bingel discusses challenges and opportunities and how planning can help manage overall tax liabilities, and knowledge can help mitigate potential exposures and combat aggressive taxing authorities on audit.

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